China Can’t Stop Growing, U.S. Data Points to Recession, Investing in Asian Real Estate, The ARM Bailout, and More!

by Addison Wiggin & Ian Mathias

  • China tries again to cool white-hot market… Shanghai Composite set to nearly double in 2007
  • John Williams on a data point found only during recessions… and last week
  • Blackstone to join forces with Chinese government? The Rio Tinto saga takes a wild turn…
  • Mayer and Hancock tag-team the booming opportunities in Asian real estate
  • Readers chime in on the subprime bust and new Bush-backed bailout… plus The 5’s take below…

This morning, the Chinese government made another attempt to cool down their bubbling economy. The central bank raised the required reserve ratio (RRR) — the proportion of cash banks are required to keep on hand — for the 10th consecutive time this year.

Under normal conditions, hiking the RRR has a cooling effect on the stock market. Not so in China. An RRR of 14.5%, the highest in China since the mid-1980s, barely gave buyers pause. The Shanghai Composite (SSE) rose a full 1% on the news.

Despite a hefty fourth-quarter correction, the SSE is still looking to return 90-100% this year.

Investors in Shanghai could barely spit on the sidewalk for the past two years without hitting a highflying stock.

Meanwhile, the U.S. economy is already in recession. At least, that’s what Friday’s jobs report suggests.

“The Bureau of Labor Statistics (BLS) used a full suite of gimmicks on the November jobs report,” says John Williams of Shadowstats.com. “It was not credible and showed indications of heavy manipulation aimed at keeping jobs growth positive but still weak enough to pressure the FOMC toward an easing.

“Even so, the BLS reported seasonally adjusted November payrolls up by 94,000, following October’s revised 170,000 gain. Unadjusted year-to-year payroll growth fell in November, to 1.04%. The decline in November annual growth, to 1.0%, has historic parallels seen only during recessions.”

The Swiss megabank UBS has joined the billion-dollar write-down club this morning… in dramatic fashion. They announced a $10 billion fourth-quarter write-down today, the biggest to date for any non-U.S. bank.

Following the 2007 bailout trend, UBS simultaneously announced that they would be receiving a massive cash injection from a sovereign wealth fund (SWF). UBS will sell the Singapore Investment Corp $11.5 billion in bonds that will one day convert into UBS shares.

Also, UBS reneged their profitable forecast for this quarter. The bank now expects to post its first quarterly loss since 1997. (For more on hyperactive SWFs and how they could help save your own retirement, click here.)

Iran has officially stopped accepting dollars for oil. We’ve heard plenty of anti-greenback banter from Iran this year. From unpegging its currency to the dollar to numerous attempts to convert OPEC’s reserves out of the dollar, it was only a matter of time …

“At the moment, selling oil in dollars has been completely halted,” Gholam Hossein Nozari, Iran’s oil minister, said Saturday, “in line with the policy of selling crude in nondollar currencies… The dollar is an unreliable currency, considering its devaluation and the oil exporters’ losses.”

The dollar, gold and oil all traded a bit nervously over the weekend, ahead of Tuesday’s FOMC meeting. Gold and oil prices rose ever so slightly, to about $806 and $89, respectively. The dollar, as you might expect, slid against its rivals as currency traders began to factor in tomorrow’s near certain rate cut. The dollar currently trades at $1.47 euro, 111 yen and $2.04 pound.

Blackstone, the king of U.S. private equity, is rumored to be partnering with an unnamed Chinese sovereign wealth fund to make a bid for Rio Tinto, one of the world’s largest mining companies.

Hmmmmn… this is like the investment year wrapped up in a nice little package: an American private equity group teaming up with a Chinese SWF to make a bid for one of the biggest players in the great global resource grab of 2007. This, too, might be worthy of a movie.

True to form, if the deal goes through, Blackstone has also announced intentions to break up Rio, including their recent gigantic acquisition of Alcan.

Goldman Sachs has garnered a $2 billion war chest of their own to be used for property investments in Asia. Goldman’s real estate managers already own over 100 golf courses and several high-ticket hotels in Japan. Now they’re turning to the rest of Asia, specifically China and India. “If invested,” comments the Financial Times this morning, “the $2 billion would — by some measures — triple the bank’s equity committed to Asia.”

“Land is and always will be the most valuable asset in places like Hong Kong, Shanghai,
Tokyo, Taipei and Singapore,” comments our Chris Hancock, having spent considerable time there studying the real estate markets.

