The timing of our second international teleconference this week couldn’t have been better.
Every single one of the foreign stock markets we covered has since shaken off its earlier correction … turned sharply higher … and blasted off toward new highs.
So I hope you were able to make it and call in at the appointed hour. But if you couldn’t, this double-length special issue gives you a second opportunity to get the information in a handy, readable format …
FOLLOW THE MONEY:
How to Harness the Power of
China’s $1.1 Trillion Cash Bonanza
(Edited Teleconference Transcript)
Bob Nichols (moderator): Martin, why is the news from China so important?
Martin Weiss: Because China is starting to invest its huge $1.1 trillion hoard of cash more aggressively. Because China has just created a government-controlled investment company that’s going to pour much of that money into equities and other investments. This is earth-shattering news, and I think it has far-reaching, long-term consequences.
Last year, China’s stock market rose by over 130%. That’s TEN times more than our stock markets rose. But this is not just about last year. Right now, for example, China’s industrial production is up by a very rapid 18.5%. China has just reported that its retail sales jumped by nearly 15%, the fastest pace in two years.
This is a boom that’s born from many years of deprivation. It’s not like the boom in the U.S., which propped up by overborrowing and overspending.
You have millions of middle class Chinese citizens that are buying homes. But they’re not buying mansions. You have millions of Chinese citizens that are starting to spend. But they’re not spending money they don’t have. That’s the major, fundamental difference that I see.
And throughout all this, China’s mountain of cash — that $1 trillion dollars we mentioned a moment ago — is continuing to grow by leaps and bounds. It has already reached $1.1 trillion. And now with China’s trade surplus expected this year, it should soon top $1.3 trillion.
So that brings us back to the truly big news that we talked about a moment ago: Beijing has just announced it’s forming a new investment company to move a big chunk of that trillion-dollar cash hoard into stocks.
Look. The Magellan fund has $50 billion in assets, which is massive. It’s so massive, in fact, that whenever the Magellan fund wants to invest some of that money, it has to tiptoe into the markets to avoid driving stock prices higher. Now compare that to China’s reserves of $1.1 trillion, which is twenty-two times larger. Even if China invests, say, just a third of the $1.1 trillion, it’s still going to be like six or seven Magellan funds.
Larry, you’re calling in from Asia now. What do you think about this?
Singapore’s Temasek Helped Boost
Some of Its Shares by 1,200%!
China Is Now Following the Same Model!
Larry Edelson: Hi, Martin. Magellan is a good metaphor. But the real model for Beijing is Temasek Holdings, formed by the Singapore government years ago — the most successful government-owned investing company in the world.
Two examples: It invested in Singapore Airlines, which is up 632% in the past few years! And it invested in DBS Bank, which has skyrocketed a whopping 1,200%. This is the effect government money can have when it goes into productive enterprises.
Now, let’s assume Beijing follows the Singapore model, starting with about $300 billion. And let’s assume recent expectations — that they’ll invest 75% in China, 25% outside of China — are roughly correct. In that scenario, figure you’d be looking at roughly $210 billion going into Chinese stocks, and another $90 billion going into regional stock markets such as Japan, Malaysia, Singapore, Korea, and India.
Martin: Can you be more specific? What are the likely targets?
Larry: Infrastructure, consumption, financial institutions, and natural resources. Beijing just announced it’s going to invest about $80 billion in building a trans-continental railroad across China into the rural areas. It will be equivalent to the first trans-continental railroad in the U.S. in 1865 which set up a railway network from the East Coast out to the West Coast and, in many ways, kicked off the industrial era in the USA.
Martin: How does this connect to countries outside of China?
Larry: Chinese authorities are going to invest in countries and companies that benefit China and that have proven performance.
For example, I was just in Malaysia, a country that’s loaded with tin, oil, gas, timber, copper, iron, aluminum. Natural resources galore. China needs those resources desperately. We hear about China going after oil in Africa. Well, Malaysia is a lot closer. So I believe Beijing is going to look to invest in Malaysia’s top companies — names like PetronAs, the huge Malaysian oil company, Mycom Steel, Integrated Rubber, and Petra Perdana.
China’s Three C’s:
Chuppies, Construction, and Cargo
Tony Sagami: Hey, Larry. This is Tony Sagami. Let me butt in here and say something about Macau.
