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April 2009



Be Glad You're Not a Money Manager

April 30, 2009 – Comments (1) | RELATED TICKERS: USHS.DL , FHC.DL22 , BBSI

I got an email from the good folks at Roth Capital today (yes, the investment bank that throws the rock n' roll parties every year in Orange County [see photo]) pointing out that small caps are being denied access to needed capital due to the nature of this financial crisis. That's a problem for the companies, but could in the end turn out to be an incredible opportunity for you. Yes, you...the individual investor.

Here's what Roth had to say (note my italicized emphasis):

"The general economic malaise and diminished health of our financial institutions and real estate in the second half of 2008 resulted in the dramatic contraction of money allocated to investing in equities. Institutional investors and money managers have a certain amount of capital to put to use, and when their funding sources request that their money be returned or redeemed, the investors are often forced to sell stocks in their portfolio to obtain the cash to return. If there isn’t adequate demand for the stock to maintain equilibrium, the price of the stock obviously decreases as the selling increases. Many of the institutional investors in small cap public companies are funds with less than $1 billion under management. These smaller funds have faced larger redemptions (as a percent of the total fund) than the bigger brand name funds, resulting in even more pressure on stocks with limited trading volume. These requests for redemption and the fear that more may be coming in the future have led the institutional investor to rate liquidity in a stock above any other factor, including valuation, growth prospects, or sector bias."

What this means is that institutional investors would rather buy liquid stocks today than cheap stocks. That's silly, of course, buy they have good reason to do so.  [more]



China, the US, and Currency Manipulation

April 30, 2009 – Comments (0) | RELATED TICKERS: FMX , TKC , CSR.DL2

If you're a global finance geek (like those guys), you may remember the hullabaloo back in January when Treasury Secretary Tim Geithner told Congress that China was manipulating its currency. China, of course, denies (and is pissed off by) such charges.

Fast-forward to this month and the Obama Administration has predictably softened its hard line on China and the yuan. That's a savvy move because China is going to be key to any economic recovery, and the US and China need to work together for any global stimulus to be successful.   [more]



Europe Going Down Hardest

April 29, 2009 – Comments (4) | RELATED TICKERS: PPMIQ.DL , ABB , CX

While this may look like some sort of awesome jazz puppet show the type you can only find near a touristy square of one of Europe's many breathaking cities, it's actually all that may be left of the European economy by the time this downturn is over. That, at least, is what it's starting to look like given some of the results that multinationals are reporting out of Europe thus far this earnings season.

The evidence
For example, we had Philip Morris International (PMI) report last week that European cigarette volumes were down nearly 4% year over year (the only ex US region with volume declines) alongside an emerging trend of European consumers trading down from Marlboro to less premium brands. Given the nature of cigarettes and the products consumers, this indicates that the European consumer is feeling some pocketbook pressure.

Then you had power infrastructure company ABB (ABB) report that it was seeing substantial order declines in both the US and Europe and that emerging markets have proved to be more resilient that their developed market peers. This indicates that infrastructure stimulus has not been as rapid to market as hoped.

Finally, there was the earnings report from Cemex (CX) today that showed stability in Mexico and a disconcerting 39% revenue decline in the US, but a downright scary 61% sales decline in Spain, a 43% decrease in the UK, and a 39% decrease in the rest of Europe. Given that (though it's an admittedly limited data set), it would appear these economies are grinding to a halt.

The takeaway
We recently updated our asset allocation guide at Global Gains and advised folks to decrease their exposure to developed Europe. These countries are suffering from the same -- if not worse -- housing, credit, and employment issues that the U.S. is, but do not have the same resources (notably people, scale, a friendly business climate) to address them. The recent reports from PMI, ABB, and CX seem to confirm that we were correct to give that guidance.  [more]



A Global Commodities Shortage: Are You Scared Yet?

April 28, 2009 – Comments (5) | RELATED TICKERS: TRQ

China, if you haven't been noticing, has been using excess cash to snap up foreign natural resource assets. In fact, according to this article from Xinhua, "China is expected to own rights in more than 100 million tonnes of overseas iron ore assets next year." That's alot.

Further, we got news today that China has signed a free trade deal with Peru. Why would such a big economy sign a deal with such a small economy? Remember that Peru is enormously rich in resources, including copper, silver, gold, petroleum, timber, coal, phosphate, potash, and natural gas -- all commodities the Chinese would very much like to secure long-term access to. Similar resource grabs are happening in Africa and are being done through both direct government aid as well as SOE-funded acquisitions. And that's also the reason China essentially funded and built this brand new Parliament building for the Mongolian government (remember Mongolia has massive copper and gold deposits in the Gobi; though as Ivanhoe Mines (IVN) knows, the Mongolian government can be notoriously fickle about who gets access to those resources):

The problem is, I don't think the Chinese intend to share, and I wonder how that will eventually distory global commodities markets.    [more]



Can China Handle Massive Unemployment?

April 28, 2009 – Comments (1) | RELATED TICKERS: CTRP , JOBS , EDU

It's an understatement to say that the job market is getting tight in China. That's the inevitable conclusion from today's WSJ cover story "China Faces Grad Glut After Boom At Colleges." This corroborates a March article in China Daily that put on a positive spin on the situation with this headline: "More Teaching Jobs for Graduates." The gist there is that the government will pay for schools to hire more teachers to soak up some of the graduate pool (gotta love Chinese media for looking on the bright side of things). China blogger Michael Pettis commented on this trend last month with some optimism about what this could mean for China's future when he wrote:

"If more Chinese graduates are forced – by terrible job prospects – to consider starting their own businesses, the long term consequences for China should be positive although, as everyone running a small business in China will tell you unendingly, starting and running businesses here is extremely difficult and, what is worse, it is never easy to know when you are and when you aren’t legally compliant.  Still, China really does need more entrepreneurialism and one of the unexpected benefits of the crisis may be to boost small businesses."

The simple fact is that China will benefit over the long-term if college grads actually leverage their education to create value and be entrepreneurial rather than just use it to get hired to work in the bullpen fielding calls for (CTRP) -- see above photo. Though in the short-term, there could be some real pain.

So what
Now, if you're a regular reader of this blog, then you know our Global Gains mindset. We're immediately asking "Who benefits?" and "Who gets hurt?" by this big picture trend.

The losers, I think, are pretty obvious. They include companies such as 51Job (JOBS), which does job placement in China. Now, they'd be in a good place if they got paid by job seekers to help them find openings. Instead, 51Job gets paid by corporations who are looking to do recruititing...and there's not a whole lot of recruiting going on right now.

Other losers are companies that cater to urban working professionals. These, after all, are what college graduates become, and there are fewer of them this year than there were in previous years. A company like Ctrip, which helps Internet-savvy Chinese book travel, looks like a clear example despite the fact that it's well-run and a leader in the travel space in China. Its addressable market will just be smaller in the near-term, and the company may achieve lower growth rates as a consequence.

Winner winner chicken dinner
On the flip side, there are going to be companies that do benefit, and I think the obvious ones there are firms that help young Chinese people become more competitive job applicants. This quote from Jane Yang in the WSJ is illustrative: "There are no job prospects for someone like me," she said during a quick meal at the school's cafeteria. "I think I'll just go to grad school."

If you read that and immediately think of New Oriental (EDU), then we think alike. I recently argued the case against shorting New Oriental on and on this blog and to tell you the truth, I would love to get a chance to buy shares below around $40. It's a well-run business with macro tailwinds, and I like those kinds of businesses...provided, of course, the price is right.

But put it (or keep it) on your watch list.  [more]



Swine Flu Bargains?

April 27, 2009 – Comments (4) | RELATED TICKERS: OMAB , PAC , ASR

By now, you're undoubtedly aware that the Swine Flu outbreak originating out of Mexico has caused the declaration of a public health emergency here in the U.S. as as well as spurred fears that we're standing on the precipice of a deadly global pandemic. As with any global crisis, that means we at Motley Fool Global Gains are on high alert for bargains. Given that this crisis has three two defining characteristics (Mexico and swine), that makes prime candidates for potential bargains Mexican companies, swine companies, and Mexican swine companies.

