Now as then, China keeps its own counsel. We know what they want us to know, plus what we can surmise from rumor and reading between the lines. But lately, we’ve been able to add presumption to news and come up with something that looks very significant.

Specifically, there’s been a flood of tantalizing stories out of the East that, taken together, strongly suggest a growing preoccupation with a form of money that was ancient even in Signor Polo’s time. And it ain’t silk. It’s gold.

We already learned, back in April, that China has been salting away bullion for the previous six years, out of sight of international gold watchers. To the tune of 14.6 million ounces. Now the evidence suggests that that was merely the prologue.

Let’s take these tidbits one at a time:

Sovereign Wealth Fund Dumping $$ for Gold?

This one is still at the rumor stage, but highly-respected website Mineweb.com is supporting it. What we know for sure is that the country founded its primary sovereign wealth fund, China Investment Corporation (CIC), two years ago, with the stated aim of rapidly deploying some of its $1.5 trillion forex surpluses – $200 billion initially, with another $100 billion recently added to the kitty – into investment in non-Chinese enterprises. This it has been doing in spades, acquiring businesses around the globe. Extractive industries are among them, including Teck Corp., the diversified Canadian mining giant.

Might it also be buying up gold? We don’t know that for sure, but it seems likely. And, in addition, rumors sneaking off the mainland indicate that within the CIC, a lot of effort is being poured into prospective investment deals in the oil and precious metals sectors. The more it produces, the more it can keep.

The Chinese have made no secret of their disdain for current American economic policy and what they see as the inevitable destruction of the dollar. That they would be moving to diversify out of the greenback shocks precisely no one, and gold is one logical landing place for all those bucks. We suspect that’s exactly what is happening, behind the scenes as well as center stage.

Gold and Silver Pushed to the People

As recently as 2002, the private ownership of gold was prohibited in China. You could be jailed if caught with any in your possession. Beginning in 2009, in a stunning about-face, the central government removed all restrictions. In fact, as Mineweb and other sources report now it’s actively pushing folks to buy some personal metal, with China’s Central Television, the main state-owned television company, running news programs cum infomercials, letting the public know just how easy it is to purchase gold and silver as an investment.

It truly is as simple as can be, because every bank sells gold and silver bullion bars in four different sizes to individuals. (Try to find the same the next time you make the trek down to Wells Fargo.) Mining companies are reportedly encouraging employees to convert some of their wages to gold on payday. Gold is traded in some form 24 hours a day. And paper proxies for the metal are also soaring in popularity.

There are persistent rumors that the export of silver has already been banned. Gold could be next.

Thus China, which only yesterday was the lowest per-capita consumer of gold in the world, is bidding to become the biggest. Some analysts believe it will pass India – the top dog since forever – as early as 2010. Clearly, the government believes the country is strengthened if everyone who can holds some hard currency.

All this suggests a mania in the making, and only in the formative stage. Imagine if hundreds of millions of new consumers climb on that particular bandwagon…

China Repatriates its Bullion

Meanwhile, in early September numerous sources reported an announcement that Hong Kong is pulling all its physical gold holdings from depositories in London and transferring them to a newly built, high-security depository at the city’s airport.

That means the government is backing the promotion of Hong Kong to a more formidable status as a Swiss-style, regional trading hub for bullion, at the same time as it reduces London’s role as a key settlement and storage center.
Press reports cited government officials as saying that marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility. Outreach will also be made to commodity exchanges, banks, precious metals refiners and ETF providers.

There can be little doubt this signals that the Chinese government fully recognizes the importance of gold in a time of crisis, and that the most prudent plan involves keeping its stores close at hand.

China Threatens to “Just Walk Away”

In one of the year’s most intriguing developments, commodity and derivative markets were thrown into a tizzy on Monday, August 31, by the worldwide circulation of a story published two days earlier in Caijing magazine (and reported by Reuters here).

According to the Caijing article, a spokesperson for China’s state-owned Assets Supervision and Administration Commission – the regulator and nominal shareholder for state-owned enterprises (SOEs) – told six foreign banks that SOEs reserve the right to default on contracts.

Say what?

Maybe the commission has been paying attention to the “just walk away” forfeiture movement that blossomed among American homeowners whose overall debt on their properties far exceeded the assessed value.

Small wonder there was panic in trading houses that hold a lot of Chinese paper. They hope any problems will be worked out short of a default. In fact, “It’s [only] a handful of companies who are being encouraged by regulators to ‘re-negotiate’,” says one banking source. “It’s outrageous, but it’s China, so everyone is treading very carefully.” Very carefully.

Nevertheless, in addition to tangible losses, those potentially affected fear the establishment of a dangerous precedent, one that could lead to utter chaos in the enormous, tangled world of derivatives.

