Keith Fitz-Gerald (Money Morning):
Millions of investors who bought gold in the last 12 months are undoubtedly very happy at the moment – considering that the yellow metal has risen 60% since last November to a recent close of $1,138.60 an ounce on Monday.

But chances are good that many won’t be smiling when they discover just what the taxman has planned for their gains.

Unbeknownst to most investors, gold is considered a collectible not a capital asset. In plain English, this means that despite the fact that many people believe they are investing in gold, the Internal Revenue Service (IRS) believes that they are collecting it.

This is no small distinction and hurts investors because it means that gold does not qualify for the 15% maximum tax bite that most of us employ as a matter of routine when we mentally calculate profits earned on investments held for more than a year. That 15% cut for Uncle Sam is the long-term capital gains tax rate that applies to most stock or mutual fund investments.

Precious metals are a completely different story. Profits from these “investments” can be subject to a 28% maximum tax rate if held for more than 12 months. And if they are sold in less than a year, the profits count as ordinary income.

The long and the short of it “is that as a result of gold’s spectacular run-up, many investors may have a tax problem they haven’t counted on when they go to sell,” said Gary E. Ham Jr., of the Oregon-based accounting firm of Jones & Ham PC

This may be especially true for investors who have piled into such asset-backed, exchange-traded funds (ETFs) as the SPDR Gold Trust (NYSE: GLD), the iShares Silver Trust (NYSE: SLV) and the iShares COMEX Gold Trust (NYSE: IAU), for example, because precious-metals ETFs are set up as something called a “grantor trust.” According to Barron’s, ETF investors are treated as owning undivided interests in the actual metal that’s owned by the fund. Therefore, when an investor sells shares in the ETF, the tax code treats that investor as having sold a share of the metal backing the fund.

Click here to continue reading this article on Money Morning.

But we’re not…yet.

Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward — all in a desperate bid to make Americans feel better about the global financial crisis.

To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight (G8) nations looks more like a mutual affection society with central bankers anxious to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”

But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.

Yet that hasn’t quite happened.

Core inflation — which denotes consumer prices without food and energy costs — has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom and boom crowd wondering if they’re worried about nothing.

So what gives?

Well, there are four reasons we haven’t yet seen hyperinflation:

Click here to continue reading Mr. Fitzgerald’s article.

The second group consists of investors who believe they can outsmart the market. They’ve stayed on the sidelines, planning to buy in and make their fortunes when the markets break down a second time. But they may never get their chance.

Both strategies are flawed. And both ignore the single strategy that investors need to employ to profit in the later stages of a recovery rally.

The first group of investors – the indexers – have a unique problem. Broad-based investments such as indices are really only favored in the early stages of any recovery rally, when there’s plenty of easy money to be made.

These investors either don’t know – or choose to ignore – the reality that long rallies tend to change character: Broad-based choices are super when the rising tide is lifting all boats early in the game. But then the game itself changes.

Early on, index investors reap the lion’s share of the market-rally profits. But as rallies mature and capital continues to flow, successful investing becomes more of a stock-picker’s game. This means that specific stocks – not the indices – become vastly higher probability bets.

There are many reasons why this shift occurs, but it really comes down to two key factors: Where the money is going, and where the money is flowing.

This means there’s plenty of fuel to keep the rally alive both here and abroad, and we’re not alone in our opinion.

Beware of the “Golden Period”

Jack Ablin, who helps oversee $60 billion as chief investment officer for Harris Private Bank (NYSE: BMO), says there is still  “an enormous stockpile of liquidity on the sidelines [and] the reinvestment of [that] cash could help fuel the market.”

Unfortunately, this is well-known to investors, which actually makes it a problem. As hedge-fund manager Kyle Bass noted: “We are today in the midst of what economists often refer to as the ‘Golden’ period, where everything feels good and the long-term effects of deficit spending and money printing have not yet been realized.”

This is something I’ve talked about time and again during investor presentations all around the world. People who are already numb from having been pummeled on the way down, have once again become intoxicated with the rally over the 12 – 18 months that such advances typically last. They see a chance to recoup all their losses and be made whole. This makes them more prone to poor timing decisions, or poor investments choices.

Another problem with long rallies like the one we’re experiencing now is that you have be “in” from the get-go or you won’t “go” at all.  Today’s algorithmic trading simply doesn’t allow for the kinds of market pullbacks and corrections we used to see as recently as 10 years ago. I know – I’ve written several of these trading programs. Today, if you’re not in when the money starts moving, you might as well hang it up.

At the same time, you just can’t sit and wait until things get better, either. If you do, you are likely to miss most of the gains.

And don’t bother trying to “time” the market. That’s a recipe for disaster, as reflected by numerous Dalbar studies. The Dalbar data repeatedly demonstrates that investors who try to time the markets not only fail miserably in the near term, over a period of years they tend to fall dramatically behind the market averages.

How much behind? Try 40%-60%, depending on what data period is examined.

Winning Markets – Big and Small

That brings me back to today’s key point. In the early stages of a rally, it’s best to invest using broad, sweeping choices like index funds or exchange-traded funds (ETFs), which are tied to the major indices. Believe it or not, picking the “right” stocks is essentially irrelevant. Sure you always want to have some zoomers in your portfolio, but when the rally really begins, it’s far more important to have broad-based stock-market exposure. It’s a shotgun approach. And it works.

Over the past 118 years, there have been 19 bear-market events in the Dow Jones Industrial Average. The average bear-market drop was 37%. The rally into the next year generated an average gain of 40% from the market bottom – with 70% of the gains coming within the first half of the rally’s duration.

That’s why, for example, I’ve repeatedly told Money Morning readers, as well as subscribers to our affiliated publications, to employ such broad choices as the Vanguard Wellington (Nasdaq: VWELX) or the SPDR S&P 500 ETF (NYSE: SPY).

Today, with the Standard & Poor’s 500 Index having zoomed 57% from its March 9 low, the rebound is 1.5 times bigger than the typical post-recessionary rally.

That means the best choices are now the companies that are backed by trillions of dollars in stimulus spending and that operate in growth markets that support real earnings, real cash flow and real purchasing power.

That makes a lot of sense if you think about it. Fully 78% of the world’s total economic activity now takes place outside U .S. borders, which means that if you really want to “follow the money,” you’ve got to look in areas that you might traditionally have considered as “off limits.” In fact, you may find that you are looking at companies whose names you can’t easily pronounce. But many of those companies not only have double- or even triple-digit growth, they are still viewed as compelling values – because of the torrid growth rates of the markets they sell to.

Take Iceland. After its financial travails, the country once again has positive gross domestic product (GDP) growth. It’s unemployment rate of 7.7% is not only dropping, it’s now well below the U.S. jobless rate of 9.8%.

