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The #1 Chinese Stock

This Could Be Trouble

Written by Briton Ryle
Posted May 11, 2016

For the second time in the last month, the S&P 500 has clawed its way to within a stone's throw of all-time highs. If you're wondering what's lit a fire under stock prices, well, you're not alone. Plenty of investors can see that economic growth here in the U.S. is not really improving...

The most recent employment numbers were a bit weak, suggesting that the long run of strong employment growth is slowing. First-quarter GDP growth was an anemic 0.5%. Corporate earnings for the first three months of the year haven't been so great, and roughly half of companies have said that earnings won't be so hot for the second quarter, either. 

It's no better for the rest of the world. Growth in Europe is terrible. And the bear market for oil and other commodities has crushed pretty much every emerging market there is. Brazil, Australia, Russia — you name it, they are struggling. 

So why in the heck are U.S. stocks doing so well? Is it a bubble? Is it the Fed? 

Well, here's a hint: Stocks are near all-time highs because of the catalyst that was making headlines yesterday, when the S&P 500 rallied for more than 1%. If you missed it, well, it's China. Investors are starting to think that China may be on the verge of another round of expansion. And that is very significant...

The Most Important Economy

I'm not going to pound the table about my next point. I really don't care if anyone wants to argue the issue. But the single most important factor for the global economy over the last 10+ years has been the emergence of the Chinese economy. 

Chinese growth pushed oil and energy demand. That in turn, pushed oil prices and helped create the U.S. shale industry. China burned a lot of coal and made a lot of steel, pushing those emerging economies like Brazil and Australia higher. Raw materials headed to China and finished goods coming from China pushed the shipping industry to new highs.

And sales to China are a critical source of new growth for a wide range of U.S. companies, like Ford, Apple, Nike, and Starbucks...

  • Ford sold a million cars in China last year.
  • Roughly 10% of Nike sales come from China, and that number grew 18% in 2015.
  • Apple's sales in China basically doubled in 2015.
  • Starbucks has 1,800 stores in China, opening about one every day.

Obviously, the Chinese market is very important for these companies and many others. Without it, earnings and sales growth would look a lot different, and the stock prices would look a lot different, too. So it's no surprise that the U.S. stock market has basically gone nowhere for the last 18 months...

SPX 5-year

You can easily see it: After a steady march higher, the S&P 500 has been stuck in a 200-point range since late 2014. That's not a coincidence — that's when China's economy started to slow and the Wall Street bears started warning that China's economy was ripe for a major crash.

The laundry list of negatives for China's economy is compelling. There's a ton of debt, growth has slowed, there may be a real estate bubble, pollution is terrible, there's too much manufacturing capacity, and the country is trying to make the daunting transition from an export economy to one that's more driven by consumer spending. 

A lot could go wrong. And with debt levels estimated to be over 250% of GDP, the consequences would be severe. 

Reading the Tea Leaves

I'll be honest with you: I can't tell you for sure whether China's economy is on the brink of an epic failure or not. And I feel pretty certain that all the high-profile China bears — like George Soros and Jim Chanos — can't be sure that the China Crash is coming, either. I mean, it's not like you can trust China's economic data...

It seems to me that China's economy is uniquely able to carry debt because it's basically a closed economy. The communist government can mostly do what it wants without repercussions from the global markets. As one smart guy recently said, "The instability [from the U.S. financial crisis]... was linked to the fact that we have essentially market-driven financial systems, and that's just not the case in China."

So while it's pretty easy to craft a very intelligent-sounding case that China's economy is doomed, the best we can really do is read the tea leaves about China's economy. And they are actually encouraging...

Right now, demand for steel in China is rising as infrastructure spending increases. Factory activity is increasing, too. Because of this, iron ore prices are rising, up 44% this year. Copper prices have risen 5%. Shipping rates are moving higher, and shipping stocks have been rebounding after a dismal couple of years. 

These are all early signs that China's economy may be a bit more resilient than some people think.

#1 Chinese Stock? 

I have a few investments in my Wealth Advisory dividend and income newsletter that benefit from China. My readers have done great with Starbucks (NASDAQ: SBUX), for instance. That stock is up 157% since I recommended it. Ford (NYSE: F) and chipmaker Micron Technology (NASDAQ: MU) also benefit from sales in China. 

But I've got one company in the portfolio that's poised to do great business in China, and no one's really talking about it. It's Disney (NYSE: DIS). 

If you check the ticker today, you'll see Disney shares getting whacked by 5% or more. That's because Disney missed earnings last night for the first time since 2011. Oh my God! It's a disaster! Disney is collapsing!

Please. 

I don't care at all that Disney just missed earnings. This is an opportunity, not a panic situation. Analysts will be talking a lot about ESPN and how Disney paid too much for some sporting events and how declining cable subscribers mean Disney will never recoup its investment.

And I will admit to you, yes, ESPN is the one blemish on an otherwise perfect track record for Disney over the last few years. Its investments in Star Wars, Marvel, and Pixar have transformed the company into the clear market leader in movies. (The last Captain America movie just took in $181 million over the weekend, the fifth-best movie opening ever.) 

Disney's got a decade of solid movie making in front of it. And even with the concerns at ESPN, revenue has been rising... 

dis div rev

The next big catalyst will be from China. Disney's recent movie Zootopia is already the best-selling animated movie ever in China. Next up: Disneyland Shanghai.

Disney has spent $5.5 billion on this park. It officially opens in a couple weeks. But a trial run last weekend drew 30,000 people. 330 million Chinese live within three hours of Shanghai Disneyland. They visit, have fun, then watch new Disney movies, and the virtuous cycle of Disney gets entrenched in China. 

Yep, Disney's gonna get bigger. Use the current weakness to buy some. 

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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