And there is one other, albeit highly speculative, possibility. Some major entities – we don’t know who, due to the opaque nature of international gold trading – have huge, perhaps quite concentrated short positions in the metal, both on the COMEX and OTC market. Is one of them China, acting through American intermediary banks?

A short position in precious metals means that the initiator of that position is obligated to deliver physical gold or silver if the buyer (who holds the long end) wants it. Suppose China is one of the big shorts. Suppose it’s been playing the market in order to buy at what it sees as bargain prices. Now suppose a gold rally induces it to just walk away from all those obligations to deliver. Who’s going to force it to make good? Guess what, no one has a gun large enough.

Granted, it’s an outlandish scenario. But impossible? No. Beijing has shown nothing but indifference to what others think of it. And if the dollar does crap out as the world’s reserve currency, there’s nothing to say that China won’t see its self-interest as lying in a completely new direction.

Conclusion. Gold, and the companies that produce it, have enjoyed a brisk runup of late, as the metal mounts yet another assault on the beckoning, symbolic $1,000 level. How much of this can be traced to what China has done, is doing, or may yet do?

We don’t know, but we suspect it’s not entirely coincidental. All rumor and speculation aside, as China clearly turns more and more bullish on gold, so will everyone else.

Regards,
Doug Hornig

Source: What the Heck Is Going on in China?

But Obama’s high-speed rail initiative has gotten off to a sluggish start, while a much bigger, $300 billion plan to create the world’s largest and most sophisticated high-speed rail network is already rapidly unfolding in China.

“Railroads were always the pride of America, and stitched us together. Now Japan, China, all of Europe have high-speed rail systems that put ours to shame,” Obama said in April.

In a proposal called “A  Vision  for  High-Speed  Rail  in  America” Obama and the Federal Railroad Administration outlined a plan to develop 10 “potential” 100-600 mile corridors in the United States, “similar to how interstate highways and the U.S. aviation system were developed in the 20th century.”

Developing all 10 high-speed corridors could eliminate 6 billion pounds, or about 3 million tons, of greenhouse gas emissions each year, the FRA said.

But the plan was pitched as more than a way to make travel cleaner and more efficient. It was touted as a way of creating jobs. In April, when Obama gave his speech, the unemployment rate stood at 8.9%. It’s since risen to 9.4% in July and will likely test 10% by the end of the year.

Meanwhile, the FRA has until 2012 to disperse the first $8 billion of the total $13 billion allocated to high-speed rail. And when that money is finally paid out, it’s more likely to go towards upgrading existing infrastructure than laying new high-speed rail.

“No one expects we are going to begin, let alone complete, the high-speed rail system with $8 billion,” FRA spokesman Warren Flatau told CNNMoney. But the stimulus funds represent the “groundwork for a more sustainable program of funding in the future.”

The remaining $5 billion has been included in the president’s budget over the next five years.

Already, it that amount seems to be woefully inadequate. Last month, more than 40 states submitted 278 pre-applications for stimulus-funded high-speed rail projects. The total amount of funds requested amounted to $102.5 billion in requests, according to CNN.

China Fast-Tracks High Speed Investment

High-speed rail may be on its way to the United States but it’s already arrived in China.

China introduced a 270mph maglev train service in March 2004 and regular high-speed train services in April 2007. But it’s not stopping there.

Beijing will spend $50 billion on high-speed rail this year alone, and the central government plans to spend another $250 billion over the next decade. By 2020, China will have laid nearly 16,000 miles of high-speed track capable of carrying the fastest trains on the planet. By comparison, America has just 457 miles of high-speed track.

And unlike in the United States, China’s high-speed railroad initiative is already producing jobs. So far, the construction of the Beijing-Shanghai high-speed route alone has created about 110,000 jobs and is playing an enormous part in China’s economic recovery.

Spending on railways jumped 126.5% year-over-year in the first half of 2009, leading to a huge increase in the nation’s steel production at a time when global demand was decidedly weak. China’s crude steel output in July reached a record 50.68 million metric tons, up 12.6% compared with last year, according to figures from the National Bureau of Statistics.

There is no doubt that “the acceleration of [the massive railroad build-out is playing a key role in China’s recovery,” David Li, an economist at Beijing’s Tsinghua University told Fortune.

Liang Yi, the vice CEO of the China Railway Construction Co. (CRCC) subsidiary working on the Beijing-Shanghai route told Fortune that his company may hire up to 20,000 new university grads to meet the growing workload. Liang said his unit alone is absorbing 8,000 more workers this year than it did last.

Of course, that doesn’t mean Chinese companies are the only ones profiting from China’s railroad expansion.

International Business Machines Corp. (NYSE: IBM) won a contract to provide software for high-speed trains the Guangdong province. Also, IBM last month announced that it was opening a “Global Rail Innovation Center” in Beijing.

