In coming up with a headline for today’s editorial, I was contemplating just using the word “denial.”

Simply put, the investors and markets are in denial…much the same as an alcoholic who thinks that if he skips drinks at breakfast and lunch, he’s okay to drink at night.

As reported here Monday, credit-reporting agency Standard & Poor’s downgraded the U.S. “AAA” credit rating from “stable” to “negative.” It was one big, loud message: if the U.S doesn’t get spending under control, its credit rating will be jeopardized further.

So how did the markets react? They gave us the opposite of what is expected. Instead of the U.S. dollar falling in value, it rallied. Bond prices, instead of declining, rallied. And gold stock prices declined with crude oil prices.

Why would U.S.-dollar denominated assets rally on the news of a U.S. credit rating cut (aside from trying to confuse the heck out of investors)? The reality of the situation is that investors still foolishly flock to U.S. dollars in times of uncertainty—even when the debt rating of the country issuing the dollars, the U.S., has been downgraded.

Back in 2005 I said there would come a time when “real estate” would become a dirty word in America. Few believed me then. Today I’m saying that, as difficult as it may be for us to see, there will come a time in this very generation when U.S. dollars will not be in vogue. A time when any economic uncertainty will see investors running to precious metals, when inflation will run rampant and U.S. dollars will become worth less and less.

Do you really think the politicians in Washington can put a cap on their spending binge? Of course not. In this day and age, spending only what one takes in is a foreign concept to our politicians. It’s utterly ridiculous. Just the interest on the national debt alone costs Washington more than $1.0 billion every day, seven days a week!

Investors are not just in denial; they simply can’t see what’s happening in the economic environment. A government debt ceiling of $20.0 trillion for 2016 may not be enough. QE, Act 3, or a version of it, looks more and more like a certainty to me this summer. What will happen when we get to the point where there are so many U.S. dollars in the financial system that no one wants them? A sobering, but real thought.

The Standard & Poor’s downgrading of the U.S. triple “A” credit rating from “stable” to “negative” is just the tip of the iceberg. Moody’s Investor Service could follow soon with its own rating cut. And the inflation that I’m predicting will take hold over America in the months and years ahead could cause the credit rating agencies to further downgrade the U.S.’s credit rating.

Michael’s Personal Notes:

While the “American Empire” continues to erode rapidly, the new superpower-in-waiting, China, booms.

For the fourth time this year, China has increased the amount of reserves the country’s large banks must maintain. Chinese banks are now required to main 20.5% of deposits in reserve. In other words, big China banks can only lend 79.5% of the money they have on deposit from depositors. Comparatively, during the real estate boom days of 2003 to 2006, it was common for American banks to lend 95% of their deposits out, keeping a reserve of only five percent.

The annual inflation rate in China hit a 32-month high of 5.4% in March. With the U.S. borrowing money like drunkards, China exporting inflation to America, QE3 just around the corner, and the Fed’s printing press running double shifts, how can inflation not become a serious problem in the U.S.?

Where the Market Stands: Where it’s Headed:

The bear market rally in stocks that started in March of 2009 is still presiding. Despite the rally, upside profits from stocks are limited. Rising inflation and rising interest rates are around the corner. We simply await the bear’s final market blow off—the final big rally to suck investors back into stocks.

What He Said:

“There is no mixed signal about this: foreclosures in the U.S. will continue to rise, the real estate market will get weaker, and the U.S. economy will get weaker. Smart investors should seriously consider unloading their stocks of consumer-products companies that produce nonessential goods.” Michael Lombardi in PROFIT CONFIDENTIAL, March 12, 2007. According to the Dow Jones Retail Index, retail stocks fell 42% from the spring of 2007 through November 2008.

Many thought China was set to stall in 2011, but so far this has not been the case. The country’s gross domestic product (GDP) growth continues to be impressive coming in at 9.7% in the first quarter, above the estimate of 9.55%, according to the National Bureau of Statistics. The results also show the significant growth difference between China and the U.S. and Europe. China is continuing to roll along at high speed, but it must be controlled.

