Roll the videotape:

Chinese traders dumped shares early this morning after a popular magazine rumored that the booming Chinese loan market is cooling off. Caijing magazine guessed that the Chinese loaned about $29 billion in August, a 43% crash from July. While that number isn’t official, traders around the red nation raced for the exits. The Shanghai Composite closed down 6.7%, its worst day in over a year. 16% of the stocks on the Shanghai Composite fell 10%, the daily limit down.

Thus, as we charted above, Chinese stocks are in a textbook bear market. In fact, down 23% since its 2009 peak earlier this month, the Shanghai Composite will be the worst performing major national index in the world for the month of August.

But still up around 50% for the year, is this the time to pile back into China — the great hope of the global market rebound? With the Shanghai Composite still priced 29 times earnings, it’s hard to be too enthusiastic. According to Bloomberg, the MSCI Emerging Markets Index is going for 19 times earnings.

Source: China Sets the Tone

Energy shares led the decline after the sharp drop in China’s main stock index increased worries about a potential rebound in global energy demand and oil slipped below $70 a barrel.

Shares of Chevron Corp tumbled 1.2 percent to $69.81 and Exxon Mobil dropped 0.8 percent to $69.56. The S&P Energy index <.GSPE> was down 1.8 percent.

The Shanghai Composite index <.SSEC> fell nearly 7 percent to a three-month low on fears that China’s government is trying to moderate economic growth and choke off some speculation in its stock market by tightening bank lending.

“China’s decline is just scaring people,” said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York.

“The world is partially relying on China’s economic growth to bring us out of this recession, and given the decline in China, there have to be concerns.”

Stocks in China have risen steadily, up 91 percent for the year at one point, despite the global recession. Commodity prices often got a boost from an increased demand from China.

The Dow Jones industrial average <.DJI> was down 68.17 points, or 0.71 percent, at 9,476.03. The Standard & Poor’s 500 Index <.SPX> fell 9.81 points, or 0.95 percent, to 1,019.12. The Nasdaq Composite Index <.IXIC> dropped 23.54 points, or 1.16 percent, to 2,005.23.

The Bank of New York Mellon index of leading Asian ADRs <.BKAS> fell 1.5 percent to 119.98 while U.S.-listed shares of China Finance Online sank 2.1 percent to $9.40.

Financial stocks, which enjoyed a strong rally last week, changed their course after a number of bearish notes from analysts.

Rochdale Securities analyst Richard Bove wrote that in the short term, “a reaction to the recent move up in the stocks may develop.”

In addition, Barron’s recommended profit-taking in Citigroup and said American International Group shares were overpriced after gaining more than 50 percent last week.

Citi was down 3.8 percent at $5.03 while AIG dropped 10.7 percent to $44.88.

The weakness in energy and financial stocks overshadowed the news of two large mergers on Monday.

Walt Disney Co agreed to buy Marvel Entertainment for $4 billion, while Baker Hughes Inc said it would buy BJ Services Co for $5.5 billion.

Marvel shares soared 25.4 percent to $48.46, while BJ Services’ stock was up 4.6 percent at $16.15.

Also on Monday, the Institute for Supply Management-Chicago’s business barometer rose to 50.0 in August. The level was higher than expected, and was on the dividing line between growth and contraction in the sector.

Aug 31 (Reuters)

China has once again set the tone for our Monday market forecast. Roll the videotape:

Chinese traders dumped shares early this morning after a popular magazine rumored that the booming Chinese loan market is cooling off. Caijing magazine guessed that the Chinese loaned about $29 billion in August, a 43% crash from July. While that number isn’t official, traders around the red nation raced for the exits. The Shanghai Composite closed down 6.7%, its worst day in over a year. 16% of the stocks on the Shanghai Composite fell 10%, the daily limit down.

Thus, as we charted above, Chinese stocks are in a textbook bear market. In fact, down 23% since its 2009 peak earlier this month, the Shanghai Composite will be the worst performing major national index in the world for the month of August.

But still up around 50% for the year, is this the time to pile back into China — the great hope of the global market rebound? With the Shanghai Composite still priced 29 times earnings, it’s hard to be too enthusiastic. According to Bloomberg, the MSCI Emerging Markets Index is going for 19 times earnings.

If you’re debating buying this dip, you should check this out: Earlier this year, Addison Wiggin penned a report that spelled out a “triple timebomb” that would derail the global rebound… one of which was a faux boom in Chinese stocks.
China’s sell-off has hit just about every asset class today, especially commodities. You know the drill by now: Commodity traders of the world have pinned hopes on China’s rise, and every time they falter, oil and copper hit the bid. Light, sweet crude is down over 3% as we write, to $69 a barrel. Copper shed about 3% as well.
Gold took a little hit this morning. Traders raced out of stocks and into the dollar. Thus, the spot price shed about $10 at the New York open, and now rests just below $950 an ounce.
China frazzled the U.S. market too. The S&P 500 opened down 1%.

“This rally is on borrowed time,” opines Dan Denning. “We don’t know when. We don’t know why. But we do know what. And the what is that stocks are going to price in much lower earnings and investors are going to pay less for those earnings. Expect a lot of fall volatility.

“Energy investors ought to take heed, as well. Lately, there’s been a nice correlation between the oil price and stocks. The better the economy, the better it is for oil and earnings. Both have gone up.