“In the next five years, China is investing more in high speed rail than the rest of the world combined,” Keith Dierkx, the director of this new center, told TheInfrastructurist.com. “This enormous build out of the HSR frees up their traditional rail network for freight. So, they’ll have more high-speed rail than the rest of the world combined–but they’ll also be getting better freight capacity.”

Canada’s Bombardier Inc., the world’s largest rail equipment manufacturer, also got in on China’s massive HSR initiative when it won a contract for work on 40 high-speed trains, as well as a signaling system.

Fortune estimates that foreign companies have won about $10 billion worth of contracts for work on China’s high-speed rail system.

Still, Money Morning Investment Director Keith Fitz-Gerald believes that the best way to capitalize on China’s massive rail build-out is by investing in Chinese companies that will have a long-term presence.

“There’s certainly hay to be made on high-speed rail development in the United States, but if you really want to capitalize on this trend you should look at China, which accounts for 25% of the world’s railroad traffic but has only 6% of the world’s rails,” Fitz-Gerald said. “To the extent that China builds high-speed rail, then effectively railroad companies across the country will benefit from increased traffic.”

In a recent Money Morning Webinar, Fitz-Gerald named Guangshen Railway Co. (NYSE ADR: GSH) as company that has good long-term prospects in China’s transportation sector.

“Guangshen is involved in high speed, it’s involved in capacity and it’s got relatively low debt,” said Fitz-Gerald. “It’s just another example of a Chinese company capitalizing on a huge infrastructure expansion that’s backed by billions of dollars in government investment.”

Guangshen’s 2008 operating revenue jumped 11.23% in 2008, in part because of HSR development.

Source: High-Speed Rail Puts Investors on the Fast Track to Profits in China, but Languishes in the U.S.

There are few certainties in this overbought market, but one common theme lately has been the dominance of China’s small caps. Seemingly every day, a little-known Chinese company is topping the biggest-mover list.

Today’s list leader is no exception.

China GrenTech (NASDAQ:GRRF) shareholders are watching their positions surge by nearly 50% as investors try to get their hands on this thinly traded microcap.

With an average of just 70,000 shares exchanging hands in any given session, today’s massive trading of over four million shares is a sign investors are willing to pay a premium to get their hands on the $6 million company’s future earnings potential.

The surge in the wireless product provider’s value comes thanks to its latest earnings report, which showed revenues ($62 million) increased by over 125% and earnings ($2 million) surged into profitable territory during the last quarter. Gross profit (the figure the government cares about) came in at nearly $50 million, up 70% year-over-year.

As you probably know, the gang at TFN has been all over the growth situation in China. That is why today’s move is so very intriguing. The fact that much of the company’s growth comes through a demand for higher technology and advanced infrastructure proves China’s growth prospects are on par with the growth this country saw during the last half of the twentieth century.

We’re out. They’re in

The macroeconomic forces that put Chinese companies atop the leader board nearly every day are not going away anytime soon. Remember, money always flows through the path of least resistance.

Why would anybody risk their wealth in a politically risky, volatile American market that is likely to stagnate for the next several years, when they could hunker down in an economy growing by 8%, 9% or even 10% well into the foreseeable future?

The amount of cash flowing into China GrenTech today proves that many investors feel it is a safer move than putting money into something like Citigroup (NYSE:C), which has the government crawling all over it.

Investing in international companies has never been easier. GrenTrech trades electronically through the NASDAQ system. That means buying its shares are no harder than buying shares of Apple (NASDAQ:AAPL) or Sirius XM Radio (NASDAQ:SIRI).

With just a few clicks of the mouse, you have international exposure AND a shot at one of the hottest-growing economies on the planet.

You know where my money is going. If not, read this report.

Source: GrenTech: China Does it Again

James McGregor wrote a book in 2005 on doing business in China called One Billion Customers. If the title sounds familiar, it may be because a man named Carl Crow wrote a book called 400 Million Customers, back in 1937. You see, the dream only gets bigger over time!

For the most the part, this dream remains a mere dream. But sometimes, someone, somewhere, figures it out. Carl Crow was someone who figured it out, and it made him a rich man.

Carl Crow led an adventurous life. Born in Highland, Missouri, in 1884, Crow started out as a newspaperman. Eyeing his fortune, he started China Press in Shanghai in 1911. But Crow eventually realized there was more money to be made in advertising. In 1918, he launched an advertising agency in Shanghai. As an adman, he helped his clients – mostly Westerners – sell their products to the Chinese.

His agency flourished. Crow’s billboards peppered China, from Shanghai all through the Yangtze Valley and as far north as Hubei. Chances are, if you flipped through a magazine in China between the World Wars, you saw Crow’s work in advertisements for cars, matches, cameras and many other goods.