Chinese stocks continue to show some buying momentum following the Lunar New Year break. The Shanghai Composite Index is edging higher above the key 3,000 level and is up 8.62% this year as of April 15, well above the comparative returns of the NASDAQ, DOW, Russell 200, and S&P 500.

My economic analysis is simple. The superlative GDP growth is great, but the problem is the associated inflation that often surfaces as consumers spend more.

China reported its highest inflation in 32 months at 5.4% for the year to March, which is well above the country’s previous upper target of three percent and its revised target of four percent. The average inflation rate in China from 1994 to 2010 was 4.25%, so there needs to be some work done here to relieve the inflationary pressures. The reality is that prices continue to rise, as consumers continue to spend.

Interest rates continue to ratchet higher and I expect the upward move to continue. The Chinese government has placed a cap on certain food products and subsidizing some of the poorer rural workers.

Traders in Asia are probably encouraged by the Chinese government’s battle against inflation and to control the rate of growth. China needs to make sure to keep its course and tackle inflation, as rising prices will hurt the majority of the 1.3 billion people living in China who are trying to just get by on a daily basis.

Chinese inflation is a real potential threat to growth and stability, not only in China, but also globally with its trading partners. We could see higher-cost Chinese-made goods as prices rise and this will drive up Chinese-made goods sold in the U.S.

Yet, overall, China is on the right path towards developing into a rising world economic power as well as a basin for incredible and sustained growth across many sectors, including industrial, mining, energy, services, and technology. If it is saleable and in demand, then you know that China will likely have the consumer market for it. China knows that and so do many of the top multinational companies, including many in the U.S.

China continues to face surging inflationary pressures despite higher interest rates and loan tightening. The country’s Consumer Price Index (CPI), excluding food, came in at 4.9% in February, which continues to be way too high. As such, China increased its key interest rates for the fourth time since October 2010. I view this as a positive move for the longer-term based on simple economic analysis that higher rates are needed to control runaway prices. The last thing you want is for prices in China to ratchet up at a rapid rate, as it would be detrimental to the economy and would place enormous pressure on the poorer citizens.

I expect interest rates will continue to ratchet higher over the next few quarters in order to rein in the inflation. The Chinese government is already placing a cap on certain food products and subsidizing some of the poorer rural workers.

China’s premier Wen Jiabao said that the government would focus on inflation and property values. Chinese inflation is a real potential threat to growth and stability not only in China, but also globally, for its trading partners. We could see higher-cost Chinese-made goods as prices rise and this will drive up Chinese-made goods sold in the United States.

At these levels, China’s inflation is a problem that needs to be rectified The average inflation rate in China from 1994 to 2010 was 4.25%,so there needs to be some work done here to relieve the inflationary pressures.

Overall, China is on the right path towards developing into a rising world economic power, as well as a basin for incredible and sustained growth across many sectors, including industrial, mining, energy, services, and technology. The reality is that, if it is saleable and in demand, you know that China will likely have the consumer market for it. China knows that and so do many of the top multinational companies, including many in the United States.

For 2011 and 2012, China’s real Gross Domestic Product is estimated to slow marginally to 9.7% in each year, down from over 10% in 2010, according to the Organization for Economic Co-operation and Development (OECD). Economic growth in the Asia-Pacific region is promising, including seven-percent projected growth in the developing Asian economies and a stellar 8.3% in China’s neighbor, India.

Traders in Asia are probably encouraged by the Chinese government’s battle against inflation and to control the rate of growth. China needs to make sure to stay its course and tackle inflation, as rising prices will hurt the majority of the 1.3 billion people living in China who are trying to just get by on a daily basis.

