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Friday, July 24, 2009

The Three Reasons China Will Lead the Global Rebound

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

For U.S.-centric investors who question whether it’s really necessary to invest in “risky” overseas markets, here’s an important fact to consider: It’s China - not the United States - that’s leading us back from the brink of a global financial collapse.

At a time when the U.S. economy continues to wrestle with joblessness, a housing hangover, and heightened inflationary fears due to a questionable central bank “exit strategy,” Beijing just reported that China’s economy advanced at a 7.9% clip in the second quarter, up from 6.1% in the first quarter.

This is well ahead of what most mainstream analysts had been projecting - particularly those who were writing the Red Dragon’s eulogy back in January - but as we’ve been telling Money Morning readers since the start of the New Year, China could well be on track for growth of 8% or more this year.

If you factor in the cash that’s not included in official state statistics - but that does influence economic growth - it’s possible that China’s growth rate could grow by an additional 3% this year and as much as 5% in 2010.

That’s not likely, mind you, but it is possible. And Beijing knows it.

Largely attributed to China’s massive $586 billion stimulus program, the country’s economic acceleration may seem startling when juxtaposed against the travails of other major markets and the United States in particular.

While Corporate America has admittedly buoyed investor sentiment with some better-than-expected earnings of late, many stalwarts continue to struggle. Take General Electric Co. (NYSE: GE), which is widely regarded as a global company, and which saw its profits drop 47%. Credit spreads remain tight and lenders are certainly in the pits as has been amply displayed by CIT Group Inc. (NYSE: CIT), which teeters on the brink of bankruptcy. Moreover, consumers continue to struggle in the United States, Europe and Japan.

In China, however, there’s a very different story coming to light. Thanks largely to an emerging middle class of 330 million people (more than the population of our entire country), Chinese consumers are coming into their own. With savings that are as much as 35% of earned income and a desire to have what we have, goods are flying off of store shelves. The expected increase in Chinese consumer spending in 2009 is greater than the forecasted consumer spending increases in the United States, Japan and the Eurozone combined.

At the same time, China’s property markets are rising again, and home values are increasing as well. Automobile sales, always a litmus test for consumer health in any developing country, are up 48% from last year and are accelerating so rapidly that China is already supplanting the United States as the world’s largest car market - a full three years ahead of my projections.

But, critics ask, what happens when the music stops? They’re worried that once the money runs out, China’s markets could crash all over again.

To China’s credit, the government acknowledges that there still are challenges and, as a seasoned China watcher, that gives me comfort. I find it reassuring to see that China’s leadership understands the game they’re playing. In fact, there are three key areas that could trip up the country’s global-growth strategy, but to keep that from happening, China’s leadership is focusing carefully on each of the three: unemployment, lending and currency.

Let’s look at each one in detail.

Unemployment: President Hu Jintao and his cabinet are acutely aware that if unemployment gets out of control, social unrest will become a major problem. So China’s leadership will do everything it can to ensure that this doesn’t happen.

Most Westerners will no doubt read into this comment with an emotional overlay, especially when the media has been filled in recent weeks with stories of the waves of riots and killings in China’s Western Xinjiang region. But, they shouldn’t. The Uyghur riots, while extremely unpleasant by any measure, are racially motivated clashes. That’s not to downplay the tragic nature of this violence, but the very nature of these riots does suggest that the chance they’ll spread beyond the largely Muslim region is minimal.

What concerns Beijing when it comes to unemployment is that riots spawned by shortages of basic human needs are a very different phenomena because they could prompt a now-divided and largely indifferent populace to unite against the government across a much broader geographic area.

And that would not only risk China’s growth, but powerful ruling elite, too, which is why Beijing is so insistent on direct stimulus benefits that keep people working. If it hasn’t dawned on you, yet, I’m sure it will in short order - China is playing it smart.

Here in the United States, Washington took its turnaround plans to Wall Street.

But in China, Beijing has taken its plans to Main Street.

While our leaders continue to pay lip service to unemployment, they really don’t care so long as protected (and connected) institutions remain standing when they should have been put out of their misery.

Lending: Since this crisis began, China has largely avoided the financial plague that has devastated Western economies. This is due in large part to historically tight restrictions on local banking practices and the confinement of derivatives and other potentially toxic financial assets to a few externally focused banks. But now Beijing has a different issue to contend with.

To ensure that the stimulus programs flow freely throughout China - and have the beneficial impact that Beijing hopes - Beijing’s bankers have more recently liberalized lending and reserve requirements inside China. This has resulted in an explosion of debt that many Western analysts believe will come back to haunt China in much the same way the lending orgy here continues to haunt U.S. financial institutions today. They’re entirely different forms of lending, but the concerns seem to be inseparable.

