economic news
We’ve been hit with a barrage of good economic news lately, but it has so far only managed to temper investors’ enthusiasm of equities rather than scuttle them altogether. Stocks actually managed to put in a decent reversal yesterday after falling to 1,040 on the S&P 500 and less than 10,000 on the Dow Industrials. Most likely we’ll rally a bit more, but chances are we’ll soon revisit and, indeed, trade below yesterday’s nadir. As more bad news gets digested, however, we’ll move closer to the Federal Reserve stepping in with additional quantitative easing, buying up bonds on the open market to put cash into the system. News of this is likely to ignite a powerful stock market rally; it’s just a question of from what level on the S&P and Dow it will occur. The bond market is certainly worried about where we’re headed. In late 2008 – early 2009 when yields were as low as they are today, the S&P was 200 points or about 20 percent lower that it is today. A weak economy and declining corporate profit expectations suggest we’ll surrender at least a portion of that difference at some point. Traders will be scrutinizing tomorrow’s GDP report as well as a policy speech from Fed Chair Ben Bernanke for clues as to where we’re headed and how soon the central bankers will act. One thing’s for sure, while we’re in a deflationary environment right now, more money printing will ultimately be inflationary. No surprise then that gold continues to display impressive relative strength and is just below record highs. It’s not just Americans that are finding comfort in owning gold. The World Gold Council yesterday released its quarterly report on gold demand. Worldwide demand in the second quarter rose 36 percent to 1,500 metric tons. Leading the charge was investment demand, with China among the strongest investment markets, where retail demand rose by 121 percent to 37.7 tons in the period. This is a trend that should persist for years to come—and the supply of newly mined gold isn’t likely to keep pace. The Chinese government actively encourages its citizens to buy gold as a means of channeling savings into investments. They go so far as to run ads on television extolling the virtues of owning the metal. Anyone can walk into a Chinese bank and purchase gold (at a smaller premium than what we pay here) and the metal can conveniently be stored at the same bank. There’s a solid rationale behind China’s gold strategy, in contrast to no such strategy here in the US. For China, the bigger its position in gold the more likely it will be to acquire the resources it desperately needs to develop. Equally important, the more gold its citizens own the greater the control the government has over its citizens’ wealth and wellbeing. China’s sizeable and growing gold horde may at some point be used to back up the yuan. They’re not there yet, but in light of the debasement that’s taking place in the dollar, the euro and the yen, we suspect the Chinese are angling to establish a gold-backed yuan. In other words, the Chinese would be able to say that you can exchange one yuan for a certain amount of gold (which, of course, would be less than the then current value of the yuan). This in turn would make the yuan a close substitute for gold. In a world of growing resource scarcity owning gold is as close as you come to controlling your fate. At $1,240 an ounce gold is downright cheap, even after a decade of outperforming other asset categories. A year or two from now, with inflation again heating up, today’s price is likely to be a distant memory and your investment account the better for it. And if you’re skeptical about the prospect for inflation given today’s deflationary backdrop, keep in mind that this inflation will be driven not by our own growth, but by growth in emerging economies in the context of increasing resource scarcity. So we could paradoxically be faced with asset (real estate) deflation and materials inflation simultaneously. That not a pretty picture, but it’s the likely scenario we’ll be faced with and our various metals investments will leave us in good stead should it come to pass.