I went to Macau two times last year, and I was shocked at how much it had changed in just six months since my first trip last year. It was like a whole new city, a whole new skyline that had sprung up in six short months. That type of booming construction is going on all over China, not just in Macau. And that’s why I think you should really take a look at how that $1.1 trillion is going to work its way into the economy.
Think of China in terms of the three “C’s†— Chuppies, construction, and cargo.
Everyone can remember how much influence Yuppies had in the U.S. on social trends and on the stock market. Well, there are 20 times more Chuppies in China than in the U.S., and they are spending money that would shock you.
It doesn’t matter whether you are talking about the food they eat, the clothes they wear, the cars they drive, or the vacations they go on, all have tremendous investment implications and it’s also shocking to see how profitable the companies are that are catering to them.
Next, you’ve got construction, a building boom going on beyond that you cannot even comprehend. The estimates vary. But anywhere between 50 to 75 percent of all the construction cranes in the world are now in China, building new buildings.
The final “C†I’d look at is cargo. China has become the manufacturing center for the world, and all those goods have to travel on some road, railroad, truck, ship, or airplane to get to Wal-Mart shelves. So look at the underlying infrastructure that gets those goods to the U.S.
But whatever you do, get the heck out of the way of anything the Chinese are selling (or exporting). If you’re competing against China, you’re going to lose.
Larry: Forgive me for sounding like a broken record, but most people in the West, even those on Wall Street, don’t understand the power behind 1.3 billion people in China that are all modernizing at the same time.
Not just the Chuppies. I’ve seen 60- and 70-year-old Chinese sitting down in Internet café’s in Shanghai.
Right now, for example, there are almost 900 million people in China that don’t have a refrigerator in their homes — let alone a computer or a car.
Meanwhile, behind this power of 1.3 billion people, you have the Beijing government making a series of financial and structural changes that continue to kick in, adding more energy to the boom. Just this week, Beijing made sweeping reforms to property laws to encourage construction, entrepreneurs, and home ownership.
Here’s a little known action that Beijing also took this week: Previously, day trading had been banned. Now you can day trade on the Shanghai stock market. And they’ve also approved financial futures for institutions to hedge their holdings. That’s another huge plus for international investors.
And, the crème de la crème is that China has just authorized what’s going to be the largest investment company in the world and tap into its $1.1 trillion dollars in reserves.
You’ve got to remember. Asia represents half the world’s population. They’re where the U.S. was in the late nineteenth century, and now they’re leapfrogging — not into the 20th century, but into the twenty-first century.
Martin: May I sum up? Whenever we look at the U.S. markets, we see more risks. Whenever we look at East Asian markets, we see more opportunities.
This is the same pattern we saw last year, but now it’s showing up even more vividly.
Last year, while the U.S. S&P 500 was up just 13%, Hong Kong was up 34%. Russia was up 92.5%! China rose 131%.
Last year, the U.S. was the 56th worst performing stock market in the world. China was the #1 best performing market in the world, except for one or two smaller countries.
Now, this year, it’s happening again! While most of the U.S. market is being held down by the housing and mortgage crisis, most foreign economies have no housing crisis. They have no mortgage crisis.
This brings home what we’ve been saying here all along: If you’ve got all, or nearly all, of your stock portfolio in U.S. stocks, you’re investing in one of the worst performing stock markets in the world today.
You are capturing less than one-tenth of your profit potential. You’re putting all your eggs in one basket — in just one country. You could be exposing yourself to more risk.
And I think you’re missing the largest, the clearest, and probably the most sustainable profit opportunities in the world today.
I was born in this country. So were my parents. Let me tell you a little story about my father because I think it’s very interesting.
It was during World War I, and he was about 10 years old. He lived in a tenement in Manhattan, and one day, he wrote graffiti on the wall. A big tough man came around — I think he was the superintendent — but he couldn’t read English. And asked: “Who wrote this?†So, my Dad stood up proudly and he said “I did. I wrote it.â€
Bob: What did he write? What was the graffiti on the wall?
Martin: It was just six words: “My Country Above All. Forever.†So when Dad told the man, the man smiled and patted him on the shoulder. “That’s good,†he said. “Very good.â€
That gives you a sense of the sentiment that my father grew up with — and that I inherited from him.
