To those who have followed his career, that’s not a huge surprise. After all, while 2008 was a year that Wall Street would very much like to forget, for Fitz-Gerald it ended up being a year to remember.

Fitz-Gerald, a longtime market professional who has been investment director of Money Morning since 2007, made a number of key investment calls last year and has watched as the market continues to prove his forecasts correct. For instance:

• When crude oil was trading listlessly at less than $90 a barrel, Fitz-Gerald predicted in a Money Morning Outlook 2008 investment story that “black gold” would move well into the high triple digits – and months later saw oil prices soar to an all-time high of $147 a barrel,
• When analysts and elected officials in Washington were attempting to soothe American taxpayer fears by saying the cost of fixing the financial crisis could be capped in the “billions,” Fitz-Gerald dismissed the prognostications and warned that the cost would be well into the trillions. He also warned that the crisis would involve the global banking community in a contagion that would spread well beyond our own borders.
• Predicted – within a few points – what’s so far proved to be the interim market bottom in the Standard & Poor’s 500 Index.
• Warned investors that China’s stock market was in for a correction, but told investors to swap out of China stocks and into stocks of global companies doing business in China as a means of minimizing risk – a market call that brought Fitz-Gerald a “speaker of the year” award from a prestigious group of high-net-worth private investors.
• Predicted – when America’s “Big Three” automakers appeared to be working through some issues with onerous union contracts and retirement benefits – that the heyday of the U.S. auto company was already over and that the car companies would soon be fighting for their actual survival.

Fitz-Gerald has some ideas. A longtime energy bull, and an avowed expert on China, Fitz-Gerald says he’s now tracking some trends that could lead to the best profit opportunities of our lifetime. Money Morning recently caught up with Fitz-Gerald at his home in Oregon, where he was working between speaking engagements. Here is a partial transcript of that discussion.

Money Morning:  You’re acquired a reputation over the years as a sharp market analyst, in large part because of a series of public market calls that he’s made over the past couple of years – market calls that were ultimately proven correct. What’s your secret? What advice can you give to investors?

Keith Fitz-Gerald: Most investors make the classic mistake of being more concerned with being proven right or wrong than they do with what actually happens with their money. That’s why we see such a “herd” behavior in the markets today. I’m more concerned with “possibilities,” and with structuring profitable investment opportunities around them. I really don’t care if I’m right or wrong as long as the strategies I assemble are flexible enough to deal with both contingencies and profit at the same time.

MM: This sounds complicated. Can you give us an example?

KF: What I do is actually very simple. I use a highly specialized branch of mathematics based on fractal theory to identify the underlying nature of the financial markets. This allows me to find relationships in data that would otherwise appear random and that others can’t see using traditional analytical techniques. And I simply recommend high probability investments based on that understanding.

MM: I know this is at the heart of the Geiger Index. Is this also the key to your newest service, Time Trader Pro?

KF: Yes. In fact, there’s a little fractal theory in everything I recommend, and in every forecast I make. But when it comes to the Time Trader Pro, there’s a twist. The Geiger Index is set up to scan for probabilities associated with directional moves. The Time Trader Pro, which uses similar calculations, is set up to determine the relative lack of movement.

The advantage is that while the Geiger sets up the big gains that will carry investors forward into the eventual recovery I see building even today, the Time Trader Pro allows investors to potentially capture gains and high-probability profits in the directionless markets we’re experiencing now. The two are designed to complement one another and, indeed, to also help establish the core positions we highlight in The Money Map Report.

MM: Do the numbers tell you everything?

KF: Not in my opinion. To be a really effective forecaster, I think you really have to combine firsthand knowledge with accurate analytics. To me, that means having “boots on the ground” and seeing stuff with your own eyes. The way I see it, there’s simply no substitute for that personal observation. That’s why I travel extensively every year.

For example, years ago, when oil was trading at $20 a barrel, I was tromping all over Asia and Europe, and was seeing the beginnings of a terrific ramp up in demand. At the same time, I was doing work that suggested severe supply constrictions. That led me to forecast oil at $100 within a decade. It got there far faster than that, of course, but the fact that I had planned for such contingencies paid off more than the actual price level, itself.

Incidentally, I have to tell you, I was laughed out of more boardrooms than I can count at the time. But that goes with the territory: You have to have the courage of your convictions to make such forecasts.

MM: Well, oil did go to $100 a barrel. Then it dropped back into the $80 range. And that’s when you said that oil prices were going to head much higher.

I like to remind people that this was a “real” call – it’s on the record in an oil story that was part of our yearly “Outlook” series. The story ran in late December, when oil was starting to move again. But you’d actually made the prediction a month or so before, while Money Morning writer Jason Simpkins was still researching the article. You said oil could “spike” to prices as high as $187 a barrel, and would then settle back down.