Right now, there are a lot of U.S.-listed Chinese companies that can’t get any respect from the marketplace. Stock picking in this sector has been difficult lately, because the marketplace is suffering from confidence issues. The entire sector has been hit hard, especially related to issues involving accounting and reporting. Institutional investors have been scared off the sector and there is a lot of value around right now.

Consider, for example, a company called Lihua International, Inc. (NASDAQ/LIWA). Here is a growing Chinese enterprise that just reported very good financial results in the fourth quarter, but the stock just can’t see to generate much interest from the Street.

Lihua International is a company that manufactures copper replacement products for China’s magnet and fine-wire market. The company manufactures and distributes lower-cost, high-quality alternatives to pure copper magnet wire, including copper-clad aluminum wire and recycled scrap copper wire. Customers include the consumer electronics, automotive, utility, telecommunications, and specialty cable industries.

According to Lihua International, its revenues for the fourth quarter of 2010 increased 164% to 135.5 million dollars. This compares with revenues of 51.3 million dollars in the fourth quarter of 2009. Management cited continued sales growth in wire products as well as the revenue contribution from a new product, copper anode, as reasons for the sharp increase in revenues. Earnings for the fourth quarter of 2010 were 9.9 million dollars, or $0.33 per share, based on 30 million weighted average diluted shares outstanding. This compares with earnings of 4.2 million dollars, or $0.18 per share, based on just over 24 million weighted average diluted shares outstanding in the fourth quarter of 2009. Lihua International finished the year with approximately 90.6 million dollars in cash (just over $3.00 per share) and about 2.3 million dollars in short-term bank operating lines.

Company management expects the business to achieve non-GAAP earnings growth of between 52.0 million dollars and 54.0 million dollars in 2011, representing year-over-year growth of 30% to 35%, respectively.

If Lihua International were a company operating in the domestic market, the stock would probably be trading at three or four times its current level. I don’t know when it’s going to happen, but the growing Chinese companies that make it through the current shunning from Wall Street should, in my opinion, turn out to be strong wealth creators.

I fully understand that the Chinese economy is a bit like the Wild West. There ain’t much law around, and it’s difficult to enforce regulations and standards in a place with such a large population and an economy at an early stage of modernization. But not all U.S.-listed Chinese companies are frauds and the entire group has taken a hit, because quite a number of short sellers have really played up investor fears.

As a speculative investor, I’d own a basket of U.S.-listed Chinese shares. Like I say, those companies that are profitable and growing (and that come through the current reckoning) should by all rights turn out to be decent investments.

The key in China will be the rapid growth of the country’s middle class. In a recent research finding, Credit Suisse predicted that the household wealth in China will double to $35.0 trillion by around 2015 based on achieving sustainable GDP growth at or near the current growth rate.

The economic analysis is simple. The extra Renminbi means more cash to spend on non-essential goods and services. This includes furniture, real estate, vehicles, and travel.

I have been a big supporter of the Chinese auto sector.

You don’t have to tell General Motors Company (NYSE/GM) to go to China and look for growth opportunities. In fact, you don’t have to tell anyone.

Going out and buying GM would not be my best stock advice, but that is not to say that there are not other opportunities to play the Chinese auto market.

The world’s automakers know that, to grow, you need a presence in China’s auto sector, whether in it’s a venture with a Chinese company or as a standalone manufacturer of vehicles. The auto sector in China remains strong, as the country is the world’s largest auto market, with an estimated 16.5 million vehicles sold in 2010, according to the Chinese Industry Association.

Sales are showing some signs of slowing early in 2011. In the January-February period, vehicle sales were 10% year-over-year to 3.15 million vehicles in China, down from 84% growth a year earlier. While this is a concern, the absolute sales growth in China is still staggering.

General Motors, a rising player in China, reported a 34% year-over-year rise in its February sales to 184,498 vehicles. While good, this was well below the record 268,071 sold in January. GM and its Chinese partners sold 2.35 million vehicles in 2010, well above its U.S. sales.