But that doesn’t mean we’re going to turn away the amazing profit opportunities that the rest of the world is offering us, or that we’re going to keep our money in sinking dollars. Instead, I want to diversify across a broad spectrum of countries.
Bob: Everyone knows the advantage of diversification to help reduce your risk. But …
Thirteen Hundred Dollars vs.
Thirteen THOUSAND Dollars!
Martin: It’s not just about diversification. It’s about beating the performance you can get with a portfolio that’s limited strictly to U.S. stocks. Look, typically, when people on Wall Street talk about “outperformance,†they’re talking about getting you a few percentage points better here … a few percentage points better there.
But when I say “outperformance,†I’m referring to five, even 10 times the results most investors saw last year.
Case in point: China’s Shanghai Index, which Larry started recommending before it took off, did ten times better than the S&P last year — with a 131% gain …
So let’s say you started 2006 with $10,000. And let’s say you put the entire $10,000 into the S&P 500. At the end of the year, you’d have a gain of about $1,360 (or about $1,300). But that very same investment in China would have made you $13,000. So you’d have thirteen thousand dollars in China. But you’d have only thirteen hundred dollars in the U.S.!
Larry: Wait a second, guys. You can’t expect lightning to strike twice, but I will tell you this: From my latest trip, it looks to me like the economies in Asia are still firing on 8-cylinders, and some, like China, even firing away on 12 cylinders!
So, though the numbers may be different in 2007, China’s economy is being propelled ahead at about the same rapid pace of 10%-plus GDP growth with lots of good news that should keep it on track. The U.S. economy, meanwhile, is suffering the same drag, with some bad news that could hold it back for at least another year.
The trade deficit in the U.S. is still huge; the trade surplus in China is still gigantic and growing.
The U.S. dollar has been falling at roughly the same pace this year as it was last year.
So the precise opportunities this year may vary somewhat from last. But the big picture is the same.
Tony: It wasn’t that long ago that you had to be either very rich or very sophisticated to invest overseas. That began to change when they invented ADRs, American Depository Receipts — foreign stocks listed on U.S. exchanges.
But still, you’d have to buy lots of them, and unfortunately, some of the really exciting butt-kicking countries barely have any ADRs to begin with.
Singapore, for example. Great growth story. Amazing city-state. But it only has three stocks that are listed in the U.S. That’s why the emergence of ETFs is so important.
Martin: And that’s why I’m holding this teleconference. With international ETFs, ANYONE can invest in foreign markets. You can buy just a few shares … or you can buy thousands of shares. You can buy them through your regular brokerage account … or … you can buy them on line. You can get them with deep-discount commissions and you can sell them at any time.
The average investor is saying: “Give me something I can buy on the U.S. exchanges from the comfort of my armchair. Give me something I can buy without having to worry about foreign brokerage accounts or foreign tax laws or foreign currency conversions. Give me something I can buy anytime I want with cut-rate brokerage commissions. Give me something I can sell anytime I want to grab my profits or cut my losses.â€
And that’s what they got. Today, there is an international ETF for almost every major stock market in the world. There’s an ETF for Brazil. There’s an ETF for Singapore. There’s an ETF for India, and an ETF for China.
Bob: How many international ETFs are there now, Martin?
Martin: Last time I counted we were up to almost 110.
Bob: You mentioned some countries that really went through the roof last year. Are those the ones that we ought to consider buying now?
Martin: Not exactly. There are several countries we have identified as among the biggest beneficiaries of the China boom — including not only the ones we’ve talked about today, but also several we’ve not talked about.
One is the ETF for Singapore (EWS). Another, right next door, is the ETF for Malaysia (EWM).
Martin, this is a bargain at a time when I think everyone should be putting some money into these opportunities.
Larry: This is a great opportunity. If you’re holding the ETFs we’re recommending stick with them. If not, it’s about time to jump on board.
Martin: Thanks Larry. That’s why I called this teleconference today. That’s why I asked all our readers to join. That’s why we’ve launched International ETF Trader. This is one of the most exciting times in the history of our world, and in the history of my company, too.
Bob: Ladies and gentlemen, thank you so very much for participating with us again. In what has been an incredible conference call. Have a terrific day.
About MONEY AND MARKETS
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MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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