He had a great run of 19 years. Then the war with Japan began in July 1937. Crow, who was outspoken in his criticism of the Japanese, fled the country. He could take none of his wealth with him. He lost everything — house, business, money. Back in the U.S., Crow penned his classic book, which helped him start over again. It’s still in print today. It’s widely viewed as a classic and is surely one of the most read books on China ever published.

Crow’s book, though, really shows how China was as much a money pit as a place where gold nuggets sprouted from the bushes. It remains that way today, ever tricky and hard to figure out. But for those who find a way, as Crow did, the rewards can be immense.

Let’s face it; a market of more than 1 billion noses is one you shouldn’t ignore. But it’s no small task trying to figure out which facial cream they might buy or what toothpaste they might favor.

However, there is another, more sure-footed way, to tap into that mass of humanity called China. Boiled down to its essence, the tactic is simply this: Buy what China needs, but can’t make enough of for itself.

In other words, as an investor, buy what the Chinese MUST buy. This next chart captures the idea. It shows China’s ability to produce a commodity against its demand for that commodity.

You want to be in the lower left-hand part of the chart. In short, the very best places to be are in potash, soybeans, iron ore and oil. In these commodities, China’s share of world production is low. For potash, China represents less than 5% of global production, as shown by the vertical axis. It is also not self-sufficient. As the horizontal axis shows, China’s production of potash is little more than 20% of its domestic demand.

Let me give you a little more color on potash. [Editor’s note: Last December, Chris urged the subscribers of Capital & Crisis to purchase the shares of Potash Corp. (NYSE: POT)]. I recently listened to a couple of presentations by Chinese potash companies. They all confirmed that there are few commercially developed potash reserves in China. The Chinese use 12-15 million tonnes of potash every year, but produce only 3 million tonnes.

Harry Yang is an executive director at Sinofert, of which Potash owns a stake. Yang pointed out that Chinese soil is potash deficient. “China uses enough nitrogen and phosphate because it is self-sufficient in nitrogen and phosphate,” Yang said. (Nitrogen and phosphate being the other two key nutrients.) “But China significantly underuses potash.”

Compared with farmers in the U.S. and Europe, application rates are half on a per acre basis. “Ten years ago, [Chinese] farmers had no idea about potash. Farmers are using more and more now.”

Liu Guocai, chairman of another Chinese potash company, Migao Corp., shared his views. He pointed out that potash inventories are low. He predicts that China’s demand for potash imports will bump up significantly later in 2009 in preparation for the 2010 planting season.

As for soybeans, China was once the world’s largest exporter. In 1995, it flipped to a net importer and has been the largest importer of soybeans in the world since 2000. Much of its supply is in the hands of companies such as Archer Daniels Midland, Bunge and Cargill.

More broadly, this speaks to China’s growing demand for food, and its growing dependence on foreign suppliers to keep its rice bowls full. This is why we see China in recent months making deals for food. It made a $500 million deal for poultry and pigs from the U.S. China attempted, but failed, to buy farmland in Mozambique and the Philippines. You may have also seen reports on Chinese deals in Africa. In Zambia, Chinese farmers already produce about a quarter of the eggs sold in Lusaka, the capital, for export to China.

As China maneuvers to secure its future food supply, one can easily see that the economic axis of the world is shifting from West to East. Understanding the dynamics of this shift will create some wonderful investment opportunities in the years ahead.

Someday, someone will write a book called One and a Half Billion Customers. Why not begin investing alongside the Chinese now, before the next half billion of these consumers arrive on the scene?

Source: Buy What the Chinese Are Buying

Much of Brazil’s South Atlantic development will require drilling wells in waters up to two miles deep, through four-five miles of rock beneath the seabed. The prize at the end will be oil deposits with reserves estimated in the tens of billions of barrels. With access to this offshore bounty, Brazil expects to take its place among the first ranks of energy-producing nations in the world.

Brazil’s state-controlled national oil company (NOC), Petroleo Brasileiro SA (NYSE:PBR) plans to spend over $175 billion in the next five years just on offshore development. The immense investment involves buying and building dozens of new drill ships and seagoing platforms, along with many dozens more support and servicing vessels. Petrobras will lay thousands of miles of pipelines on the seafloor, connecting massive complexes of subsea equipment that will sit atop hundreds of oil wells.

To finance much of this development, Brazil has turned to China. With the active support of the Chinese government, many Chinese banks are lining up to extend loans to Brazil’s energy sector. Right now, there is an agreement for a Chinese consortium to lend Petrobras $10 billion. In exchange, Petrobras will eventually ship 200,000 barrels of oil per day to Chinese refineries. There are more such long-term finance supply deals in the works.