Now, you might expect that Mexican swine companies would be taking it on the chin the hardest. But as it turns out, Bachoco (IBA) is down just 4% today. That compares favorably with Chinese swine company Zhongpin (HOGS), which is down 9% -- perhaps the consequence of its clever and transparent ticker.

But the Mexican companies being hit hardest today turn out to be the airports. These three companies Grupo Aeroportuario Centro Norte (OMAB), GA Pacifico (PAC), and GA Sureste (ASR) are down 13%, 16%, and 11%, respectively. So, are these swine flu bargains?

The problem with Mexican airports
As you can see, these three companies are differentiated by geography. OMAB's flagship airport is Monterrey, PAC's are Guadalajara and the tourist towns of Puerto Vallarta and Los Cabos, and ASR's is mega tourist town Cancun. Now, it's already been a tough year to be a Mexican airport operator regardless of whether you cater to tourists or business people. That's because the U.S. economy has been crushed (meaning fewer tourists and trade), airlines are struggling (meaning they're flying less often), the peso has been crushed (meaning your businesses are less attractive to American investors), and a pesky drug cartel war has intensified in Mexico and is now being actively covered in the US people.

These things all have negative effects on the airport businesses, and the last thing they needed was a swine flu outbreak to further depress interest in traveling or doing business in Mexico. But that's what they got (nothing like photos of folks wearing surgical masks to get tourists from Ohio interested in visiting Cancun).

So are they cheap?
The other point worth mentioning here is that these airports are monopolies in their regions thanks to concessions granted by the government. In return for that monopoly, the airports are heavily regulated and must agree to 15-year development plans that are revised every five years. These plans dictate how much the airport can charge and how much they must spend on capital expenditures. Thus, in return for a great competitive position, you get capped upside and downside.
That brings us around to the question of valuation. First, let's compare recent returns:

Company   3-month return   TTM return
OMA             4%                       -50%
PAC              29%                     -43%
ASR              32%                     -38%
EAFE Index    9%                      -43%

As you can see OMA (Monterrey) has underformed the market over both time periods and has yet to show any signs of life. This may be a function of its business focus and its size. Not only is it focused on business travel to Monterrey (and we all know manufacturing has been hit hard), but it's also the smallest of these three companies.

Next, let's look at current multiples:

Company   P/S   P/E   EV/EBITDA
OMA          2.9    11.8       5.2
PAC           5.2    17.1       7.5
ASR           4.4    14.6       6.3

Now, it's worth noting that the denominators in these equations are cyclically depressed and that the best time to buy cyclical stocks is generally when they "look" expensive.

That said, the one problem that I have with that reasoning is that these are government-regulated entities at a time when I believe we'll be seeing governments around the world trying to increase revenue (raise taxes) without duly burdening the general population. Thus, regulated companies will get hit hardest and in the case of the Mexican airports, that may cap their upside even when this cycle turns. As a result, though OMA is a past recommendation of GG, I'm not enormously excited about any of these swine flu bargains. But OMA is my favorite of the three.

Here's why
As I said before, the big differentiator between OMA and PAC/ASR is that OMA's traffic is primarily derived from business people while PAC/ASR's traffic is primiarly derived from tourists. While the business traffic has suffered worse in this downturn, I believe it has the potential to rebound more quickly. Further, business traffic over the long-term (again, my opinion) is less likely to be affected by the negative lingering effects of drug violence -- which I think are only now starting to show-up in the tourist decision-making process.

Further, OMA just finished adding a new terminal in Monterrey which will hopefully come on line just as the cycle is switching (talk about serendipitous timing). That recent expenditure may also serve to keep the Mexican government out of their hair since OMA just got done with a big spending project. Here was the progress on that terminal as of last December:

In the end, these are all steady, solid businesses, but I'm not yet convinced any of them are screaming swine flu bargains. If the news cycle worsens, however, we may get there. So keep your eyes open.  [more]



Where Are You Golfing This Weekend?

April 24, 2009 – Comments (2) | RELATED TICKERS: AAMRQ.DL , POT , MOS

My life is pretty much a series of mind-blowing events (flash back to my engagement: "Seriously, she said yes?!?" or when I got hired at the Fool: "Seriously, we have Pizza Day?!?!"), but one of the mind-blowingest of all (that's not a word, but it's Friday, it's near 80 degrees outside, and I'm blogging) is when we were driving around Ulan Baataar, Mongolia, (U-B to the locals) and our contact turns around and says, "Hey, you wanna go hit some golf balls?"

Mind you, U-B is basically desert and we were in the middle of a mild sandstorm. Our answer, of course, was "Absolutely!" Thus, the picture above: Hittin' balls at U-B's one and only driving range.

Anyway, I've been looking for a way to get that picture up, so there you go. But there is some value to this post. I figured since I take the weekends off (and this is supposed to be a seriously nice weekend) that I should start a "Friday Night Links" series to make sure you get your fix of global investing over the weekend. So here goes, your inaugural installement of Friday Night Links!!!:

FNL #1: James Fallows' plane back to Beijing gets hit by lightning, prompting a humorous comparison of Chinese and Americans who get stuck in travel delays. (It's funny because it's true. That sarcastic American who says something obnoxious during an emergency like, "No wonder American Airlines (AMR) is in trouble; they can't even land in the right city!"? Yeah, it's probably me.)

FNL #2: China has been secretly stockpiling gold since 2003. What does this mean? Check out Chris's blog for more.

FNL #3: Chinese farmer income rises 8.6% in Q1. I'm telling you people: Ignore the Potash's (POT) and Mosaic's (NYSE: MOS) of the world for now and drill down on small Chinese fertilizer companies. See Global Gains for more.

FNL #4: Not related to global investing, but this is my buddy's comic strip. This one made me chuckle. You may find it a bit bawdy if you're the type of person who finds things that are a bit bawdy a bit bawdy.

FNL #5: Thanks to an ecnomic crisis and threats of piracy, the Egyptian government saw Suez Canal revenue decline 21% year-over-year. Which raises an interesting question: When will Egypt call in airstrikes against the Somali pirates?

As for me, I'm gonna enjoy the weekend in style as soon as I'm done with that pesky 10-mile race on Sunday.




Jackie Chan: Eleutherophobe

April 24, 2009 – Comments (0)

I'd ignored Jackie Chan's comments about China being too chaotic to handle freedom until now because, well, I didn't really have anything to add. But then I saw a post on China Law Blog today called "Jackie Chain Is a Know-Nothing Self-Loathing Racist" and I thought, "Yeah, that's a post people need to see."

The good folks at China Law further link to a post at The Useless Tree that says it best: "Personally, I think Chan is wrong.  I think the average Chinese person knows his or her own personal interests and, given the chance, would advocate for those interests in non-violent ways that could be productively channeled into new and less repressive political institutions. I have more faith in the average Chinese person than does Chan.  But, then again, I am not trying to sell movies to the the Party leadership..."

The background there is that Chan has had some movies censored in China, which obviously hurts his take.

In the end, I'm pretty skeptical that Hong Kong or Taipei are any more "chaotic" than Beijing or Shanghai. I mean, God save you if you get stuck on a ring road in Beijing during rush hour. What is clear, however, is that while Chan is an eleutherophobe, he is not a catagelphobe. (You can look those up if you're so inclined.)




What the Heck is Going on in China?

April 23, 2009 – Comments (1)

We've got an interesting discussion brewing on the Global Gains discussion boards (join in by clicking the link, but you have to be a subscriber) about all of the conflicting signals coming out of China and what they mean for the Chinese economy.