Iceland was the first nation to have its currency destroyed and its finances and political government replaced.  It embraced its pain, and focused on doing what was necessary to fix its issues. Now its exports are booming, and its outlook is much better than it was just a few months ago.

Iceland has turned into an example of growth following a situation that most people thought was unfixable. From September 2008 to August 2009 – a period in which most economies were shrinking –the Icelandic economy actually expanded 2.4%. For global investors, economic growth – in the face of some of the toughest economic issues in generations – is the Holy Grail in surviving an economic crisis.

Tourism is flourishing in Iceland, as international citizens flock to that country’s shores to enjoy having a strong currency to spend.

Icelandic vocalist Bjork, 32, a former fashion model wearing silver snakeskin leggings, black boots and blond ponytail, recently told a journalist that “business is growing.” Thanks to the utsala – “SALE” – signs that were everywhere, “tourists are buying a lot these days, and even Icelanders are buying more at home.’

Granted, shopping for designer duds in Iceland with a snake-skinned model may not be your notion of a conservative-economic recovery play, but don’t miss the real point here: What Bjork was shrewdly observing was that consumers in her part of the world are no longer panicking. They’re back from the brink of almost-total collapse and have now come to terms with their nation’s economic recovery.
This demonstrates just why investors need to be looking at markets where there is real growth – from the smallest economies like Iceland, to some of the largest – such as China.

Speaking of which, with a population of 1.3 billion, a personal savings rate of 35%, and a government that isn’t suffering from a fiscal hangover, it’s no wonder the world’s leading companies are beating a path to the Red Dragon’s doorstep.

In China, the government’s focus is growth, and banks are looking for projects to invest in.  Those in positions of power and authority understand the need for balancing savings, growth and long-term investments. China’s stimulus plan focuses on infrastructure development, which will generate long-term growth, while the United States had had to use its balance sheet to prop up “zombie banks” – just to keep things from getting worse than they already are.

If this sounds a bit complex, the reality is that it’s actually quite basic. Limiting yourself to index investments at this stage of the market cycle is not your best bet. We’re now at the stage where the world’s stock markets have already delivered the broad, indiscriminate gains that benefit index-investors to more specific opportunities that require more-careful analysis and some specialization. Follow that game plan and you’ll be a long-term winner.

Source: The Two Investing Mistakes to Avoid at all Costs

Of the 41,572 people polled, it now looks like those 31,179 bullish investors kept their word.

The Standard & Poor’s 500 Index has zoomed 15% since those investors were polled (and 53% from its March 9 market bottom).

Let’s face it. A 75% bullish inclination is a disproportionately high percentage. It’s way out of the norm.

What those 31,179 bulls are telling me is … well … we’d better watch out. Statistically, the individual investor excels at making the wrong decision at precisely the worst possible time. I view this survey as yet more evidence that the “herd” may once again be heading down the wrong path.

After the collapse of Lehman Brothers Holdings Inc. (NYSE: LEHMQ) investors yanked more than $120 billion out of equity mutual funds. That’s more than the total amount of money investors poured into these funds during 2007 and 2008, a period when exuberance was at its height, according to Money magazine.

And after the S&P 500 hit its March low, most people missed the subsequent rally – 32% through June 23, when the CNNMoney poll was concluded – a run-up that could have mitigated their enormous losses.

The disturbing reality is that investors chase hot money and hang onto losers.  Most individuals have an awful sense of timing – as well as an unending tendency to act irrationally.

According to a recent Dalbar/IFA study, over-exuberant investors can lose a lot of money.  For example, the S&P 500 returned 11.81% a year on average between 1989 and 2008.  The “exuberant” gain-chaser scored 4.48% in the same time frame. Factor in inflation and the average investor gain disappears completely (See accompanying chart). You could have done better in a bank savings account!

Hope For the Best, Prepare For The Worst

That brings us back to the two most pressing questions of our time:

• What’s going to happen next?
• And what should we do about it?

Although pundits are spewing forth about an “improved” outlook for the U.S. economy, history tells us that we’re more likely to see a stock-market correction in the near term.

Over the last half a century, stock-market rallies that follow the horrific declines we’ve seen over the past 24 months are typically followed by a secondary decline of 14% to 50%.

What will happen after that is anybody’s guess. According to a study by Ned Davis Research, any secular bull market that followed a recession in the last 100 years resulted in gains in excess of 60% during an 18-month stretch. In situations where that rally was actually the catalyst for a resurgent economy, stocks averaged 110% over the next 36 months.

But we also have to remember that the bear market that started all this grew out of the worst financial crisis since the Great Depression. According to longtime investor Jeremy Grantham, the record deficits, stimulus packages and bailout packages have “reduced to guesswork” any market forecasts (as reported in CNNMoney).  That’s probably why Grantham recently warned clients: “If you feel overconfident about anything, take a cold shower and start [analyzing] again. Just be patient. In our strange markets, you usually don’t have to wait too long for something really bizarre to show up.”

Here at Money Morning, I’ve been counseling readers for more than a year to think long term. My advice is to preserve your wealth by navigating the near-term chaos. Stifle the knee-jerk urges to buy or sell.  If you succumb to the urge to follow the herd, the crowd will inevitably lead you down the wrong path. And probably at the worst possible moment.

Instead, follow these five strategies:

1. Position Your Portfolio: Develop a portfolio structure you can live with – such as the 50-40-10 allocation model we recommend in our monthly sister publication, The Money Map Report. That way you can take all sorts of economic contingencies into account, while still maintaining a steady course that emphasizes sound “safety-first” choices, portfolio stability and high income. How much stability should you be looking for? Our 50-40-10 model is typically 30% less volatile than the broader markets. But it can dramatically outperform the broader indices on the upside.

2. Limit Your Losses: Invest no more money than you can afford to lose. This sounds simple, but you’d be amazed at how many of the thousands of investors I’ve talked with through the years still don’t get it. They view themselves as “investors,” when they’ve actually become “speculators.” One Texas man I know lost half his wealth during the past two years. When I asked why he’d put so much money at risk, he shrugged and replied: “Because I could.”

Get your strategy in place then pick specific investments that keep you within the guidelines you established. Focus on global stocks with high dividend yields. And make sure you include a healthy dose of energy, technology and inflation-resistant holdings. Such stocks tend to blossom at the first signs of a real recovery – just like they have after every other documented economic downturn in history.

And finally, always make sure to manage your risk. Limit speculative positions to 2% to 5% of your overall portfolio value. That way even a total loss in one holding won’t be enough to eviscerate your portfolio.

3. Avoid Surprises: In my talks with audiences all around the world, listeners are often the most surprised to learn that successful professionals  don’t wake up with thoughts of how much money we can make each day. Instead, we think about two things from the time we get up until the time we go to bed:

• What’s the most likely thing that could cause me to lose money today?
• And how can I avoid that?