“We’re still bullish on energy for a lot of reasons. But if the party ends sometime in September/October/November, you can expect lower oil and energy prices. That means if you have gains in energy stocks, you’d want to think about trailing stops and profit taking. In fact look for profit taking on the share market as a precursor to a new move lower.”
Oil service giant Baker Hughes bought fellow oil field tech company BJ Services today. The transaction will cost BHI about $5.5 billion.

“I’ve said over and over that there are only a small number of world-class firms that have the technology to find, drill and extract the world’s hydrocarbons,” says Byron King, who holds Baker Hughes in theOutstanding Investments portfolio. “Now there is one less.”

“BHI’s goal in this deal is to expand its international presence, and to leverage on BJ’s pressure pumping expertise. Now BHI can compete for the growing market for large integrated projects, by incorporating pressure pumping into the firm lineup.

“I expect that this acquisition will be good for the long term prospects for BHI. And it illustrates that there are other opportunities out there, smaller firms that are candidates for a takeout.”
While the Chinese growth story is faltering today, India is forging ahead: The Indian government said this morning that its economy grew 6.1% in the second quarter, narrowly beating Wall Street estimates. That’s really pittance compared to its typical 9% or greater growth over the last three years… but hey, we’ll take 6% these days.

“However, in light of the poor monsoons, the possibility of the growth of this magnitude continuing for the rest of the year looks remote,” write our Indian partners at equitymaster.com. “There are some who argue that manufacturing and services are fully capable of filling in the void left by agriculture, and hence, growth may not be as badly impacted. With rural India accounting for half of India’s consumption, such an assumption for the time being looks a bold one, indeed. Furthermore, if the central bank starts tightening monetary policy in the wake of high inflation that food prices are likely to bring, it may hurt growth prospects further. All in all, things point to a growth in the region of 6% with a downward bias.”
It’s Monday… time to find out which banks kicked the bucket over the weekend: With failures in California, Minnesota and our home state of Maryland, the FDIC has bumped the yearly total of failed banks to 84. The three shuttered banks had about $1.9 billion in assets, which ended up putting a $446 million dent in the FDIC’s deposit insurance fund.
“More than one in four banks announced an unprofitable quarter,” notes Dan Amoss, referring to the FDIC’s latest quarterly report, which we mentioned Friday. “There is still a long road of pain ahead for bank shareholders… here’s the crux of the FDIC report:

“Nonperforming loans now make up 2.77% of the entire banking industry’s assets. This is up from 1.4% in June 2008 and 0.47% in June 2006. As these loans get ‘worked out’ in today’s credit environment, the market will start to realize how severe net charge-offs will be.

“The FDIC published updated figures for the combined noncurrent loans and loan loss allowance at all FDIC-insured institutions. Here is an updated version of the chart we published in an Aug. 14 Strategic Short Report alert. The new figures — the moves from December 2008 to June 2009 — are highlighted in the dotted lines at the far right of this chart:

“You can see how problem loans are increasing at a much faster rate than the rate at which the banking industry is adding to its loss allowance. This means that published capital ratios are misleadingly high.”
The FDIC has put the government (read: taxpayer) on the hook for another $80 billion in potential future losses,The Wall Street Journal reports today. That sum is the totality of the FDIC’s “loss share” agreements — in which the FDIC promises to take a huge amount of possible future losses if another bank agrees to take on a failed financial’s assets.

The FDIC currently predicts the $80 billion in backstops will end up costing the insurer “just” $14 billion… $4 billion over the present balance of its deposit insurance fund. We’ll keep an eye on this one.
The Fed has made $14 billion in paper profits from emergency loan programs, the bank quietly announced today. Since the start of their unusual programs about two years ago, itty bitty interest rates and fees on loans worth hundreds of billions of dollars have actually netted the private/public bank an embarrassment of riches.

So where’s the money? Which banks owed what? What about the other programs, like the AIG bailout? Who knows… no one can audit The Fed. They just wanted you to know this morning that they’ve made a freaking killing bailing out the risky bets of their Wall Street buddies.
While it’s a little off our beat, we’d be remiss not to mention this: If given the chance, 57% of Americans would vote to remove every single member of Congress. A Rasmussen poll released yesterday gave participants two rhetorical choices: Either let ’em all stay or throw the bums out. When the dust settled, 25% said they would maintain the status quo, 57% would want a clean slate and 18% weren’t sure… or perhaps afraid they would end up on some “dissident database.”
Last today, another sign of the times… looks like capitalism will remain an easy target for a while. Here are the two feature films at this year’s Venice Film Festival:

Capitalism: A Love Story — Michael Moore’s new flick. While we trust this guy as far as we can throw him, the trailer looks like he spends a bunch of the movie making Wall Street execs and Congress people squirm, which is usually fun.

The Informant! — Matt Damon plays Mark Whitacre, the Archer Daniels Midland exec who exposed the companies lyin’ and cheatin’ in the ’90s.
“I agree with Bill Bonner,” a reader writes, referring to our issue on Friday, when we suggested, with Bill’s help, that many depression hurdles are still ahead. “We will be going through a lot of suffering and adjustments. My expectation is that we’ll probably come out of this crisis around 2016. This is based on the 17-year economic cycle.

“With 84 bank failures and 416 banks on the list about to go kaput, and the TBTF zombie banks, we have a long way to go. BTW, check out theBankrate.com’s star ratings on banks. They have replicated the FDIC’s CAMELS rating very successfully. All the three banks that failed last Friday already had a 1-star rating (the lowest rating).