Signs Chinese Stocks Are Poised For Another Run
While the outlook for U.S. stocks will likely remain gloomy at least until the next round of quantitative easing begins, the next few months could see big gains in the Chinese stock market. I have an opportunity in mind that could help you take advantage of this, but first let me review some of the reasons why China is so attractive right now: 1. China Passes New Milestones. China has recently surpassed Japan to become the world's 2nd largest economy. It has also become the world's largest energy consumer, and the world's largest car manufacturer. General Motors now sells more cars in China than in the U.S. What's more... 2. China's Growth Rate Promises Big Returns. Despite the economic slump in the Western world, China's projected growth rate remains robust. I doubt it will fall below 8% for many years. With U.S. growth low to non-existent today, investors need to have some exposure to China’s expansion. But more importantly, the figures for the first half of 2010 suggest that China's economy is rebounding, even as the U.S. recovery remains a long way off. For instance... 3. 176 IPOs Were Launched in Chin in the first 6 month of the year. The large number of IPOs this year is a bullish sign that tells me free enterprise, entrepreneurship, and innovation will drive China's economy forwards. 4. Retail Sales In China Topped 1 Trillion yuan. With consumer spending weakening in the U.S., China hopes to lessen its dependency on exports and grow its domestic consumption to sustain its economic miracle. And that is exactly what's happening. Retail sales in China surpassed 1 trillion yuan—or $180 billion—growing at a year-over-year rate of 18%. This trend, if continues, should produce rapid sales growth for Chinese stocks. Besides, Chinese exports have also rebounded... 5. Chinese Exports Hit New High. China's exports for June set a new record. What's more, China’s exports exceeded imports again, giving China, in July, its highest trade surplus level in 18 months. 6. Industrial Output Rose 13.4%. While the U.S. recovery remains a long way off, China's industrial output continues to grow. 7. Fixed-Asset Investment Rose 25% in the first half of the year. Total investment in fixed assets rose has been growing at a double digit rate since 2001. In July, China's foreign direct investment rose 29%, a relative “slowdown” compared a breakneck pace of the last year. These factors and many more tell me that Chinese stocks are poised to break out of the trading range they have held to for the past few months. Anytime after Labor Day, we could see the beginning of a very rapid rise. To help you take advantage of this urgent opportunity, I have arranged for you to attend a private briefing on China's best investments...

currency trading
Until relatively recently, the only practical way for you to play currency (FX) markets was by wading into the potentially treacherous waters of futures contracts. This often required you to have a separate account unrelated to your stock brokerage account. Yes, you could trade on margin, putting up as little as a few thousand dollars. But because of the contract size, even a very small move against you could have been disastrous. For example, a euro FX contract is for 125,000 euros (US$185,000 at current rates). A $.0001 per Euro change equals $12.50 per contract. More often than not, investors who tried this kind of trading got beat up pretty badly for their effort unless they initially put up most of the value of the contract. But now, with currency ETFs, you can trade through your stock brokerage account and gain access to this lucrative market with an initial outlay of, say, only $1,000-$2,000 and not have to worry that a minor move in the wrong direction might wipe out your entire investment.