To be fair, that might be the case. However, the thing to keep in mind is that China is not just changing the rules in isolation the way the United States did leading up to the financial crisis. Instead, we’re seeing stronger internal controls being developed, increasingly strict layers of banking supervision being installed, and a general rise in the quality of borrowers - all at Beijing’s insistence.

The result of all this is that China’s financial system should become increasingly stable even as it grows by leaps and bounds.

Obviously there will be fits and starts, but this is a far cry from the warped system U.S. investors have been forced to rely upon to date - a system whose hallmarks seem to be inept leadership, somnambulant or sleazy regulators, conflicted lenders and greedy Wall Street executives who focus on profits no matter the cost.

Chinese Currency: Many Western observers worry about China’s intentions when it comes time to purchase our debt. I think that’s overblown. The real question is what Beijing will do to manage the concentrated U.S. dollar risk it currently faces.

To the extent that China can keep a lid on its unemployment situation and maintain control over its banking system, expect China to maintain the status quo and to continue its purchases of U.S. Treasuries and U.S. dollars. But don’t expect it to sit still. China is acutely aware of the highly concentrated risks it faces because of its ongoing dealings with the United States.

Therefore it’s logical to expect China to diversify its holdings with additional oil, gold and resources purchases in the months ahead. Not only will resource-specific investments help hedge the $2.3 trillion currency-reserve risk China bears, but if the dollar collapses such “hard-asset” investments will maintain much of their value and will be eminently tradable via the $120 billion in yuan-based swap agreements that China has assembled.

Here’s one final thought to consider.

Unlike the West - which views the financial crisis as a burden, a mistake, or a bad dream to be lived through - China’s leaders see this as the most significant opportunity of a generation. It’s a chance for their country to establish itself as a leading global power.

That’s why China will continue to pull further ahead. And that’s why U.S. investors who don’t wish to be left behind can no longer ignore China.

Monday, July 20, 2009

Market Recoils as CIT Edges Toward Bankruptcy

By Jason Simpkins
Managing Editor
Money Morning

The probably bankruptcy of CIT Group Inc. (NYSE: CIT) could have major implications on the retail and manufacturing sectors this week, as many related companies are reliant on the financing giant.

With options running out over the weekend, CIT advisors began preparations for a bankruptcy filing. As of Sunday, JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (MS) were talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, Bloomberg News reported.

Bondholders held calls last week to discuss whether to swap some claims for equity to reduce indebtedness. Thomas Lauria, a lawyer at White & Case LLP, told Bloomberg that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy, but had yet to hear back from CIT management.

“It seems CIT was ill-prepared for this moment, so they’re scrambling,” Scott Peltz, a managing director at consulting firm RSM McGladrey Inc. told Bloomberg. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.”

While CIT is not nearly the household name of Citigroup Inc. (NYSE: C) or Bank of America Corp. (NYSE: BAC), the lender finances over 1 million businesses – including Dunkin Donuts and Eddie Bauer.

Three prominent retail trade groups sent letters to financial regulators this week warning that the failure of CIT would undermine the industry supply chain.
“[Retailers] are unbelievably concerned right now,” New York bankruptcy lawyer Jerry Reisman told the Buffalo News. “What we may have here is a total disruption in small business.”

Reisman said he received more than two dozen calls from panicked stores and apparel manufacturers, some of which said they may not have the money to pay their employees.

An otherwise light week on the economic calendar gives way to the next round of earnings as Apple Inc (Nasdaq: AAPL) and Texas Instruments Inc. (NYSE: TXN) highlight the corporate releases this week, while consumer companies The Coca Cola Co. (NYSE: KO), McDonalds Corp. (NYSE: MCD), and Inc. (Nasdaq: AMZN) join the mix.

U.S. Federal Reserve Chairman Ben S. Bernanke will head to Congress where several critics await. As for the healthcare debate, the August deadline seems less likely, though the Senate has its two cents to add in the coming days. Expect plenty of politicized talk about the ballooning deficit and the impact on small businesses.
Market Matters

The financial sector appears to be on the mend as earnings season brought several positive signs that the worst is over and soon “business as usual” will return to Wall Street. Goldman Sachs Group Inc. (NYSE: GS) easily surpassed analysts’ earnings estimates on solid trading revenues, while JP Morgan got a boost from its investment banking division to shatter the forecasts.

Even Citigroup and Bank of America posted solid results (thanks to one-time gains), though both entities have many ongoing challenges to overcome before the Feds let them fend for themselves.