Oil didn’t quite hit the $187 level you forecasted, but it did run up to an all-time high of $147, before settling back to where it is now. Did this surprise you?

KF: Given that we didn’t get a major geopolitical shocker, I’m not surprised that we didn’t hit $187. But I’ve been very candid in stating that the dramatic fall we’ve seen has been much deeper than I’d expected.

MM: Could oil prices stay this low for much longer?

KF: Anything is possible. The real question is: What’s probable.

People are chalking the fall in prices up to lower global demand, but I think that’s a mistake. What’s really going on here is that, at lower prices, hedgers and speculators haven’t had the need to hedge their contracts as extensively and this, more than any single factor, has helped pull down futures prices – which are tied to delivery – and keep them there.

The other factor that’s affected oil has been the relatively rapid rise in the U.S. dollar. Oil is priced in dollars, so it’s important to remember that a substantial portion of the fall in oil prices can simply be accounted for by that increase in the dollar.

MM: What about the long term?

KF: Longer-term, the world won’t realize that global demand is rising all along – despite what the statistics say – until the economic recovery stimulates oil demand again. Probably no more than five years from now. Eventually, the fundamentals of declining production, growing demand, and thin inventories will overwhelm today’s low prices. Which is why I think oil will be back at $212 dollars a barrel … a figure that’s downright conservative compared to Matthew Simmons [peak oil pundit and author of "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy"], who’s on record predicting that oil prices will reach $500 a barrel.

MM: I know that your expectations for China have a lot to do with this. And India.

KF: Yes, they do. From a macroeconomic standpoint, both nations are growing by leaps and bounds – even with the problems posed by the global financial crisis. Sure there’s a short-term contraction, but let’s get that off the table right now. Longer-term, the trend is clearly for higher oil prices.

Both China and India have huge populations that are using increasing amounts of petroleum and petroleum-based products. And both have millions of drivers and middle-class consumers who have never known lower prices – so they don’t think twice about paying more.

From a technical standpoint, oil is dramatically oversold to the point where much of the industry is unsustainable. History suggests that these stunningly low prices will result in diminished capital investment, declining exploration efforts and a reduction in rig counts. When the stimulus programs of the United States – and other key countries – ultimately take hold, these factors will combine to reflect net shortages and, logically, will force prices higher.

MM: We’ve seen this cycle before …

KF: Absolutely.

MM: Speaking of China, Keith, what’s next for the Red Dragon? What do you see there this year? How about over the next five years?

KF: At this stage of the game, China is literally the only player on the field with enough muscle to pull the rest of the world out of hock. This means the rest of the world will have to play ball – whether they like it or not. Ironically enough, that’s exactly what the G7 concluded recently when its members noted that China can use its huge trade surplus to spend it’s way out of this mess at a time when the rest of the world is busy borrowing it’s way out. There’s a big difference between the two scenarios. I’d rather invest in growth, rather than borrow to grow, any day of the week.

MM: What else do you see, here?

KF: The view from 30,000 feet is this: I don’t think there’s an asset class on the planet that won’t be at least indirectly affected by their China’s actions within the next decade. In that sense, every investor needs some sort of China strategy, especially now.

MM: What about the stimulus?

KF: [U.S. Federal Reserve Chairman Ben Bernanke and his minions have decided upon a course of action and are taking it. And while I’m as hopeful as the next person that it’s ultimately successful, history paints a different picture.

No nation in recorded history has ever bailed itself out of a hole by debasing its currency, and debasing their currencies is precisely what the United States (and many other nations) are doing right now – at least for anything other than short periods of time.

The bottom line is this: The U.S. Federal Reserve, the U.S. Treasury Department, and the elected officials in Washington all believed they could spend the crisis into submission. But, ironically, all they’ve done is prolong it and I think that history will show that the cost of preventing the crisis actually exceeded the potential costs of simply letting it unfold and play itself out. What’s more, history supports my contention.

I also think that history will show that there are all sorts of unanticipated consequences from all the spending and the debt that’s now choking our country.

What really stinks to me is that a relatively small number of people drove the rest of us to the brink of financial oblivion, and that huge numbers of people who have tried to be responsible with their assets, who paid their mortgages on time, who own up to their debts, are now being involuntarily saddled with the bailout.

MM: What you’re saying, Keith, is that lots of innocent American taxpayers and conscientious individual investors have paid with their homes and even their jobs for the misdeeds of others.

KF: That’s right.

You know, during the early days of the financial crisis, there was a lot of conjecture on the Internet that the federal government should simply hand out a few trillion dollars to U.S. consumers. Most experts dismissed that as fringe thinking. It didn’t seem so fringe to me then, and it certainly doesn’t seem so now. The vast majority of the American people would have been far better off being able to put cash directly in their pockets to stimulate the economy than they will be now with government programs that reward bad business decisions and that throw good money after bad.