In other words, concentrate on understanding what it is that you don’t know. And then make sure to steer clear of that potential pitfall. It’s an approach that helps you make better decisions. Don’t swing for the fences and risk a strikeout each time you come to bat. Instead, make up your mind to go for much-higher-probability singles and doubles. Risk aversion should be your new mantra, especially now.

4. Risk Less – By Saving More: This is actually a neat little trick. Classic market theory holds that to generate bigger returns, you have to have to take on more risk. That’s true – as far as it goes. But here’s what that adage doesn’t address: By taking some simple steps to save more, you can actually accumulate wealth more quickly than by the increased levels of risk most investors are relying upon at the moment.

5. Don’t Let Yourself Get Whipsawed Out of the Market: Investors who prepare for only one kind of market are the most susceptible to panic selling. To them, investing is an all or nothing propostion. As we highlight in Money Morning, you’ve got to prepare for both “up” and “down” markets. And you do so with some simple hedging strategies. Hedging, after all, isn’t just for hedge funds. In fact, everyday people just like us can use them very effectively, which is why we encourage our readers to do so. You see, if you’ve prepared for “up” and “down” markets, you no longer have to actually “predict” what the markets are going to do. Then you can focus on finding quality companies with real earnings, a healthy dose of overseas sales and high income.

Once these five strategies are in place, you can turn your money loose to do the work it wants do for you. And you can sit back and enjoy beating the so-called “smart” money – practically no matter what the stock market does next.

Source: Five Ways to Outsmart 31,179 Other Investors

But the reality is that this tectonic shift in global finance – and the economic shockwaves that will result – could provide investors with some of the greatest profit plays they’ll ever see in their lifetimes.

No matter which camp you’re in, the China-spawned changes are headed our way.

In 1990, the U.S. banking system was 2.3 to 2.7 times the size of its counterpart in China. Today, however, the situation has been reversed, and there is much more of an imbalance. In fact, China’s banking system has 25 times the reserves of the U.S. Federal Reserve.

At some point, the United States will no longer be able to dictate international monetary policy. Unfortunately, as our monetary policy aptly demonstrates, Washington seems to be the only player involved in this game of high-stakes global finance to not understand just how this is destined to play out.

U.S. leaders continue to employ monetary policy as a weapon – despite the fact that most of the rest of the world views the U.S. dollar as a liability.
At the end of World War II, virtually the entire world functioned on dollars. By some accounts, 100% of the world’s money supply was the dollar. Today that figure has dropped all the way down to 19%, says Rochdale Securities LLC analyst Richard Bove, a noted expert on the U.S. banking system and Federal Reserve.

Now that the federal government has deployed a few trillion dollars more as bailout bucks, it’s clear that the greenback has lost its mojo and the U.S. government has lost its international monetary leverage.

Why is this worrisome? History tells us that the countries with the strongest economies tend to also have the strongest currencies. It may take awhile for the latter to catch up with the former, but the relationship is highly correlated relationship – suggesting that China’s on the rise economically, while its currency is advancing with the unstoppability of a diesel locomotive operating at full throttle.

So if the U.S. dollar gets derailed as the world’s chief reserve currency – as we’ve repeatedly predicted is destined to take place – the world’s next reserve currency is likely to be China’s yuan, known officially as the renminbi.

Washington says that won’t happen, since Beijing takes steps to keep the yuan from being fully tradable. That’s true enough. But Beijing also understands that the dollar is a liability – which is why China’s leaders are going to great lengths to establish the yuan as a viable currency all its own, while simultaneously minimizing the Red Dragon’s dollar-based exposure.

In the last six months, for example, China has signed at least $95 billion in swap agreements, under which it can trade directly with countries for payment in yuan. The countries that sign these deals are getting huge discounts from China in exchange for their participation – and for buying goods from China. And the deals enable China to do an end run around the entire dollar-based currency trading system.

When it comes to this long-term plan to boost the yuan’s importance, China is waging a campaign on multiple fronts. This past spring, for instance, China organized a meeting in Moscow – attended by representatives from Brazil, India and Russia – where the main goal was to supplant the U.S. dollar as the world’s main reserve currency, replacing it with a yuan-led market basket of currencies, one that is simply backed by China’s renminbi, or perhaps even one based on the International Monetary Fund’s so-called Special Drawing Right (SDR).

Created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system, the SDR was redefined in 1973 as a basket of currencies. Today, the SDR consists of the euro, Japanese yen, pound sterling, and U.S. dollar.

My guess is that this gathering in Moscow was merely the first of many such meetings that we’ll see take place around the world in the years to come. Expect the list of attendees to grow, as well.

Given all that we now know, the real question becomes: What happens if China succeeds and the yuan displaces the greenback as the world’s top transactional currency?

The list of potential implications is very long, and includes several scenarios that are almost apocalyptic. But most of the outcomes raise as many questions as they answer.

Let’s consider the Top Five:

• Global Gloom Leads to U.S. Doom: The U.S. dollar goes into freefall for the simple reason that if no country has to hold dollars any longer, they won’t. Instead – thanks to the ragged state of the U.S. government’s finances – many countries will dump greenbacks fast as they can, which will only put additional pressure on an already-strained U.S. financial system, which in turn will further damage our economy.
• Inflation Inflates: Inflation will strike here with a vengeance, as anything bought, sold or priced in dollars will instantly rise in price to offset this fall.
• Repatriation Risk: With the dollar serving as the world’s de factocurrency, U.S. companies bear very little exchange rate risk when the time comes to repatriate assets or make currency-related adjustments. That would change overnight and prices throughout the value chains would rise sharply to compensate.
• Money Costs More: The cost of money itself would rise. If the dollar falls, not only will there be massive selling pressure against it, but the cost of borrowing it will rise dramatically as lenders raise rates to cope with the increased risk of dollar-based transactions.
• Death By Debt: And finally, if there is another reserve currency, other countries will no longer have to buy our debt, and you can guess where that will leave us – especially given the fact that we’ve taken on trillions in new debt to help finance our way out of our current mess.

My best guess is that we won’t see any one of these things in isolation, but will instead experience a blending of several or all of them. To the extent that China continues to absorb our inflationary influences, buy our debt in measured doses and maintain its reserves, we’ll probably have a measured decline in the value of the dollar – but not the catastrophic fall many in the doom, gloom and boom crowd are predicting. At the same time, I also see the IMF change course in the next few years to reflect China’s increasingly substantial influence and monetary power.

On the individual investor level, this clearly provides a new set of influences that most investors have yet to grasp. Most will perceive what I have said as a threat, but I believe the correct way to view this is that there will be a whole new set of opportunities coming our way.

Some of those opportunities will be obvious – like the need to invest in currencies and commodities that are of interest to China. Others, like direct investments in China’s yuan, will require special insight, a good investment guide, or a leap of faith.

