SmarTrade News

by Ron Rowland 10-08-09

Right now, China is celebrating 60 years of Communist party rule. Most of the party-goers aren’t old enough to remember anything else, of course, but that isn’t stopping the nationwide festivities.

The sheer scale of China is mind-boggling! Just think about it …

• 1.3 billion people — more than 4x the U.S. population …
• 3.7 million square miles …
• And borders that touch 14 other nations!

Communist China Turns 60.

Back in the 1970s, the Chinese government figured out that the whole “central planning” thing wasn’t working so well. And communist ideology gave way to a pragmatic mix of state ownership and entrepreneurial capitalism.

It worked … China’s economy is now 70 times bigger than it was in 1978, when the economic liberation began. Depending on how you calculate, China is either the second or third largest economy in the world!

The vast industrial base, concentrated in the coastal regions, is transforming China. Farm workers from the massive interior are drawn by the relative high pay of factories. New cities spring up out of nowhere to house these workers and provide for their needs …

… And now many of the products that were once immediately shipped to the U.S. or Europe are staying at home, snapped up by China’s newly-prosperous middle class.

A middle class in a communist society? Hard to believe, yes, but there really is such a thing in China now. And there’s an entire younger generation that now knows what they’re missing — and they’re working hard to reach the next level.

China’s new middle class is on a shopping spree.

So if long-term rewards are what you’re looking for, China represents an amazing investment opportunity. But how do you play it?

First, recognize that anything China-related is going to be a roller-coaster ride, just as it has been the last few years. Therefore don’t invest unless you’re prepared for the bumps and jerks.

Second, know how much risk you’re taking. Individual Chinese stocks can deliver amazing profits, but they can be hard to trade. That’s why I think exchange traded funds (ETFs) are the best way for most investors to get involved in China’s hot market. And you have several choices — some diversified, some more specialized.

Here’s a quick summary:

Broad-Based China ETFs

U.S. investors can pick from four ETFs that track diversified Chinese stock market indexes:

• iShares FTSE China Index Fund (FCHI)
• iShares FTSE/Xinhua China 25 Index Fund (FXI)
• SPDR S&P China (GXC)
• PowerShares Golden Dragon Halter USX China Portfolio (PGJ)

Each of these ETFs takes a slightly different approach to constructing a China portfolio. FXI holds the 25 largest Hong Kong-listed companies that are available to foreigners. FCHI and GXC are similar but add some mid-cap stocks to the mix. They’re a little more diversified than FXI. All three are capitalization-weighted.

PGJ takes a somewhat different tack. First, it includes only Chinese stocks that have a listing on U.S. exchanges. Second, PGJ uses a tiered-weighting method, which results in the sector mix being a little different from the others.

Specialized China ETFs

If you want to get a little more aggressive, Claymore offers two China ETFs that have a tighter focus:

• Claymore/AlphaShares China Small Cap Index ETF (HAO)
• Claymore/AlphaShares China Real Estate ETF (TAO)

HAO is a good way to get exposure to small, fast-growing Chinese companies. These stocks tend to be less dependent on exports and more related to China’s domestic economy. TAO gives you an opportunity to profit from China’s real estate and construction boom.

China is growing like crazy.

Inverse and Leveraged China ETFs

What if you think that China’s stock market has gone up too far, too fast, and is due for a quick drop? You may still be able to profit with ProShares UltraShort FTSE/Xinhua China 25 (FXP). This is a 2x leveraged inverse ETF. For instance, on a day when the underlying index goes down 2 percent, FXP is calibrated to move twice as much in the other direction — up 4 percent in this example.

On the other hand, if you’re bullish on the Chinese market, there’s the ProShares Ultra FTSE/Xinhua China 25 (XPP). This 2x leveraged “bullish” fund aims to give twice the daily move in the same direction.

The leverage factor for ETFs like these is reset daily, so the 2x math doesn’t always work for periods longer than a day. In other words, FXP and XPP are best used as tools by short-term traders, but if your timing is right you can make big profits from them.

Chinese Currency ETFs

If you want to bet on China’s currency, the renminbi (also called the yuan), you can do it with these two instruments:

• Market Vectors Chinese Renminbi/USD ETN (CNY)
• WisdomTree Dreyfus Chinese Yuan Fund (CYB)

There’s one key difference between the CNY and the CYB: CNY is actually an exchange traded note (ETN), not an ETF. Practically speaking, ETNs work much the same way as ETFs, but they’re actually a form of debt instrument. I wrote about the unique risks of ETNs earlier this year in my Money and Markets column.

Chinese law prevents the funds from directly investing in the renminbi, so they hold currency derivatives known as nondeliverable forwards. These are similar to futures contracts, which reflect a market’s expectations. As a result, these funds might not perfectly track the yuan.

As you can tell, there are plenty of ways to invest in China’s stunning growth story. I’ve only covered a few of them here, and ETF sponsors are planning many more. Do your research first, but don’t overlook China. The opportunity is too big to pass up!