“As we all know, we will see more banks, retailers, restaurants and companies catering to conspicuous consumption fail. I have started comprupt.com, a site where you can predict which company is going to implode next and when. Heck, this may just be Monopoly 2.0… at least trying to have some fun with the destruction all around us.”

The 5: That’s the spirit.
“Robert Prechter’s analysis indicates that we are in for a major retracement similar to what your graph shows,”writes an Elliott Wave fan, responding to the same edition of The 5. “He is also predicting deflation, instead of inflation, which will affect the prices of oil, gold and silver to the downside. The other contrarian prediction is the dollar will strengthen through all of this mess.”

The 5: Not a bad forecast at all. Bill Bonner shared a similar sentiment during his presentation this year at our Investment Symposium. To paraphrase him: Betting on inflation is starting to feel too easy.

Source:  China Sets the Tone, FDIC Falters, Fed Makes a Profit, India’s Surprise and More!

Friday, the Dow dropped 76 points. It’s probably going down soon… but maybe not yet. The Dow would have to rise to about 10,350 to equal the ’29 bounce. And heck, it’s not September yet. September is traditionally the worst month for investors… followed by October, November, December, January, February, March, April, May, June, July and August.

But what’s this? The morning news: Chinese stocks suffered their worst day since November – with the Shanghai index down 6%.

The rally is probably not over; still we wouldn’t want to be long when the market opens in New York this morning.

Many analysts regard everything beyond the price data as noise. You never know whose ideas or whose explanation or whose predictions are correct, they say. All you really know for sure is the price.

According to the Efficient Market Hypothesis, the price has in it all the information, theories and delusions of all the players in the world. By this reasoning, the price information is ‘perfect.’ No one can know more about what a stock should sell for.

Many analysts think they can watch the patterns of price movements and find some clues at to what they will do next. They see ‘heads and shoulders,’ ascending triangles and descending tops… and think they mean something. For us, here at the Daily Reckoning, price movements tell us something, but only in their extreme form… and only because we have an intuition about the way nature works.

When we see a price that has suddenly shot up, for example, we expect that it will suddenly shoot down sometime in the future. When we see a series of price increases over a long period of time, on the other hand, we expect to see a series of price declines over a long period of time, too. If we look closely, we find that the price at the end of the long incline is exceptionally high… and the price at the end of the long decline is exceptionally low. We believe – intuitively and logically – that exceptional things don’t remain exceptional for very long. That’s why they are exceptional. Broadly, when prices are exceptionally high they will fall – to the point where they are exceptionally low, and vice versa.

Beyond that, we draw little nourishment from the price numbers. They don’t tell us why things are happening. And while we recognize that it is impossible ever to really know why anything happens (the number of butterflies possibly flapping their wings in China is beyond our comprehension), we are nevertheless heirs to the old story-telling tradition of our deathward marching tribe. We want to know why things happen the way they do… we want heroes and villains… we want winners and losers… we want a plausible story that explains what is going on.

We have maintained an episodic correspondence with Jack Lessinger for nearly 20 years. Jack is a “socio economist.” That is, he’s looking at the big picture of economic trends as they fit into the wider world of social life.

What Jack sees – in his new book, “The Great Prosperity of 2020,” is a series of booms and busts that correspond to the way people think about themselves… what they want… and how they want to live. This is what defines American capitalism, he believes. And then he connects these phases of American capitalism to development patterns and real estate trends. Since about the beginning of the 19 th century, he sees three major forms of capitalism – the small-scale frontier capitalism which peaked out about the mid-1800s… followed by large-scale industrial development which reached its zenith, according to Jack, at the beginning of the 20 th century… followed by the consumer society that we grew up with.

Each major trend rises and falls. Prices rise and fall with them. The first wave of development raised prices of frontier land, first in the Mississippi River basin… and then out on the prairies. In real terms, farmland in some part of the mid-west hit peaks in the speculative fever of the 1880s that have never been seen since. Then, the development of the next phase pushed up values in major industrial centers – particularly in Chicago – whose growth far surpassed the older cities such as New York and Philadelphia. There too, prices in inner city Rust Belt metropolises have never been higher. Then, came the Material Age… when the consumer was king. Every king wanted his own suburban castle… and his carriage, with horse power provided by Chevrolet or Ford.

The bigger picture was that energy was cheap and US manufacturing was leading the world in the post-WWII era. Cheap energy seemed to make suburban life a sensible, affordable alternative to the city. In the suburbs you had the advantages of being close to a major city – with access to jobs, entertainment and education. You also had the advantages of country living – backyard swimming pools, gardens, lawns, fresh air, and space.

Movement to suburbia began in the ‘20s. By then, the first suburbs were being built north of Baltimore… connected to the downtown area by tramways and paved roads. The richest families began by buying summer places on the high ground of Guilford and Mount Washington. Then, as transportation improved… and the cities became more and more crowded with immigrants and factory workers… the rich lived year-round in their leafy refuges.

As the trend developed, the suburbs spread… and the middle classes joined the exodus. By the ‘80s, practically all that was left in the central cities were drug addicts and welfare recipients.

Meanwhile, in the early phase of the consumer trend, wages for ordinary working stiffs were going up rapidly. A guy could graduate from high school, get a decent job, and expect to earn more and more money. This gave him the wherewithal to buy more and more stuff. So buying stuff became a national past-time. “He who dies with the most stuff wins,” was the basic rule of the game.