We may not have liked how it would have felt had the government held back and allowed some of these institutions to just fail. History has shown us time and again that the financial markets have a remarkable ability to deal very swiftly with such adverse financial situations – and with a surprising cost effectiveness. Why would this situation be any different?

MM: What will the fallout be here? For the economy? For the U.S. dollar? For gold?

KF: Let’s start with the dollar because that drives everything else. In the extreme short term, the dollar has proven to be a safe haven, which is largely responsible for its rise. At some point, however, this is going to have to change. You cannot put the printing presses in overdrive and expect things to remain the same. But that’s exactly what Team Fed has done to date.

MM: What about inflation?

KF: Well that’s the big unknown. Right now, the markets are pricing in deflationary expectations – based on the global downturn. In the long run, however, history demonstrates that the markets eventually must deal with this. What’s more, the embers that are only smoldering now could easily ignite and turn into one of the hottest inflationary conflagrations we’ve ever seen.

What people don’t understand is that consistent currency manipulation is merely staving off inflation; it isn’t removing the threat of it. Most people also don’t understand that this is being done at the expense of people’s savings. They’ll soon see this is the case. Knowing this, I don’t see how any rational investor can afford to avoid preparing for inflation.

MM: So how does this play out with gold? With other commodities?

KF:  Contrary to what people believe, gold has never been statistically proven to be an inflationary hedge. But it is a great crisis investment that does have a direct correlation to interest rates and bond prices. So gold should really be tied, proportionately, to fixed-income investments because it helps stabilize them – and to provide an inflation hedge at the same time.

As for other commodities, the markets tend to run in 17-21 year cycles, and if we look to 2000 the beginnings of the latest one, that suggests we have until 2017, or so, before commodities lose their luster. In general, I’m a commodity bull, but clearly we have to time our selections carefully, because now’s not the time for indiscriminant buying.

MM: One final U.S.-related question. What’s the outlook for U.S. stocks right now? I know your models recently showed that the U.S. indices were nearing the “sweet spot,” where valuations made them compelling enough to buy. Has that changed?

KF: No. We’re still closing in on what could be the buying opportunity of our lifetimes, but there are a lot of things that have to lock into place to make that happen. The most important off all is that banks have to again begin lending to consumers and to each other. Taking TARP money and hoarding it, or using it for buyouts – something our ongoing Money Morning coverage has chronicled – just isn’t acceptable. If the banks won’t play ball, the government should force them to … or take the money back and let them fail.

Now is not the time to play partisan politics either. This crisis is serious enough that we need to concentrate on just being Americans and work through this as quickly and expediently as possible. Washington is only just beginning to understand how serious this crisis is, which means as investors we have to take our personal financial security into our own hands. The unfortunate reality is that the government may not get around to protecting our personal financial security – despite our elected officials best intentions.

MM: In a bit of financial irony, you’ve pointed out to lots of folks that China will actually benefit from this financial crisis, using it to enhance its stature in the global financial community. And no one is better positioned than you to understand how China will fare … you run an annual investment trip to that country each year and you have a substantial network of contacts there. Given that perspective, tell us how China can benefit from this situation.

KF: Absolutely. First of all, China has $2 trillion in reserves … the most in history and the highest stockpile as a percentage of GDP on the planet. This gives China not only the clout to spend its way out of this mess, but the muscle to work with the rest of the world in a controlled, measured fashion that helps maintain global financial balance. Clearly, a lot of people on Wall Street won’t like the fact that they don’t call the shots anymore, but they had their chance. Now they need to let someone else lead.

From an investment standpoint, I think it’s particularly ironic that the global financial crisis – more so than any other factor – may be the catalyst that ultimately transforms China into the investment of a lifetime. Even during the depths of the Asian Financial Crisis a decade ago, I don’t’ recall seeing Chinese markets this undervalued relative to the upside profit potential.

MM: What about Japan? The Japanese yen has traditionally been a safe haven during troubled times.
KF: Yes it has, but I think that could come crashing to an end this time around.

Japan bailed itself out the last time around through a massive stimulus program aimed at exports. But it did little to stimulate the domestic economy and that’s costing the country dearly this time around, because now it’s behind the proverbial eight ball. In fact, there are some indications that Japan may be sinking into another “Lost Decade” that’s even worse than the malaise we face here in the United States. It’s not illogical to assume the yen could fall off the cliff and crash as a result.

I’ll be home again in Kyoto shortly and will update you on what I find when I get there.

Source: Financial Crisis May be Creating the Best Investment Opportunities of our Lifetime, Money Morning Expert Says

• Widespread foreclosures caused home prices to fall in 134 U.S. metropolitan areas. Foreclosure filings eclipsed 250,000 in January, their tenth straight month above that figure, Bloomberg reported.