the price of gold
Yesterday, we awoke to find gold prices off sharply, furthering the consolidation the metal has been under for several days now. What prompted yesterday’s selling was a comment regarding gold from an official from the Bank of Korea (BoK), the South Korean central bank. Like many others recently, the Asian nation is known to be interested in diversifying its foreign reserve holdings away from U.S. dollars. At nearly $271 billion, South Korea’s dollar reserves are the sixth-largest in the world. Traders have been expecting South Korea to follow the lead of China, India and others, by adding gold bullion to its reserves. After all, among the world’s largest economies, South Korea has the smallest gold holdings with just 14.4 metric tons of gold, the equivalent to 0.03 percent of total reserves. That makes them the odd man out as most nations do hold at least a modest portion of their reserves in bullion: 10 percent on average for all nations, and considerably higher levels for the more developed nations. The U.S., for instance, has about 77 percent of its reserves in gold bullion. But contrary to expectations—and reasonable belief—Lee Eung Baek, head of the BoK’s reserve management department said in an interview, “We follow the big trend. Gold isn’t the trend.” Mr. Lee’s statement that gold isn’t in a trend is just plain wrong. As you can see from the chart below, which shows the gain for gold during the past year in both U.S. dollars and South Korean won, while the metal’s performance in terms of the Asian country’s currency has been more muted, it is in a bull market in more than just greenbacks. Indeed, gold has been a better investment than holding most paper currencies over that time. A long-term chart, say since the beginning of the decade, would demonstrate an even more pronounced uptrend for the yellow metal. In terms of the won it has gained more than 300 percent! We found it odd the South Koreans would forego the metal simply because it “offers little value,” with “no cash returns” in the worlds of Mr. Lee. Given that gold is the only “currency” that isn’t simultaneously someone else’s liability, and with so many of the world’s major currencies seemingly racing each other to the debasement cellar, to say gold offers little value is absurd. We look forward to reporting the day when the South Koreans get religion and start buying gold. We don’t know if will be at $1,500 an ounce, $1,800 or $2,000, but we’re confident that day will come. Of course chances are Mr. Lee will have gotten the boot before then. In the short term, gold could pull back further. There’s a gap in its price chart down around $1,047, so a dip slightly below that level is quite possible. But that represents a rather modest decline that would merely erase the gains of the past month. Moreover, it would set the stage for another leg up in the bull market that shows every indication of being in a major long-term bull market. A few weeks back we pointed to investors’ lackluster interest in silver as a sign that the party is just warming up in precious metals. The South Korean official’s ambivalent view toward gold is another indicator that we have far further to go on the upside. If, again in the words of Mr. Lee, “There’s an illusion in gold,” it’s that the metal isn’t a legitimate asset class that deserves a prominent place in every portfolio. Don’t let the current minor pullback shake your faith in precious metals. Instead, view it as a good buying opportunity. The fundamental case for gold remains as strong as ever.

another big quarter
Intel (INTC) has done it again. The world’s largest semiconductor chipmaker reported third quarter earnings last night that once again beat market expectations. Not only that, the quarter was so impressive that the results actually surpassed the company’s own updated guidance released two months ago. Thanks to a strong back-to-school season, growing China sales, as well as general industry restocking, Intel collected $9.39 billion in revenues, easily outpacing consensus expectations of $9.05 billion. Gross margin (percentage of sales remaining after costs of production are taken out), which has steadily risen for the last 3 quarters was 58 percent, beating the company’s own expectations of 53 percent. These two factors led to larger profits, as net income was reported at $1.86 billion, or 33 cents a share, handily beating estimates of roughly $1.5 billion or 27 cents a share. Intel, whose chips already power more than 80 percent of the world’s PC, continues to expand its global reach – particularly in China. On the company’s conference call, Intel’s CEO Paul Otellini reiterated his thoughts that Asian consumers will lead a rebound in the personal-computer industry – initiating a rebirth of year-over-year growth in that market this year (which is contrary to most analysts’ predictions). The region already accounts for 65 percent of Intel’s sales – 55 percent if you take out Japan. Gartner Inc., a technology research firm, noted that shipments of PCs in China grew by 11 percent in the second quarter over the year-earlier period, far beyond the 2.8 percent growth seen in the first quarter. Gartner has yet to release their third quarter figures, but based on Intel’s results, we expect to learn that the pace has remained torrid. Intel’s outlook for the fourth quarter was also exceptionally upbeat. The company expects revenue for the current period to be $10.1 billion (plus or minus $400 million), outpacing consensus estimates of $9.7 billion. Further, the company sees margins expanding even further, expected at 62 percent (plus or minus 3 percent). While already impressive, the margin number is also notable given that if the company can reach the high-end of its range it would represent Intel’s largest profit margin in the last decade. Needless to say, we are impressed with the company’s quarterly numbers, and think Intel is executing its fundamental business plan exceptionally well. With less reliance on the domestic market (only 20 percent of sales), and continued expansion into developing economies, Intel’s revenue stream is growing at a fast clip. The diversity of revenues also helps reduce overall business volatility. This utterly dominant company is trading at less than 15 times 2010 earnings, and with a PEG of 1.4, the shares continue to represent compelling value.

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