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China Back to Growth

Best Performing Market This Year Is...

Written by Christian DeHaemer
Posted December 4, 2012

The good old US of A is in a bind.

It's looking as if it no longer works like it used to. America just can't get it done.

The official 2012 Congressional calendar shows the 112th Congress, 2nd session will end on December 14 — though we could run into overtime right up to the end of the year.

Make no mistake; time is running out.

The political class is lining up on the extremes. A tax agreement is far away.

A failure to compromise will lead to a new downgrade on U.S. debt. The market didn't care last time the S&P rating agency dropped its grade for America, but it might when it's joined by Moody's and Fitch. That would be bad for stock investors.

On top of all this, there are some concerning new data points...

Yesterday our friends at the Institute of Supply Management told us its Purchasing Managers' Index fell to 49.5 last month from 51.7 in October. The market was expecting a slight drop to 51.

The ISM tells us numbers below 50 indicate a shrinking economic environment... If it goes on long enough, we start to call it a recession.

The ISM number is the lowest since July 2009 and the biggest miss in five months. That's not good.

This confirms last week's bearish news on consumer spending. Business Insider reported:

Consumer spending activity declined for the first time since May, posting an unexpected 0.2% m/m drop after rising briskly in the previous three months. Real spending was also quite weak, declining by 0.3% m/m, marking the biggest decline in this indicator in some time... Consumer spending activity is unlikely to provide any meaningful boost to economic activity in Q4.*

*editor's emphasis

This data lead to downgrades by usual cast of Wall Street villains. MarketWatch says:

Barclays Capital trimmed its fourth-quarter target to 1.8% from 2.2%. CIBC World Markets chopped its estimate to 1.2% from 1.8%. And RBC Capital Markets dropped its forecast for growth to 0.2% from 1%. Other firms that reduced their estimates include Morgan Stanley, Goldman Sachs and Macroeconomic Advisers. The MarketWatch consensus forecast of economists estimates GDP will grow 1.1%, down from a prior estimate 1.5%.
If the professional liars of Wall Street are downgrading the market heading into their year-end bonus payout — we must really be in trouble.

Brown Shoots

And don't expect the Fed to save us this time.

Bernanke recently gave his annual address to Congress. He basically shrugged and said, “What're you gonna do?”

Bernanke told members of Congress that recent economic data points “suggest further weakness ahead,” and that the Federal Reserve is projecting the U.S. unemployment rate will remain at 7% or above all the way through the end of 2014.

He went on to say, “I don't think the Fed has the tools to offset the fiscal cliff.”

This comes after Bernanke announced over the summer that he would keep interest rates low until unemployment went down... and buy $45 billion in mortgage-backed securities every month until the economy improved.

Housing Up

On the plus side, Bernanke's target has been a housing recovery. Housing contracts were up 13% over last year and 5% sequentially.

Don't fight the Fed here: Buying a house would be a logical investment strategy given low rates, low housing prices, and a pervasive bearishness by the mob in that sector. Nick Hodge has been all over this story. 

The U.S. economy is a mixed bag at best. It is time to look for investment opportunities elsewhere...

Like a boulder falling on a trampoline, the time to buy stocks is at the moment of maximum inflection. Look at beaten-down, ultra-cheap environments where most speculators are afraid to go.

For example, the best-performing stock market this year has been Venezuela. It's up 228% YTD in the hopes that President-for-Life Chavez will die. The second best is Egypt, which went up 55% in the aftermath of the Muslim revolution.

China Back to Growth

Perhaps you don't want to go that extreme. You want blood in the streets — just not that much...

Let's check out the second largest economy on the planet, China.

The Chinese market has been beaten like a lazy whelp. The Shanghai 180 Index has fallen from a high near 13,000 five years ago to 4,600 today. It is getting very close to buy range, if it's not there already.

The common investment story is that corruption has fueled massive misallocation of funds. There are modern ghost towns in the desert and factories that make footwear no one wants.

That is all true, but there is good news as well: China is now in expansion mode.

The official Purchasing Manager’s Index (PMI) rose to its highest level since July, reaching 50.2 in October — a marked improvement from September’s figure. As we learned above, anything over 50 is expanding.

I've been digging through some Chinese companies, looking for the diamonds in the rough.

This one flashed up on my screen:

clnt

Cleantech Solutions (CLNT) is a China-based manufacturer of metal components and assemblies primarily used in the wind power, solar, and other clean technology industries.

The company just reported 48.5% growth in revenues and 107.5% growth in net income for Q3.

After the multi-year beat down, Chinese stocks are extremely cheap. CLNT has a trailing P/E of just 2.94 and a price to book of 0.14.

The company jumped 29% yesterday on news it was buying back 157,966 shares of common stock for a total of US$612,903. This company is only valued at $13 million, so that is a sizable buyback.

There are a number of these out there.

And if our political leaders don't get their acts together, we will see these types of values in U.S. stocks as well.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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