The first challenges to stuff culture came early, says Jack. The hippies and counter-culture movements of the ‘60s were basically a reaction to the excesses of consumerism and suburbanism. Then, prodded by the oil crisis, there was a counter-trend movement towards self-sufficiency and independence in the ‘70s. Those early attacks were beaten back by credit and bubble markets. It seemed crazy not to enjoy the benefits of stuff culture when it was at its apogee in the late 20 th century.

But now the consumer economy has played itself out, says Jack. It is spent, worn out and passé. Here at the Daily Reckoning we described the Bubble Epoque – the final, blow-out phase of the trend – day by day, during the 2001-2007 period. Now, we are describing the bust-up. The consumers are broke. The suburbs are démodé. The lust for stuff has given way to a lust for security, stability, and simplicity.

The shift from one major trend to another one is typically marked by depressions. The transition period requires retooling, re-pricing and often, relocating. The suburbs are unlikely to be a growth area in the next socio-economic trend. Instead, it is likely that suburban property hit its all-time high in 2005-2006. We will never see those prices again – ever. People will move. They will move to new areas.

The “season of depression,” to use Jack’s term, usually lasts 20 – 30 years. We are in one now. He puts the end of the depression – and the beginning of a new period of prosperity – at 2020.

*** “You couldn’t get away with that in the US. I was amazed. It was like a Las Vegas show… but a wild Las Vegas show…”

The boys were excited Friday night. They found a nightclub that would send a bus to pick them up at midnight… and bring them back at 5AM. The club was about 20 miles away… in the middle of rural France. It seemed improbable… but there it was… advertising a ‘Dental Floss’ night. (Referring to those micro-size underpants worn by young women…)

And so they made their arrangements by telephone. And at midnight… the bus came to pick up three of our boys… plus a French friend and an Irish writer who is spending a few days with us. Your editor went to bed….

“I can’t believe they wanted to do that,” said Elizabeth. “Imagine being trapped in a nightclub for 5 hours… and what could you do… the loud music… the cheap alcohol… it just sounds like torture.”

It sounded like torture to us. But the boys seemed to enjoy it. We awoke to sounds of laughing and talking. It was 5:30AM. The boys were back. From the sounds coming through our bedroom window, it sounded as though they had had a ball. We had to wait until noon on Saturday, after they finally woke up, for a report:

“It was amazing. They had dancing go-go girls who were practically naked. They did some dance numbers… and then they visited the tables. They were very friendly.

“It was run very professionally… the bouncers did their jobs well – big black guys. Someone spent a lot of money building the club.”

“What did you do?”

“We danced. We drank. We joked. The girls seemed especially interested in Edward (15). We had a good time….”

“Didn’t anyone ask for Edward’s ID?”

“No… no one seemed to care how old he was. Edward really enjoyed himself. Of course, his eyes almost popped out of his head. And he’s probably ruined for normal life… he’ll spend the rest of his life trying to recapture that excitement of his first nightclub experience…”

Source: Working Out What’s Behind the Price

Chinese property sales are up over 60% so far this year, the nation’s National Bureau of Statistics proclaimed yesterday. That puts the housing bubble here to shame. We’ve heard a bunch of nosebleed data points come outta there in the last few weeks… check these out:

• New loan issuance has tripled in the first half of 2009, to $1.1 trillion. That’s more than half of the entire Chinese GDP over the same period.
• 95% of those loans went to state-owned enterprises or provincial entities
• The Shanghai Composite is up 79% year to date, the best major market performance in the world
• Stocks on the Shanghai Composite trade for 35.4 times earnings, double that of the MSCI Emerging Markets index
• M2 money supply rose over 28.5% in the first half of the year
• The seven largest bond sales in the world this year were domestic transactions in China.

Damn near everything is up dramatically in China in 2009… except exports. Strangely, we don’t hear a lot of concern that the backbone of their economy has contracted 23% since this time last year.

“The Chinese government realizes,” adds Dan Amoss, “that its stimulus spending and pressure on banks to expand lending is inflating a massive bubble in the Chinese stock and property markets. The problem with unsustainable economy activity is, of course, that it must eventually end.

“But for now, the Chinese have much more room to borrow and inflate than the United States (which has spent the last few decades doing so). Eventually, the market will cut them off. The end will not be pretty, and at some point in the future, shorting Chinese stocks may be one of the best short-selling opportunities in history.

“In the meantime, it makes no sense to bet against China. The Communist government has proven very efficient at stealing the resources of its people (via inflation and taxation) and channeling them into whatever infrastructure project they deem necessary.

“This process could end next week or next year.”

Dan’s keeping an eye on China, but right now his focus is on a very well-known bank on the other side of the Pacific. He believes this major financial player will soon have to cut their dividend… crushing their stock price.

Source: China Bubble Version 2.0

Our faith is weakening. That is, our faith that the government will be able to cause inflation, sooner or later. Let’s review our own narrative: deflation now, inflation later.

This from Investment U:

Forget the grim news that Alcoa (NYSE:AA) is slashing costs and cutting 13% of its workforce. We all know times are tough. But the market’s a forward-looking beast. And right now, it’s doing exactly what I predicted on November 19. It’s favoring small caps over large caps.

In December the little guys put up big numbers – a 5.8% gain versus a mere 1.1% uptick for the large guys, based on the Russell 2000 and S&P 500 indexes.

Before I get to my favorite ways to screen and play this emerging small-cap rally, let me first address my critics.

My last column failed to convince some of you. Others thought I simply skimped on the proof. Or more specifically, that I failed to tell you why NOW is the right time to buy small caps.