“These Asian cities lack the land for the urban sprawl we in the U.S. see in places like Chicago, Washington, Houston, Los Angeles, Charlotte, N.C., and Atlanta. So when you can’t build out, you build up. And that’s exactly how these Asian economies are making their magnificent growth possible.”

Chris has three Asian real estate plays in the Free Market Investor portfolio… two of which are still trading below his buy-up-to price. Reserve members get them free.

“Real estate of the non-U.S. variety has charted its own flight path,” adds the venerable Chris Mayer. “While the U.S. and European markets have come down a lot, Asia keeps rising.”

And if you’re looking for more proof that the U.S. economy is decoupling from global markets, check this out:

Historically, the universe of publicly traded real estate stocks has been in the U.S. Not so anymore. “Today,” says Mr. Mayer, “you can see that the non-U.S. markets are more than twice as large as the U.S. market. With the money on tap for emerging-market real estate investment, I’d expect that difference to grow ever wider over time.”

You may recall that upon his return from India in early November, Chris was eager to invest in the Indian hotel industry. But he’s waiting for the market to correct, as it inevitably will. We’ll keep you posted… or you can read it in Capital & Crisis.

China’s brand-spanking-new $2.1 billion coal-fired power plant came online earlier this month. The plant, comprised of four 1,000 megawatt generating units, is now China’s largest coal-fueled power source.

“By the end of 2007,” reports our Byron King. “China will have added NEW electrical capacity to its grid, greater than the total output of Germany. That’s in one year. People are burning anything and everything they can lay their hands on over there to generate heat and power.”

“As a real estate appraiser in the Chicagoland area,” writes a reader, “I worked for banks for 30 years. When the laws changed to package real estate mortgages and sell them, that was the beginning of the end. No one had any responsibility for any loans being made, because all who were involved didn’t care to whom they were made, just so they were made and their fees collected. Realtors went along with the flow, but the mortgage brokers were the true inflators and deceivers in the whole process. They put pressure on the appraiser to make sure their loans were justified, or no more work for the appraiser. Even with good appraisals, the market was frothing. You had multiple contracts on houses that weren’t worth what the bids were.

“It was the low rates and the promise that the real estate would appreciate. Commercial real estate was selling for 4-5% returns without all the expenses accounted for. Now those less-than-5% returns are much less with rising taxes, expenses and vacancies. All those many owners are stuck with them, and they can’t sell for what they were bought for. And now we’re brought to today, with many owners overextended.”

“I just got the latest encouragement from Countrywide to buy a new home. Forty-year mortgages!” exclaims a reader, inadvertently reinforcing the above reader’s remarks.

“I may never live to see my house paid off. How great is that, to die owing? Needless to say, it went straight to the shredder. I bought my house to live in, not to make gobs of money, sell it and buy a now more expensive house, exactly like the one I live in now. Let the prices fall — my tax rates will fall, as well.”

The 5 responds:
Prices will continue to fall. Your taxes? Not so quickly.

“Are you out to lunch or what?” asks a reader. “Assistance to borrowers in danger of losing their homes, regardless of whether they made, or were duped into making, poor purchase decisions was not only the caring and appropriate thing to do, but was also necessary to restore confidence. The markets showed their approval. To ignore the plight of hundreds of thousands of Americans is to confirm the view of many that big business cares nothing for the proverbial ‘little guy.’”

The 5 responds:
You’ve gotta be kidding me. What does this have to do with big business versus the little guy?

This market rose on a sluiceway of easy credit, government-sponsored mortgage lending and mortgage brokers falling all over themselves to get a piece of the action. When we interviewed Robert Rubin for the movie IOUSA,
he trotted out this old chestnut: “There’s no such thing as a free lunch.” If this very limited and entirely voluntary bailout actually comes to fruition, someone will have to pay the cost. That someone is likely to be you… you’ll pay higher taxes, higher mortgage rates/fees, or both.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Even with the White House’s “lipstick on a pig” bailout plan, the fallout out from rising foreclosures is likely to take its toll on financials throughout 2008. We’ve been beta testing a new service for just such an occurrence. Since August of this year, you’ve been receiving the Strategic Short Alert free of charge.

Three of the four positions editor Dan Amoss has picked are up… the biggest gain to date is 58%, down slightly from its apogee of 80%. The average of all four positions is up 12%… three times what the Dow returned during that same period. Next year, we’re expecting gads more.

For details on continuing to get the Strategic Short Alert free, see our membership drive for the Agora Financial Reserve.

ADDITIONAL RESOURCES
Blackstone plans audacious bid for Rio Tinto
Goldman in $2bn Asia real estate push
The coming China crash

rspertzel

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