The bottom line – and the most important thing to remember – is this: No matter how this plays out, there will always be an upside for investors who are willing to seek it out.

Source:  The Five Financial Shockwaves to Expect When China’s Yuan Swaps Places with the U.S. Dollar

If you’re looking for the next “Big Oil” play, bet on Beijing.  As we’ve been reporting for the past several years, China has been on a global commodities shopping spree, which includes locking up every source of oil that it can.

The Red Dragon has cut deals in Africa, South America Russia and the Middle East – and won’t stop there. Even the mainstream news media is finally becoming aware of this crucial trend.

But here’s the thing. It’s not enough just to know that this is happening. In order to profit, an investor really needs to understand why it’s happening – and to invest accordingly. Investors who lack this insight may make the strategic misstep of betting heavily (or exclusively) on the Western heavyweights – Exxon Mobil Corp. (NYSE: XOM), BP PLC (NYSE ADR: BP) or Royal Dutch Shell (NYSE ADR: RDS.A, RDS.B) – while ignoring the oil sector’s real growth story, which is China.

Just this year alone:

• China and Russia have signed a multi-billion-dollar, intergovernmental agreement to construct an oil line from Russia that will supply oil directly to China. Actually seven agreements in one, the terms depict a deal worth trillions of dollars – including a 20-year oil contract to pump Russian oil to the Chinese market. In return, China has agreed to provide a total of $25 billion in loansto Russian oil companies Transneft and OAO Rosneft Oil Co. China even gets a cut of Rosneft’s production, as part of the deal.
• In Africa, China’s CNOOC Ltd. (NYSE ADR: CEO) and Sinopec Shanghai Petrochemical Co. (NYSE ADR: SHI) are teaming up to buy a $1.3 billion stake in Angolan offshore development rights from U.S.-based Marathon Oil Corp. (NYSE: MRO). A key point of note: Angola – historically one of Exxon’s favorite investment targets – has recently overtaken Nigeria as Africa’s biggest oil producer.
• While noting that it’s hardly a done deal, The Wall Street Journaldid report earlier this month that China National Petroleum Corp. (CNPC) is interested in buying all or a part of Argentina’s YPF SA (NYSE ADR: YPF) for $14.5 billion.
• In Africa, China’s CNOOC Ltd. (NYSE ADR: CEO) and Sinopec Shanghai Petrochemical Co. (NYSE ADR: SHI) are teaming up to buy a $1.3 billion stake in Angolan offshore development rights from U.S.-based Marathon Oil Corp. (NYSE: MRO). A key point of note: Angola – historically one of Exxon’s favorite investment targets – has recently overtaken Nigeria as Africa’s biggest oil producer.
• Reports continue to circulate that CNPC will be taking the majority stake in Iraq’s Rumaila oilfield from BP. Rumaila is Iraq’s biggest oil field, producing more than a million barrels of crude oil per day.
• And China has become quite chummy with Brazil’s Petroleo Brasileiro (NYSE ADR: PBR). Petrobras is developing a huge new offshore field – one of the biggest new discoveries in decades, in fact – and any deal would include a production-supply agreement.

This flurry of deals hasn’t been a surprise to Money Morning readers. Even so, it’s worth taking a moment to look at some of the key catalysts behind many of these deals. Let’s look at the Top Three:

• Nervous Reserves: China is sitting on the world’s largest pile of cash – more than $2.3 trillion by some estimates. With an estimated 70% of that, or about $1.61 trillion, in U.S. dollars, there is no question it’s a huge source of financial firepower strength at a time when global markets are uncertain, if not downright weak. But it’s also a liability, too, in that China can’t diminish its high-concentration of greenback holdings without pushing the dollar off a cliff. So buying oil is a great way for China to diversify its reserves without kneecapping poor old Uncle Sam.
• Those Not-So-Free “Free” Markets: China has less faith in the “free” markets than the West does. Ironically, the United States and other Western powers are partly to blame for Beijing’s free-market skepticism. For instance, not only did the United Statesslam the door in China’s face when China tried to buy Unocal Corp. [now a part of Chevron Corp. (NYSE: CVX)]  a few years back, but when former U.S. President George W. Bush invaded Iraq, the war summarily cut off China’s ability to source oil from that Middle East member of the OPEC 12 (the Organization of the Oil Producing and Exporting Countries). Prior to the invasion, Beijing really didn’t consider the need to diversify China’s foreign-oil sources so our military action prompted their economic reaction. Now the genie’s out of the bottle.
• Peerless Perspective: China’s leaders know that they must lock up oil supplies at a time when the Western world can’t seemingly be bothered to understand that this is a zero-sum game. In other words, China views the global financial crisis as an opportunity to be exploited for economic gain and the security of its people, not as a problem to be solved. China understands the big picture, and even though we apparently painted it, the West doesn’t.  By scouring the earth for oil at a time when the West is hamstrung by the global financial crisis, not only is China able to strike more favorable deals at more favorable prices, but it’s locking up huge supplies of commodities for its own use for years, even decades, to come. In doing so – and this is the part of the equation so many experts don’t get – these resources are no longer available for our use here in the United States, which has major supply and pricing implications for this market.

Bamboozled by the Western media – which has perpetuated the “global-recession-means-lower-demand” story – it simply hasn’t dawned on most people here in the West that China doesn’t care about the majorlong-term impact this global buying spree will have on our economy.
Besides, this whole story thesis is flat out wrong. While the recession is definitely dampening our use of oil and gasoline, China’s oil demand is growing by more than 20% a year. And of the 8 million barrels a day that China already uses, half comes from imports. Beijing sees those as troubling statistics, which means that China:

• Absolutely must lock up as many significant external supplies oil as possible right now.
• And must accelerate its domestic exploration-and-processing efforts at warp speed.

Nor is this a static situation. China’s auto market is growing by 50% a year. It’s already the world’s largest, having passed the United States earlier this year. In fact, according to some estimates, China will have more cars on its roads in the next 20 years than all those we currently have in this country – even if you include the engine-less “restoration project” your next-door neighbor’s son has sitting under an oak tree in their back yard.

China’s never known high prices and its consumers haven’t either. So they don’t care like we do about what “price” is posted at the pump. Sure, you can argue as many Western analysts do, that China’s fuel is highly subsidized, but so what? That’s a moot point. Consumers who remember what it was like back when gasoline was 99 cents a gallon aren’t going to grouse about how it now costs $6 a gallon – these newly minted motorists will merely see gasoline as just part of the cost of having a car.