First, there's Gordon Chang in Forbes with "Another Chinese Fib: 6.1% Growth," where he claims that "Chinese officials, after a brief flirtation with honesty...are evidently going back to fakery when it comes to the production of economic statistics" and that "The Chinese...are not buying their government's storyline," as evidenced by the unusually high amount of RMB that are being exchanged for Hong Kong dollars at the border. (Please note that Mr. Chang is the author of a book called The Coming Collapse of China, so he may -- literally -- be talking up his own book.)

Alongside Mr. Chang's claim that Chinese citizens are not buying into talk of recovery comes an article in WSJ's China Journal called "No Recession Here, Say Chinese Consumers," which cites a poll noting 65% of Chinese don't think the country is in a recession.

Now, it could be that it only takes 35% of the population to skew the money-changing statistics in Hong Kong, but who knows? What is clear, though, is that not all Chinese are ignoring the "optimism."

And apparently investment banks are buying into the optimism and not Mr. Chang's pessimism as well, because they're all revising their GDP outlooks upward as the WSJ also reported today in "China GDP Expected to Hit 8% as Optimism Grows."

This all seems to support a hypothesis that we cited last week from economist Michael Pettis who wrote on his blog: "The overall picture is consistent with two different and popular predictions. First, the stimulus package is working and that China will soon emerge from the worst of the crisis. Second, that the fiscal stimulus represents a risky bet on the duration of crisis abroad, and if sustainable and recovery in global demand does not occur in the next few quarters, it will set the stage for a deeper contraction late this year and next year."

Not too helpful, is it?   [more]



The World's Best Seafood

April 23, 2009 – Comments (1)

Whenever we travel for Global Gains, we generally end up declaring an MVP for each leg of the trip. Our man Kuldeep (pictured above) was the MVP of Bombay. Not only did he get us to our meetings on time(!) and in air conditioning(!) (Kuldeep might very well be the world's best cab driver), but he also got us to Trishna, home of the what I'm declaring to be the world's best seafood.

The night started innocently enough, but before we knew it we had tiger prawns the size of our hands...

And eminently satisfying (note Paul's facial expression) plates of well-seasoned pomfret, king crab, squid, and blackfish...

Those were some spectacular eats. So if you're in Bombay, make the trip to Trishna. (And I defy you to find a Fool blog that's giving out more actionable tips that this one!)




I Dare You to Short EDU

April 22, 2009 – Comments (14) | RELATED TICKERS: EDU , PSO , BIDU

"Can we practice our English with you?"

That's the line that ultimately led to this picture in Shanghai:

And to this one in Beijing:

And while the "Practice My English" scam is a notorious one in China to sell everything from expensive tea to schlock art (we've been approached far more times in China than these two and we'll only pose for pictures while protecting our wallets), what's not a scam is the torrid growth of English language education in China. Thus, I was surprised to read about New Oriental Education (EDU) the other day on short-selling website Citron Research.

And while Citron does a lot of good work, I don't think their analysis of New Oriental (a Global Gains recommendation, by the way) was up to their usual level of quality.

Let's go to the videotape
In their report, Citron claimed that New Oriental was horribly overvalued (a "fantasy-land valuation" in their words). As evidence for this conclusion Citron cited the recent multiples that Pearson (PSO) paid to acquire Wall Street English from The Carlyle Group (which they gleaned from a very brief WSJ article.)

The "short" version is that WSE has $70mm in revenue and Pearson bought it for $145mm, a P/S ratio of 2. New Oriental, however, has a P/S of 9 according to Citron. And since WSE has "equal if not stronger brand recognition" that New Oriental, it's obviously going down.

Not so fast
This isn't a great comparison. First, while WSE had $70mm in revenue last year, New Oriental had more than $250mm, making it 3.5x larger. Second, while WSE has a brand and business that caters exclusively to high-end, business-oriented adults, New Oriental offers a broad array of English language programs for kids, teens, and adults as well as subject tutoring and test prep services for the gaokao (China's national college entrance exam). In other words, it's a much more diverse business with broad brand recognition in every space. And third, New Oriental's brand is dramatically better-known in China that WSE. That's because 1)it's a domestic Chinese (rather than a foreign) brand (see it listed here as a "National Brand In My Heart" and 2) New Oriental founder Michael Yu is a teaching celebrity in the country whose speeches are often given to SRO crowds.

Then there was this bit of gold from Citron: "Wall Street Institute’s seller was Carlyle Group, not exactly naive investors who would sell a property for a mistakenly low price."

Perhaps Citron is unaware, but we're in the middle of an enormous financial crisis. Once strong hedge funds are seeing massive redemptions and have suddenly become motivated sellers? Could it be that Carlyle was actually shopping this property priced to move?

As it turns out, we found out in EDU's earnings conference call that EDU signed a confidentiality agreement and cannot comment on the multiples Pearson paid for WSE. Why would EDU have signed such an agreement? Because they were given the opportunity to look at WSE's books and either 1)got outbid or 2)decided to pass. Thus, we can surmise that Carlyle was either 1)shopping this property and willing to accept a low price or 2)WSE isn't actually all that profitable a business despite its top line.

In any case, there's more to the valuation story here than a simple P/S comparison.

Which brings us to my conclusion
Is New Oriental an expensive stock? Yes. Even after you back out the cash on the balance sheet (another thing Citron didn't bother to do), it's selling for a little less than 7x sales (though that's still less than the 14x sales Chinese search engine Baidu (BIDU) is selling for). That's a lot, particularly in the currently depressed market environment. Further, the English language education space in China is getting more competitive.

But while we're not recommending you buy the stock at these prices at Global Gains (though we've advised our members to take advantage of a few profitable dips), this is not a stock you want to short. That's because it has the potential to be an extraordinarily successful long-term growth story.

Despite the downturn, parents in China continue to be willing to spend on education for their (remember national policy here) one child and New Oriental is the biggest name in the space. Its teachers get rave reviews from students (and we can vouch from being in the classes that they're great)  [more]



Another Crazy Cheap Stock...

April 21, 2009 – Comments (6) | RELATED TICKERS: PM , BTI , RAI

Welcome back to the ongoing series "Crazy Cheap Stocks That Are Extraordinarily Difficult to Buy," where we profile compelling international stock opportunities that are tricky for American investors to get a hold of. If you missed the first installment, it's here. Crazy cheap stock #2 begins below.

Begin at the beginning
If you find your way to the Prague Stock Exchange and quote the ticker BAATABAK, you'll see a familiar name pop up: Philip Morris. Indeed, this purveyor of cigarettes is a global behemoth, with the world's #1 brand (Marlboro) and cash flow generating capabilities that other companies can't even fathom.

But BAATABAK isn't you're basic Philp Morris. It's actually Philip Morris CR AS, a subsidiary of Philip Morris International (NYSE: PM) that's in charge of manufacturing and selling cigarettes in the Czech Republic and Slovakia. Philip Morris is by far the dominant cigarette in Czech Republic with, if you believe PM's 10-K, substantially more than 15% market share. (British American and Reynolds American be darned.)

Due to the nature of its business, PM has operating subsidiaries in many, many countries. But if I've counted correctly, only two are public. And the reason why I've dialed in on BAATABAK today is that while it offers the same strong brand, balance sheet, competitive position, and business as Philip Morris international, it offers something more in exchange for trading geographic diversity for geographic concentration in the Czech Republic and Slovakia: a 15.2% dividend yield.

That's right, a 15.2% dividend yield.

Which is pretty good
That's extraordinarily high given the quality of the underlying company and the fact that PM will not be pulling out of either of these countries anytime soon. Thus, BAATABAK is likely to receive the support of its parent if it ever has any issues with debt (though the balance sheet is fairly strong with $143mm in cash against $146mm in total debt).

BAATABAK has had some issues with inventory build-up as an excise tax increase went into effect in the Czech Republic last year, but its cash flow record is good and the support of the parent leads me to believe that the high-yield here is a pretty good long as you have access to the Prague Stock Exchange.

Pack your hideously unmistakeable neon blug bags...