As they put it, “We all know small caps lead the markets out of a recession. But what makes you so convinced we’re on the way out?”

As my college physics professor liked to say before each lecture, “Prepare to be enlightened.”

Why It’s Prime for Small-Cap Investing

Let me first disclose, I’m not a market timer. I don’t look for single infallible data points to signal my buys or sells. Instead I track trends (both long and short term). And there’s no denying the trend at the National Bureau of Economic Research – the committee responsible for officially uttering the economic curse word, recession.

You see, these guys – albeit a collection of the most educated and intelligent economists – have a knack for being late. By the time they make the call, the recession is usually close to over. Or in the case of the last two recessions (1990 and 2001), over completely.

This time will be no exception. The government’s about to dope up the economy on stimulus packages. In other words, plenty of economic growth is in the works. If you’re skeptical spending massive amounts of money we don’t have will do the trick, I understand. But just realize, something will prove to be the catalyst for a turnaround. And the numbers belie that something will materialize very soon:

• Since 1900, the average recession lasted 14.4 months.
• And since World War II, only two recessions (1973 and 1981) lasted longer than 15 months.
• So strictly by the numbers – based on a start date of December 2007 for the current recession – odds are this recession will be history by early spring.

You could argue, if you dare utter the words that “this time will be different,” that we’ve never experienced such a financial collapse. And the averages could be meaningless.

Fair enough. But again, I challenge you to recall any other period when so much stimulus (in the form of obscenely low interest rates, tax breaks and massive government spending) poured into the markets with no impact.

It doesn’t exist.

Ultimately, we’re at the tail end of this recession. And we know that means a small-cap rally is next. If you really want to press your luck, you could wait to until the end of the first quarter to consider small caps stocks. But I wouldn’t.

Being late could mean missing out on serious profits. Whenever you decide to jump in, here’s how I would go about finding the best opportunities…

Small-Cap Investing: The Big 3 Screening Criteria

In this market, our primary concern needs to be credit. Companies need it to operate and grow. Small caps are no exception.

That’s why the first thing I screen for is small companies with no or little debt (debt-to-equity ratios below 0.3). This alone will narrow down your choices significantly. But it will also reduce your risk.

Next, screen for companies with a sustainable competitive advantage. It could be revolutionary products, an insurmountable first-mover advantage, or extremely high barriers to entry. Anything that protects the underlying business from competition and enables the company to do the most important thing of all – increase earnings by at least 30%.

Yes, such companies do exist. And a market panic can only hold them back so long. Eventually, share prices will follow earnings. If you stick to the fastest-growing companies, I guarantee you’ll be holding onto the fastest-growing stocks, too.

Beyond these criteria, look for companies within three years of an initial public offering. Wall Street tends to overlook many of these firms. Plus, smaller and/or newer companies have more room to grow.

2 Small Caps Stock Investments to Bank On

In November, I singled out Genoptix, Inc. (Nasdaq:GXDX) and American Pubic Education, Inc. (Nasdaq:APEI). I still consider both strong buys. I’d also add these two small caps to the list:

E-House Holdings (NYSE:EJ).

Debt-to-equity checks in at 0.07. It could easily be zero as the company has enough cash to pay off debt almost six times over. E-House possesses an insurmountable first-mover advantage in the real estate agency services industry, with 1,800 professionals in offices in more than 20 cities. And its earnings have increased 62%.

I know. It’s a real-estate stock. And a Chinese stock, to boot. But that doesn’t matter. Nothing’s going to put a stop to the Chinese wealth creation machine. And the next big ticket item (after a television, refrigerator, air conditioning and a car) for the Chinese middle class is a home. If you have any doubt, consider E-House increased sales 63% in the first nine months of 2008. Despite such impressive fundamentals, shares trade for just 15 times forward earnings. But they’re on the move, up 51% since December 1, 2008.

American CareSource Holdings, Inc. (Nasdaq:ANCI)

Debt-to-equity checks in at zero. ANCI has just $16,000 in outstanding debt and over $8 million in cash. The company’s competitive advantage comes from its size and position as the first ancillary benefits management company. ANCI helps companies control health care costs by offering cost effective alternatives to physician and hospital-based services through its network of 2,400 providers. It also uses a proprietary software platform to help clients identify additional areas for cost improvement. Growth is off the charts with revenues up 127% and earnings quadrupling in the most recent quarter.

It goes without saying that controlling health care costs is a big concern. For the government and individual business owners alike. As a result, demand for ANCI’s services will only increase. And just because you probably never heard of the ancillary health care market, don’t think it’s small. At $574 billion it accounts for 30% of total national health expenditures. Given the current fascination with cutting costs, that percentage will only increase, leaving endless opportunities to grow for ANCI.

Source: Small-Cap Investing: How to Play The Emerging Small-Cap Rally

This from Money Morning:

The Chinese word for crisisis weiji.

But get this – when translated literally, wei means danger and ji means opportunity.  So to the Chinese, a crisis – or danger – represents an opportunity.

Of course, you don’t have to actually speak Chinese to understand what this mindset means for investors.

What you’re seeing in China today is nothing less than the classic definition of a crisis presenting the profit opportunity of a lifetime.

While investors in U.S. markets are mostly concerned about saving their necks, China has been stacking the deck in favor of those who have the guts to pull the trigger on the most undervalued market in memory.

Here’s why you should consider taking an early position in China in 2009.