Because it understands its need for continual economic progress – as well as the role oil has to play to make that a reality – China is doing whatever it takes to guarantee future supplies, including structuring deals in ways that have caught Western companies by surprise. For instance, China’s companies are looking at how they can get a deal done by giving the other party something it actually needs. Moreover, in a move that’s as frustrating to Western leaders as it is surprising, many of these deals come with no strings attached. I suppose you could call it the “Red Dragon Option” – although Western firms would do well to embrace these as potential Harvard Business Review case studies.

After reading this overview, a U.S investor might want to conclude that China’s already got this one wrapped up and that “any resistance is futile.” But that’s not necessarily true. While China’s grown by leaps and bounds in terms of its financial sophistication when it comes to these deals, the country still lacks the relative exploration-and-production technology to go after the deep-water reserves and complicated fields where most of the still-undiscovered oil remains. Those are also the same kinds of locations where natural gas may be the better bet.

And that suggests that investments in both sectors – including deep-water drillers and companies that specialize in natural-gas liquification -may pay off for investors anxious to dine with the Red Dragon, instead of being listed as an entrée on the menu.

Source: Three Reasons China is Positioned to be the Oil Sector’s Next Big Profit Play

[Editor's Note: The global economic recovery will create an estimated $300 trillion worth of global-investing-profit opportunities. To find out how to capitalize and profit, you just need to know where to look.

]]> http://www.contrarianprofits.com/articles/three-reasons-china-is-positioned-to-be-the-oil-sector%e2%80%99s-next-big-profit-play/19976/feed 0 http://www.contrarianprofits.com/articles/the-secrets-to-global-dividend-investing/19739 http://www.contrarianprofits.com/articles/the-secrets-to-global-dividend-investing/19739#comments Fri, 07 Aug 2009 00:24:39 +0000 Keith Fitz-Gerald http://www.contrarianprofits.com/?p=19739 If you want a stable dividend, focus on global companies. Dividends still matter. But you have to know where to look.

A record setting 367 companies reduced their dividends during the second quarter, no doubt leading many shell-shocked investors to conclude that income is dead.

But there’s more to this story. A total of 283 companies actually said that they boosted their payouts, and an even-larger group of companies maintained their current dividend payouts, Standard & Poor’s Inc. reported.

Not surprisingly, each of the two groups of companies featured some defining characteristics. The companies that had cut their dividends were largely domestic in nature, or at least had a decidedly domestic emphasis. By and large, the firms that were able to maintain or…

When Airbus recently announced the delivery of its first China-built passenger jet, it was more than just the usual bit of corporate PR. It was an admission that any company that wants to remain a global leader in its industry will have to embrace China as a customer – and probably as a partner.

Airbus – a subsidiary of defense giant European Aeronautic Defense and Space Co. NV, also known as EADS NV – said it assembled the A320 passenger jet in a plant in Tianjin, China’s sixth-largest city. The factory is 49%-owned by a Chinese consortium, and is expected to produce another 10 passenger jets this year alone.

The China connection doesn’t end there, either: The just-completed A320 will be sold to a leasing company and eventually put into service by Sichuan Airlines Co. Ltd., a regional carrier.

Both Airbus and its U.S. rival, The Boeing Co. (NYSE: BA), understand that the Chinese market is crucial to their futures. Boeing has said that China will become the largest aviation market outside the United States by 2028, with the mainland set to require 3,700 additional aircraft - worth more than $350 billion – in that time. Airbus, which projected a slightly lower figure of about 2,800 aircraft, hopes to see its market share rise from about 30% now to about 50% in the next couple of years.

In the near term, the global downturn has left China’s carriers feeling the pinch, too, but it’s the long term that has companies such as Airbus and Boeing feeling both excited – and worried.

In many industries, partnerships represent the price of entry. And in the long haul, China has ambitious plans of its own. In the commercial airliner business, for instance, it is already developing a regional airliner and more recently has launched plans to design and build a globally competitive jumbo jet of its own.

The Rise of China as a Powerhouse Market

One of the hallmarks of any great economy is its ability to produce technically complicated machinery. I’m not talking flat screen TVs here but stuff like spaceships and, closer to earth, commercial and military aircraft. While Airbus is a partner right now, the point is that China is moving up on the technology scale both hard and fast. Faster, in fact, than most Westerners realize.

But the rollout of a completely Chinese-built Airbus A320 highlights something else, the significance of which is lost on most investors: It’s not really about Chinese airplanes or even the fact that China is making something new. The real key here is that Airbus – like many companies – understands that the Chinese market is growing so fast, and has the potential to be so huge, that that it has to invest there, and do so as a partner, or risk getting left behind.

Chances are good that Airbus understands something else that I’ve been telling investors since I first visited China nearly 20 years ago: There will come a time when China makes the transition from just being the world’s biggest manufacturer and becomes the world’s biggest market. In the long run, it’s not about China the export machine – it’s about the Red Dragon’s transition into a full-fledged consumer market.

With more than 300 million people – the majority of whom save an average of 35% of their income, China’s quickly emerging middle class is by itself potentially larger than the entire U.S. population. And the top 2% of China’s academic community – I’m talking the best and brightest only – is larger than our entire university population.

The bottom line: China not only has the capability to produce entirely new and different products, but its consumers increasingly have the ability to buy them. Consider Snow Beer. Most people have never heard of the ubiquitous green bottled stuff because it’s sold only in China. Yet according to beer-market-researcher (yes, they do exist) Plato Logic Ltd., Snow Beer sold about 6.1 billion kiloliters of beer in 2008, up 19.1% from the year before – outselling such former brand leaders as Bud Light and Budweiser.

Not surprisingly, Snow Beer is a partnered product - the result of a collaboration between China Resource Enterprise Ltd., and London-based SABMiller PLC (OTC ADR: SBMRY) news portalalibaba.com reported.

Maybe this won’t surprise you, but it never fails to surprise the majority of people I talk with when they learn that China is now the world’s largest beer market, having surpassed the United States as early as 2001.

It’s much the same story with cars. For the past four months running, China has been the world’s largest automobile market. There are still a dozen or more automakers slugging it out for Chinese consumers’ hearts and minds, but all the biggies are there – including the only profitable business unit of General Motors Co., the Japanese, European makers and more. China this year also became the world’s largest producer, consumer and exporter of light-duty electric automobiles.

China Profits Poised to Zoom

And that brings us back to Airbus.

After delivering the 10 planned A320s from its Tianjin factory this year, Airbus plans to deliver aircraft at a rate of four a month by the end of 2011. Overall, Airbus expects to deliver 70 A320s to China in 2009 – a total that includes jetliners built in Europe.

But it’s just not enough, notes Airbus China President Laurence Barrons. In fact, the executive told the China Daily that the “ramp-up [production] capacity of 48 planes a year is insufficient to meet [domestic] demand.”