Best wishes,

Ron

P.S. I cover China and other international ETF trends in my 21st Century Superpower Trader premium service. Subscribers receive specific buy and sell recommendations for the fastest-moving global markets. Follow this link for more information.

About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amy Carlino, Selene Ceballo, Amber Dakar, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Two Barriers on the Road to Wealth

by Nilus Mattive 10-06-09

Have you ever been driving on the road when traffic suddenly comes to a halt? You sit there wondering what the heck is going on up ahead for ten or fifteen minutes. Then, suddenly, things start moving again and you realize that the hold-up was caused by merging traffic and a couple of yahoos who decided to wait until the last possible second to move over into the proper lane.

Why do people consistently do things like this? Why do they wait until the last possible moment to move over, even when there were ten signs warning them to do so for the last five miles?

I lump them into two categories:

The first group wants to eke out every last possible foot before they merge, thinking they’re going to time it perfectly. Never mind that it rarely happens and they end up sitting in gridlock with everyone else. It’s not about the end result — it’s about the thrill of going for an extra advantage.

The second — and larger — group is simply not paying attention. Maybe they’re talking on their phones, shaving, or eating burgers. Whatever the reason, they don’t even see the signs in the first place. They’re blindly following the car ahead of them.

None of this is news to you, I’m sure. If you’ve driven on a U.S. highway, you’ve seen these people in action over and over again. But I bring it up today because these very same psychological mistakes can prevent us from successfully building wealth.

Let’s Start with the Proverbial Portfolio Lane Changers …

There’s nothing wrong with trying to actively manage your portfolio. In fact, I think you’re right to stay on top of your finances day in and day out.

However, I don’t think you’re going to get ahead by shifting out of an investment every time it slows down a little bit.

Not only will commissions — and possibly taxes — put a serious drag on your performance, but you face very stiff odds of regularly outperforming, too.

There’s an important difference between taking charge of your finances and making too many micro adjustments.

As a real world example, I’d point to my portfolio in Dividend Superstars. Some of our positions were initiated in the summer and fall of 2007 … right as the market was beginning to crack. And during the March lows, they had fallen substantially (though a lot less than the broad market).

However, their fundamental businesses hadn’t changed. The dividend income was still flowing. There was no reason to abandon ship, in my opinion … so I told my subscribers to continue holding.

Today, the shares have recovered quite nicely. And once you factor in the dividend income, they have really outperformed their benchmarks.

Had we jumped in and out, we would have run the risk of getting whipsawed over and over again.

So my message is this: If you’re already paying attention to the market “signs,” and adjusting accordingly … great! Just don’t overdo it. Major shifts should be undertaken only after much consideration.

Meanwhile, Inertia Can Be Even More Damaging
To Your Ability to Consistently Build Wealth!

I was recently at the Salvation Army to donate some items. As you’d expect, I asked for a donation form so I could write off these donations on my tax return.

That’s a logical thing to do, right? I mean, who wouldn’t take the two minutes to fill out a simple piece of paper for the chance to keep some more of their hard-earned dollars away from Uncle Sam!

Well, the answer is “a lot of people,” apparently.

I say that because as I was filling out my form, another guy next to me grabbed a form and asked me some basic questions about how it worked.

I explained that it was pretty simple. You just wrote down what you were donating and took your copy home with you. An accompanying piece of paper would tell you how much your items were realistically worth for deduction purposes.

He started to write down a word or two … then said something like, “Who am I kidding? This isn’t worth it!” He crumpled up the paper and walked away. And he wasn’t alone. I saw plenty of folks who just dropped stuff off and left.

Sometimes filling out a simple form can yield big financial rewards!

Look, if you’re just giving a couple t-shirts, I understand — it’s not worth the hassle. But I’m talking about people who were giving chairs, tables, and many other big items.

My point is this: Nearly everyone knows that donating to a charity is tax deductible. Yet not everyone will take even one very easy step to ensure that they reap the financial benefit of doing so.

Yet if you want to build and maintain wealth you have to not only think about money matters on a regular basis, but also have the discipline to follow through on your plans!

Consider retirement planning, one of my favorite subjects …

It’s no secret that contributing to a 401(k) plan makes sense for most workers. There are upfront tax advantages. Many companies toss in “free” money in the form of matched contributions. And it’s pretty clear that the traditional retirement anchors such as pensions and Social Security aren’t necessarily going to be there the way they were in prior years.

Yet according to mutual fund behemoth Vanguard, only 60 percent of workers eligible for 401(k) plans chose to participate in 2008.

Sure, you could argue that the other 40 percent had a better use for their money. Or that the recession crunched their finances to the point where contributions weren’t possible.

BUT, Vanguard also found that 84 percent of workers in 401(k) plans with AUTOMATIC enrollment participated.