The Chinese government has established strategic guidelines for its national firms. That is, the Chinese government has set goals for Chinese firms to supply China’s long-term needs for energy and other natural resources. The Chinese are looking well ahead into the rest of this century, and even into the 22nd century. They want to ensure their future access to a diverse global supply chain, as well as win entrée into resource-rich regions of the world for Chinese industries and support firms.

Why are the Chinese receiving such a warm welcome in Brazil? According to Sergio Gabrielli, CEO of Petrobras, “The U.S. has a problem. There isn’t someone in the U.S. government that we can sit down with and have the kinds of discussions we’re having with the Chinese.”

In other words, there is a new geopolitics of oil at work. In the olden days, it would have been large international oil companies (IOCs) like Exxon Mobil (NYSE:XOM), Shell (NYSE:RDS.A / RDS.B) and BP walking into a room to meet with the Brazilians. The IOCs were the only game in town. They controlled the financing and the technology for large developments.

But today, the biggest deals begin with a political understanding at the top, hammered out between the highest levels of the respective governments. This top-down political deal making cuts out the IOCs, except where they have technical expertise that can be hired on a contract basis.

In essence, we are witnessing the end of the post-World War II economic construct of the world’s financial system. That construct always had a Western bias. But the 2008 crash of the Western business and financial model has changed everything. It has left a barren worldwide financial landscape for large development projects. Most traditional Western financing is simply not available for large projects. And as French author Francois Rabelais (1494-1553) once noted, “Nature abhors a vacuum.”

Thus has the Western financial crisis handed well-capitalized, government-backed Chinese banks and industrial firms an unmatched competitive advantage. With the traditional credit markets dry, Chinese banks have transformed into key lenders for the resource developments that will fuel the next generation of humanity. Indeed, for now, the Chinese are the world’s ONLY lenders for large resource development projects. See Brazil, Exhibit 1.

China’s Rare Earths Monopoly – All But Insurmountable

China’s support for Brazilian energy development is not the only angle that the Chinese government is pursuing for its future gain. China’s large reserves of foreign exchange, as well as its national strategic focus, has enabled incomparable – even insurmountable – progress for the Middle Kingdom to corner the world supply of substances called rare earths. Here’s the production chart for the past half century. Obviously, something is going on here.

Now that we’ve seen this chart, the questions arise: What are rare earths? And why are they important?

Rare earths are the 15 elements within the lanthanide series of the periodic table, plus the elements yttrium and scandium. The best known are lanthanum, cerium, neodymium, praseodymium, gadolinium, europium and samarium.

Here’s why rare earths are important. They’re used in a wide range of industrial and electronic applications. For many years, large amounts of lanthanum and cerium have been used in petroleum refining, with the result of increasing yields from each barrel of oil by about 10% while extending the life of other expensive catalysts like platinum. And rare earths find their way into myriad other applications, from aerospace super-alloys to rechargeable cell phone batteries.

More recently, large volumes of rare earths (especially neodymium) have gone into magnets. In fact, rare earths are a key component in strong, permanent magnets. It’s not those cute little refrigerator magnets; your computer contains a number of tiny magnets in its hard drive. If there are no permanent magnets, there are no computers. Or DVDs or DVRs or iPods, etc. Say farewell to your wired way of life.

And then there are the giant 1-ton magnets used in large windmill assemblies. Each windmill magnet is about the size of a car engine and uses 560 pounds of neodymium. The implication is that if the U.S. wants to erect windmills to generate electricity, the nation is making a long-term commitment to buy and use unprecedented amounts of neodymium. And there are NO substitutes. For just this one “clean energy” application, large amounts of rare earths – and the ores and mines to produce them – are essential.

There are many other clean-energy applications for rare earths as well, particularly in the now forming electric car industry. Neodymium magnets are key components in electric motors and regenerative braking systems used in hybrid vehicles. Without these magnets, no electric cars will ever roll off an assembly line, let alone whiz down an American highway.

Another significant demand for rare earths will come from large rechargeable batteries for electric cars. Nickel-metal hydride (NiMH) rechargeable batteries, for example, contain cerium and lanthanum in a form called “mischmetal.” And right now, NiMH batteries are the battery of choice for many hybrid vehicles. Overall, a typical hybrid electric vehicle can use about 50 pounds of rare earths – between the rechargeable battery pack, the permanent magnet motor and regenerative braking system. (Plus other tiny magnets for the sound system, power windows, power seats, windshield wipers, etc.)

So clearly, demand for rare earths is set to skyrocket. Just clean energy applications will drive unheralded demand for metals of which most investors – let alone consumers – have never heard.

It’s also important to keep in mind that almost none of the rare earths used in large power systems (like windmills) or electric vehicles (such as with NiMH batteries) are currently being recycled. The long lifetimes of the magnets and batteries, coupled with the lack of recycling technologies and dedicated facilities, means that any increase in supply can only come from new mining.