The Mother of All Stimulus Plans

While it’s not old news, the current crisis in U.S. financial markets is all too familiar.  The Standard & Poor’s 500 Index is down almost 40% from its 52-week high and there seems to be no end in sight.

Worse, the malaise encompassing the United States has clearly spread to the rest of the world, including China.

So it appears that what investors once considered to be the greatest investment opportunity of our lifetime has imploded – just another financial black hole where portfolios go to die.

Truth be told, however, there is ample evidence that China’s economy and markets will weather the storm and ultimately thrive in the year ahead.
The Chinese economy has been the fastest growing in the world for the last three decades, averaging double-digit growth for the last seven years.  And while the credit crisis has slammed on the brakes in terms of growth in the West, China is still on track for a solid 8% growth in 2009.

But the Red Dragon isn’t about to take any chances.  With $2 trillion in foreign exchange reserves available, China can increase the growth rate of its economy – even as it works to boost economic recovery efforts elsewhere in the world.

And that’s just what it’s about to do.

The People’s Republic of China has already announced a $586 billion (4 trillion yuan) spending package.  To put that in perspective, this plan amounts to a staggering 20% of China’s gross domestic product (GDP).  Compare that to the $1 trillion in U.S. bailouts, which equate to about 8% of GDP.

And China’s reserves won’t be doled out in dribs and drabs. The plan calls for spending the whole amount in just a few years.

To further grease the recovery skids, China has reduced interest rates five times in the last three months, and loosened lending rules.  Now China’s banks are perfectly positioned to get the ball rolling, flush with cash from a world-leading savings rate of 35%.  And because they are state-owned, the cash will flow quickly from the banks to government projects.

The convergence of the recent market swoon and the stimulus plan means you now have the opportunity to buy great companies at the dawn of the Chinese century.

But specifically, where should you look to park investment capital in the Chinese market?

Well, there are solid plays across all spectrums of China’s economy, but the best are in infrastructure, consumer goods and energy.

Infrastructure Paves the Way to Profit

The first place to look is infrastructure development, which has been the main engine of China’s explosive growth over the past two decades.

While most believe China’s economy is export driven, statistics show public works spending accounts for 4%-6 % of the country’s GDP growth. From 2007-2010, China will spend a whopping $725 billion on infrastructure improvements in a race to accommodate its rapidly migrating populace.

By 2030, 1 billion of its people will live in cities, up from 600 million today.  About 170 mass-transit systems will be needed.  Another 40 billion square meters of floor space will be built in 5 million buildings – 50,000 of which could be skyscrapers.

And all of these developed regions will be connected by new roads. Shorter transport times drive down costs, and smooth the transition to city living for China’s exploding middle class.

Plans for China’s road system call for 12 major routes across the country from north to south and east to west connecting millions to new routes of commerce, according to The Wall Street Journal.  The system will stretch 53,000 miles by 2020, surpassing the 47,000 miles of roadways in the United States.

It will take massive amounts of steel, cement, and bulk transportation to build those roads.

Money Morning Contributing Editor Martin Hutchinson believes one big winner from the infrastructure boom will be Vale (ADR:RIO) the world’s largest producer of iron ore. As the world’s leading producer and consumer of steel, China is also the world’s leading importer of iron ore, which – along with coking coal – is a key component in steel production.

And while prices and demand for Chinese steel fell sharply in the second half of 2008, they are already beginning to pick back up.

In fact, steel production in the Chinese city of Tangshan, in the Hebei province, has risen to more than 70% of capacity as companies resumed output after prices stabilized, the Tangshan Evening News reported Dec. 26. About 39 out of 57 iron and steel factories in Hebei, China’s biggest steel-producing province, are operating now, compared with 25 in August.

Tangshan is an industrial-level city in that steel-rich region.

“The iron-ore stocks have been overly poorly treated in the past couple of months with all the fear over China,” Michael Heffernan, a client adviser with Austock Securities Ltd., told Bloomberg News.

“Negativity over the Chinese situation is overdone,” Heffernan added. “In the past couple of months the Chinese may have been posturing to get the best possible deals they could when negotiations over contract prices reopen.”

That’s good news for Vale, which looks attractive with a Price/Earnings (P/E) ratio of only 8.6.

A big source of China’s iron-and-steel demand has to do with the country’s commitment to railroads. A full $100 billion of the stimulus package will be spent on rail services.

That makes Guangshen Railway Co. Ltd. (ADR:GSH) a good play.

Guangshen Railways is the biggest rail operator in China with cargo and passenger operations between Guangzhou and Shenzhen, as well as Hong Kong.

There is an acute shortage of rail capacity to carry raw materials from China’s western provinces to manufacturing centers on the Red Dragon’s East Coast. Right now, cargo capacity is only 35% of demand, according to the Chinese Railway Ministry.

That helped revenue at this $94 billion company to jump 17% in the first three quarters of 2008, despite a crippling snowstorm in January.  Guangshen also yields about 3%, rewarding investors who are willing to hold the shares as they wait for the stimulus to kick in.

China’s Urban Migration and Growing Consumer Class

The opening of new highways is providing greater mobility to China’s population, accelerating the massive move from the hinterlands to the cities. Incredibly, China will have 221 cities with more than one million inhabitants by 2025 – compared with 35 in Europe and nine in the United States today.

Quite simply, that urban migration is responsible for creating the largest consumer class the world has ever seen – a middle class greater than the entire population of the United States.

Retail sales in China are estimated to have risen about 21% in 2008, according to the Ministry of Commerce. And now that weakness in the global economy has dented exports, the government is making an even greater effort to boost domestic consumption.

