China Syndrome 3

A wave of sub-prime mortgage crisis hit the financial market hard last month. The rising interest rates and looming recession reduced demand for new homes even worse than Wall Street analysts expected in August, recent government data indicated.

According to Bloomberg, the decline in housing market could cause 1.5 million families to lose their home this year. It also may lead to 100,000 people working in the housing industry to lose their jobs and many mortgage companies to close their doors. The list goes on and on ……

However, after hitting the bottom on August 16th and a surprise Fed rate cut announcement earlier this month, the stock market roars up and both Dow and NASDAQ indexes are getting close to the all time high again. So many of you would like to ask why? Many of the talking heads in the media can cite a number of reasons, but the smartest investing gurus would tell you that it’s because we are benefiting from a strong Global Economy.

US economy is probably slowing down but there is no sign of recession, but the world economy is at its best shape than ever. The US may be the locomotive of the world economy before, but in the new century the fastest growing BRIC countries (I don’t know who coined this term – please check with the dictionary on the left – it refers to the world largest developing countries: Brazil, Russia, India and China) are the economic hot zone in the new global economy environment. In the hot zone, the economy is growing fast, people in those regions are catching up with the way of our living in the US. Especially in China, the “de facto” manufacturer of the world, with the world largest population of 1.4 billion, its economy is growing at about 10% rate for the last 10 to 15 years. With the current pace, it will replace the US, emerging as the biggest economy on earth in the next 25 years.

China will host the Olympic Games in 2008, a lot of construction going on. Chinese stock market, ironically had 10 years of bear market from 1995 to 2005. However, after bottomed out in early 2006, it doubled, quadrupled in 2006 and 2007. Real estate value soared in Shanghai and Beijing. Many people believed that Chinese stock market was over ran, that’s why it crashed in late Feb. to early March. But that’s when Shanghai SSE Composite index was 3,000, now it’s in 5,500. So you do the math. But that’s for A-shares, A-shares are not tradable to foreigners for various reasons. In order to catch the moving train, the only way for you and me to invest in China is to buy the Chinese stocks listed in NYSE and NASD, which they call the N-shares. Like I said, although the Chinese index moved from – oh I have to check – maybe from 1,000 low in Dec. 2005 (see earlier posts China Syndrome published on September 13, 2007, where I plotted out SSE Composite index, the symbol is 000001.SS) to 5,500 now, but the N-shares have not moved that much. A few well known ones, like LFC, BIDU, moved a lot, but the big oil companies like PTR did not until I recommended.

Overall, the Chinese stocks are on fire. I don’t know how long they will last, but for now, buy-on-dip seems to be the right thing to do.

Recent Performance

Enjoy,

Swimmer