• Aluminum Corps of China Ltd. (ADR: ACH), China’s state-owned aluminum group, will invest $19.5 billion in debt-heavy Australian mining company, Rio Tinto PLC (RTP). More than $12 billion will be spent on mining assets and the rest will buy bonds convertible into shares, Reuters reported. The deal will give China unprecedented access to much-needed commodities and raw materials.

• Media conglomerate Viacom Inc. (VIA) said its fourth-quarter profit fell 69% as the recession sapped advertising revenue. “It is clear that while as cable network owners we are in a more favorable media segment than most, advertising (comparisons) are likely to get worse before they get better,” Chief Executive Philippe Dauman said on a conference call, the Associated Press reported.

• Fourth-quarter profit for Coca-Cola Co. (KO) fell 18%, but beat analysts’ expectations. The company reported net income of $995 million, or 43 cents a share, down from $1.21 billion, or 52 cents, a year earlier. “They’ve been very focused on taking costs out now that they have a strong product portfolio,” Erin Smith, an analyst with Argus Research in New York, told Bloomberg.

• Sources told Reuters that General Motors Corp. (GM) is talking with China’s SAIC Motor Corp. about selling part of its stake in their decades-old joint venture. The 50-50 venture builds and markets Buick, Cadillac and Chevrolet models in China.

• A $27 billion (A$42 billion) stimulus plan was rejected by Australia’s Senate yesterday (Thursday). Australia is heading toward its first recession in 18 years. Adamant on passing the stimulus, the government will make further concessions before the measure is voted on again, Bloomberg reported.

Source: Global Investment News Briefs Friday, February 13th, 2009

In a recent interview with Bloomberg Television, Mobius said there are “terrific bargains all over the place” and his biggest holdings are in Asia, adding that he is “aggressively” purchasing Chinese stocks.

Emerging market stocks have nosedived this year at a much faster pace than indices from larger, more affluent economies. So far this year, The MSCI Emerging Markets Index, a benchmark for equities in 24 developing nations, has fallen 53% – driven mainly by falling commodity prices and a freeze in credit globally.

Russia’s stocks were slugged the hardest; its equities have dived 72% this year. India’s stocks have fallen 65% this year. Brazil and China stocks are down 56% and 52%, respectively, this year, MarketWatch reported.

“We’re beginning to see this bottoming situation,” said Mobius, who oversees about $26 billion in emerging-market stocks as executive chairman of Templeton Asset Management Ltd. “I sincerely believe that next year we’re going to be beginning the next bull phase. The amount of money going into the system has to find a home.”

He’s got a point. The BRIC economies – Brazil, Russia, India and China – each unveiled stimulus plans aimed to spur domestic consumption and boost GNPs.

• Brazil’s government called for $3.6 billion in tax cuts on personal income, consumer loans and automobiles.

• In November, Russia Prime Minister and former President Vladimir Putin unveiled a $20 billion stimulus, which included a cut in profit tax.

• India’s government said in early December it would spend $4 billion more from December to March 2009 than previously planned.

• China’s $586 billion economic stimulus plan is one for the record books. The infrastructure overhaul will pump boatloads of money into low-income housing, water and energy projects, airports, disaster relief and new railroads over the next two years.

And those stimulus plans are on top of several interest rate cuts from each BRIC economy.

“What you are going to see is a reversion to emerging markets first because those markets are the cheapest” and the economies are growing faster, Mobius told Bloomberg. “There’s no reason why, going forward, they shouldn’t be the first ones to get the attention of investors.”

Source: Emerging Markets – Especially BRIC Economies – “Bottoming”

It’s this focus on developing jobs and infrastructure, or “new material product” – absent in any similarly focused U.S. stimulus so far – that will keep China’s economy on the fast track economically, while also helping boost the Red Dragon’s ailing stock market.

China’s governmental policies famously (or infamously) favor specific state-sponsored companies – especially the infrastructure companies Beijing deems integral to the nation’s physical renaissance. And a large portion of the stimulus money is expected to go right into the coffers of these companies.

Stocks have responded accordingly, advancing an additional 11% last week. The Shanghai index extended those gains yesterday (Monday), climbing 3.6%, or 72.11 points, to close at 2090.77, as investors held out hope that additional stimulus plans would be unveiled following another high-level government meeting in China this week, The Associated Press reported.

Further fueling investor ardor was Beijing’s declaration that it would not be investing in troubled Western financial firms any time in the near future.

China’s $200 billion sovereign wealth fund, China Investment Corp. (CIC), has lost roughly $6 billion of the $8 billion invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. Lou Jiwei, the company’s chairman, last week rejected the notion of putting any more of the government’s money into banks outside of its homeland. And he did so citing an overwhelming fear.