Because this made me laugh

April 20, 2009 – Comments (1)

And you will to if you're a bit of a geek about world politics: Facebook Group: World Leaders.

Well done, The Atlantic. Well done.



A New Venue for Biased News

April 20, 2009 – Comments (1)

Via China Journal:

"The state-owned publishers of the People’s Daily official newspaper today launched the English language version of the Global Times. The paper will become China’s second English-language daily to be distributed nationally, after the venerable-if-staid China Daily. 'A 24-page newspaper with nationwide distribution, the English edition will be a vital new medium affording international readers the opportunity to discover and understand China, while allowing Chinese to express themselves to the world,” it said on its Web site.'"

Set your browser bookmarks now. Information control aside, Chinese newspapers are worth following if you're interested in keeping track on investments in the country.  [more]



Will China's Stimulus Plan Change the World?

April 17, 2009 – Comments (1) | RELATED TICKERS: CTRP , HMIN.DL , CAT

Back in November just after China announced its 4-trillion yuan stimulus plan, Bill Mann and I wrote an article called "Why China's Stimulus Plan Will Change the World." We received a great deal of feedback from that article, including vehement disagreement with our view from Heritage Foundation Fellow and China scholar Derek Scissors.

He and I argued over email a bit, but I thought it would be more helpful if he made his views public to the entire Fool community. Thus, Derek is live on our site today with his rebuttal, "China's Stimulus: More of the Same, and Not That Much More."

Now is where you take sides
Derek's is a good article and required reading for anyone who's thinking about investing in China today. And though we would seem to disagree pretty sharply on the surface, I actually don't think our thinking is that far apart (at least in the near term).

For example, Derek argues that in the near term, when it comes to Chinese stocks, investors should stick with infrastructure plays and direct beneficiaries of the stimulus, rather than on consumer discretionary-type companies (think something like (CTRP) or Home Inns (HMIN)) that will only be successful with the resurrection of the Chinese middle-class consumer...a resurrection that is a longer way off).

At Global Gains, we absolutely agree. We like a few domestic and multinational infrastructure plays -- something like Caterpillar (CAT) -- as well as companies that should benefit from the expansion of China's power grid. I'm also keenly interested in the fertilizer sector since the government as made agricultural independence a priority going forward. Further, I'm optimistic that the government will support farmers and rural China this year given the magnitude of the labor migration reversal. (This article from Xinhua has more.)

That's because these folks:

Are back to being these folks:

Second, Derek argues that the stimulus isn't a solution to China's economic woes, but rather a stop-gap to buy time until US consumption resumes and Li in Wuhan can go back to manufacturing tsotchkes and electronics for Jimmy in Wichita to buy at Wal-Mart. I agree.

China simply can't pull export manufacturing out of its economy overnight. It needs to wean itself off away from it, and while Derek thinks China will go back to its exporting ways once this crisis ends, I think China will continue to try to diversify its economy. And that's where our long-term views differ.

As I see it
My understanding is that since the 1997 financial crisis, China and other Asian export economies have been trying to protect themselves from volatility through current account surpluses and resulting stashes of foreign assets. If China were to continue this policy in this financial crisis, the country would be best served by further weakening its currency or pursuing alternative means to increase the competitiveness of its exports in a world that looks to be becoming more protectionist.   [more]



Crazy Cheap Stocks...

April 16, 2009 – Comments (8) | RELATED TICKERS: MCD , SBUX , YUM

Welcome to a new recurring feature on the blog I'm calling "Crazy Cheap Stocks...That Are Extraordinarily Difficult to Buy." Here's how the idea came to fruition...

First, I figured what fun is a stock blog if I don't throw out stock ideas from time to time? So I was all set to throw out some crazy cheap stock ideas. But then I realized that I have to save my crazy cheap stock ideas that are somewhat easier to buy for our Global Gains members (you know, since they pay and if you just read my CAPS blog, you're getting all of this goodness for free).

So I was all set to kibbosh the idea and keep talking about currencies and tacos. But then I remembered that in the course of my research on foreign stocks I come across all sorts of names that are crazy cheap but can't necessarily be included in GG because they're extraordinarily difficult for American investors to actually buy and thus never see the light of day. But now, thanks to the blog, they will.

And with that as I prelude, I bring your crazy Cheap Stock That's Extraordinarily Difficult to Buy #1
If you've been to Singapore, then you've undoubtedly seen a restaurant in a mall called Breadtalk. It's a bakery/cafe concept that sells some pretty tasty items. Breadtalk is the eponymous flagship concept of a company called Breadtalk Group. But Breadtalk Group isn't a one trick pony. It has other dining concepts in Singapore and has penetrated China with a food court concept called Megabite.

Now is a good time to reveal that I think Megabite is good food.

That's the only picture I have of Megabite, but it gives you a sense of the magic. Forty or so distinct food stalls and a keg in the center dispensing Tsingtao. You can also get ice cream and fruit juices. This Megabite resides in the basement of a high-traffic mall in Beijing and you can only pay for things by loading up a Megabite card (similar to how one rides the Metro in Washington, DC). The card encourages loyalty and keeps folks coming back.

My love for Megabite aside, it is actually a small part of the business, but I mention it because it's evidence of the fact that this is a pretty innovative little restaurant company that's developing a couple of neat ideas for expansion across emerging Asia as the populations there develop the wealth to support them -- and concepts that are more tuned to the populations there than anything McDonald's, Starbucks, or YUM! has to offer.

Which brings us to valuation
But this feature isn't just about Crazy Neat Stocks That Are Extraordinarily Difficult to Buy, it's about Crazy Cheap Stocks. And Breadtalk Group looks pretty cheap. Off a $46mm market cap we have $21mm in net cash, $142mm in revenue, $5mm in earnings, and nearly $5mm in TTM FCF after spending on growth capex. For those who don't want to do that math, that means an EV/Sales ratio of 0.2, a P/E of 9, and an EV/FCF of 5.

Of course, the near term will be rocky given that Breadtalk is a consumer discretionary name that is overexposed to a Singaporean economy that's been rocked by collapses in the financial, real estate, export manufacturing, and shipping industries. But if you're willing to put up with volatility and brave the Singaporean market to buy shares (beware that the gray sheets listing is highly illiquid), I like this a long-term Asia growth story in the space. Good management, good concepts, and thus far a proven ability to produce sound financials.

And with that, I hope you enjoyed the first edition of Crazy Cheap Stocks...That Are Extraordinarily Difficult to Buy. There are more where this came from if this is a feature folks like.  [more]



Terrorists Strike India Again

April 16, 2009 – Comments (0)

I discovered this picture the other day as I was looking through photos to use on the blog, and I was troubled by it not just because I look like a goofball, but because I look like a goofball standing in front of a historic building that's since become a major target for terrorists and a site of death and destruction. Anyway, it's a bit sobering to see now and something I'll use as a reminder of the risks associated with traveling and investing abroad.

Further, if you haven't read it, I'll take this opportunity to recommend you all read an article written by Fool Nick Kapur eulogizing his uncle who was killed in the attacks in Bombay on the Taj and the Oberoi. Here's the link.

Now we have news today that terrorists have hit India again...but this time they're maoist rebels set on disrupting the current election. I send my sympathies to the victims and their families, and here's hope that the election proceeds successfully. Because real democracy and political freedom are necessary in any country that aspires to be a global economic leader.




On Blowguns and the Doomed Dollar

April 15, 2009 – Comments (0)

I've talked some on this blog about my outlook for the U.S. dollar (dour) and what you can do to protect yourself against its weakening against other currencies. You can get more information on that in the two part series...

Is the US Dollar Doomed?
Yes...the US Dollar is Doomed

If you've read those posts, then you know I like the Brazilian real short-term and the Chinese RMB long-term as good places to play defense. And the reason Brazi trumps China in the short-term is that is has "stuff" (i.e, commodities such as oil, minerals, and food) to export.

