Three Down-to-Earth Rules

I was brought up on a farm. We grew radishes and green onions in the summer; parsnips and daikon in the winter.

The work was tough. But my siblings and I had plenty of food to eat, our clothes were always clean, and we spent hours chasing butterflies, climbing trees, or swimming in a river slough.

One day each summer, our fun was interrupted when a very important person came to visit the farm.

That’s the day my mother would practically scrub the skin off us and make us put on long pants, while my father would break out the one and only suit he owned.

Who was the V.I.P.? The president of the local bank — the financial lifeline between our negative cash flow of the spring planting season and our positive cash flow from the summer harvest.

If the weather cooperated and the crop prices stayed high, my father would pay back the spring loan in full. If the summer wasn’t so good, he’d have to go back to ask for an extension, hat in hand.

Unfortunately, the bad summers seemed as frequent as the good ones. But despite it all, my father managed to put his three kids through college and live an honest life. In my book, that makes him a giant success.

How did he do it? By sticking with some basic, down-to-earth rules:

Down-to-Earth Rule #1. Never borrow for personal spending. It’s strictly for business.

Down-to-Earth Rule #2. Always pay back the principal and interest in full, and as soon as possible. Then, if you need to borrow again, start from a clean slate. In other words, don’t pile debt on top of debt.

Down-to-Earth Rule #3. Never give up control. The bank is your creditor and deserves all due respect. But don’t let him become the owner.

Today, my father’s 91 and he’s stopped farming. What he hasn’t stopped doing, though, is reminding me about his three rules, especially when he suspects someone might be breaking them.

How America Is Willy-Nilly
Breaking All Three Rules

American consumers and politicians have been on a drunken spending spree. We spend far beyond our means — often just to keep up with the Joneses. Then, instead of paying it back, we pile it up.

And who do you think is loaning us all that money?

Mostly Asian central banks and investors.

China and Japan are the two largest owners of foreign reserves and are currently sitting on $262 and $650 billion, respectively, mostly in U.S. dollars.

And all told, the U.S. owes a cumulative $2.1 trillion to the nine largest countries in Asia. To help put that into perspective, Saudi Arabia, the world’s largest oil exporter, only holds $159 billion of U.S. debt.

The result is that Asia’s largest nations, especially Japan and China, have effectively been transformed into America’s biggest bankers.

This week, China’s President Hu Jintao is making his first official visit to the U.S. and is scheduled to meet with President Bush at the White House on Thursday.

On the surface, he’s coming to ease anxiety over China’s growing economic clout and “help Americans understand China’s policy of seeking sustainable development and peaceful growth.”

That’s why China recently placed a $5 billion order for 80 Boeing jets … removed the ban on U.S. beef imports … and promised to crack down on rampant product piracy.

Meanwhile, President Bush and Treasury Secretary Snow also have an agenda: They figure the last thing our economy can afford right now is for the Chinese to stop buying our Treasuries and stop helping us to finance our $2-billion-per-day trade deficit.

So you can bet that our president and his pals are just as anxious about Hu’s visit as my parents were about their banker’s visit.

Forget the White House.
Show Me Microsoft,
Starbucks, and Boeing!

I’m not overly worried. China wants our dollars just as bad as we want them to buy them.

Instead, what interests me the most about Hu’s trip is what he’s doing prior to his White House visit.

His first stop — in Seattle — isn’t to meet with President Bush. It’s to enjoy dinner at the lakeside home of Bill Gates, pow-wow with Howard Schultz of Starbucks, and tour Boeing’s jetliner factory.

I think it is very telling that Jintao is going to visit the largest software company in the world, the largest airplane company in the world, and one of the most visible retail companies.

It is almost as if Hu and his entourage are on a shopping expedition to figure out what to do with their fast-growing hoard of U.S. dollars. Could it be a repeat of the 1980s when a cash-flush Japan went on a shopping spree and bought American landmarks like Rockefeller Center and Pebble Beach Golf & Country Club?

I don’t know. But here’s one thing I do know: China and its Asian neighbors are growing richer by the day, creating wealth for investors in the right place at the right time.

Big, big wealth.

I’m not telling you something that you don’t already know. The stocks of popular ADRs (American Depository Receipts) have gone berserk in the last year, delivering triple-digit returns:

Stock	Country	Ticker	52 week %
Sify Ltd	India	SIFY	241.2%
Rediff.com	India	REDF	209.3%
Tom Online	China	TOMO	120.9%
Orix Corporation	Japan	IX	114.9%
Woori Finance	Korea	WF	118.6%
Kubota	Japan	KUB	109.6%
China Life	China	LFC	101.7%

However, anybody who thinks that it’s too late to join the Asian growth game couldn’t be more wrong. From everything I can tell, the biggest, most exciting, opportunities are just beginning.

