Featured Trades: (CHINA), (FXI)

1) China's PMI Sets Market a Flutter. Several decades ago, a kid selling greeting cards door to door (yes, that's how old I am) stopped by my office. When I said no, he suddenly burst into tears and threw a handful of samples up in the air, which then wafted back down into the adjoining cubicles. That's how I felt this morning.

On hearing that China's (FXI) purchasing managers index dropped from 52.1 to 51.2, the lowest reading since February 2009, your first guess would not be that that the Shanghai market would jump 1.2% or that the Dow would pop 1.9%.

Perhaps traders took the new data as proof that the Chinese central bank's tightening measures were working, and that no more would be needed? Maybe strength in commodities and food prices is spilling over into the rest of the economy? How about a first day of the month buying binge by long term global investors? Maybe it's just random short term noise?

All of this is happening with ten year Treasury bond yields, which by far have been the most accurate leading indicator of the economy, straining their way back down to 2.95%. IBM raised three year money today at a staggeringly low non-yield of 1.13%, locking in an upside potential for investors of nothing! Is the double dip recession, once off, then on, now off again? Go figure.

What happened to the kid? The secretaries from the adjoining office (yes, that how old I am) scurried over, helped him pick up his cards, bought a couple of boxes, and looked at me like I was some kind of monster. The kid strolled out of the place with a smirk on his face. Sometimes you just have to throw up your hands and cry.

Is China Trumpeting a Recovery?

Featured Trades: (CHILE), (ECH)
iShares MSCI Chile Fund ETF

1) Chile is Looking Hot. Want to invest in an extremely well managed country with almost no debt, budget surpluses, an appreciating currency, and the price for its dominant export commodity going through the roof? Then, Chile is the place for you. It is an old trading adage that if you throw bad news on a market and it doesn't go down, you buy it. That has happened in spades in this prosperous Latin American country, when the ETF barely backed off a peso after it was devastated by a massive 8.8 magnitude earthquake in February that caused $32 billion worth of damage. While I have seen too many emerging nations blow their mineral wealth on ornate palaces, fast cars, and faster women, and stash the rest in secret Swiss bank accounts, that is not the case with Chile. Looking at the country's finances is a breath of fresh air. Of course, the 800 pound gorilla in the room is copper, for which it is the world's largest supplier, and generates one third of its GDP. Chile has had the good luck to be run by a government that took windfall prices from copper's meteoric price rise over the last decade and poured it into development projects and debt reduction. It runs a debt to GDP of only 6%, compared to 60% in the US, and 140% in troubled Greece. While corruption is rampant in much of the continent, the newly elected president, Sebastin Pinera, is already a self made billionaire, having made a fortune introducing credit cards to the country during the seventies. So what's the point? You don't get a more pro business leader than that. The country's demographic pyramid looks good until 2017, when a rapid shrinking of its fertility rate starts to bite (click here for why this is important). It is already approaching US fertility levels of 2.1, barely the replacement rate. Prior to the earthquake, GDP growth for the previous two quarters came in at an explosive 11.3% and 13.7% annualized rates. Many analysts believe the full year rate will come in as high as 5.5%. With reconstruction now getting underway, the central bank is expected to raise interest rates to keep the economy from overheating, likely leading to a stronger Chilean peso. Rising revenues and an appreciating currency give investors a 'hockey stick' effect that I am always looking for in international trading profits. Think Canada, Singapore, and Australia. And get this: even though the government is running a budget surplus, it raised taxes to pay for the rebuild. Perish the thought!? I recommended Sociedad Quimica Y Minera (SQM) last year, the country's largest lithium producer for batteries (click here for the call), with spectacular results. Ironically, Chile's ETF (ECH) is dominated by utilities and has no direct mining exposure, as they are all government owned, such as the giant CODELCO. That will change if privatizations begin. But Dr. Copper's footprint in the country is so big, you can't help but participate, even if indirectly. With China on a tear to accumulate more of the red metal for its own infrastructure build out, that looks like a good bet.

A Missed Buying Opportunity in Chile?

Featured Trades: (XOM), (USO)
United States Oil Fund ETF

3) Pick Up Big Oil While it is Still Cheap. I have always been an unfashionable person. I was still wearing my bell bottoms and mutton chop sideburns well into the eighties, and even today people laugh at my yellow power ties which are 30 years old. It's all part of my living antique image. To be consistent, I am remaining unpopular in my fascination with oil companies, which are now trading at multi generational lows, thanks to the errant ways of BP. ExxonMobil (XOM) has stoked my interest further, announcing a blowout of a different sort today, with Q2 revenues soaring 24% YOY to $92.4 billion. Higher crude realizations, a new LNG project coming online in Qatar, and sharply recovering refining margins all contributed, enabling EPS to jump from $1.46 to $1.60. I have followed this company decades before the 1999 merger with Mobile Oil, back when it was still the Standard Oil Company of New Jersey, have met various members of the founding Rockefeller family over the years, and helped guide their foundation into some early hedge fund investments. David Rockefeller, John D.'s grandson and chairman of the Chase Manhattan Bank, once told me that I was one of 70,000 names in his rolodex. This is the world's most conservative company, and there is a reason why the Gulf blowout happened to BP and not to them. I think rising oil prices (USO) are going to be a major investment theme from here on, and that we will revisit $150/barrel oil sooner than you think. I wrote about Occidental Petroleum (OXY) earlier (click here for the piece). My investment in an all electric, carbon free Nissan Leaf also anticipates this move (click here for that piece). I'm putting XOM on my 'buy on meltdowns' list.