Well, I happened on a WSJ article today about another currency that may strengthen in a country that also has stuff...the Indonesian rupiah. And the WSJ makes a good case that the rupiah could have a nice year. That could mean, of course, that it's a lot to get a whole lot more expensive for American tourists to buy blowguns from Indonesian street vendors in Jakarta:

(Yes, that is what's happening there.)

Anyway, Indonesia isn't necessarily a "stable economy" given the dual threats of Muslim extremism and an over-reliance on commdoties in the economy. But that also means it's a great place to pick up bargains when sentiment turns south.

Sentiment has been south in Indonesia for a while now, but if the rupiah does provide some currency tailwinds, it could end up being a pretty good year to have Indonesian exposure.  [more]



The World's Best Tacos

April 15, 2009 – Comments (4)

We're not just wisdom and stock picks here at the TMFMmbop blog (I've noticed most other CAPS bloggers reference themselves in the third person, so I figured I might as well adopt the practice as well); we also do food.

And that's one of the nice things about traveling around the world in the name of get to eat a lot. As you can see here:



And, of course, here:

*Seriously, does the sight of Bill Mann drinking two milk shakes ever get old?

My bright idea
So I figured I'd put some of that global culinary knowledge to use with some restaurant recommendations. First up: Tacos.

If you're in the Polanco neighborhood of Mexico City at night (and if you're in Mexico City at night, I recommend you stick to the Polanco neighborhood), you have to stop at El Farolito:

The tacos are all classically small (meaning they're also cheap and making it easy to try lots of varieties) and delicious:

Though I recommend the Tacos al pastor:

And they're made right in front of you:

And if you're not into beer, Grandma's juices (you'll know what I'm talking about if you go) are also spectacular. Anybody else have a candidate for world's best taco?  [more]



If You Don't Do This, You Won't Beat the Market

April 14, 2009 – Comments (1) | RELATED TICKERS: AAPL , GOOGL , GE

Sheep don't beat the market.

I was reminded of that today as I was wrapping up my re-read of Global Investing: The Templeton Way in advance of the first discussion in our Global Gains curriculum. (More on the curriculum here.) Here's Sir John on the subject:

"If you are going to produce a better record than other people, you must not buy the same things as they. If you are going to have a superior record, you have to do something different from what other security analysts are doing."

Yet I'll guess that many of you are trying to beat the market by doing exactly what thousands of other people who are just like you are trying to do. Heck, just look at the most-rated stocks in CAPS. We're ostensibly a savvy community, but even we can't stop talking about Apple, Google, GE, Microsoft, and the rest of the big boys that dominate the business pages and that are largely owned by institutions.

Why do we bother? This is largely effort wasted. We're not creating new knowledge, just debating the merits of existing knowledge.

How to beat the market
Sir John is basically saying you need to do at least one of two things to beat the market:

1) Look at different stocks than the market is looking at; or
2) Analyze stocks in a different way than the market is analyzing them.

Now, back in the day, #2 was not a difficult course of action. Ben Graham made his partnership by analyzing stocks for their liquidation value...something few else were doing. But as the years have gone on, analysis techniques have been invented, developed, refined, and disseminated and the speed of analysis has been supercharged by computers. Thus, I believe that it is now very difficult to analyze stocks in a way that is different from the way(s) the market is analyzing. Momentum, DCFs, multiple analyses, etc. are all commonplace in the market today.

This leaves us where?
Thus, if you're to beat the market, I believe you're left with one choice: To look at different stocks than the market is looking at. That's why I've made my career at TMF analyzing microcaps, foreign stocks, and my favorite...can you guess?...micro-cap foreign stocks.

These are stocks few else are looking at, and I know from watching the research report wires that more and more sell-siders are dropping coverage of this niche each and every day. That means opportunities are being created, and that's why I do what I do at Global Gains.

This is where CAPS fails us
Yet it's not necessarily your fault that CAPS -- like most financial databases -- skews to cover well-known mega caps. In fact, we (TMF) actually don't give you the ability to rate most micro caps, many foreign stocks, and hardly any micro-cap foreign stocks. (I can continue to bring this up from time to time in order to keep up pressure on the guys are reading, right?)

Try, for example, to pull up the profile for China Green Agriculture (CGA) -- a stock that's doubled for Global Gains since October on the back of a low valuation (at the time) and strong fundamental performance. It's unrate-able because of its size and will remain unrate-able for quite some time.

That unrate-ability may lead you to believe CGA is dangerous or unknown. In fact, it's performance -- both the stock and the business -- has drastically outpaced those megacap peers I mentioned before.

Are you willing to look at different stocks?
It's that last rebuttal -- the danger/unknown factor -- that I get most often when I ask Fools why they're not investing more in foreign stocks. And it's an understandable point. Many folks simply don't feel comfortable investing in places that they do not live in and/or visit frequently.

But if you're willing to do reading, you can actually turn this to your advantage. Again, the Sir John Templeton text is illustrative:

"When you are a thousand miles away in a different nation, it's easier to buy the things that other people are selling, and to sell the things that other people are buying."

In other words, if you're willing to do your research, your physical displacement from an investment environment can be a major advantage because you're not as emotionally tied up in a country as its citizens are.

Consider this
For example, most of us in the US are hoping (I think) for a economic recovery. And indeed, when you're making investment decisions today, you may be subconciously influenced by that hope. I've heard a number of money managers say they just won't short anyting right now because valuations are too low. And while that may be a good reason, they may also not feel emotionally right about shorting an economy that they so want to turn around and hope and believe will.

Some sophisticated investor in Vanuatu, however, may be looking at the economic statistics coming out of the US vis-a-vis the recent stock market bounce and be preparing to make a big short bet. I'm not saying this is the correct course of action, but just that being emotionally divested from the place you're investing may be a significant systemic advantage. In the end, you as an American should be able to cast a much colder eye at China than a Chinese investor who grew up a Young Pioneer and has bought hook, line, and sinker into whatever story the government is spinning on CCTV.

All of this is to say
Advantages over the rest of the market are few and far between in today's market. But I believe you as an American investor and those of us working at Global Gains have at least two important ones by investing in small foreign companies. That's because 1)you'll be looking at stocks the rest of the market isn't and 2)you'll be able to look dispassionately at the company's financial data and the country's economic data.

And you have to do those two things if you're going to beat the market. Are you willing to try it?  [more]



China’s Massive Fraud

April 13, 2009 – Comments (2) | RELATED TICKERS: CHL , CGA , FXI

That’s me standing in front of the Terra Cotta Army outside Xian, Shaanxi Province, China. As you might guess from the name these life-size statues are advertised to be warriors who were to protect the first emperor of China (Qin Shi Huang) in the afterlife. Wikipedia, as always, has more information.

Thus, I was shocked today to find this headline at Xinhua News: “Expert says terracotta army of servants, not warriors.” You can read the article for yourself, but apparently it’s not a slam dunk that these folks are warriors after all. That means China’s been misleading the world for more than 30 years…a pretty massive fraud.

That was a joke
I’m kidding, of course, though I do find archaeology and its interpretation fascinating. Further, the Terra Cotta Whatever-They-Ares are a must-see for anyone who can make it to Xian.

But that wasn’t the only news coming out of China today.

China’s bright future?
We also had stocks hit an 8-month high after Premier Wen stated again that the stimulus/economy is working following the release over the weekend of China Central Bank data showing that exports dropped 17% in March -- lower than expected. China commentator Michael Pettis -- whose blog I’ve previously highlighted on this blog -- weighs in with his thoughts here.

You can read his complete analysis if you jump over, but here’s the interesting takeaway:

"The overall picture is consistent with two different and popular predictions. First, the stimulus package is working and that China will soon emerge from the worst of the crisis. Second, that the fiscal stimulus represents a risky bet on the duration of crisis abroad, and if sustainable and recovery in global demand does not occur in the next few quarters, it will set the stage for a deeper contraction late this year and next year."