“I don’t dare to invest in financial institutions now,” Lou said last week at a conference in Hong Kong, Bloomberg News reported. “The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything.”

China has a long history of doing things on its own terms, says Keith Fitz-Gerald, Money Morning’s investment director and editor of The New China Trader. But before you label China’s back-patting and trash talk as propaganda, step back and consider which of the two you’d rather invest in: A disheveled U.S. market, or infrastructure development in China, the fastest-growing economy on the planet?

Investors have chosen the latter.

“In such uproar, it’s not clear how much is bottom fishing versus bottom building,” Fitz-Gerald said of the Shanghai index’s recent run up. “However, the fact that many Chinese companies have superb numbers is undeniable.”

Following China’s State Investment Cycle

Unlike in the United States, and many other Western economies, consumerism isn’t the main engine of China’s economy.

Rather, it’s the government – a running tally Fitz-Gerald has labeled as “China’s state investment cycle.”

About 70% of China’s economy is driven by state investments, with consumers filling in the other 30%. For the United States, those ratios are reversed, Fitz-Gerald says.

The recent $585 billion stimulus plan is just one of several gigantic investments the Chinese government has made (See chart: New Material Product). Other recent examples include its litany of Olympics investments, such as stadiums and arenas, hotels, restaurants, roads, tourist attractions and more.

There are three things to consider here.

First, China is in the midst of one of its largest state investment cycles ever – generating streams of profit never before seen.

Second, when China spends big money, it feeds the companies big enough and capable enough to handle the job. It will be those companies on Beijing’s short list that rise to the surface in the next few months, Fitz-Gerald said.

And third, despite consumers driving only 30% of its economy, China has the largest middle class in the world at 300 million people. What’s staggering about this is that they are only starting to spend their growing wealth. So when these state investments give consumers more income to spend, the only problem the government will have is keeping economic growth from getting out of control.

‘Aimed at Growth …Adding to GDP’

But before getting too far ahead of the current reality here, let’s return to the Shanghai index’s rally. Much of it has been driven by clear signals that state investments will continue.

As of now, the index is nearly 67% off its October 2007 high. And that proves two things:

• First, China’s biggest companies have been severely affected by the global economic crisis.
• And second, they remain some of the cheapest stocks in the world.

The bottom line is this: The U.S. economy – as measured by gross domestic product (GDP) – will decline by 5.0% in the current quarter, followed by declines of 3.0% in the first quarter of 2009 and 1.0% in the second quarter, Goldman Sachs Group Inc. (GS) predicts.

On the other hand, analysts predict China’s GDP will grow anywhere from 5.0% to 10.0%, easily making it the world’s fastest-growing economy, no matter where it lands in that range.

Fitz-Gerald believes the direction of China’s GDP is evident in the direction its government thinks, at least economically. And if there’s one thing that pares down each country’s economic thinking, it’s a look at each their recent economic stimulus packages.

“The U.S. government is running around rewarding bad behavior,” Fitz-Gerald said. “China’s package is aimed at growth, creating jobs and adding to its GDP.”

Source: China Stocks Advancing as Beijing Boosts Investments

MidAmerican is 87.4% owned by Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B), which just last week paid $5 billion for a stake in Goldman Sachs Group Inc. (GS). Buffett’s vote of confidence for Goldman was enough to lure skeptical investors back into the treacherous financial services sector and boosted Goldman Sachs’ shares by nearly 10% over the two days following the announcement.

Similarly, shares of BYD (Build Your Dreams) shot up 42% in Hong Kong Monday following MidAmerican’s decision. BYD’s stock had tumbled 56% since hitting its 52-week high last October.

The purchase also marks Buffett’s first large investment in China following the sale of Berkshire’s stake in PetroChina Co. Ltd. (ADR: PTR) last year. After cautioning investors against the Chinese stock market at a time when it was just beginning to peak, Berkshire sold 28 million shares of PetroChina, netting a profit of about $3.5 billion from what had been a $500 million investment in 2003. PetroChina has lost roughly half its market value since Buffet divested Berkshire’s stake.

Buffett now appears ready to test the fast-growing Chinese market again, and a stake in BYD opens up brand new opportunities for MidAmerican, a diversified energy-products company, and for BYD, a builder of electric cars that has some ambitious objectives.

The global auto industry is just one worldwide business sector pushing to capitalize on China’s tremendous long-term promise. China’s auto market is expected to advance at an 18% clip this year. The U.S. auto market is in the midst of an 11-month slump, its longest since a 14-month slump that took place in 1991. New car sales are expected to fall 17% this year, Bloomberg News reported.

The Shenzhen-based BYD is actually a battery manufacturer that plans to advance its business by selling plug-in electric cars in China by the end of this year. It intends to import those cars into the U.S. market by 2010.

