The China Bubble, Investing in LNG, Gold Coin Advice, American Jobs and more!

by Addison Wiggin & Ian Mathias

  • More China bubble signs: Central bank raises rates, investors beg for futures trading and margin accounts
  • But not all is lost: Two resources still booming in the Red Nation
  • American job loss returns… fine details show worst employment environment in 25 years
  • Plus, Chris Mayer’s latest investment opportunity: How to play the rise of LNG


  Is the great hope of the investment world little more than hype? We like to visit the “China boom or China bust?” debate every once in a while, and the argument today is pretty one-sided… the “busts” have it.

  “Bubbles are best identified by credit excesses, not valuation excesses,” famous short seller Jim Chanos begins, “and there’s no bigger credit excess than in China.” He’s clearly made up his mind, calling China “Dubai times 1,000.” Given his history with Enron, then Tyco, then homebuilders, then banks and then overhyped infrastructure bets last year — we pay attention when this guy pounds the table.

  Chinese investors will soon be permitted to trade index futures — on the margin, no less! (Heh, talk about credit excess.) The China Securities Regulatory Commission announced this morning the legalization of stock index futures, margin trading (where traders need only a 10% down payment to take a position) and short selling.

Of course, these could all be great ways to tame Chinese market volatility and allow prudent investors to hedge their bets. But as we’ve learned good and hard here in the U.S., nothing takes a bubble to the next level better than leverage and derivatives. The measures are expected to go into effect by March.

  China’s central bank raised its interest rates yesterday for the first time in five months… another sign that credit is getting out of hand there.

  “They’re down to a 10-day supply of coal in China,” Byron King reports, with a far more urgent matter than index futures and interest rates. According to the Shanghai Daily, "The State Grid Corp. of China, which supplies power to more than 1 billion people [not a typo], has warned that a national electricity shortage may worsen… Thermal-coal stockpiles were falling amid the delay in deliveries caused by bad weather… Some cities had begun temporarily switching off power supplies to limit consumption."

“Switching off power supplies is certainly a way to ‘limit consumption,’” Byron quips. “China’s energy problem is something of a triple whammy. China relies on coal for 80% of its electricity generation. Yet China can’t mine enough domestic coal. Like coal mining nations everywhere, China’s shallow seams are mostly mined out and the shafts are deeper and more dangerous (killing over 4,000 Chinese coal miners per year). So China imports significant amounts of coal.

“But Chinese coal imports require extensive transport and logistical systems to get the coal from the port to the power plant. Problem is, the infrastructure isn’t built out to the scale that the Chinese need.

“Now add on top of this the problem of bad weather in China. And it’s not just a one-off problem this year. Things like this seem to happen over and over. Last year, for example, China called out its army to shovel snow off the roads and rail beds so that the coal trains could deliver the goods. Wow, talk about outrunning the headlights.

“All this means that coal prices should firm up and rise this year. Carbon intensive or no, coal is there, and much of the world is built to use coal-fired power. The China news also means that whenever the State Grid shuts off the power, factory managers are throwing a switch and firing up their backdoor diesel generators. This means increased oil use in the Middle Kingdom, surely a strong support for rising oil prices.”

So chalk up two points for Byron’s Outstanding Investments portfolio, which is well exposed to the coal and oil industries. If we’re sure about anything in China — boom or bust — it’s that they’re going to need more energy and materials to keep all those lights on at night. Byron has his readers well prepared for that reality… check out Outstanding Investments if you would like to be, too.

  “The collectable coin market in China is exploding,” notes Nick Bruyer of First Federal Coin. “We’ve been beating the drum on that for a few years now, and we’ve seen auction records been shattered all over the place, but it’s such a young market that it has a huge amount of growth potential. We think the China Panda series and some of the coins that have been minted in the last 20 years from China, all the way up to their 12 oz. gold coins that have just tiny, tiny mintages, are great opportunities.

“If you favor American coins, you can’t beat vintage United States gold coins, especially those coins that survived the confiscation in 1933. Coins that were legal tender then are still legal tender today, such as the Saint Gaudens Double Eagle minted from 1907 through the early 1930s and the Indian Head 10 dollar gold piece… you can own them for less than a thousand dollars a coin, and they are really bedrock, vintage proven collectable coins.