In other words, China is hanging in there. Yet over the next 1 to 2 years, we’ll either see China pull away from the rest of the world as it’s able to diversify its economy away from exports or a prolonged demand downturn in the rest of the world will sink all of China’s stimulus efforts because the country simply can’t diversify away from exports.

It should be fun to watch
Of course, China isn’t standing around passively waiting to see what happens here. We’ve had announcements over the past week about the new national healthcare system there, which would indicate that China is following the World Bank’s advice to strengthen the country’s social safety net in order to preserve growth, poverty reduction, and economic development.

And then there was the announcement today that China will make $25 billion available to its neighbors in SE Asia so they can improve their own infrastructure and energy situations.  If you’ve been to Cambodia, Vietnam, or Laos, you know that $25 billion will go a long way and that spending on transportation and electric infrastructure is sorely needed. Vietnam, for example, could use wider roads:

And a somewhat more efficient/reliable way to string up power lines:

Put these two efforts in together and China is simultaneously working to strengthen its own domestic economy/consumption picture while also spending to support consumption in its region. This indicates to me that 1) China is not confident in a US recovery and wants to hedge its bets and 2) It does -- as I’ve said before -- have more “outs” than many give it credit for.

And heck, just for good measure, China tossed out a new Human Rights Action Plan today as well (if China isn’t positioning itself for a global leadership role, then I don’t know what positioning a country for a global leadership role would ever look like).

The best case scenario
Now, if the US does recover, that’s the situation where China benefits the most because it gets its export crutch back, but has already begun to work on domestic and regional transformation. If the US doesn’t recover, China’s economic picture is a little more blurry.

Again, I think the country has more outs than folks generally believe, and that’s why we’ve been agitating for our Global Gains members -- whether they’re aggressive or conservative investors -- to increase their exposure to China at the expense of, for one, Western Europe. That’s because China offers more upside growth than its developed market peers as well as -- given announcements like those today -- the potential for greater stability as it establishes a social safety net and works to strengthen its region. In terms of specific stocks (again, we're down on the FXI for reasons noted here), I've been looking hard at the agriculture sector (CGA, YGYB.OB, YSYB.OB, CBLUF.PK) given government support there for the country to become self-sufficient and the domestic consumer sector (CHL, AOB) given that I think the export manufacturing picture remains unresolved.

What's your outlook for China/best China ideas? Share them in the comments below.  [more]



How to Find the World's Best Stocks

April 13, 2009 – Comments (0)

We've launched a new feature at Global Gains that we're calling the curriculum. If you were my mom, you'd call it a book club. I like curriculum better.

Anyway, the goal of the curriculum is to get more of our members reading about and understanding now just the tenets behind international investing, but also to yield a better/wider understanding of the various countries and regions we're looking at. I thought this we be a good idea when we were brainstorming for the curriculum, but as I was rereading the first book on the list (Global Investing the Templeton Way), I was reminded that it's not just good, but critically important.

Top down v. bottom up
One of the debates we often have in analyst meetings is whether or not we should be looking for stocks top down (ie, oil prices are bound to rebound, let's find a good E&P) or bottom up (find the best companies at the cheapest prices macroeconomic forces be darned).

Ultimately, I don't think there's a good clear answer here (though if you have one, drop it in the comments below), and every stock choice -- at least the ones I make -- is a result of a combination of these two factors. Here's John Templeton on the subject from that aforementioned book:

"Underlying this inellectual exploration [of relative valuations across geographies], however, must be a bedrock of hard facts about the life and times of the countries whose markets you are dealing with. The numbers don't exist in a vacuum. The global investor must see the world not only in terms of p/e ratios and dividends, but as the teeming, turbulent planet-sized village that it is. Often, the root of global investment opportunity lies in understanding the course of world events, rather than just fixating on purely investment oriented issues."

Top down AND bottom up
For Templeton, it seems like its both, and I was glad to (re)read that, because I very much agree. And it's by combining a bottom up approach with regards to stock selection (looking for high quality at low prices) with a top down approach with regards to market opportunities (yes, it's worth looking at China and Brazil; no I don't care how cheap that eastern European stock is because that region is in trouble) that you end up being able to find the world's best stocks.

And that's one of the reasons we're so high on getting out and traveling as part of our research process for GG. There is simply no better way to understand our "turbulent planet-sized village" than by actually getting out of the office and experiencing it.  [more]



More on How to Handle a Doomed Dollar

April 09, 2009 – Comments (4) | RELATED TICKERS: YUM , PBR , RIO

Now that I've learned how to embed images (tip of the hate to Chris Harris), this blog is about to get a whole lot more fun (and yes, it can get more fun than pointing out that Bill Mann looks a little bit like Mao).

But before I get to the fun and the revelation that prompted this post, I'd be remiss if I didn't point out that our Global Gains service released a new issue today with two stocks that I think are pretty tremendous risk/reward opportunities. If you're a GG member (and thank you if you are), you can get that issue here. If you're not a member and you click on that link, you'll be asked to take a free trial. I say, give it a shot.

And now for one revelation and multitudes of fun
So here I've been this week talking about why I think the dollar is doomed and why the Brazilian real makes sense as a currency to go out and get exposure to. But then I go off and start posting about China (though I did toss out MercadoLibre and Credicorp as two worthy ideas in this post).

You may have noticed that neither of those companies are actually based in Brazil. So is that the best I've got? Of course not.

More Brazil than you can handle
In fact, our GG team visited Brazil last year and had the opportunity to meet with a number of interesting companies and money managers. And now that I can embed photos, here's where the fun begins.

First, because you'll hear all about it if you buy into Brazil, here's a picture of us standing in front of the BOVESPA stock exchange:

It's a great old building in the middle of Sao Paulo, but when you actually get inside, you find the trading floor totally empty. That's because -- as as most exchanges these days -- the trading is completely computerized. This is a far cry from what's going on at the exchange in Buenos Aires where guys still stand around smoking cigarettes and making trades manually. This is also evidence why Brazil is an emerging global economic power and Argentina, well, isn't.

The trading volume data coming out of BOVESPA is impressive as our the listing requirements that hope to make Brazil a trusted international market. This is all good progress. The one problem is that thanks to government regulation, it's almost impossible for foreign investors to buy on BOVESPA (indeed when the folks at the exchange found out we weren't setting up a subsidiary in-country, they wondered why we were there at all).

But there are still good ways to bet on Brazil.

How to bet on Brazil
The invention of the ETF has been by most accounts an incredible benefit for individual investors. One danger with ETFs, however, is that if you're not careful, you end up making bets you didn't think you were making. If you read my post on FXI, that means not necessarily betting on broad grwoth in China when you buy it, but rather on the success of state-run Chinese banks.

Similarly, with the iShares Brazil Index (EWZ), you're not broadly betting on Brazil, but rather on Brazil's banks and Brazil's multinational commodity companies. Indeed, the top 10 holdings there account for more than 60% of the assets and are concentrated in Petrobras (PBR), CVRD (RIO), Bradesco (BBD) and a few others.

Now, you don't need me to tell you that companies like PBR and RIO are going to be far more affected by commodities prices and the global economy than by anything that actually happens in Brazil. More alarmingly, EWZ gives you almost no exposure to the Brazilian consumer (some good names in that space are Redecard and Natura Cosmeticos) or the healthcare sector (Odontoprev is a fascinating company and ridiculously cheap right now) -- two spaces I like in Brazil right now.

Of course, those all trade on BOVESPA (though you can find Redecard on the pinks).

But here's another name
Yet there's another Brazilian consumer stock that I like and continue to follow called Brazil Fast Food (BOBS). It only trades OTC here in the US and that's one of the reasons its so beaten down (American investors aren't customers and don't know what to make of the company). Now, BOBS is a bit of a turnaround situation and it's struggled due to high input (read: food) price increases that it has not been able to pass along with consumers, but it's reasonably cheap and has a deal with YUM! Brands (YUM) to expand KFC in Brazil.