BYD’s lithium-iron phosphate batteries give the company’s F6DM, or Dual Mode, mid-sized sedan the ability to travel 62 miles in all-electric mode before traveling an additional 205 miles on gas power. BYD’s F3DM, a smaller and less expensive model, reportedly has a 100-mile range in electric-only mode. By comparison, the recently unveiled General Motors Corp. (GM) Chevrolet Volt can go only about 40 miles before it needs the gasoline engine.

MidAmerican Chairman David Sokol told The New York Times that his company was impressed by BYD’s ability to produce electric cars that have a range of almost 190 miles on a single charge, and can be 80% recharged in just 15 minutes.

Sokol also pointed out that plug-in electric cars may be more adaptable to the United States market than cars that run on hydrogen or ethanol because there is already existing infrastructure to supply electricity for recharging almost anywhere, whereas hydrogen or ethanol stations and supply routes would have to be established across the country.

“We can drop these charging stations anywhere,” Sokol told BusinessWeek. “If you want a rapid charging one in your garage it will cost between $2,500 and $3,000 to install.”

The annual energy cost to run a BYD-made electric car, based on 12,000 miles of driving per year, would be about $400, Sokol said. That compares to $2,400 for a traditional gas-powered car with fuel priced at $4 per gallon. Also, the energy consumed by an electric car in the U.S., assuming the national average of 51% of power supplied by coal, would produce half as much carbon dioxide as a gas-powered automobile.

BYD sold 85,104 cars in the first eight months of the year, a 35% increase from 2007. The company, which is widely known as a leading producer of cell-phone batteries, estimates that auto sales will make up 30% of its 2008 revenue, up slightly from 25% in 2007. And with Buffett’s help, BYD may see even faster growth, as the Berkshire name brings newfound credibility to a relatively unknown carmaker.

“Warren Buffett is very well respected globally as well as in China, so as an investor he will help us build our brand,” BYD Chairman and Chief Executive Officer Wang Chuanfu told BusinessWeek.

Wang also said that Buffett’s involvement could accelerate the BYD’s transition to the U.S. market, and noted that MidAmerican Energy could be a big part of his company’s future plans.

“Developing our electric vehicles requires a lot of energy, which MidAmerican Energy can supply us in the future,” Wang said.

Michael Dunne, managing director of J.D. Power China, recently called the tie-up the “most exciting news in China’s auto history.”

Berkshire is a “formidable investor, which brings confidence to the picture,” Dunne said. “BYD can say ‘Yeah we can do this.’”

Source: Berkshire Stake Brings Confidence and Credibility to Top China Electric Carmaker BYD

The Bank of East Asia Ltd. (OTC ADR: BKEAY), commonly referred to as BEA, asked Hong Kong authorities to investigate “malicious rumors” spread mainly via cell phone text messages that called the third-largest Hong Kong lender’s liquidity into question.

“The management of BEA hereby states in the strongest possible terms that such rumors have no basis in fact,” BEA said in an e-mailed statement today. “The bank’s financial position is sound and stable.”

Hong Kong-traded shares of BEA dropped 11% to a new 52-week low as investors and retail customers alike lost confidence in the bank. The stock recovered slightly in late afternoon trading to end the day down almost 7% at the Hong Kong close.

“We’re a little bit concerned,” Sonny Hsu, a Hong Kong-based analyst at Fitch Ratings Inc. told Bloomberg News. “We’ll keep an eye on what’s going on. If you just look at the numbers, I think the bank is financially still sound.”

BEA had $51 billion (HK$396.6 billion) in assets as of June 30 and a capital adequacy ratio of 14.6%, according to Bloomberg data.

The rumors stemmed from concern about BEA’s exposure to securities of the now bankrupt U.S. investment bank, Lehman Bros. Holdings Inc. (OTC: LEHMQ), but the Hong Kong bank’s exposure is only $61 million, or less than 0.2% of its total assets.

“The rumors took various forms,” said Bank of East Asia’s deputy chief executive, Joseph Pang, at a news conference, The Wall Street Journal reported. “Some said the company’s financials were problematic, and others said the government is about to take over our bank. Some others said there is a 10,000 Hong Kong dollars [U.S. $1,282] limit to each withdrawal. All of these are baseless.”

BEA extended retail branch hours to accommodate the influx of worried customers and honored all withdrawals.

Hong Kong’s central back pledged its full support to BEA today, saying it would bolster the bank’s liquidity if needed.

“I can confirm categorically that these rumors are unfounded,” Joseph Yam, chief executive of the Hong Kong Monetary Authority, told the press, Reuters reported.

“The banking system of Hong Kong is very robust,” Yam added.

Hong Kong officials are anxious to dispel these rumors and cut off a potential crisis of confidence similar to the one in the United States that caused the collapse of Wall Street giants as The Bear Stearns Cos. Inc. and Lehman Bros.