It’s not surprising, then, that Airbus is planning on boosting production to 286 aircraft a year in Tianjin, which puts the China production facility on par with Toulouse and Hamburg, where the company has its European plants. Ultimately, and again here’s the really important stuff, there’s no reason in the world why Airbus won’t begin selling Chinese-made aircraft overseas to non-Chinese carriers within the next few years. Not only will this further pressure Boeing, but also it demonstrates yet again that there isn’t an asset class on the planet that won’t be affected by China’s growth – a point that I’ve made so often that it’s basically become a Money Morning mantra.

Speaking of which, Chinese domestic air passenger growth would make a western air exec drool. According to China’s Aviation Administration, domestic traffic is up 17% to 56.9 million in the first four months of 2009, at a time while international traffic fell 17% to 5.6 million. Some consider that a wash, but get this: Over the past 30 years, air passenger traffic rose at an average annual rate of 16% – reaching 190 million at the end of 2008.

In a statement issued on April 8, Li Jiaxiang, the director of the Civil Aviation Administration of China, stated that China intends to boost travel to some 700 million trips a year by 2020. And that underscores yet again the projected growth in China’s middle class strength. Somebody’s going to be paying for all that travel. My own travel experiences in China suggest that it will be the Chinese Yuppies, or “Chuppies.”

With the increase in demand has come an escalation in quality – of products and services. Gone are the days when flying Air China meant taking your life into your own hands and ghostly silent terminals at a few scattered airports. Also gone are the formerly ubiquitous souvenir shirts depicting overcrowded aircraft with parts falling off as they zoom skyward.

Flying in China today is a wonderful experience that I look forward to each time I visit China. The airports are modern and well staffed, the security is generally excellent and the flight crews are as sharp as they get. Increasingly, the aircraft are mostly all new – a welcome change from some of the timeworn airframes I routinely hop aboard when traveling back here in the United States. Of course, having real food with real silverware is a nice perk, too, in an era when a boxed lunch sets you back seven bucks.

Now, before you guys jump all over me with comments about state subsidized travel and the like, I know – you’re right. But that doesn’t change the fact that air travel in China is a throwback to an earlier – and eminently more pleasurable – time when travel was an experience to be enjoyed, and not just time spent getting from Point A to Point B, as is now the rule in the Western world.

In a recent interview, the president of Sichuan Airlines Co. Ltd., showed me that China understands the path to take to win in the global game of business when he said that “when air travel becomes a consumer pastime, that’s when you will see the real peak of aviation demand and industry growth.”

That’s true of virtually every market in China these days – which is why investors better not miss their flight: The Red Dragon’s domestic market is just getting ready for takeoff … 

Source: Airbus Deal Shows Investors That China Profits Are Cleared For Takeoff

Editor’s Note: Fifteen trades. All profitable. Since launching his Geiger Indextrading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 15 for 15, meaning he’s closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.

But the “hottest” investment money may soon be flowing from China back into the United States – thanks to an accompanying development that didn’t even make the news (let alone headlines) here in this country. This will translate into windfall profits for U.S. investors with holdings in the “right” kinds of companies, and in the long run should bolster the U.S. dollar.

This other, below-the-radar development was China’s decision to relax the rules that guide its company’s overseas investments. In a clear attempt to boost investments beyond its borders, China has changed some of its rules to make it easier for its companies to make foreign investments, and to use foreign financing for those deals.

Why China’s “Hot Money” is Headed Our Way

The new rules – which take effect Aug. 1 – will make it lots simpler for China-based firms to make major investments here in the United States– no small deal at a time when credit and other forms of capital remain scarce. This development is especially bullish for U.S. investors holding stocks in U.S. companies involved in such industries as oil, gold, natural resources and high technology, as well as companies that possess strong global brands, since these are precisely the kinds of companies China-based firms will be on the prowl for.

Once the rules take effect, Chinese companies will no longer have to report foreign currency transactions, or go through China’s central bank. Instead, these firms will be able to buy foreign currencies in whatever market they happen to be operating in, and will even be able to borrow from the banks in those markets as a way of fueling direct overseas expansion. Lastly, China-based firms doing business abroad will no longer have to repatriate assets, meaning they will be able to take their foreign profits and directly reinvest them overseas.

China is making this bold move for a number of reasons. Obviously, Chinese leaders want their country’s economic expansion to continue unabated, and these investments will provide China and its companies with access to leading products, cutting-edge technologies and badly needed natural resources – much of it at bargain prices, since many of the top target markets are mired in recession.

But a key incentive for these liberalized rules has to do with China’s aforementioned foreign currency reserves, an estimated 70% of which are held in dollars or dollar-denominated assets. By allowing its companies to make direct investments, and by no longer forcing them to repatriate foreign currencies, China believes its dollar-based holdings won’t keep rising at an accelerating rate.

At first blush, that sounds like it would be bad for the greenback. Surprisingly, the reality will be quite the opposite.

Defusing the “Nuclear Option”

For many investors concerned about the outlook for the U.S. dollar, the threat that China will stop buying U.S. Treasuries – or even worse, might “dump” the U.S. government debt – has provided fodder for something known as the “Chinese Nuclear Option.” The basic premise is this: China, fed up with the United States’ spendthrift ways, and overly liberal uses of debt, finally gets fed up with the losses it’s been taking on its U.S. investments and opts to dump both U.S. dollars and U.S. debt – a move that crashes the U.S. economy.

This scenario is a popular one within the conspiracy crowd. The doom-and-boom merchants also seem to like it.

But what these folks don’t understand is this: China can’t stop buying U.S. Treasuries, and can’t cease to accumulate U.S. greenbacks – even if its leaders wanted to.

In fact, based on my 20 years of experience in the region, I expect China to accelerate its Treasury purchases throughout the rest of this year and into 2010, which will come as a shock to all those expecting U.S. Treasury sales to crater. But I also expect the Red Dragon to take a few other steps that also will catch most western observers by surprise.

Before I get to that though, let’s talk about why China’s not going to start dumping dollars anytime soon and why the so-called “nuclear option” is actually a benign threat:

• China needs our trade and the money that comes with it – so you can expect reserves to continue to climb. In fact, my guess is that we may see Chinese currency reserves rise to as much as $3 trillion less than 36 months from now – and that’s even after China’s economic leaders take steps to slow down the pace of growth it the country’s foreign reserves!
• China finds itself the unanticipated position of needing America. And America of needing China. Many people may not like it, but that’s a different story. Even if the Chinese wanted to stop buying our bonds and trading in our dollars, there is not another currency on the planet with enough liquidity at present to absorb the overflow. The euro came close a few years ago, before it ultimately failed. And that means that China is stuck with Uncle Sam – and Uncle Sam with China.
• Thanks to the record inflows in the second quarter, China now has $2.13 trillion in currency reserves, some 70% of which is dollar-denominated. That means that China can no longer afford to see the U.S. dollar dumped. If that happened, China’s economic future would be put at risk – something that Beijing is not about to let happen. Indeed, China must continue to support the greenback, or risk a complete meltdown. So it will find a way to “deal” with the growing U.S. debt load. At the very least, we may well see China at least maintain its current pace of Treasury-debt purchases; and it may well step up its Treasury purchases for the rest of this year and throughout 2010.

