by Addison Wiggin – March 8, 2011
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The 5 searches for the story no one's telling… in the world's most expensive emerging market?
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China’s two competing governments… which one has the upper hand… and how it could “unravel” the China growth story
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The “flight to safety” currency that has reached parity with the greenback, and then some
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Reader debate over public unions mercifully winds down… "all you have to do is collect the membership fees" charges another… and much, much more!
"One question," the gentleman asked me, "why Colombia? What are you doing here?"
It was innocent enough, if direct. We were seated at Casa Vieja in an upscale neighborhood in Bogota last night. Chris Mayer, Bruce Robertson, Dave Gonigam and I are being hosted this week in el presidente of Interbolsa, the largest brokerage house in Colombia.
"We believe the market is unnecessarily maligned by lingering fears over the drug war," we answered, "and therefore less expensive than the market will bear when the real Colombian story gets out. We expect to find opportunity here."
With price-to-earnings in the 18 range… we wouldn't exactly call Colombia cheap. Seated at the table with us was a gentleman who makes his living running a fund in Cambodia and who'd just returned from investment tours of Haiti and Cuba. Those places are most assuredly cheaper and possess deeper "value" plays than anything we'll find here.
Still we think, as with our project in Nicaragua, we believe there is a unique opportunity here. And it’s right in our wheelhouse.
"The security issues are a thing of the past," our host assured us. "Colombia's future is food and energy — two things the world needs and will be buying forever." We aim to find out.
This morning, we begin with a meeting at the Treasury Department. Then off to the HQs of the three largest domestic oil producers in Colombia. We'll have much more to report tomorrow.
In the meantime, we return to Baltimore, where the intrepid Dan Amoss has cast his eye across the Pacific at an emerging market far more accustomed to grabbing headlines.
“The biggest surprise for markets in 2011 could wind up being the unraveling of the Chinese growth story,” says Strategic Short Report editor Dan. “Over the weekend, Chinese Premier Wen Jiabao told the annual gathering of the National People’s Congress that “stability” is the key for the coming year… and “stability” will come about by taming inflation and corruption.
“It’s important to understand that there are effectively two governmental factions in China,” Dan says, fresh from an eye-opening presentation by legendary short seller Jim Chanos. “One faction is interested in power, control and stability. The other is interested in getting rich by any means necessary.
“In the wake of the Chinese stimulus package of late 2008, the second faction’s priorities — construction and industrial activity of all kinds — came first. But now that consumer prices are spiraling out of control in China, threatening social stability, the first faction is growing more concerned about its hold on power.”
Expect further tightening in China — enough to set off a panic in real estate and banking, says Amoss.
“I used to watch cranes from my condo in South Beach [Miami] in 2005,″ Mr. Chanos told the crowd. “And I remember when the number of cranes stopped going up — both up vertically and in quantity. We’re not there yet in China, but we may be getting close."
According to Chanos, the “second” Chinese government — the one that cares about money first — has been rolling in dough, thanks to entities called LGFVs, or local government financing vehicles, and rapidly rising real estate prices.
"LGFVs are joint ventures between local governments and property developers," Dan explains. "Local governments own the land. There are no property taxes to speak of in China, so local governments earn tax revenue by selling land into these joint ventures. Then, they get a piece of the proceeds from development.
“Loans to these LGFVs are in a sort of netherworld. The Chinese banks think they are going to be “money good” because they are quasi-government entities. Sounds a bit like Fannie Mae mortgage-backed securities prior to 2007, no?
“But a study of LGFVs conducted by banking regulators last summer discovered that a staggeringly high number of these LGFVs couldn’t support their debt loads on a cash flow basis. Chanos estimates that about half of these loans could go bad.”
Several weeks ago, Chinese authorities announced they would no longer publish changes in property prices. Hmmmn. Any guess why they'd do that? We’re headed back to China again in May to get another look for ourselves. In the meantime, Dan is keenly following Mr. Chanos' lead and investigating new ways to make money from an overheated market there. We'll keep you posted on his progress, or you can follow along in Strategic Short Report.
Gold is bumping up against its all-time high again. It traded overnight at $1,437. Silver has touched yet another record at $36.24.
That performance comes in spite of a slightly firmer dollar index, now at 76.43.
In a testament to the shifting fortunes of the U.S. dollar, overnight trading saw $1.08 fetch one Swiss franc. Old-timers will tell you they remember when a Swiss franc would only set you back $0.25… back in the 1970s:
Briefly, in 2008, the Swiss franc and the dollar reached parity. Last September, the franc made another run at the dollar, reached parity again… but this time it passed right through and hasn’t looked back.
A weak dollar is even a concern here in Colombia. During one of our meetings with bankers yesterday, they lamented the exchange rate reaching 1,900 Colombian pesos to the U.S. dollar. Only last year, the central bank had a policy of intervening to keep the currency within a 2,200-2,600 range versus the dollar. They have given up that strategy and are targeting the 1,900-2,000 range.
"If the peso strengthens to 1,600," our new friends were telling us, "pffft… it's over." The currency would be strong enough to make Colombian goods too expensive for exporting. The recovery they see under way now would be in grave danger.
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Stocks begin a new week with the S&P firmly above 1,300. “Despite another strong day of selling last Tuesday,” says Jonas Elmerraji of our small cap desk, “the S&P 500 ultimately found support at our key 1,300 level once again.
“You can think of the S&P's 1,300 support level as a massive pocket of demand for U.S. equities — whenever sellers let the S&P 500 slip down to that level, the ask prices get absorbed by that demand and the stock finds support. In a sense, every time the S&P catches support at 1,300, that support level becomes stronger and more significant.
