Daily Investment Interpretations

April 9, 2009

2009-4-9:  Wells Fargo announced record profits today and a bright forecast going forward, and the markets responded with enthusiasm. The NASDAQ added 61.88 points (3.89%) to close at 1,653, the Dow advanced 246.27 (3.14%) to 8,083, and the S&P 500 gained 31.40 points (3.81%) to close at 857. Oil jumped to $52.24, and gold lost the $2.60 it gained yesterday to close at $883.30. The VIX fell again to 36.63.... its lowest close since last September! (As one of my advisory services put it, this market is running on hope, rather than fundamentals.)
More About China
    China entered this economic downturn with a high savings rates, a sound banking system, and two trillion U. S. dollars. The Chinese economy was export-oriented, and it was taken off-guard when its export market collapsed. However, the Chinese government has implemented a fast-acting $586 billion fiscal stimulus package that is proportionately larger, compared to China's GDP, than the U. S. package, and that has taken off while the U. S. stimulus program is still in its planning phase. As a result, China's manufacturing industry expanded 50% in March for the first time in six  months, vehicle sales rose 25% in February, and China's housing market turned up again in January. The Asian Development bank has just reported that China's stimulus plan is improving beyond expectations. (U. S. automakers reported rising sales in China last month.) 
    The Shanghai Composite has risen 33% so far this year.
    Because China needs raw materials (and has plenty of money to pay for them), and needs markets to which to export finished products, it may boost other emerging market economies such as that of Brazil.
    The developing-world economies may take a while to come back, but China appears to be already on its way. (Are we seeing a tectonic shift in world economic leadership from the U. S. to China?) 
    Perhaps as important as China's actual recovery is the fact that we know that, regardless of what happens in the rest of the world, the Chinese economy isn't going to collapse. The global perception among investors that China is recovering is also important, I think, as well as the idea that at the moment, this is "the only game in town".
    What kind of return could we reasonably expect from the Chinese marketplace between now and the end of 2010?
   The FXI ETF peaked at about $73 a share on October 31, 2007. However, because it distributed small dividends three times since its 10/31/2007 peak, its adjusted peak for comparison purposes is $73/1.08 = $67.59.FXI closed yesterday at $30.51. If between now and the end of 2010, the price of FXI returned to its October 31, 2007, apex, an investment in it now would yield a 2.215-to-1 return.
    Are there ways to boost that return? The answer is yes, by using leverage.
    I'm going to do some additional homework before I write further about leverage schemes. (I may have some good news in this department, but I need to check it  first.)
    I believe the time has come to invest in some overseas markets. (More this  weekend.)