That’s why Money Morning Contributing Editor Horacio Marquez likes China Life Insurance Company Ltd. (ADR: LFC).

China Life is experiencing continued growth for reasons unique to government regulations.  Without a social security system, Chinese consumers must fund their own retirement – one reason the Chinese save an amazing 35 cents of every dollar they earn.

Also, China Life’s investment portfolio hasn’t been hit by the market meltdown, because government regulations prevented the company from owning subprime-related mortgages and securities. With 43% market share, Moody’s Corp. (MCO) expects premiums to grow between 30% and 40% in 2008.  And right now, only 3% of China’s consumers own life insurance, leaving plenty more room for growth.

Another company worth looking at is China Mobile Ltd. (ADR: CHL).

With 443 million subscribers, China Mobile is the dominant provider in the world’s largest mobile telecom market.  And in terms of growth, an additional 3 million to 4 million consumers become mobile phone subscribers in China each month, according to the Chinese Ministry of Information.

The company’s earnings per share (EPS) increased 31% in the first three quarters of 2008 and China Mobile stock yields a healthy 3.2%.

Now, the mobile services giant is in talks with Apple Inc. (Nasdaq:AAPL) to introduce the iPhone to the burgeoning Chinese market.  And with the global slump hurting smaller players, it’s on the hunt for acquisitions with attractive valuations in emerging markets.

Soaring Energy Demand = Growing Profit

Despite a slight slowdown in the economy, China’s energy appetite continues to grow at a ravenous pace. And even though the country is building one coal-fired power plant a week, China’s unable to keep up with exploding demand.

China’s electricity consumption rose 5.2% in 2008 and investment follow.  A total of $84 billion (576 billion yuan) was invested in the sector in 2008 – a 1.52% over to 2007.  Power grid spending rose 17.69% to $42 billion (288.5 billion yuan).

As with other forms of infrastructure, China plans to up its investment in electricity over the next several years. China has already announced $29 billion in new energy projects, including a new natural gas pipeline, construction of 10 new nuclear power plants, and a new coal mine, set to produce 14 million tons of coal a year.

Here are two solid profit plays on the new infusion of cash:

Money Morning Investment Director Keith Fitz-Gerald likes Yanzhou Coal Mining Co. Ltd. (ADR:YZC).

China burns more “black rock” than the United States, Japan and Europe combined, and this company is one of China’s biggest coal suppliers. It produces lots of high-grade, low-sulfur coal, which burns cleaner and fetches a premium price.  The company also boasts profit margins of 22% in an industry where the margins average about half that amount.  For the first three quarters of the year, the company posted profits that were up 364% from a year ago.  This kind of growth, in a stock that’s trading at three times earnings, is a big time potential bargain – especially given its dividend yield of 4.3%.

Both Fitz-Gerald and Hutchinson recommend like Huaneng Power International Inc. (ADR:HNP), as well.

Huaneng is the largest utility in China, and is a virtual lock to benefit from growth in any form. It owns 16 operating power plants, and has controlling interests in 13 others. As a state-owned enterprise, it has the contract to produce the power for the entire eastern region of China, including Shanghai and Beijing.  Although it’s been generating losses lately due to high coal prices, the power company is likely to increase output and profits with any economic expansion.

If you’re leery of investing in individual stocks you might want to look at the Templeton Dragon Fund Inc. (NYSE:TDF). Over 80% of the closed-end’s assets are directly invested in China. And with roughly 50 positions, it provides ample diversification.

PS. This is the tenth installment in Money Morning’s “Outlook 2009” series, which looks at the global investing outlook for the New Year.
Source: China’s Red Dragon Turns Financial Crisis into Opportunity

Last week, Taipan Daily editor Justice Litle gave six reasons why the China bears are wrong. Justice says continued growth, the recent correction in oil and the country’s personal savings rate mean China’s fundamentals are strong.

However, J. Christoph Amberger in Today’s Financial News says analysts who predict Armageddon for America based on a 20% drop in the Dow and discount a 60% drop in the Shanghai Stock Exchange may just have sand in their slide rules. 

Ian Davis in The Growth Stock Wire says it’s a tale of two contests in China…

Despite the success of the Olympics, Chinese stocks are in the gutter. According to Ian:

The index that tracks shares available to mainland Chinese investors, the Datastream ‘A’ Shares China Index, is down 58% from its October 2007 peak. Each time this index looks like it’s ready to begin a sustained rally, it simply gets hammered again. Chinese investors may be happy watching the games, but they’re losing a fortune in the stock market.

However, this may set up a great buying opportunity for investors…

Huge declines like this often create great values. In a bull market correction like this one, the earnings (the “E” in P/E ratio) often remain healthy, but share prices (the “P”) go far beyond what anyone thinks is possible. Thus, you get stocks selling for low P/E ratios… say under 12 [...]

China’s P/E ratio has dropped to 16. This is still significantly higher than its long-term median of 10, but significantly lower than it was a year ago. Chinese shares also trade for a price-to-book ratio of nearly three, so they’re not a screaming buy yet.

Ian says wait until shares sink to less than 12 times earnings and less than two times book value before buying.

Source: Are Chinese Shares a Buy? Here’s the Answer… 

Yesterday, China’s benchmark Shanghai Composite Index dropped 5.2 percent after economic data revealed wholesale price inflation jumped to its highest level in 12 years in July.