“Another important factor for this coming week is the fact that we've also set an overhead resistance level at 1,344, the spot where the index halted its climb in February.”
So 1,300-1,344 marks a “consolidation channel,” in technician lingo. “A break outside of the consolidation channel gives us two very distinct trading signals: a break above 1,344 tells us to buy, whereas a slide below 1,300 tells us that it's time to make short-side bets. “Right now, I think that the more likely of those two possibilities is an upward breakout.”
Jonas’s readers followed his guidance just last week to 51% gains on a silver stock option in five days… and 27% on an options play with the oil ETF. To learn how his system can work for you, check this out.
We haven’t seen much of Bogota yet… but we’ve already been warned about "los arboles de la muerte" — the trees of death:
Back in the 1940s, city fathers got the brilliant idea to plant a bunch of fast-growing trees like eucalyptus, cypress and pine. Unfortunately, in Bogota’s climate, they can grow as high as 60 feet.
This creates two problems. First, they get in the way of buildings, power lines and — for that matter — other trees. So sometimes they have to be trimmed to rather, um, hideous effect.
The other problem is that at 60 feet… and a weight of 12 tons… they start to fall over. Between 1999-2004, falling trees were responsible for one death per year in Bogota. Last year, 150 trees fell: 80 caused property damage, 35 caused injury and two people were killed.
We’re told that pruning, uprooting and generally fixing the problem currently employs 1,000 people in Bogota. We don’t know if they’ve formed a public union or not.
“I was in police work for almost 28 years before retiring,” writes a reader, winding down our union debate, “and yes I made an adequate living. Obviously, enough not to qualify for any governmental assistance like most of the private sector.
“I paid 8.25% of my salary to my own pension and paid to get medical and dental coverage for my family. We also had to bargain for our salary, but we could not go out on strike. Many times, it was an arbitrator who decided one package over another.
“What the police and fire unions are fighting for in New Jersey is the pension fund to be replaced with money stolen from it by the state and the state allowing city governments to skip their required payments. Then blame us because they now don't have any money.
“We and our public have been victimized. A number of cities resorted to laying off police and firemen. Camden, which rates No. 2 last year for most crimes, laid off close to half their force. If the private sector is that bad, join us."
The 5: Indeed, like the Federal variety, local and state governments have borrowed heavily against their pension funds to pay current bills. Now the well is dry. A lot of important promises are getting broken… and there are going to be a lot of people unhappy over it.
Especially given the trillions in stimulus and bailout money the Federal government has already spent that seems to have simply vanished…!
“Mr. Bernanke suggested last week,” writes another, “that he can control inflation within 15 minutes. He was 100% sure in his statement. He's also confident the dollar will remain the world's reserve currency.
"If so, then why the heck doesn't he take control of the current inflation he is exporting around the world?”
The 5: We assume you mean the price increases that have sparked revolt in North Africa and the Middle East? In his testimony to Congress, Mr. Bernanke said he believes any current increases in food and energy prices are a function of expanding demand from emerging economies like this one here in Colombia… and bad weather.
He also said he doesn't believe they are the result of the Fed's strategy of "printing money" through direct purchases of U.S. Treasuries. Heh.
That, my friend, is what makes investing both interesting and profitable. If you believe Mr. Bernanke is either mistaken or… how shall we say… being intentionally misleading, you can bet against him. Here are several ways to do so, right here.
“P.S.: Your company has been sending me e-mails,” a reader writes, “telling me you have the scoop on the next best stock to purchase… as long as I pay you a fee for these stock picks!
"Now, don't get me wrong. I feel that a man or woman should get paid for their hard work, and I'm sure you have done this.
“But what bothers me I have to take a chance with my money on whether or not the stock picks you gave will return a profit. All you have to do is collect the membership fees.
“I'm not trying to be rude or disrespectful, so please don't get upset with me about the comments I have made. More power to you if you can make your money this way. But I will tell you what I will do. If you will send me just one stock you think is going to do well and not charge me for it, I will buy the stock, and if it does well, I will pay your fee to join.
“I don't believe that's a unfair request, just one stock. And as I stated, if it does as well as you say your company picks will mostly do, then I will buy a subscription.
"Does this sound fair to you?”
The 5: We’ll do you several times better. Go to this website and sign up for our new free e-letter, Daily Resource Hunter — it's free — and you’ll get a free special report with two ticker symbols… and two other opportunities worth keeping an eye on. That's four stocks we think are going to rise… and four chances for us to prove to you our services are worth the fees.
We created the new free Daily Resource Hunter to keep a more focused eye on developing opportunities in energy, precious metals, industrial metals, agriculture… all the wealth that’s created by pulling goods from the earth. Again, here’s where to sign up.
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S.: “GACK!” our final correspondent exclaims with unusual alacrity. “In Abe Cofnas' article Friday on using a new low-cost instrument to trade forex, he mentions to ‘watch your inbox for my full presentation.’ I think I may have inadvertently deleted it!
“I usually delete any references to trading the forex, but this one sounds like a trade I would like to try. Is there a way you guys can provide a link to his presentation and/or website?”
The 5: Indeed, Abe’s approach is unique. It has nothing to do with ETFs, options or the futures markets. He recommended two currency trades yesterday… one on the euro and another on the Canadian dollar. If he’s right, you stand to make as much as 566% and 117%, respectively. If he’s wrong, you’ll never lose more than you put up on the recommendation. And perhaps best of all, you’ll be able to collect your winnings or count your losers by Friday. Mr. Cofnas will walk you through his unique strategy, right here.