BOBS, for those of you who don't know, is a burger joint, and it has a pretty neat ad campaign that plays off Rio's Christ the Redeemer statue. Here's the statue:

And here's the ad campaign:

Anyway, I think it's pretty clever. The company's flagship Bob's Burgers franchise is also known for its milkshakes (which we can confirm are good):

(Please not that in the course of blogging, I'll never pass up the opportunity to post an awkward photo of Bill Mann.)

This is getting long
I can speak more on BOBS if folks are interested (let me know in the comments), but I think it's an interesting play for folks who are willing to tolerate illiquidity and volatility and should benefit from growth in the Brazilian consumer sector. Though as I said earlier, it has struggled with its turnaround.

The overriding point, though, is that ETFs can be a little bit dangerous if you're using them to diversify away from the US. If you're not careful you may end up making bets you didn't actually want to make.  [more]



The World's Worst Labor Laws

April 09, 2009 – Comments (12)

I write a lot about China for There's a simple reason for this: I think it's a very worth place for study if you want to be a successful long-term investor in today's stock market. I also enjoy reading and writing about China as well as visiting it...which we get to do annually as part of our research at Global Gains.

One thing that has struck me in a few years of doing this writing for are the extremely negative reactions to China that I get from many American readers/investors. I'm not precisely sure of the sources of this angst/xenophobia (it may be that China is demonized every electoral cycle as a place that's taking jobs, poisoning our children, and ruining the global ecnomy), but it exists. Moreover, that unwillingness on the part of many Americans to look at China is why we can all make good money as long-term investors in China today. (See this article for more.)

Of course, it's also all relative.

Relative? How so?
I promised in an earlier post to start providing to links to some of the great resources on the Internet for learning about Chinese business and culture. But rather than just put up a list, I thought it'd be better to do them one at a time with a little bit of context.

That brings me to this post -- China's Labor Laws: The Cultural Disconnect Goes Both Ways -- that was recently featured no the China Law Blog (a site authored by law firm Harris & Moure).

Before for you read their post, ask yourself: Which country treats its workers better: China or the US? If you're an American, I'll wager money that you'll answer -- likely without hesitation -- "The US." And at the end of the day, you're probably right. But now go read the CLB post.

What'd you think?
It's funny that from China's perspective the ability to lay off hundreds of people for no reason seems like a gross mistreatment of workers.

Now, the point of this post is not to get into a dispute about which country better protects workers, but rather just to highlight the fact that certain things about our regulatory framework seem bizarre to other countries just as certain things about the regulatory frameworks in other countries seem bizarre to us. Similarly, many of the problems that exist in other countries exist here as well, but for some reason we have grave concerns about them in other countries, while we're willing to almost overlook them here at home.

For example
Another recommended reading is "The Quiet Coup" -- an upcoming article for The Atlantic written by former IMF official Simon Johnson. In it, Johnson postulates that many of the problems that plague the US today -- cronyism, a government that's too intertwined with the financial sector, etc -- are problems that have plagued emerging economies in times of crisis. But because we're the world's strongest economy and we can print our way out of this crisis, we don't feel any urgency to solve those structural problems.

If that's American exceptionalism, then we're in for some pain.

I'd also challenge you to write down all of things that scare you about China and count up how many of them can also apply to the US. While the complete stifling of opposition political speech is something that we (thankfully) don't have to worry about here, corrupt politicians, lack of regulatory enforcement, and cronyism in the government/financial sector certainly are realities in both countries.

This is not meant to be anti-patriotic
The point is that every country has its problems and the things it does right and wrong. But in order to really understand a country, you have to be willing to learn about its history, culture, and norms. The China Law Blog is a great resource to start doing just that, and I hope that all Americans and American investors will take some time to do it because 1) China will be a major global player for the next few decades and 2) It looks like a pretty good profit opportunity for savvy investors who are willing to spend some time on legwork.

Comments welcome below. Our GG team is watching this blog, and we'll try to answer all comments, questions, and critiques.

P.S. Doesn't Bill Mann sorta look like Mao Zedong?




Why FXI is Cruisin' for a Bruisin'

April 08, 2009 – Comments (4) | RELATED TICKERS: LFC , CHL , PTR

If you read my last post or any of my articles or my Global Gains newsletter, you're aware that I tend to be pretty high on China. But I'm not high on all of China, and I red-thumbed FXI (the iShares FTSE/China 25 Index) to prove it.

Here's why
Now, I'm generally not a fan of FXI because it focuses so strong on the state-owned parts of the Chinese economy, and I'd prefer to invest in the privately-held, small cap sector. But some rumors coming out of China today have me particularly freaked out.

But before we get to those, let's take a look at what you're actually buying when you buy FXI.

FXI's top 10 holdings
1. China Life Insurance (LFC)...8.8%
2. Bank of China...8.3%
3. Industrial and Commercial Bank of China...8.2%
4. China Mobile (CHL)...7.8%
5. PetrChina (PTR)...5.7%
6. China Construction Bank...4.8%
7. Ping An Insurance...4.7%
8. China Telecom...4.7%
9. China Shenhua Energy...4.2%
20. China Merchants Bank...4.1%

One thing should immediately pop out at you: There are a lot of banks here. And if you look at FXI's entire portfolio, you'll see that financial firms account for about 50% of the holdings. So, if you buy FXI, you're not only making a bet on SOEs, but you're making a pretty big bet on China's state-run financial sector.

Is that a bet you want to make?
You're probably aware that this is a pretty tough time to be a global financial firm. Of course, you may think that Chinese banks will do better than most because 1) They're backed by a government that has enormous reserves and 2) They're customer bases are not tapped on out cheap debt that they're now defaulting on.

While both of these things are true today, that's where today's rumors come in.

The whispers
One of my favorite viewpoints on China's economy (I promised valuable links in my last post) is the China Financial Markets blog written by Peking University professor Michael Pettis. If you read down to the bottom of today's long and interesting post (the whole thing is worth reading, but the applicable part here is the last paragraph), you will find this:

Yesterday I was having coffee with some visiting friends from Goldman when one of them received a notice that there were credible rumors on the March increase in new loans. We had all been expecting a very big March number – between RMB 1.3 and RMB 1.6 trillion.

It turns out that the true number may have been an astonishing RMB 1.9 trillion.

That means that for the first three months of the year we have had loan increases of RMB1.6 trillion, RMB 1.1 trillion, and RMB 1.9 trillion. This amounts to RMB 4.6 trillion for the first quarter of 2009, compared to RMB 4.5 trillion for all of 2008. Notice to my students: learn more about how to resolve and restructure bad loans. This will be a great career option for you over the next few years.

In other words, at the behest of the Chinese government, state-run banks are engaging in massive, expedited lending programs. And I don't know what your experience has been, but whenever I've engaged in massive, expedited anything (take beer drinking in college, for example), neither the quality nor the results have ever turned out very good. I agree with Pettis that the same thing stands to happen here.

So I'll ask again: Do you want to be making an outsized bet on the health of China's banks? At Global Gains, we think there are better ways to invest in China, and I detailed one of them in my previous post.   [more]



My Top Long-Term Play

April 08, 2009 – Comments (3) | RELATED TICKERS: FXI , AOBID

Now that I've scared folks away from the dollar, I'm back with a few additional words on China (as promised in my last post). Further, by the end of this post, I'll reveal my favorite way for American investors to play China today.

But first, the big picture
One of the contacts we have at Global Gains is a guy named Matt Hayden who specializes in doing IR for small Chinese companies. We've discovered over time that a lot of the companies we find that look interesting end up being Hayden clients and that Matt also does a pretty good job of giving us the heads up on companies we might be interested in (note to other IR reps: That's because he doesn't bombard us with info on every company he represents, but because he exercises discretion and only sends along the ones he thinks we might like).

