The first car I ever owned was a 1963 Ford Falcon. It was round, ugly, and slow … and it took me two summers of hard work on my father’s vegetable farm to save the $100 to buy it.
I then stupidly used more of my hard-earned money to try and turn the Falcon into a hot rod. But I still ended up with a round, ugly, slow car.
One year later, I traded up to a 1968 Chevy Chevelle SS. It was everything a hot rod was supposed to be: sleek, loud, and fast … very fast! Man, I loved that car. Unfortunately, I had to sell it to pay for college.
What’s this got to do with investing? Well, right now, when I look at the U.S. economy, I see a 1963 Ford Falcon. So no matter how much money you throw into the U.S. stock market, you’ll still be riding in a slow vehicle. Meanwhile, China’s economy is moving like a ’68 Chevelle SS, and so are lots of Asian investments.
Our Economy Has
No Get-Up-and-Go
The evidence of a slowing U.S. economy just keeps piling up.
Last week, we saw more signs that the housing market is imploding. Sales of existing homes fell 11.2% in July vs. the same period a year earlier. To make matters worse, the market is flooded with a 7.3-month supply of homes — the most in 13 years.
New home sales were even worse, cratering by a whopping 22%. The supply of homes for sale hit 568,000 units — a record high. That represents 6.5 months of supply, the highest reading since November 1995.
Plus, the Commerce Department reported that durable goods orders fell by 2.4% in July. The pinstripe crowd was only expecting a 0.5% decline. This report is widely used to gauge the health of the manufacturing industry. And it’s beginning to look sickly.
Perhaps the worst news has been the poor profit reports from a bunch of major American companies like Dell, Toll Brothers, and Wal-Mart. Talk about Ford Falcons!
But while these dogs are sputtering and stalling, their sleek, fast hot rod counterparts are moving right along. I think it might be time to make a trade-in:
Trade-In #1
Tech Stocks
I tell you all about Dell’s problems in my report “Six Stumbles and a Big Fall.†One of the many concerns I cite: Executives leaving the company and going over to Asian rivals.
Well, that list just keeps getting longer. In addition to David Miller, who left his post as Dell’s President in China, three more Dell executives have left the company to go work for Chinese computer giant Lenovo in the last two weeks:
Christopher Askew is Lenovo’s new senior vice president in charge of the service department
Sotaro Amanoas is now president of Lenovo Japan
David Schmoock is now senior vice president of Lenovo’s market evaluation and strategy group
Why are all these guys trading in their old jobs to go to an Asian rival? Because Lenovo is firing on all cylinders.
The company just reported that its sales for the first half of 2006 hit $3.5 billion, a whopping 38% jump from the same period last year. In addition, Lenovo’s personal computer sales increased 12%.
Trade-In #2
Real Estate
The weak home sales numbers I mentioned earlier have taken their toll on U.S. homebuilders in more ways than one: Toll Brothers, one of the industry’s bellwethers, delivered its second-quarter results last week. Talk about a broken-down jalopy …
- Profits fell 18% compared to last year.
- Toll Brothers told Wall Street to drop its per-share, full-year guidance to a range of $4.41 to $4.63 instead of the previous $4.69 to $5.16.
- The company slashed its 2007 sales forecast by 15%.
- It’s also walking away from property that it has options on. In dollar terms, Toll Brothers wrote off $23.9 million ($0.09 a share) of unexercised options on land that it decided not to buy.
Things aren’t looking any better under the hood, either:
- Cash on hand fell from $689 million to $322 million.
- Unsold inventory increased from $5.07 billion to $6.23 billion.
- Customer deposits fell from $68 million to $56 million.
- Total liabilities jumped from $3.58 billion to $4.09 billion.
Hmmm … shrinking cash … rising inventory … ballooning debt. I wouldn’t set foot in this rust bucket. But heck, don’t take my word for it. Here’s what CEO Robert Toll had to say:
“The continuing malaise in the housing market, we believe, is the result of an oversupply of inventory and a decline in confidence.
“The speculative buyers of 2004 and 2005 are now sellers; builders that built speculative homes are trying to move them by offering large incentives and discounts; and some anxious buyers are canceling contracts for homes already being built.â€
Wow! Not very reassuring, is it? Especially from someone who’s paid to be bullish on this industry.
Compare that to what’s happening in China and Hong Kong: While Toll Brothers was bemoaning an 18% drop in profits, Hong Kong real estate developer Cheung Kong saw its profits surge 33% to $1.57 billion!
I think Cheung Kong’s strong results are indicative of a larger trend in Asian real estate. After all, real estate prices in most mainland Chinese cities increased by at least 10% in the last year.
Trade-In #3
Consumer Discretionary Companies
For the first time in more than 10 years, Wal-Mart reported a drop in its quarterly earnings. And it warned that the second half could be challenging. According to the company’s chief executive, Lee Scott,
“In the United States, customers tell us they are most concerned about gas prices. This has been consistent every month this quarter.â€
Now, if the largest retailer in the U.S. is having problems, that doesn’t bode well for other businesses that rely on consumers’ discretionary spending.
One area that is especially sensitive to weak spending: the travel industry. Reason: If people are having trouble buying food and gas, they’re not going to fork over money for big vacations.
While the U.S. is looking shaky, I can’t say the same for China. In fact, Chinese consumers aren’t having any problem spending on travel:
Hotel and catering sales in mainland China surged by 15.5% to $71.4 billion in the first seven months of 2006.
The Hong Kong Tourism Board reported that visitor arrivals to Hong Kong in the first seven months of 2006 hit 14.38 million, a 10.3% year-over-year increase.
Hotel occupancy rates hit 88% in July, even after a 3.5% increase in the supply of hotel rooms and high-single digit price increases.
This leads me to a great investment idea: One of the best ways to profit from the booming Chinese economy is investing in Chinese hotels.
I will soon meet with executives of three of the largest hotel chains in China. I expect to uncover a gem or two in the process.
By the way, I’m not saying you should completely abandon the U.S. stock market. But I am saying that certain areas look a lot healthier over in Asia. I’m also saying that anyone who isn’t investing over there is missing out on a fast and exciting ride.
It’s your choice: a ’63 Ford Falcon or a ’68 Chevelle SS. You already know which one I’m taking.
Best wishes,
Tony
About MONEY AND MARKETS
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, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
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