That 24-percentage-point difference tells me that, for a lot of workers, the sheer “hassle” of filling out a simple form is too much of a burden. They’d rather miss out on all the great advantages of participation than do a couple minutes worth of work. It has nothing to do with their financial situations at all.

Want Prosperity? Just Follow the Rules of the Road!

Since you read Money and Markets, I know you’re already pretty serious about building — and maintaining — your wealth. You’re already very disciplined. And I’m positive that you know a heck of a lot more about financial matters than most other investors out there.

But I also know that we all change lanes a little too frequently, or fail to heed warnings along the road from time to time. So it’s nice to get a gentle reminder that little steps DO pay off down the line. And that it is indeed possible to obsess over your portfolio a little too much.

Remember, all the knowledge in the world doesn’t mean a thing if you don’t use it properly.

So continue to do what you’re doing, and always keep an eye on places in your financial life that you could improve. Here are just four areas off the top of my head:

Taxes: Whether it’s taking the time to fill out a donation form, or enrolling in a tax-sheltered retirement plan, there are plenty of ways to lower your tax bill.

Asset allocation: Periodically revisit your portfolio and make sure you’re happy with how much money you’ve got invested in stocks, bonds, commodities and so on. The percentages should jibe with your age, your risk tolerance, and your overall opinion of where the world economy is heading.

Specific investments: Don’t stick with winners or losers just because. Make sure their stories are still sound … and their purpose in your overall portfolio is still valid.

Your budget: I’ve discussed this in detail before, but it really pays to keep track of what you’re making AND what you’re spending. I think you’ll find that there’s always another way to put a little extra money away for a rainy day. And as many Americans are now discovering, getting thriftier can actually be enjoyable!

Heck, at least think about these things the next time you’re stuck in traffic. Because we all have the tools and potential to build wealth consistently. It just takes a little planning and a lot of patience.

Best wishes,

Nilus

About Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

by Claus Vogt 10-07-09

Bull markets are said to climb a wall of worry. And during the past week this valued adage came to my mind again and again.

You see, I’ve been travelling quite a bit in Europe … giving speeches and presentations. This gave me the opportunity to talk to many institutional and private investors, and entrepreneurs. And was I ever surprised about how much things have changed!

From: “The Fed and the Government Will Not Let it Happen” …
To: “The Fed and the Government Can’t Fix It.”

In 2007 and during most of 2008, I was extremely bearish, predicting a severe global recession, a bear market in stocks and commodities, and a banking crisis.

“That’s very interesting, Claus,” is what I was regularly told. “But you’re much too bearish. Don’t you see how the world has changed? The central banks and governments are so much brighter now than they used to be; they just won’t let it happen.”

Back when I said a bear market was on the horizon, many pundits disagreed.

In other words, my very bearish forecasts were met with high skepticism.

Now the story I have to tell is somewhat different … I’ve turned medium-term bullish for the economy and the stock market. I expect a bounce lasting at least until mid 2010.

And you know what? I get more or less the same reaction as I did two years ago, with one twist: “That’s very interesting, but we don’t believe it. The problems are too big to be solved by central banks and governments.”

I’m Left Wondering … Who Is Actually Bullish?

Maybe my experiences are a statistical outlier and not representative of what’s going on in the world of finance. Or maybe this European picture differs totally from what’s going on in the U.S.

But I doubt it.

The bearish reports I’ve read during the past few weeks are constantly referring to too many bulls!

Yet the U.S. sentiment indicators aren’t showing the high degree of bullishness that the bears are constantly referring to when underlining their own bearish forecasts.

Take a look at the chart below, which shows the Investor’s Intelligence Advisor Sentiment.

The bears correctly state that the bullish sentiment is nearly as high as it was when the stock market hit its all-time high in October 2007. But they neglect to mention that in October 2007 the number of bulls wasn’t especially large!

What’s more, during each of the bull market years 2003, 2004, 2005, 2006, and 2007, there were long stretches of much higher bullishness in this indicator. The same holds true for prior bull markets.

So historically, the bulls-to-bears ratio does not look excessively high.

Meanwhile, Many of Those Who Saw the Crisis
Coming Are No Longer Bearish Over the Medium Term …

Over the weekend I was one of the speakers at the Summit of Austrian Economics in Vienna. Many of the European analysts — professors and practitioners — who predicted the global financial crisis were gathered there. Plus Marc Faber and John Naisbitt appeared as special guests. All were given the opportunity to present their current outlook.

For the medium term, I expect the market to continue advancing.

Interestingly, all of these very successful forecasters are still very, very bearish and anxious about the longer-term future … say three, five or even ten years out. But for the medium term, they aren’t bearish anymore!

Of course there were differences about how long this medium-term may last. Opinions ranged from one to three years — with the usual caveat that forecasts will change if developments warrant.

Still, these independent thinkers — contrarians if you will — have shown a very deep understanding of what has been going on economically during the past year. They were on top of the game then … and I think they’re on to something again.

Best wishes,

Claus

About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.