Anyway, Matt's out on the road now giving a presentation to shellshocked American investors about why China remains a good long-term opportunity. Here's the short-short version...

1) Chinese stocks are cheap and get cheaper if you're willing to look at smaller and smaller companies
The average P/E of NYSE-listed Chinese stocks is currently 8.8x. On the Nasdaq, it's 14.5x. And if you're willing to look at OTC, it's a super-low 4.8x. In terms of EV/EBITDA ratios, those subsets check in at 6.2x, 7.2x, and 4.3x respectively.

2) China has upside
China's GDP is just one-third that of the United States despite having 4 times the population. It also has the lowest debt level (in terms of both government and individual consumers) of any major world economy.

3) There are near-term catalysts
I'm not as sure as Matt is about how these materialize in the near-term, but over the long-term, there are clear reasons to see further economic development in China. These include infrastructure building, the further emergence of a cash-rich middle class, the encouraged consolidation and privatization of state-owned enterprises in order to make the economy more efficient, and the expansion of social welfare programs to spur the spending of some of those aforementioned citizen savings.

Put these facts together and you end up with a picture of a long-term growth story selling for cheap that also should have some stability amid 2009's economic turmoil. And that's why analysts at Paribas, Blackrock, Carlyle, and guys like Jim Rogers have been pounding the table for China in their reports.

Here's what I don't want you to do
Now, a lot of folks see this stuff and think to themselves, "Yeah, I should have some China." But then they think, "But China's far away, the government is a little bizarre, and these milk scandals and what not have me sketched out about the quality of management." So they either end up doing nothing, or they end up buying an ETF such as FXI.

If this is you, here's my advice: Do not buy FXI.

There are lots of reasons why we have this opinion at Global Gains and Todd Wenning does a nice job of summarizing our thinking on this matter in an article called "The Wrong Way to Invest in China." If you don't want to click over, the gist is that FXI is dominated by moribund state-owned companies that couldn't give a rat's you know what about you as an individual American investor.

Here's what I do want you to do
Of course, you're right to think that when you invest in China you should be diversified. After all, there are enormous execution and other risks in the country that we -- as American investors -- can't 100% solve for. But rather than buy an ETF, I want you to buy a basket of small, non-state-owned Chinese companies. As you might guess from the data above, these companies are selling for much cheaper than their NYSE-listed, state-owned counterparts, and yet have more upside and are being more dynamically run.

And what I mean by a "basket" is that you should own 5 to 10 of these types of Chinese companies that added together equate to about 1 or 2 full positions in your portfolio. Now, I can't actually reveal some of our top picks here because they're too small to even been rate-able tickers in CAPS. But if you look at my scorecard you will see China Biotics (Nasdaq: CHBT) and American Oriental Bioengineering (NYSE: AOB). These companies fit the bill of what we're talking about in terms of individual basket components, and there are others.

But that's the best way for American investors to play China for the long-term: Create your own diversified basket of small-cap Chinese companies. For those who want more information on the ins and outs of China, I'll pop back with some of the most helpful resources I've found on the Internet for understanding China's many realities.  [more]



Yes...the US Dollar is Doomed

April 07, 2009 – Comments (12) | RELATED TICKERS: MELI , BAP , BAC

Now that we've established that the U.S. dollar is in for some weakening (see previous post) the next two logical questions are 1)Does it matter? and 2)What can you do about it?

I'll get to those in this post as well as provide two relevant and actionable stock ideas from my CAPS scorecard.

Does it matter?
There's a great comment/question on the previous post that points out that since many other countries are pursuing inflationary policies in this crisis environment that the relative effect of all of this inflation on the U.S. dollar might not end up being so bad. And Fairholme fund manager Bruce Berkowitz tendered the same observation in a recent issue of Outstanding Investor Digest.

Here's what I'd say: Thje U.S. dollar will not weaken against all other currencies, but it will weaken against some in the near-term and over the long-term weaken quite substantially against others. For example, the dollar will not weaken against the euro (as long as it still exists...though I'll save my prediction that the euro is going down for another post). That's because Germany demands a weak currency to subsidize its ailing manufacturing sector. Similarly, the dollar will not weaken substantially against the Korean won since that country needs to stabilize its electronics exports. It will also not weaken substantially against any currencies that are staring down default risks and/or are used in countries with serious ethical problems such as Argentina or Africa. In the short-term, it might not even weaken substantially against the Chinese RMB since that country is committed to keeping its manufacturing steady until it can succeed in weaning itself off of low-cost exports as a main economic driver and into being a more diversified economy.

What you can do about it
But here's one currency that the U.S. dollar should fare quite poorly against: the Brazilian real. That's because Brazil doesn't rely on dollars to prop up a manufacturing sector and the country is also a major exporter of agricultural, mineral, oil, and other commodities that should see their prices rise amid inflation and thus act as a hedge. Further, given Brazil's desire to become a regional and global economic player, the country would be quite happy to see its currency rise at the expense of the dollar. Other candidates to do well against the US dollar are the Peruvian sol and Chilean peso (for reasons similar to those of Brazil, though on a smaller scale) and the Australian dollar (again thanks to natural resources).

Of these, I believe the Australian dollar is the only currency easily accessed via an ETF. For the others, you need to be creative or you need to be willing to buy stocks that do the bulk of their sales in these currencies.

Those aforementioned two stock ideas
The first is Credicorp (NYSE: BAP). This is the dominant bank in Peru and one that -- despite having some money with Madoff -- has held up exceptionally well in this downturn. That's a result of its strong competitive position as well as of Peru being so underbanked that the only folks using banks right now down there have very good asset quality (unlike the folks who BofA had to lend to to generate any kind of growth). Credicorp is not a recommendation (yet) of our Global Gains service, but it's stock we've looked at repeatedly and one we really like below $40. (For further notes, you can see our notes on the company here: GG sub required, if you don't have one, what are you waiting for?)

The second is MercadoLibre (Nasdaq: MELI), which is the dominant e-commerce provider in Latin America. It's a bit spicey in that the company also has exposure to Mexico, Argentina, and (gasp) Venezuela, but Brazil is the bulk of the business...and that business should continue to grow in importance. It also has the #1 site in Chile. This is a GG rec and the write-up is here (again, sub required):

Final words on China
But this does not mean China is not a good long-term currency play. In fact, I think every American investor should be learning about China today in order to take advantage of the investment opportunities (big growth, very low prices) in that country today. But I'll get to that next...  [more]



Is the US dollar doomed?

April 07, 2009 – Comments (3)

I've gotten a number of questions from Fools and non-Fools alike about how to protect one's portfolio from a collapsing dollar and/or rampant inflation. The good news is that yes, there are ways to protect yourself from a collapsing dollar. But before I get to how you might go about doing that, let's first establish if this is even something you need to be worrying about.

Is the dollar doomed?
Here's something Warren Buffett said on this topic: "In the future, I would predict that the U.S. dollar will decline. ... Force-feeding the rest of the world $2 billion a day is inconsistent with a stable dollar."

So that's at least one pretty smart guy who thinks a weak dollar is something you need to worry about. Yet it's even more dire than it sounds! That's because Buffett said this at the beginning of 2008. That's...

...before the dollar strengthened considerably against the world's currencies last year;
...before our government decided that it was ok to start printing trillions of dollars in bailouts/stimuli/rescues/whatever to prop up our financial system;
...before Chinia and Russia announced that it might be a good idea for the world to stop using the dollar as its reserve currency; and
...before Treasury Secretary Tim Geithner said he was open to ceasing the use of the US dollar as the world's reserve currency.

The short answer is yes
So, yes, it would seem as if the world is headed towards a substantially weaker dollar. And if you're the type of person who works in the US, gets paid in dollars, has all of your savings denominated in dollars, and is hoping to someday spend the dollars you're accumulated on things like tacos and beers (or shelter or pharmaceuticals or whatever), then you are in a pretty tight spot today...and you'd be wise to do something about it.

More coming...  [more]

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