Of course, the possibility that CIT will file for bankruptcy protection has left panicked customers without a significant source of funding for their daily operations. After late hour negotiations failed, the government chose to pass on another sizable bailout and allow true capitalism to play itself out. CIT turned to private firm and bondholders to help devise a financing plan and avoid the fate of Lehman Bros. and others. But now, nervous retailers and manufacturers are lining up alternative funding sources with the hope of dodging significant business interruptions.

Bed Bath & Beyond (Nasdaq: BBBY) and Wal-Mart Stores Inc. (NYSE: WMT) are among CIT’s largest customers, though many are small independent operations. A CIT failure could prove devastating for those firms considered the lifeblood of American business.

In other earnings news, techs enjoyed another decent quarter as Intel Corp. (INTC) easily bested expectations (that is, before that $1.45 billion antitrust fine) and International Business Machines Corp. (NYSE: IBM) earnings grew by double-digits, while management raised its outlook for the next few quarters. Though both offered encouraging signs for the sector (and economy as a whole), Dell Inc. (Nasdaq: DELL) warned that lower margins are impacting its operations and Google Inc. (Nasdaq: GOOG) experienced its lowest rate of revenue growth since going public five years ago.

The travel industry continued to struggle as consumers and business professionals delayed trips and Marriott International Inc. (NYSE: MAR) and American Airlines parent AMR (NYSE: AMR) posted disappointing results.

Economically Speaking

The White House also experienced a “good news/bad news” week as House Democrats began to push forward a major healthcare overhaul. Before the real lobbying could begin in earnest, the Congressional Budget Office (CBO) Director proclaimed the proposal would have no positive results on reducing costs or expanding coverage and would actually increase government spending.

Investors shrugged off the CIT developments and focused on positive earnings and economic data. Stocks surged early on the Goldman news and soared right through the technology reports. Technicians joined the fun as the Standard & Poor’s 500 Index broke beyond resistance at 930, a strong sign for traders who monitor charts. Major indexes snapped a month-long losing streak and the tech-heavy Nasdaq Composite climbed to levels not seen since last October, while fixed income suffered reverse “flight-to-quality” trades. Oil rebounded on the favorable market and economic signs.

While the debate over a healthcare overhaul rages on, the Treasury Department reported that the budget deficit ballooned beyond a record $1 trillion and seemed prime to move even higher if Congress cannot reign in spending. Analysts fear that interest rates ultimately will move higher should the alarming trend continue and foreign investors shy away from U.S. securities.

But for now, inflation seems very much under control, despite sizable jumps in both the retail and wholesale gauges. Though gasoline prices surged by 17% in June, prices have already begun dropping at the pumps and most economists do not expect a repeat performance in the months to come.

Though retail sales increased in June for the second consecutive month, much of the gain was related to the rising gas prices and consumers remain reluctant to part with their hard-earned income in light of the weakening labor picture.

On a positive note, weekly jobless claims fell to its lowest level since January. However, naysayers claimed that much of the decline was due to calculation problems stemming from auto closures and layoffs are still very much on the rise.

Finally, the hectic economic calendar ended on a positive note as the housing sector showed renewed signs of a rebound as both new construction and permits for future activity experienced unexpected strength. Even Dr. Doom himself, NYU professor Nouriel Roubini, the man best known for predicting the current crisis, reversed course and claimed the global economy would move out of recession by late 2009.

The minutes from the June Fed meeting showed that policymakers revised (positively) their forecasts for economic activity in 2009 and 2010, though they expect the unemployment situation to remain weak through next year. Most Fed watchers do not see any change in the funds rate for the foreseeable future.

On another note, numerous renown economists (about 200), including a few Nobel prize winners, called on Congress to cease the grandstanding and stop criticizing the Fed’s handling of the financial crisis and economic downturn (particularly Bernanke’s “tactics” surrounding the Bank of America/Merrill Lynch deal). The strongly worded letter by some of the nation’s sharpest minds stated that such politicizing could prove detrimental to the recovery.

Friday, July 17, 2009

How to Profit From China’s “Hot Money” Strategy

China made headlines around the world this week when it revealed that its foreign reserves had eclipsed the $2 trillion market for the first time, rising by a record $178 billion in the second quarter – thanks to a flood of “hot money” that flowed into the world’s most promising economy.

Complete story

Monday, July 6, 2009

Real Estate: Firing your agent is a serious matter

By BOB & DONNA McWILLIAMS, For The Capital

Published 07/05/09

When you sell your house with an agent, you'll enter into a written agreement with the agent and their brokerage firm to list your property for sale.

