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October 2011 - Page 3 of 9 - Money Morning - Only the News You Can Profit From

Unfair Chinese Business Practices Threaten Profits of U.S. Businesses

U.S. companies have become increasingly worried that unfair Chinese business practices are hurting their ability to compete and will start eating into the juicy profits they've been extracting from the Asian giant.

Problems with how China treats foreign businesses have been simmering for several years, but a recent incident with Wal-Mart Stores Inc. (NYSE: WMT) has pulled those issues back into the spotlight.

Earlier this month the Chinese city of Chongqing forced Wal-Mart to close 13 of its stores for two weeks because officials said the retailer had mislabeled less expensive pork as a better organic type. The officials also fined Wal-Mart $423,000 and even arrested two employees.

This unusually severe response isn't the first. Chinese authorities in May fined Unilever PLC (NYSE ADR: UL) more than $300,000 for announcing that it planned to raise prices – a move officials said undermined the government's attempts to control inflation. French-based Carrefour (PINK: CRRFY) was fined for posting erroneous prices.

Google Inc. (Nasdaq: GOOG) had a protracted battle with Chinese authorities last year over censorship of its search service. Google moved its search engine overseas in protest. Many analysts saw the incident as a way for the government to shepherd users toward domestic search giant Baidu Inc. (NYSE ADR: BIDU).

These penalties top years of unfair Chinese business practices that give advantages to state-owned businesses, including regulations that compel foreign companies to transfer their technology to Chinese firms and laws that weigh more heavily on foreign companies than domestic ones.

"If I were a foreign company, I'd be pretty scared right now," Corbett Wall, a retail expert who heads Shanghai consulting firm +CW Associates, told USA Today. "I absolutely think that [what happened to Wal-Mart] has to do with tensions building up between China and foreign companies."

Hurting Profits

Big U.S. companies have relied on expansion into China's growing economy to prop up earnings during a period in which Western economies have sagged. They're concerned that if the trend of unfair Chinese business practices worsens, it'll threaten their profits.

According to the 2011 annual survey of U.S. companies conducted by the American Chamber of Commerce in China (Amcham), a majority of U.S. businesses – 71% – said China's licensing process discriminates against foreign companies.

And 40% said they thought the "indigenous innovation" policy – in which the Chinese government favors domestic companies over foreign ones in matters of official procurement – would hurt their business. More than one in four – 26% – said that policy already had hurt them.

A similar number, 24%, said that economic reforms in China had not improved the business climate for U.S. companies, a steep increase from the 9% who said so a year earlier.

At the same time, 78% of U.S. companies said that their operations in China were "profitable" or "very profitable."

"There are two themes to the data," Amcham China Chairman Ted Dean told Bloomberg News. "American companies are doing well and American companies are concerned about in some cases the current regulatory environment and in others the trend line for the regulatory environment."

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Why a Year-End Rally Is More than Possible

Lately it seems everyone wants to know one thing: Are stocks going to rally through year-end?

The answer is an unqualified "maybe."

Last week, the Dow Industrial Average gained 1.4% to close Friday at 11,808.79. The Standard & Poor's 500 Index rose 1.1% to 1238.25. But the Nasdaq Composite Index fell 1% to 2637.46.

So while it seems like stocks have come a long way in a short time – and they have – in the big picture, we're still crawling and clawing our way up…

However, after hitting 5,048 in March 2000, the Nasdaq Composite is still almost 50% below that high-water mark.

It's the Composite's lack of traction that worries me.

It tells the story, not just of the tech wreck of 2000, but of technology and growth companies at the margins failing to get any meaningful traction. (And many are marginal indeed. Of the 3,000 companies in the Composite, most are smaller than the average companies in the S&P and Dow.)

Given that, you may find it hard to believe we can get back to old highs on the major industrial indexes.

But it is more than possible.

That's because so many of the companies in these indexes are "global" in terms of their inputs, sales, and revenues. And thanks (almost exclusively) to global growth, these big companies are momentarily well positioned. Thanks to overseas sales, their earnings have been strong. And when the revenue streams earned globally are translated back into cheaper dollars, currency gains make net profit numbers a lot stronger.

In this sense, actually, the Fed's quantitative easing programs helped hugely – both by lowering the U.S. dollar's value and by lowering interest rates. Low rates allowed companies to re-tool their balance sheets by retiring debt and reducing the cost of outstanding obligations.