China: The Planet’s Most Promising Profit Play?

Just this week, China reported that its economy expanded at a faster-than-expected 7.9% for the second quarter – even spawning talk of a “V-shaped” economic rebound. After China’s growth rate was reported to have slowed to 6.1% in the first quarter – the worst showing in a decade – economists said the best investors could hope for for was a “U-shaped” recovery, and perhaps not even that.

Past statistics will now probably be revised higher, a fact that led HSBC Holdings PLC (NYSE ADR:HBC) China economist China economist Qu Hongbin to boost his forecast: He’s now forecasting growth of 8.1% this year, and is forecasting growth of 9.5% in 2010 – up from prior estimates of 7.8% and 8.1%, respectively. China’s recovery will be broad and deep, and will be due to inherent health, and not just because of the $586 billion economic stimululs package the country announced last November – a stimulus we said at the time was designed as much to benefit the West as it was to boost China’s domestic health.

It now appears that assessment was completely correct.

For folks who think China’s all about control, these loosened foreign-investment rules and faster-than-anticipated growth should serve as a real eye-opener. China is a communist country in name only. Driven by an intense need to maintain its growth and the desire to become a respected member of the global Tier One fraternity, China is rapidly becoming one of the world’s most effective and efficient capitalists.

The new financing rules will help China build on its recent successes in at least three key ways, by:

• Enabling China-based firms diversify abroad, making them more globally competitive, and much more flexible in terms of the opportunities available to them. I see this as an extension of something I said way back in 2007, when I mentioned that Chinese companies – in the truest Confucian tradition – would view the credit crisis as an opportunity to be capitalized upon rather than a burden to be endured. Investors can China-led and funded mergers and acquisitions to jump significantly in the next 24 months. Investors who take the correct positions ahead of time can expect to profit handsomely – in both the near-term and over the long haul.
• Helping Beijing balance the needs for constant internal growth against the ever-growing international reserves requirements it now sees developing around an increasingly fragile U.S. dollar. Expect Beijing to be especially active in the use of the multi-country-swap agreements it recently put in place as a means to this end.
• Creating ways to help China offset the economic risks associated with its concentrated dollar holdings. Investors can expect to see escalating pressure on the World Bank to create special drawing rights and/or China-led currency equivalents as this situation develops further.

There is no doubt that some people will view what I have told you today with fear. Others will greet this news with hostility. Both reactions are to be expected in an era of increasingly protective legislation emanating from one of the worst financial crises on record. But I also think these are both the wrong viewpoints to embrace.

You see, I smell opportunity.

As noted above, the relaxation or outright removal of these foreign-investment curbs by China is simply another strategy designed to slow the accumulation of dollar-denominated reserves and to reduce the risks associated with the shaky greenback.

But China-based companies will go on a shopping spree, seeking out the world’s biggest bargains. And right now, some of the biggest markdowns can be found in the U.S. market. The bottom line is this: In making these moves, China has essentially installed a big neon arrow that tells us where the hot money is headed – specifically, right into companies involved with oil, commodities and currencies. Companies with high-tech know-how will be prime takeover targets.

And, given the growing affinity China’s emerging consumer class has with top global brands, companies that control the world’s most-popular brands will be the recipients of capital infusions – if not outright buyout offers.

Oil and commodities are a literal no-brainer. If China wants to slow down the accumulation of reserves in U.S. dollars, and there isn’t another currency that’s widely held enough and liquid enough to take the greenback’s place, natural resources and hard assets are the most logical place to be.  We’ve been on this trend for some time, now.

The same holds true for currencies. History demonstrates time and again that strong economies produce strong currencies. From the Romans to the Babylonians in ancient times, to the English, French and Spanish in the Age of Exploration, and even to the dollar and yen in more-recent decades past, the strongest currencies always belonged to the countries with the strongest economies, and with the strongest assets, to boot.

Right now, that all describes China.

To position yourself for profit, consider starting with one of EverBank’s WorldCurrency Access Deposit Accounts – for Chinese renminbi. Not only is it the only deposit account of its kind in the United States, it’s also insured by the Federal Deposit Insurance Corp. (FDIC). As another possible profit play, consider establishing a small position in the WisdomTree Dreyfus Chinese Yuan Fund ETF (NYSE: CYB). As an exchange-traded fund, or ETF, that tracks the Chinese yuan, it’s easy to trade and even easier to own if you don’t want to hassle with direct currency ownership.

Investments such as this one benefit from strong growth backdropped by a system of stability.
Expect both.

Zhou Xiaochuan, governor of the People’s Bank of China – that country’s version of the U.S. Federal Reserve – recently ruled out any sudden shifts in China’s foreign-currency-reserves-management programs, telling Bloomberg News that his country’s central bank will continue to be invested to “ensure liquidity, safety and returns.”

China will be a big beneficiary from such a stable strategy – as will investors who understand these new rules and apportion their capital accordingly.

Source: How to Profit From China’s “Hot Money” Strategy

[Editor's Note: Fifteen trades. All profitable. Since launching his Geiger Indextrading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 14 for 14, meaning he's closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index.]

Just last week – for the first time in 60 years – Taiwan opened its doors to investments from Mainland China. The impact was almost immediate. On Friday, Guangzhou-based China Southern Airlines Ltd. (NYSE ADR: ZNH) submitted the first bid under the new regulations and became the first mainland company to apply to invest in Taiwan.

By the day’s end, three more of China’s air carriers had joined the race and filed applications to invest in Taiwan: Air China Ltd. (OTC ADR: AIRYY), China Eastern Airlines Corp. Ltd. (NYSE ADR: CEA) and Hainan Airlines Co. Ltd. Clearly, these companies understand the stakes here, which is what’s behind the rush for these potentially lucrative new routes between Taiwan and China.

Speaking for China Southern, spokeswoman Zeng Qingning noted in theTaiwan News “we can begin selling tickets once our office is approved to become a branch.” My experience suggests that other companies are well advanced in their preparations too, which is why this probably isn’t the last we’ll hear on this topic.

One-Way Street

Just last Tuesday, Taiwan’s Ministry of Economic Affairs (MOEA) announced that China-based companies and investors would be permitted to invest in more than 100 different product-and-service categories, and that regulations governing applications by China-based companies seeking to open branches or subsidiaries in Taiwan also were ready.

These initiatives were an outgrowth of several new investment accords reached in May between the Association for Relations Across the Taiwan Straits (ARATS) and the Straits Exchange Foundation (SEF). When I reported on these at the time, I told Money Morning readers that they literally were watching history in the making just as I was from my perch in China as the news unfolded.