Depending on which company you select, these agreements may differ somewhat, but they all contain a lot of the same basic information. For example, the agreement will specify a term of the listing (many last for a period of six months); it will obviously contain the agreed-upon list price, and numerous other clauses will address the various other responsibilities of the broker, agent and seller. Not too long ago, listing agreements were only a page or two long. Today, they can be six pages or more. The additional detail is all directed toward making sure there is maximum clarity about who is going to do what.

One part of all these agreements is a paragraph that outlines the conditions and procedures for terminating the listing.

This brings us to the topic of our column - firing your agent. The process of selling a house can be a long and stress filled event. In this environment, even the best of client/agent relationships can be put to the test. Also, market conditions may change, causing a client to reconsider the whole concept of selling.

Regardless of the reason, terminating a listing agreement is a very serious matter and there are a number of things you should remember, before going down that road, including:

Does the agent deserve it? If you want to terminate the listing contract, because you've just decided you no longer want to sell, that's one thing. But, if you want to give the listing to another agent, that's an entirely different matter. As we have said in previous columns, agents get paid nothing unless a house goes to settlement. Agents pay out of their own pockets for virtually everything associated with putting a house on the market. So, if an agent loses a listing, not only are they obviously out the commission, they also realize a significant financial loss for things such as signs, showing services, brochures, Internet services, advertising and myriad other expenses associated with selling your house. Plus, an agent can quickly spend hundreds of hours of time establishing and servicing your listing. Add it all up, and an agent may have five or ten grand invested in your place in no time at all. Pull your listing, and it's all just money down the drain.

As a result, carefully examine the reason why you want to switch agents and make sure you have legitimate beef. Before you just haul off and give them the heave ho, call your agent and let them know what's bugging you. Chances are you may find out that your concerns are either ill founded or the agent was simply unaware of the existence or degree to which you had a problem.

In most cases, issues with an agent/client relationship can be traced to a lack of communication. Don't let an issue fester. Bring concerns up with your agent before they rise to the level where you want to terminate the agreement.

Finally, recognize that there are many things which are beyond your agent's control. Especially these days, market conditions are rapidly changing. Just because your agent said you could get $500,000 for your place, that could change - two months from now it might only be worth $450,000.

Being up-to-date with the competitive environment and how it might affect the sale of your house is an important duty for a listing agent. But, if the news is bad, don't shoot the messenger. It's not a perfect world and, from time to time, things are going to get messed up. We forgot who first said it, but we like the quote, "Excellence does not require perfection".

Know what it says in your listing agreement. If, for whatever reason, you've decided to terminate your listing agreement, make sure you understand the process for doing so. In most listing agreements, there will be a paragraph that says something like this: "Either Owner or Broker, by giving written notice, may cancel this Agreement so that it will terminate at midnight ( x ) days from the date of receipt of such written notice. Owner and Broker may also terminate this Agreement at any time by mutual written agreement." The number of days for that written notice is something you would have agreed to when you first signed the agreement. Many times, you'll see 30 days in there. But, once again, listing agreements can vary from company to company and agent to agent.

So, if you've decided you're going to call it a day with your agent and send in the written notice, please give them a call, talk it over one final time, and if the problem can't be resolved, let them know the letter will be forthcoming. It's not fair to the agent to just let a termination letter show up unannounced in their fax machine or e-mail. Remember, this thing works both ways. It's not unheard of to have agents fire their clients.

Understand the impact of terminating your listing. Even after you terminate a listing, this does not completely sever your relationship with the former agent. Most listing agreements will state that for six months (this time can vary) after you end the listing, you may still owe the agent a commission if you sell the house to someone who was made aware of the property during the time you had the property listed with that agent. This clause is usually in listing agreements to protect the agents from unscrupulous sellers who use an agent to attract a buyer, then try to dump their agent in an effort to avoid paying commissions.

Another misconception some sellers have is that changing agents will make their property appear as though it's new to the market. In this market, houses can be on the market for a long time and sellers worry that their property could become stale or stigmatized. But, unless you take your house completely off the market for at least 90 days, the counter that keeps track of how long you've been for sale will not reset to zero. Just changing agents won't help this. Besides, don't get too worried if your house has been on the market for a while. These days, seeing a house be around for 200 or 300 days isn't uncommon, and buyers don't see that as a red flag like they used to. In fact, some buyers may see a long time on the market as testament that a seller is ready to make a deal. In that way it can even be looked upon as a positive in generating an offer.

In conclusion, terminating a listing agreement is not something to be taken lightly. You have signed a contract with someone who is going to shell out considerable time and money on your behalf, all with absolutely no guarantee that there will be a pay day at the end of the road. Keep the communication going, and it will probably avoid the unpleasant process of parting ways.