Another factor is that there appears to be an official Chinese policy to slow down export of rare earths. Chinese exports have decreased by 8% or so each of the past three years. Chinese suppliers have placed foreign customers on allocation, at reduced quantities from years past. The Chinese explain that they have closed mines for environmental reasons. Yet the Chinese also promise adequate supplies of rare earths if foreign users will move their industrial facilities into China.

According to Yoichi Sato, head of the Rare Earths Department of Japan’s Mitsui Industries, China is displaying its long-term strategy toward these critical elements. Mr. Sato believes that China is playing a complex game with the world’s rare earth consumers.

First, China is restricting rare earths exports, to provide its own high-tech industries with the chance to flourish and gain a competitive edge over rivals in Asia, Europe and the U.S. And second, it will force many foreign firms to move their high-tech factories and research centers to China to circumvent quotas. China, to be sure, has a small army of highly capable scientists and engineers who focus on rare earths applications – over 15,000 Ph.D.-level individuals, by one count.

Mitsui’s Mr. Sato believes that China will use its existing monopoly status in rare earths production to crush any competition that emerges. While about 42% of worldwide rare earths resources are outside China, there are NO non-Chinese sites with any significant processing or refining capacity. In the game of rare earths, China holds almost all of the cards.

Mr. Sato has stated, “Many people are looking at establishing alternative refineries and sources outside China, but the investment is not necessarily a sound one because of the threat of price revenge by China. If new projects emerge, as they have recently in Malaysia and Australia, China could just drop its prices and force rivals out of business.”

And as if on cue, in April 2009, Chinese firms used their financial muscle to buy large stakes in potential foreign rivals in Malaysia and Australia.

I hope that you now understand the importance of rare earths to the 21st-century economy of the West, particularly to the energy future of the U.S. I’m following this situation very closely. There ARE some potential investment opportunities in rare earths, but only in very small, thinly capitalized firms.

Until we meet again,
Byron King

Source: Brazil’s National Commitment to Energy – Bankrolled by China

But in this market, as in all markets, it’s best to look at the unfashionable – sectors that are scorned or ignored by the market and countries whose stock markets have been beaten down by adversity. Of course, it’s difficult to do this if you constantly have an ear to Wall Street.  Perhaps that’s why Warren Buffett’s bases his investment business in Omaha, Neb., not New York.

Fashionable investments can do very well in the short term. In 1998-99, you could have made a lot of money in tech stocks. In 2006-07, you could have made lots of money investing in China. If you were given perfect foresight, you could construct a successful investment philosophy around “momentum” sectors, buying whatever is currently “hot” and dumping it before the market turned. For most of us, there’s nothing more boring than an investment that just sits there.

The problem is that none of us have perfect foresight, and what’s worse is that we all have a tendency to believe what limited foresight we do have is better than it really is.

But if investing in fashionable sectors is pretty well guaranteed to give you worse returns than the market, then there must be some other strategy that will give you better returns, on average. After all, for every loser there must be a winner.

And while some of those winners are Wall Street insiders trading on privileged information – the Securities and Exchange Commission can’t catch them all – there is also reason to suppose that a winning investment strategy is to invest in sectors and countries that are actively unfashionable, in which the conventional Wall Street wisdom is to shun them, even on a “bottom-fishing” basis.

One example of this appeared in the banking sector a few weeks ago when Citigroup Inc. (C) shares sold for less than a dollar.

During 2008, there had been innumerable attempts to rally the banking sector’s stock prices, mostly led by the same types of Wall Street operators who had caused the banks’ initial problem. But by February/March 2009, the hot money had stopped trying – either through bankruptcy or exhaustion – and Citigroup’s decline to $1, after several months languishing around the $4 to $5 level, was a pretty good sign that the pros had given up.

At that point, there were two possible routes for the unfashionable investor to take: Invest directly in the stocks that had been beaten down by buying Citigroup or Bank of America Corp. (BAC); or go in the opposite direction, staying with the unfashionable banking sector but looking for the banks that were best run and had the fewest operating or asset problems.

The first strategy, if blessed with pinpoint timing, would have made the most money in the short run, no question. A buyer of Citigroup at $1 would today be sitting on a 300% profit in about six weeks.

However, that was a risky strategy. Citigroup could have been subjected to a government intervention that wiped out its shareholders. Further it was in no sense “value investing.”  Even the bankrupt American International Group Inc. (AIG) has risen five-fold from its nadir to $1.70, in spite of the fact that the government owns 80%, and would be due to receive no less than $150 billion before AIG shareholders got a penny in the case of a liquidation.

Indeed, investing in either would have been like gambling at a Las Vegas casino – fun when it works, but not if you might need the money.