How to Own a Piece of
China’s Crown Jewels

The government of China just announced last week that it will sell off billions of dollars of its most valuable government-owned assets. I’m talking about the economic crown jewels of China, and smart investors are lining up to grab a piece of them.

Here’s the scoop: Wang Zhigang, chief of the corporation-research department of the State-Owned Assets Supervision and Administration Commission, announced last week that Beijing is going to reduce the number of central government-owned enterprises by about half.

His own words: “The goal is for the number of companies to total 80 or 100 in the end.”

But they’re not going to sell those companies via IPOs. Instead, their plan is to mostly merge the companies into the remaining government-owned corporations. This approach is intended to satisfy critics that complained that China has sold its best assets too cheaply, lining the pockets of corrupt investment bankers and stock brokers.

But think about what that means.

It means that, starting later this year, a handful of publicly traded Chinese stocks are going to receive windfalls worth billions of dollars. A stock that’s trading for $10 today could suddenly be worth two, three or even four times that amount if it’s one of the favored companies that inherits one of the jewels.

So I figure the right move is to start accumulating shares in leading Chinese companies. In many cases, those are companies sitting on the IPO launching pad. Some prime examples:

1. Shanghai Prime Machinery’s IPO has already attracted over 20 times more orders than available shares. Shanghai Prime, a spin-off unit of state-owned Shanghai Electric Corp, is selling 600.56 million shares at between (HK) $1.70 and (HK) $2.10 each, representing 10.5 to 13 times forecast 2006 earnings.

2. Bank of China. The BOC will face the Hong Kong stock exchange listing committee on April 27, and should float its IPO near the end of May or early June.

Hong Kong tycoons, like Li Ka-shing of Hutchison Whampoa, Lee Shau-kee of Henderson Land, and Cheng Yu-tung of New World Development, have already secured their piece of this lucrative banking pie. The Royal Bank of Scotland, the world’s sixth-largest bank, paid (US) $3.1 billion for 10 percent of Bank of China in August.

The deal is so hot that bids of less than a few hundred million have been turned away.

What’s behind this mega-demand? Shares of its mainland rivals — China Construction Bank (CCB) and Bank of Communication — have surged since going public.

Shares of CCB have already risen 26% this year. Its $9.2 billion IPO in 2005 was the world’s largest. It’s the third largest bank in mainland China. And it’s valued at just 1.96 times book value.

Bank of Communications, China’s fifth largest bank and first to sell shares overseas, has leaped 38% since December and trades at 2.7 times book value. The Bank of China, however, is priced to sell at only 2 times book value. Therein lies a part of the excitement and the opportunity.

China Merchants Bank and the Industrial and Commercial Bank of China are also expected to sell shares later this year.

Dalian Port, the largest container terminal operator on northeast China’s Bohai Sea, is ready for its (US) $277 million IPO. Dalian Port has set the price range for its IPO at (HK) $2.17 to (HK) $2.57 a share, which translates to 15 to 18 times trailing 2005 earnings.

I think that’s relatively cheap because the number of containers passing through Bohai Rim ports, which include Dalian, Tianjin and Qingdao, grew 25% last year to 26 million standard 20-foot boxes. Dalian Port, which controls 75% of oil terminal operations in the city, saw its profits climb by 14% in 2005.

Tianjin Port will do a (US) $150 million IPO toward the end of this month, and Shanghai International Port, China’s second-largest port behind Shenzhen’s, is going to conduct an (US) $800 million IPO later this year.

One more key point you should not miss: Two Chinese companies are bypassing the Hong Kong Stock Exchange and heading straight for our Nasdaq market. Acorn International, China’s largest television home shopping company, and Microport Medical, a Shanghai-based cardiac and cranial stent maker, are planning an IPO for June. Directly on the Nasdaq!

That brings back memories. I can distinctly remember people telling me that, after rising from 459 in 1990 to over 1,000 in 1995, all the “easy money” had already been made in the Nasdaq. Of course, the Nasdaq went on to quintuple from there and make some investors very rich.

Now, when I look at China, Taiwan, Singapore, India, and South Korea, I see an opportunity that reminds me of the high-tech boom of the 1990s … but with more sustainable growth, a lot less hanky-panky and substantially reduced risk of a bust.

Why? Because most of them are not breaking the three down-to-earth rules.

Stay tuned. More details to come.

Best wishes,

Tony Sagami

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About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. 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. Contributors include Jennifer Moran, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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