Melco PBL Entertainment (Macau) Limited (MPEL)

I can never understand how U.S. government officials can talk out of both sides of their mouth like this and expect anyone to take them seriously. All we have been hearing out of them lately is "We have a strong Dollar policy," "We are concerned about the recent weakness in the dollar," "blah, blah, blah, blah," yet here our officials are pressuring one of the world's most powerful nations to let the dollar's value fall in relation to the value of their currency.

Washington has been badgering China for years to allow the yuan to appreciate instead of artificially keeping its value down. The value of the yuan has been slowly, but steadily rising over the past couple of years. It just hit a new high versus the U.S. dollar yesterday. Its value has risen by 20% since China revised its foreign exchange trading system in the summer of 2005. This trend is accelerating. The yuan gained 6.9% in 2007 and it is up approximately 6% so far in 2008.

Sure a weaker dollar versus the yuan would possibly help U.S. manufacturers by keeping them from losing some of their business to cheap Chinese imports and it might do some good for the U.S. trade deficit, but it certainly would not help inflation. America has been using the cheap goods that China produces to keep its inflation rate artificially low for years. Forcing China to raise the value of the yuan would bring a lot of pain to U.S. consumers as the cost of all of the cheap stuff that they buy at Wal-Mart would rise. The Fed could double interest rates and we still would experience massive inflation if we're going to force the country that we import most of our goods from to raise the value of its currency in relation to ours. How can the government cry about inflation and hammer on China at the same time? IT MAKES ABSOLUTELY NO SENSE. Either they don't really mean what they are saying either about inflation or what they are saying to China, or they're just plain stupid.

If I was China, I would say "Enough already. You want the yuan to appreciate against the dollar, you got it." And then turn around and sell the heck out of my U.S. currency reserves, causing the dollar to fall like a rock. They could use the proceeds from the sale to build up their country's infrastructure (something that we haven't done here in decades), fix the earthquake damage, and keep their citizens awash in cheap gas. A rising yuan would help China fight the massive inflation that it has been experiencing lately. Be careful what you wish for guys...you just might get it.

I don't see how the trend of a rising yuan versus the dollar doesn't continue for a long time. A great way to play this trend in CAPS and in real life is to purchase the Market Vectors Chinese Yuan Exchange Traded Note, CNY. I added it in CAPS a coupe of weeks ago and I am becoming increasingly tempted to add it to my real portfolio. 20% appreciation in three years isn't going to knock your socks off, but I expect this trend to accelerate. Even if it doesn't, there is a very good chance that it would still be enough to beat the pathetic performance of the major indices here in the U.S., such as the S&P 500. The S&P is only up 14% over the same time period that the yuan has increased 20%

I am being very careful about investing in Chinese companies, but this trend will certainly be your friend when investing there. One stock that I really like right now is Melco (MPEL). It operates casinos in Macau. Think Las Vegas in China, but bigger. MPEL has been performing remarkably well lately and it is just becoming profitable, yet it has been hurt by the general sell-off in casino and Chinese stocks lately. Even if MPEL's earnings don't rise as quickly as many analysts estimate, and I personally think that they will rise even faster with its new City of Dreams project close to being complete, the currency effect of the yuan rising versus the dollar should be enough to generate outstanding returns for investors.

Deej