But at the other end of the spectrum investment in banks such as U.S. Bancorp (USB) or BB&T Corp. (BBT) made a lot of sense. I said as much in my late February review of the top 12 U.S. banks.

Those banks had made money even in the dire fourth quarter of 2008, and looked likely to continue making money going forward. They have powerful franchises in attractive regions of the country, and with short-term rates now much lower than medium term rates their new businesses should be exceptionally profitable. USB has risen 110% from its early March nadir and BBT is up 80%. And both were, and are, investments into which you could reasonably put a decent chunk of money.

Going forward, the banking sector is no longer unfashionable; analysts are waiting eagerly for first quarter figures and the results of the government “stress test” so they can pick winners. It is, however, more than possible that at some point in the future the current recession will once again cast a cloud over the banking sector, making it possible to invest while it is again unfashionable. If not, some other sector will be in the doghouse, and we at Money Morning will try and alert you to that event.

Another example, this time an international one.

In 1999, I was working as a banker in Croatia. The North Atlantic Treaty Organization (NATO) was engaged in its Kosovo campaign, dropping bombs on neighboring Serbia and Montenegro (with the occasional stray hitting Croatia, Bulgaria and Macedonia). Needless to say, the tiny Croatian stock market was itself “bombed out” and people were saying that the country was economically doomed.

That was obvious nonsense. Croatia has an exquisite coast and 5,000 islands, and when the neighborhood is free from explosions they attract tourists from all over Europe and beyond. So, I put my modest savings into Croatian shares – the least risky I could find; a medium-sized bank and a food company. Within a year, I had tripled my money.

Opportunities for unfashionable investment occur fairly rarely, but are more common in bleak economic environments like the present. When they occur, they can prove exceptionally rewarding.

Source: How to Bank Real Profits by Bucking Wall Street’s Latest Fashion Trends

Three reasons why they will explode out of this worldwide slow down; they have no debt and a three trillion dollar surplus, six-percent growth is considered a recession, and most importantly, a government that puts China first.

One more thing, the Fed just bought up a huge amount of our debt to guarantee the three trillion dollars the Chinese hold will be worth enough to keep them from selling it.

Of course, our Fed said the purpose was to assist homebuyers by lowering interest rates. But what really happened was that we just paid a huge ransom to the Chinese to keep the price of our bonds propped up.

With this move, the Chinese just graduated from emerging economy status to key player in the world. When we have to prop up our bond prices to keep the Chinese from selling them, they have arrived.

Don’t let this news get you upset, get even. Let’s make some money on them!

First idea, China Life Insurance Company, symbol LFC.

It is essentially a monopoly that is fully backed by the totalitarian regime in China, and it is protected from competition by the government. It has a 50% market share and has only developed about 10% of its potential.

Earnings this year are around $1.39 and are expected to grow to about $2.14 in 2010. The stock price is around $50 now and has been as high as $69 in the last 12 months.

You have to love monopolies!

Next idea, China Mobile Limited, symbol CHL.

This company has more mobile phone subscribers than we have people in the U.S., 470 million. It grew its subscriber base by 6,000,000 just last month. It has no debt, is swimming in cash and is expected to add 7,000,000 new subscribers per year going forward.

The stock is around $43 now, down from $90 in the last 12 months, with a 3.7% dividend.

Mobile demand in China is insane. Mobile technology has allowed them to develop an entire communication system nationwide with virtually no infrastructure costs. The future is unlimited for this company.

Don’t feel like a stock play, try an ETF, FXI. It has a few non-performers in its portfolio, but it is currently selling for about $28 and has a 12-month high of almost $55. That’s a lot of upside potential for an ETF with a 3.1% dividend.

The key to a successful China strategy is the inevitability of the play. Patience will be rewarded, but don’t get antsy if it doesn’t fly off the charts in the next six months. Give this a three to five year time horizon and you won’t be disappointed.

Don’t tread water in the U.S. market for five years to see any appreciable growth. Hit the road and get in on this far eastern money monster.

Source: Buy China Now: Making Money There Will Be Too Easy

• Shares of C.H. Robinson Worldwide, Inc. (CHRW) climbed as high as 4.8% in trading yesterday (Monday) before closing at $44.03 a share. For the past five days, the company’s stock jumped nearly 16%. Money Morning Contributing Editor Horacio Marquez recommended investors buy C.H. Robinson’s stock yesterday in his popular Buy/Sell/Hold series.

• A team of economists at Morgan Stanley (MS) believes Latin America’s economy may contract 4% this year, which would be the biggest decline since 1980. Leading the region’s decline is South America’s largest economy, Brazil, whose gross domestic product could fall as much as 4.5%, Morgan Stanley said.

• Foreign investing in China fell by 15.8%, or $5.83 billion, in February, from the year earlier. The decline marks the fifth straight month that companies and government tightened their spending on Chinese assets, Bloomberg reported.