Regarding this most recent rally, the European picture is what brightened the big-cap world and set the stage for this upward movement. Specifically, it's optimism that an effective backstop plan to save Europe from imploding continues to drive shorts to cover.

And if any plan put forward is even credible, it would set the stage for an even bigger market rally.

But we're not there yet…

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This Energy Stock Has Climbed 20% – In Just Two Weeks

Oil prices jumped more than 4% yesterday (Monday), hitting the highest level in two months and boosting one of our favorite energy stocks to a 20% gain in two weeks. Since falling to a 52-week low of $76.15 a barrel this month, oil prices rose 4.4% Monday to close at $91.27 a barrel. This resurgence […]

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Avoid the "Euro-Whipsaw"

Investors are tired and frustrated of the market volatility resulting from Europe's debt woes — but they shouldn't panic and exit the markets. Money Morning Chief Investment Strategist Keith Fitz-Gerald joined Fox Business' "Varney & Co." to discuss what investors should expect this week from Europe, and how the markets will react.

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"The Way Forward" – Who Paid for the Study?

Global Economic Intersection Article of the Week

Editor's note: This is the first of two related articles. The second is here.

A friend whose judgment I respect said the just-published study on US economic policies moving forward by Alpert, Hockett, and Roubini, was a MUST READ. This was confirmed by Joe Nocera, the NYT financial writer who said: "Its analysis of our problems is sobering. Its proposed solutions are far more ambitious than anything being talked about in Washington." So I read it. Their omission of what caused the world's economic problems and what should be done about it is so glaring that I wonder who paid for the study.

Follow up:

Summary of Study

The authors do an excellent job of detailing today's global economic problems:

  • High unemployment and the threat of renewed recession.
  • The possibility that the European sovereign debt problem will spiral into a full-fledged global banking crisis.
  • The hoped-for demand boost from emerging market countries is fading as policies to control inflation and credit-creation kick in.

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7 Dividend-Paying Water Company Stocks Bound to Make a Splash

When it comes to commodities, attention typically focuses on gold and oil. But there's only one commodity that humans truly cannot live without – water.

Water covers nearly three-fourths of the Earth's surface, but 97.5% of that is undrinkable seawater, and 70% of what remains is frozen in glaciers.

Climate change, pollution and mismanagement of water resources have already created problems supplying the world's 7 billion people with fresh drinking water. None of those problems are going away, and all are likely to get worse – the earth's population, for example, is expected to reach 9 billion by 2025.

At least 80 countries already are suffering from water shortages, and the United Nations (UN) estimates that 67% of the world population will be "water-stressed" by 2025.

Even parts of the United States have increasingly suffered from droughts and water shortages, particularly in the West and sections of the South, like Texas.

"Water isn't just the oil of the 21st century; water is the raw material for life, for everything,"
said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "I truly believe, as we see this all play out, that water could end up being even pricier than oil – on a per-liter basis."

Just as companies like ExxonMobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) have profited from a high-demand commodity like oil, so too will many of today's water companies profit as fresh water becomes increasingly scarce.

Still, no one is quite sure when water company stocks will start to take off, so the smartest way to play this industry is to look for companies that pay you to wait by offering up a healthy dividend.

Fortunately, since many companies in the water business are utilities, quite a few fit this definition.

Here are seven water company stocks that are in a position to profit from the "blue gold" and that will put cash in your pocket in the meantime:

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Vale SA (NYSE: VALE): This Emerging Market Mega-Miner Is Taking Production to Another Level

You might think you know everything you need to know about Vale SA (NYSE: VALE), but you don't.

This is a company that, while big, is rife with hidden profit potential.

Vale is what I like to call a "mega-miner." It's best known as the world's largest iron ore producer, but few realize that it also controls railroads, ports and shipping fleets.

Indeed, Vale is a vertically integrated company with a diverse mix of assets that includes more than 6,000 miles (10,179 kilometers) of railroad infrastructure, eight seaport terminals, five general cargo ports, and two iron ore export terminals. Beyond that, it generates its own energy through hydroelectric power plants.

And better still, Vale has the internal capital to self-fund further development.

These characteristics imbue the company with major profit potential.

So Vale SA is an unequivocal "Buy" (**).

Taking Charge of the Iron Ore Market

Vale is the world's second-largest mining company, behind only BHP Billiton Ltd. (NYSE ADR: BHP).