“For smaller budgets, the graded silver and Gold Eagle series are enormously popular with collectors. We’ve seen some record-breaking prices set for the top-grade, MS70 coins. That’s a great series.”

We agree… so much to the extent that we’ve reserved a stash of 2009 $5 Gold Eagles just for 5 Min. Forecast readers. These are the same MS70, perfect-grade collectable gold coins Nick mentioned — available exclusively to you. Hopefully, you’ve heard us mention this deal in the last few weeks and you’re already picked up a few. But if not — this is your last chance. Your exclusive access ends tonight.

  Gold’s right where we left it yesterday. An ounce officially goes for $1,128 as we write.

  The U.S. economy shed 85,000 workers in December, the Labor Department reported this morning. That’s a thumb in the eye of the revised November jobs report, which showed the first net employment gain in nearly two years. We’re not out of this mess yet.

In fact, the fine print of the December report is downright lousy. While the 85,000 lost jobs pales in comparison to the half a million-plus this time last year, the employment participation rate fell to 64.6%, a 25-year low. In other words, the number of people actively employed or actively seeking employment is at a generational low. The headline numbers — like the 10% unemployment rate — look half decent only because 929,000 “discouraged workers” have given up looking for work, gone back to school, retired or gotten thrown in jail.

The average hourly workweek stayed at 33.2 hours, too — just off a record low. That gives employers a lot of room to add hours before taking on new employees.

And one last point — one we’ve made many times before — the Labor Department has the statistical mojo to put these numbers wherever it’s politically convenient. Could this all be a ploy to help push through the House’s “jobs bill”?

  The European unemployment rate inched up to its highest level in 11 years, the EU statistics office reported this morning. 9.9% of euros are officially out of work, the most since 1998.

  The U.S. stock market is mostly unfazed by this morning’s global job developments. After a pretty dull week of trading, major indexes opened down just a few tenths of a point this morning. Whatever buzz has been killed by the jobs number was likely offset by surprisingly good holiday sales numbers from a number of big-name retailers.

  The dollar trade was volatile after the jobs report. But now that the dust has settled, the dollar index is right about where it started — 77.8

  Oil’s in a tight range too, around $82 a barrel.

  Gasoline, on the other hand, has risen steadily all week. The national average price at the pump is back to $2.71 a gallon — like oil, over a one-year high. It took $4 a gallon in the summer of 2007 to get people to start paying attention. We wonder, in this dire recession, how much it’ll take this time around.

  “There are a number of big trends forming in favor of liquefied natural gas, or LNG,” reports Chris Mayer.

“Last year was a big year for LNG. We saw a wave of new capacity hit the market. We had new LNG terminals take their first deliveries in 2009 — in Kuwait, Canada, Brazil and Argentina. New facilities opened in the U.K. And China and India also imported more LNG.

“In the great quest to boost energy supplies, LNG could get much bigger. It makes up only 7% of natural gas supplies today, but LNG trade volumes are up 65% since 2000. Industry forecasts call for another 180% increase over the next 10 years. Nearly every big oil and gas company is upping its LNG capacity.

“So how big can it get? I think it’s clear there is a lot of room for growth. There are big untapped gas reserves off the coast of Africa and in the South Pacific and huge LNG expansion projects happening in Australia and Qatar. Major investments are going toward building facilities to liquefy the gas so it can be shipped to distant markets. And that’s going to be a boon for the companies that supply all that goes with LNG — the pipes, cold boxes, heat exchangers, storage systems and lots more. Turns out there are great opportunities here and most are still in the early stages, like the one I just recommended to Capital & Crisis readers.”

  “You said sell Treasuries,” a reader writes. “Meaning what? Sell if we currently have Treasuries as an investment or sell them short?”

The 5: Well… the former if you hope to save your money, and the latter if you wish to make some. There are several ETFs (TBT, PST) and funds (RYJUX) out there that make getting short pretty painless.

Have a nice weekend,

Ian Mathias

The 5 Min. Forecast

P.S. Last call on our exclusive stash of $5 Gold Eagles. When offered to the public in 2009, Gold Eagles of all denominations and styles often sold out in a single day. The U.S. Mint actually suspended sales in December because it couldn’t keep up with demand.

So starting tomorrow, the coins we reserved for you will be made available to everyone else. What the price will be then or how long supplies last… who knows. If you want in, now’s the time.


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