“Hong Kong’s regulation over banks is really tight, so the chances of having a bank go bust is very slim,” Francis Lun, a general manager with Fulbright Securities, told The WSJ. “The problem is that there were recent instances where big, global banks vanished overnight, so every one just got panicky.”

Hong Kong authorities are investigating the source of the rumors, but have few leads.

“The case is still under investigation and no arrest has been made so far,” the Hong Kong police department said in an e- mailed statement, Bloomberg reported.

Source: Confidence Crisis for Hong Kong Bank Tied to Lehman Bros. Rumors

China’s benchmark Shanghai Composite Index has plummeted nearly 70% in the past year. A big reason for the decline was concern among investors that economic chaos in the United States and Europe would deplete China’s breadwinning export market. But, so far, those fears have proven to be largely unfounded.

China’s exports grew 22% in the first eight months of the year, despite sluggishness in the global economy and turmoil in the world’s financial markets.

Even more impressive: China’s retail sales grew at the fastest pace in at least nine years last month, soaring 23.2% to $128 billion. Retail sales climbed 22% in the first eight months of the year, a hefty jump from the 16.8% pace for all of 2007.

So even if exports do diminish, there is a mounting body of evidence that suggests China’s domestic demand will be enough to offset global weakness.

“Our outlook for consumption growth remains broadly positive,” said Jing Ulrich, JPMorgan Chase & Co.’s (JPM) chairwoman of China equities, in a research note. “As China’s government attempts to move from export-dependent growth, we expect that additional resources will be pledged to support domestic consumption.”

This is also true of China’s industrial sector, which many critics contend is showing signs of weakness. China’s industrial output expanded 12.8% in August after growing 14.7% in July, according to the National Bureau of Statistics. But there is a strong possibility that output will ramp back up over the next several months, as factories that were closed for the Olympics come back on line and Beijing sets out to rebuild areas of the country devastated by an earthquake earlier this year.

The government closed down a multitude of factories in and around Beijing to keep pollution from blemishing the Summer Olympic Games. Factories closed in Beijing and the surrounding areas account for 26% of China’s economy, according to Goldman Sachs Group Inc. (GS).

“We expect industrial activity to pick up with the reopening of factories in Beijing and surrounding areas,” said Ulrich.

Merrill Lynch & Co. Inc. (MER) estimates the factory shutdowns, combined with weaker demand for steel and cement, knocked 2.5 percentage points off headline growth.

“We expect a post-Olympic rebound in industrial production growth on both pent-up demand and the post-quake reconstruction,” said Merrill economist Ting Lu. The tab for rebuilding large portions of the Sichuan region after May’s devastating earthquake is expected to run about $78 billion.

With such robust growth in so many key sectors, a 70% decline in stock prices is almost baffling, unless you consider the troubles that have beset U.S. and European financial companies, as well as the gradual extinction of Wall Street’s once-proud investment banks.

According to Jonathan Wu, head of distribution at Premium China Funds Management, cash-strapped U.S. and European banks have spent the past year liquidating their Chinese assets in a desperate bid to shore up their balance sheets.

“It’s just sheer panic. U.S. and European banks are suffering to keep themselves afloat [amid the sub-prime crisis],” Wu told IFA. “What we have seen is that they are selling holdings in Chinese companies because Chinese stocks have been most profitable [for investors].”

It remains unclear when China’s stock indices will bounce back, but Wu says investors won’t be waiting for a U.S. recovery to pump cash into Chinese equities – especially at their current deeply discounted levels. Price/Earnings (P/E) ratios for Chinese stocks have plunged from about 40 last year to 14 in September.

“[Investors] may lose another 10%, they may lose another 15%,” Wu told IFA, “But on a long-term trend, because of the fact that we are just buying these value stocks that have such good fundamentals behind them, once there is that confidence restored in the market, stocks will fly.”

China Still Head of Strong Emerging Market Class

There’s little doubt that China’s economy will expand at a slower rate going forward, but it’s becoming more evident that the country’s vulnerability to the turmoil plaguing the West has been greatly exaggerated. China is still expected to lead emerging markets in a period of strong growth throughout 2009, even as the United States and Europe continue to struggle.

“The negative impact coming from the global slowdown will continue to affect Asian economies, but the extent of the impact will be small and felt more next year,” Haruhiko Kuroda, President of the Asian Development Bank (ADB), told the Financial Times. “But even then, the impact, or downward adjustment, will not be as great as some of us had feared [because] real demand is strong, including domestic demand [and] investment as well as the consumption are strong.”

China’s economic growth will remain unchanged at 10% this year, the ADB said last week. Growth is then expected to slow 9.5% in 2009, which would still handily trump whatever growth developed economies manage to muster up.