It's the world's largest producer of iron ore, and the world's second-largest producer of nickel. And that gives the company significant leverage in the fast-growing economies of Asia, especially China.

Historically, Vale had to battle the added costs of longer-term production contracts and short-term shipping rates. But that's no longer the case.

Last year, iron ore pricing moved to short-term contracts based on the spot market — to the benefit of producers. And to combat shipping costs, Vale recently bought its very own fleet of large ore-carrying vessels. Now it controls its own shipping rates.

These new developments mean that Vale will no longer be held hostage to long-term production contracts or to short-term shipping rate demands.

Now that Vale has full control over its iron ore business, it can look forward to newer ventures. And it has a big-time market in its sights.

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11 Investing Terms You Have to Know

The language of investing used to be fairly simple. A limited vocabulary of investing terms gave you enough understanding to successfully navigate the markets.

Those days are gone.

Things like 24-hour media coverage and analysis, computer-driven trading systems that affect prices within minutes of breaking news, complicated macroeconomic issues, and sophisticated investment products have created an increasingly complex market environment.

This means investors must understand a variety of sometimes strange or seemingly unrelated terms if they hope to prosper – or, at the least, hold their own – in these treacherous economic times.

Failing to become familiar with these investing terms could damage to your portfolio.

Investing Terms You Must Know

The following 11 investing terms have become commonplace in today's market and economy. Study these and you'll have a much better chance of not just surviving, but profiting:

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How to Invest: Finding Profits in Any Market

The traditional ways of saving money aren't enough anymore.

Over the past few years, it's more than likely that your portfolio took a huge hit… your house lost value… and all the dollars you have tucked away for a rainy day lost value with each passing day.

Whether you realize it or not, you're getting burned.

It's time to look at investing in a completely new way.

The old asset allocation models your stockbroker once promised would never lose money (How did that work out for you, by the way?) are the way of the past. The "growth stocks" aren't growing. The "value stocks" have lost their value.

You need a new plan. And we have it for you.

Here at Money Map Press, we use a 50-40-10 model that guarantees real growth from a solid base of investments and reduces your exposure to risk. To learn more about this strategy – and what the Money Map Report is recommending right now, click here.

Let's get started.

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Bank Stocks Are Bad Investments – But Excellent Trading Opportunities

Long gone are the days when bank stocks were safe investments. Now, and for the foreseeable future, the only safe way to play banks and financials is by trading them.

Banks face so many issues, both in the near term and on a long-term secular basis, that putting shares away, even now when they look cheap, could be hazardous to your wealth and your mental state.

On the other hand, precisely because many of the headwinds banks face are obvious, closely following the developments affecting banks can lead to profitable trading opportunities. And, by familiarizing yourself with how bank stocks trade, you'll be in an excellent position to determine exactly when they've become good long-term holds.

As a trader, I'm always looking for sectors and stocks where developments affecting earnings and profitability are mainstream news. It means I don't have to mine mountains of arcane data to get the big picture. And right now, all the news coming out about banks makes them ripe for trading.

Here's what I look at and how I would trade bank stocks.

Banking on Volatility

The first thing I see when I'm looking at banks is that most of them have been exceptionally volatile. Volatility is the lifeblood of trading. They've definitely got that going for them.

The most common measure of an individual stock's volatility is how it compares to the volatility of the market as a whole. Beta measures how volatile a stock is relative to the Standard & Poor's 500 Index. A beta of "1" means that the stock is as volatile as the market. A beta of "2" means the stock is twice as volatile as the market.

Here are some betas for bank stocks you should consider as good trading candidates: Bank of America Corp.'s (NYSE: BAC) beta is 2.76; Citigroup Inc.'s (NYSE: C) is 2.89; Wells Fargo & Co. (NYSE: WFC) 1.78; Morgan Stanley's (NYSE: MS) is 1.10; JPMorgan Chase & Co.'s (NYSE: JPM) is 1.43; and Goldman Sachs Group Inc.'s (NYSE: GS) is 1.26.

There are many very volatile European banks to trade, too. But these are even riskier. Personally, I don't like unanticipated volatility. I like to understand what is happening, what developments are ebbing and flowing to generate volatility.

With the banks, there's a fairly long list of negative headwinds, which is where their e mbedded volatility comes from.

Big Questions For Bank Stocks

U.S. banks, and even more-so their European counterparts, are facing some very big issues. Each hurdle is big in and of itself, and collectively they form a tremendous weight on the sector.

The biggest question marks are:

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