Prior to last week, “cross-strait” investments had been a one-way street – from an official standpoint, at least – with Taiwan companies having invested hundreds of billions of dollars in Mainland China,including about $77 billion since just the late 1990s alone, The Wall Street Journal Asia reported.

In return, China’s been allowed absolutely zilch and has been legally barred from making investments in Taiwan. The fear – at least what’s been stated publicly – is that China would use its rapidly expanding economic might to blunt Taiwan’s efforts to remain an independent nation.

(You may recall from your history books that China views Taiwan – formerly known as Formosa – as a “breakaway republic,” a position the island nation has held since 1949, when the two split during a civil war that led to the creation of the communist-controlled People’s Republic of China.)

China’s Newfound Role as an Economic Savior

Behind the scenes, however, the story is much different. Many Taiwanese business leaders I’ve spoken with confidentially welcome normalized relations and view the opening process as a development that’s long overdue. For them, it’s not about political aspirations; it’s about what China can do for their over-leveraged, underutilized assets. Many, including new Taiwan President Ma Ying-jeou, for example, are acutely aware of the fact that Taiwan missed out on many of the benefits of China’s rapid industrialization and global emergence over the past 10 years, thanks to poor political relations and antagonistic regulation.
And it’s cost Taiwan dearly. The desire for continued independence aside, once-proud Taiwan has become another in a long list of nations around the world that are eating big slices of humble pie and that now see China as a potential savior from the current global financial crisis.

Taiwan’s experience with the Taipei 101 Tower is a concrete example of the potential benefit of China’s emerging economic might. The tower was supposed to stand as a symbol of Taiwan’s newfound economic prowess and, at the time of its construction, was the world’s tallest building.

But it soon became a colossal white elephant. In fact, until very recently, it stood less than 50% occupied. That’s when several of China’s corporate powerhouses took up residence, including:

• Lenovo Group Ltd. (OTC ADR: LNVGY), the growing global PC giant.
• Sinosteel Corp., the major iron-ore importer.
• And Tiens Group Co., a China-based direct-selling conglomerate that is the world’s fifth-largest healthcare products firm.

According to The Wall Street Journal, the building is now more than 80% occupied and rents in the area have risen by 5% to 10% in anticipation of more highbrow Chinese clients. Of course, it doesn’t hurt to have such big-name players as Bank of America (NYSE: BAC), Google Inc. (Nasdaq: GOOG) and even Merrill Lynch (NYSE: SAR) as tenants, but the reality is that the Mainland China companies are the firms that are really being sought right now. That’s particularly true at a time when the mainland economy remains on track for annual growth of 8% or more this year, and appears to be the only one of the world’s top industrialized economies that’s not in a deep state of denial or contraction or both.

The fact that China’s bucking the trend is not lost on the Taiwanese business community. Nor is the fact that many of the best-positioned and fastest-growing Mainland China companies are state-owned enterprises.

“In contrast to the past, when this was seen as a threat, they’re more attractive now for their deep pockets,” said one local real estate professional I interviewed who wanted to remain anonymous.

Not surpassingly, the welcome mat is not out for military-backed enterprises. Nor does it include potential investments in high-tech or real-estate-development projects. I think that will change, particularly if Taiwan’s economy registers a couple more consecutive quarters of contraction, and if its companies continue to experience weakened global demand for its products.

The Art of the (Asian) Deal

Despite the very clear need, Taiwan is still trying to exercise some caution in deciding which deals to approve. According to Deputy Economic Minister John Deng, if the capital comes directly from China the economics ministry will review it. Capital coming from third party destinations “investing over 30% in, or effectively controlling local companies” falls under the same scrutiny. Likewise, Deng noted, if China invests in more than 10% of a company’s stock, it will be “seen as [a] direct investment.”

So far, the first couple of Mainland China delegations have already reached $68 billion worth of deals in various industries.  Some are undoubtedly smaller and involve a smattering of the 200 industries open for direct investment, but it’s the bigger transactions that have everybody excited because they are a harbinger of better times and more profitable relationships ahead.

In April, for example, China Mobile Ltd. (NYSE ADR: CHL) offered $527 million for a 12% stake in Taiwan-based FarEasTone Telecommunications Co. Ltd. Because it was made prior to the new rules and involved the politically sensitive telecom industry, the consensus is that the deal won’t pass scrutiny. But you never know and that’s part of the thrill of the hunt.

Portfolio manager Henrietta Luk of Melchior Asian Opportunities Fundnotes that “local retail investors have gone on a treasure-hunt frenzy guessing which is the next industry or company to link up with China, leaving foreign investors chasing any stocks that are not limit up to make up for their hugely underweight positions in Taiwan.”

And they will have to chase them – literally. According to the Taiwanese Tourism Board, more than 300,000 Mainland Chinese visited Taiwan through April of this year, versus 320,000 during all of 2008. The number of mainland airports serviced from Taiwan has increased from 21 to 27, while the number of direct flights has soared from 108 to 270 per week, an increase of 150%.

Given that jump, it’s no surprise that China Southern Airlines submitted the first bid under the new regulations – or that the three rivaling carriers joined the hunt that same day.

If you’re of the same opinion, and want to attempt to ride this wave yourself, consider getting started with an investment in an exchange-traded fund (ETF) – specifically, the iShares MSCI Taiwan Index Fund (NYSE: EWT). With top holdings in computer hardware (42.44%), industrial materials (21.93%) and financial services (16.42%), you’ll no doubt hit something on China’s wish list soon.

Watch for agreements either late this year or early in 2010 that will permit the two countries to trade one another’s shares for the first time in 60 years – and then watch for the huge jump in liquidity that goes with it. I’ve been hearing for several months now – very quietly, I might add – that regulators in both Taiwan and China are considering a dual-listing agreement that would at least partially remove restrictions that prohibit individual investors from directly investing in each other’s stocks.

There’s clearly a long way to go here with regard to the global financial crisis, but the flurry of cross-straits activity we’re seeing and the accelerating nature of the activities there provide important confirmation that we’re on the right track.

I have no doubt that Taiwan will turn out to be one of the region’s powerhouse investments over the next five years – albeit one that is more closely tied to Beijing’s fortunes than many people on this side of the Pacific are inclined to accept.

Source: By Opening its Doors to China for the First Time in 60 Years, Taiwan Paves a New Path for Investor Profits

Editor’s Note: Fourteen trades. All profitable. Since launching his Geiger Indextrading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 14 for 14, meaning he’s closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, Geiger Index. ]]> http://www.contrarianprofits.com/articles/by-opening-its-doors-to-china-for-the-first-time-in-60-years-taiwan-paves-a-new-path-for-investor-profits/18799/feed 0