A survey released yesterday (Tuesday) found that the overwhelming majority of executives operating within emerging markets are optimistic about their growth prospects over the next two years, Reuters reported.

About 87% of executives operating within emerging markets are optimistic about company revenues over the next two years, and just 3% are pessimistic. Roughly 80% are optimistic about profitability, according to an Economist Intelligence Unit poll of 1,300 executives in emerging markets at companies with annual revenue of at least $100 million.

“I am, despite the enormity of the financial crisis, more optimistic about the state of the world economy,” Jim O’Neill, head of global economic research at Goldman Sachs Group Inc. (GS), told an emerging markets conference in London.

Because the U.S. economy no longer dominates the way it once did, O’Neal sees a bigger opportunity for the so-called “BRIC” countries (Brazil, Russia, India, and China).

“It may be that the BRIC consumer is indirectly squeezing out the U.S. consumer,” he said.

China is the most influential of all these markets because it is roughly the same size as the combined markets of Russia, India, and Brazil.

Source:  Why China is Still the World’s Best Long-Term Profit Play

• Continental Airlines Inc. (CAL) became the latest airline to announce reduced flight service and jobs cuts yesterday (Thursday). Continental will eliminate 3,000 jobs and 16% of its flight capacity, The New York Times reported. The cost cutting efforts follow similar moves from UAL Corp.’s (UAUA) United Airlines, Northwest Airlines Corp. (NWA) and Delta Air Lines Inc. (DAL).

• France Telecom SA (ADR: FTE) announced yesterday (Thursday) that it was pursuing a $42 billion bid for Sweden’s TeliaSonera AB (PINK: TLSNF), The Associated Press reported. TeliaSonera dismissed the initial offer as too low, but France Telecom reported it has the backing of the French government and could up its bid.

• The Mortgage Bankers Association (MBA) announced yesterday (Thursday) that both the percentage of loans in foreclosures, as well as the number of foreclosure starts, climbed to levels not seen since 1979, MarketWatch reported. For one- to four-unit properties, 2.47% of all mortgages outstanding were in foreclosure, up from 2.04% in the fourth quarter, according to the MBA’s latest National Delinquency Survey. At the end of first quarter 2007, only 1.28% of such homes were in foreclosure.

• The number of U.S. citizens filing first time unemployment claims fell last week, the Department of Labor said yesterday (Thursday). Initial jobless claims decreased by 18,000 to 357,000 in the week that ended May 31, the lowest level in more than a month, due in part to the Memorial Day holiday, Bloomberg News reported.

• Stocks in China fell to a six-week low Thursday (yesterday) on speculation that the government would tighten prices to curb inflation. The move that would shave profits from the country’s commodity titans. The CSI 300 Index, which tracks 300 stocks traded in Shanghai and Shenzhen, fell 1 percent to close at 3,512.14, the lowest since April 23, Bloomberg reported.

• The U.S. government announced yesterday (Thursday), via the Department of Justice, that it is suing Honeywell International Inc. (HON) for selling material used in bulletproof vests that it alleges was defective, The Associated Press reported. According to the DOJ, Honeywell had scientific data that showed the ballistic material, known as Zylon, “degraded quickly over time, especially in hot and humid conditions,” leaving the vests unfit for use. The department also alleges that Honeywell failed to notify the government or the vest manufacturer, Armor Holdings Inc., of the defect.

• E.I. Du Pont De Nemours & Co. (DD), commonly known as DuPont, said yesterday (Thursday) that it is targeting a 40% increase in soybean and corn yields over the next 10 years through its Pioneer Hi-Bred unit, according to Thomson Financial. The company expects DuPont Agriculture & Nutrition segment sales to grow by 6% to 8% and earnings by more than 15% on average between 2007 and 2010.

• Swiss pharmaceutical maker Novartis AG (ADR: NVS) spent nearly $1.3 million lobbying the U.S. government in the first quarter on drug and health care issues, according to a recent disclosure form, The Associated Press reported. Novartis lobbied on bills designed to ensure the government has a sufficient stockpile of influenza vaccine in case of an outbreak.

Source: Global Investing Roundups: Friday, June 6th, 2008

China stocks had tripled in a year’s time and carried enormous valuations. We singled out China’s largest air carrier, China Southern as a stock likely to take a beating as air seeped out of the bubble. The stock is down 43% since that column. What’s truly incredible, however, is that China’s version of the Dow has been cut in half in just six months. This is where it starts to get interesting…

Just as our bearish interest in China was piqued in November, our bullish interest in China has been piqued here in April. Below is a two-year chart of China’s stock market. This is a chart that shows mass pessimism and devastating losses. This chart makes a contrarian stand up and take notice.

Chinese stocks could fall another 50% from here. But let’s not forget… the current rise of China is one of the greatest growth stories in the world. A big uptrend after this washout is inevitable. China is back on our watch list.