However, Taipan Daily editor Justice Litle says China’s long-term outlook remains strong – and some China plays look more favorable than they have in years. Here are Justice’s six reasons why the China bears are wrong…

Reason to Buy China #1: The Silly Season Is Over

Chinese investors went through a mania phase last year. There were tales of lines half a mile long snaking out from the doors of the local stock brokers. In April 2007 alone, nearly 4.8 million new trading accounts were opened in China — more than the prior two years combined.

All these new buyers led to a silly season for Chinese stocks. You could see it in the difference between Shanghai A-shares and Hong Kong H-shares…

At one point, companies with dual listings in Shanghai and Hong Kong were getting as much as an 80% premium on the A-shares price. This was a reflection of Chinese capital controls — it’s still tough for mainland Chinese to get their money out — and naive buyers who wanted to play at any price.

Now that the frenzy has subsided, real values are starting to show up again. The hot money has burned itself out, providing opportunities for those who see longer-term value and aren’t out to just flip a quick buck.

You see this pattern play out over and over again when a new opportunity comes to a place. Investors get excited and lose their heads, they push things way too far, and then the market comes crashing back to earth. That’s when the patient players get interested.

Reason to Buy China #2: Oil Is Coming Down

As of this writing, crude oil is more than 20% off its near-term highs. It looks like oil could be heading for the $100 mark — a possibility we pondered in “What If the Price of Oil Implodes.”

One of Asia’s greatest challenges has been keeping a lid on inflation pressures. It’s not easy to grow like crazy without seeing the price of basic goods and services rise too quickly.

Oil closing in on $150 a barrel threatened to swamp Asia with inflation on a local level — as the price of transport, food, and fuel went up — and also to cut into export profits as shipping costs rose.

With oil backing off, China and India can breathe a little easier. The fear that high-priced oil might kill the Asian miracle is lifting. That gives them more time to tap alternative energy solutions and build economic strength at home.

Reason to Buy China #3: The Locals Are Optimistic

The news reports mostly focus on the bad things — civil unrest, government crackdown, pollution and so on. That’s the nature of the beast mostly… for the most part, good news isn’t as interesting as bad.

But a recent survey from the Pew Research Center shows that most Chinese feel positive about where their country is headed. According to the survey, 86% are “content with the country’s direction.” (That’s up from just 25% six years ago.)

Perhaps even more surprisingly, six in 10 Chinese reported being satisfied with their jobs. And 70% were in favor of China’s shift toward a free-market economy.

The biggest concern in the Pew Survey? Rising prices. But that concern is addressed by the fact that oil is headed down these days — not marching higher as it had been for most of the year.

Reason to Buy China #4: The Growth Is Still There

China has had an amazing run, growing its economy at a near double-digit pace since the early 1980s. But the dragon isn’t done yet — not by a long shot.

Global Insight, an economic consulting firm, forecasts that China will overtake the U.S. as the world’s largest manufacturer in 2009. This is as much because the U.S. base is shrinking, even as China’s is growing… but that still counts as an eye-opening stat.

Plus for the longest time, China was seen as the world’s source for low-tech goods. Chinese factories were known more for sneakers, trinkets and cheap plastic toys than items of real value…

That’s all changing now as China moves up the quality food chain. Now we are seeing savvy companies like China Medical Technologies (NASDAQ:CMED) produce some of the most sophisticated high-tech devices in the world. As China gets better at enforcing intellectual property laws, its high-tech skills will only increase… and profit margins, too.

Reason to Buy China #5: Personal Savings and Domestic Demand

Perhaps even more impressive than China’s long-term growth rate is the personal savings rate.

Americans spent more than a dollar for every dollar they earned in 2006. The U.S. savings rate actually went negative. The Chinese, meanwhile, salt away 35 cents for every dollar they earn.

Just imagine how much extra money you’d have on hand if you’d managed to save 35% of your income, year in and year out, ever since you started working. Then just think of all the things you could buy with that cash.

Part of the reason the Chinese save so much is because there’s no real social safety net. But that’s changing, too: As the Chinese economy evolves, things like insurance and healthcare and retirement plans grow more affordable.

The upshot is, at some point, China’s big savers will feel a little bit more comfortable spending some of that cash they’ve saved up. And the newly minted middle class in China are already taking a hard look at things like cars, air conditioners, washing machines and so on.

As local economies grow, the locals themselves feel more comfortable spending a portion of their ample savings. That in turn leads to more domestic growth, which leads to a more positive outlook, which in turn increases spending. Chinese domestic demand is headed into a virtuous cycle that could run for decades.

Reason to Buy China #6: Huge Foreign Reserves

In balance sheet terms, China is rich… massively rich.

We’ve already seen what can happen when cities and counties go bankrupt. The residents of Orange County, California, got a nasty taste of that. Jefferson County in Alabama was on the brink this year, too. (As with Orange County in 1994, they took on some really dumb trades.)

So it’s not good when some regional authority — be it local or national — is running short on cash. China doesn’t have that problem. If anything, they have the opposite problem. Economist Brad Setser estimates that China has somewhere between $2.3 trillion and $2.4 trillion in excess reserves.

That’s a lot of dough… enough to make a 20% down payment on the entire U.S. economy! And hundreds of billions more roll in every quarter.

Point being, money can’t always prevent bad things from happening. But it sure can fix a lot of things. If China has to take extra steps to keep economic growth on track or keep the domestic demand side humming, it certainly won’t be stymied by lack of funds.

Source: Six Reasons to Buy China