• The 146-year-old Seattle Post-Intelligencer will publish its final print issue today, becoming an online-only news portal. The paper’s owner, The Hearst Corp., made the decision after failing to find a buyer for the newspaper, Reuters reported.

• The government said Sunday that it intends to seize real estate, cash, bonds, art, autos, boats and other property worth more than $100 million from Bernard Madoff and his wife, including the Madoffs’ $7 million Upper East Side apartment in Manhattan and homes in Montauk, New York, Palm Beach, Florida, and France. Prosecutors will seek $17 million in cash and $45 million in bonds in accounts in Ruth Madoff’s name, acting Manhattan U.S. Attorney Lev Dassin told Bloomberg. Madoff, 70, pleaded guilty March 12 to defrauding investors of as much as $65 billion in the biggest Ponzi scheme in history.

• The U.S. Treasury said yesterday (Monday) that foreigners were net sellers of U.S. securities in January, a worrying development at a time when the government is rolling out a massive spending plan to mitigate the 14-month recession. Adding to the economy’s problems, the U.S. Federal Reserve said industrial production fell to its lowest level in almost seven years in February. U.S. industrial output fell 1.4% in February, following a 1.9% drop in January, according to government data, Reuters reported.

• MGM Mirage (MGM) is in talks with banks to pledge casinos as loan collateral, as it seeks to modify lending terms and avoid default on a $7 billion senior credit facility. The company agreed in December to sell the its Treasure Island casino and canceled a condominium development at CityCenter, MGM’s joint venture Strip development with Dubai World. The Las Vegas-based casino company said it is also open to selling more assets, Bloomberg reported, citing a person with knowledge of the discussions.

Source: Global Investment News Briefs Tuesday, March 17, 2009

We’ve been cautioning readers against expecting any near-term returns in China under the current economic malaise. With unemployment at record highs, a 100-year drought crippling agriculture and exports at a mere trickle, China is not the place to be right now.

But looking out on the horizon, we wonder if China should be your primary investment destination for potential long-term returns.

Car data for January 2009 certainly suggests a strong bias toward China.

The China Association of Automobile Manufacturers said Tuesday that 735,000 vehicles were sold in China in January. That surpassed the 656,976 vehicles sold in the U.S. the same month.

While car sales slowed in China along with most other countries, U.S. sales plunged 37% in January to a 26-year low. Meanwhile, vehicle sales in China dropped 14.4% from a monthly record 860,000 in January 2008.

January sales were 0.8 percent below those in December, and below the 790,000 some analysts had anticipated.

Last week, Mike DiGiovanni, General Motors Corp.’s (GM) executive director of global market and industry analysis, forecast that China’s car sales could hit 10.7 million vehicles in 2009, more than his estimate of 9.8 million unit sales in the U.S.

China is certainly a major market for G.M. but the company is also losing market there. In October 2008, Toyota (TM) beat out G.M.’s Chinese venture as the number-two auto maker in China for the first nine months of the year. VW/Audi holds the coveted top spot in China.

If you’re interested in securing your financial future, you may want to contact your broker about ETFs and other funds based on Chinese equities.

A little-known indicator surfaced as China was preparing to attend the first meeting of the Committee on Statistics under the United Nations Economic and Social Commission for Asia and the Pacific, held in Bangkok, Thailand, from February 4-6.

An article in the People’s Daily called into question the final official GDP numbers for 2008 issued by China’s National Bureau of Statistics. Apparently, the 6.8% positive growth released in Q4 2008 did not correlate with the negative growth in China’s power consumption.

Now it seems that China will face a power glut this year, further calling into question its official GDP data.

The China Electricity Council (CEC) on Wednesday said in a report that demand for energy is expected to decline this year – with a possible uptick starting in Q3. The report cites shrinking exports as the culprit.

We’ve already written extensively about China’s record unemployment and factory closures. However, the extent of the problems have rarely become as clear as with the current CEC report on lower power consumption.

The CEC said that power usage grew 5.23% in 2008, or 9.57% lower than a year ago and the slowest in eight years.

The shrinking demand was mainly attributed to the industrial sector. Approximately 3.43 trillion kilowatt-hours of electricity was used by the industry last year, up 3.83% from a year earlier, slower than the overall social power consumption growth rate for the first time.

In 2008, China’s economy has reached its slowest pace in seven years. Beijing reported that the year-on-year growth rate for the fourth quarter slid to 6.8% from 9% in Q3 and grew 9.9% for the first three quarters.

The big question now is: are those numbers reliable?

We’ve been advising investor for months now to avoid China and instead look at emerging economies in South and Southeast Asia. This latest revelation about China’s questionable GDP data underscores our ongoing concern about any near-term recovery in China.