Yes, there is clearly some slowing in the Chinese auto market, but I view dips as opportunities to buy for those with a longer-term view.

Given that only about 41 in 1,000 Chinese own vehicles, according to some industry pundits, there is clearly ample room for growth, especially as the income levels continue to rise. This fact will drive vehicle sales going forward to the point where China will likely remain the top auto market in the world.

The area of expensive or luxury vehicles is booming in China. The middle class is growing at a staggering pace, with more millionaires being created. When consumers find wealth, a big-ticket item they buy is a vehicle. The richer they become, the more they spend on vehicles. The sale of luxury cars is surging in China, according to auto industry researcher J.D. Power and Associates. The rate is well above what we are seeing in other industrialized countries.

There are numerous ways to play the Chinese auto sector. You can buy an auto company with exposure to China, such as the major global automakers.

Alternatively, you can also buy Chinese auto-parts makers. Some Chinese auto plays that I have covered in the past include Brilliance China Automotive Holdings (OTCBB/BCAHY.PK), China Automotive Systems, Inc. (NASDAQ/CAAS), Wonder Auto Technology, Inc. (NASDAQ/WATG), SORL Auto Parts, Inc. (NASDAQ/SORL), and AutoChina International Limited (NASDAQ/AUTC).

There has been a rise in discussions on the concept of reverse mergers in the media relating to companies in China listing on domestic exchanges. The speculation is that some of the small Chinese stocks debuting on the domestic exchanges, which resulted from reverse mergers, are being investigated for pump and dump schemes, along with questionable reporting. Yes, there will be frauds and misinformation, but my investment advice is to remain patient and not simply go out and dump Chinese stocks. This is my best stock advice to you.

China is on the right path towards developing into a rising world economic power as well as a basin for incredible and sustained growth across many sectors, including industrial, mining, energy, services, and technology. The reality is that, if it is saleable and in demand, then you know that China will likely have the consumer market for it. China knows that and so do many of the other global multinational companies, including many in the United States.

The country is cash-rich. At the end of 2010, China held about $1.16 trillion of U.S. Treasuries, based on information from the U.S. Treasury. The amount held is significant given that the Federal Reserve holds just a bit more at $1.2 trillion.

China had about 1.341 billion people at the end of 2010, according to the National Bureau of Statistics. Think about the sheer size of the country’s middle class, which is mind-boggling and clearly reflects the amazing potential in China. The World Bank estimates that, within five years, there will be 542 million middle-class consumers in China. Yet, that may be conservative, as I have seen top-line estimates at around 700 million.

The groundwork has been laid. The workers are marching in from the farm. And the end goal is to build a world superpower in economics and political influence.

For 2011, China’s Gross Domestic Product (GDP) is estimated to grow by over 10%, according to the Organization for Economic Co-operation and Development (OECD). In fact, economic growth in the Asia Pacific region is promising, including seven-percent projected growth in the developing Asian economies and a stellar 8.3% in China’s neighbor, India. China is working hard on increasing its trade and alliance with India.

And people are spending. Domestic sales in China are predicted to reach $2.1 trillion in 2010, versus $1.8 trillion in 2009, according to the Chinese Academy of Social Sciences.

The current per-capita income in China is just below $4,000 a year, yet it has more than doubled over the past few years and wages are heading higher. With this comes more spending. Consider this: at the present time, only a small fraction of China’s GDP is driven by consumer spending, compared to about 70% in the U.S. China wants to drive consumer spending long-term and this will drive organic domestic GDP growth.

“If you build it, they will come” appears to be the motto in China these days. Just take a look at Beijing and Shanghai and you will notice the commercialism that has sprung up in that country. It was only a few decades ago that China was still closed to outside firms and domestic entrepreneurship. This has changed and the associated growth has been stellar.

Wait another 10 years and I’m sure the country will continue to grow into a much bigger mega-market for goods and services.

China is growing exponentially in many areas. An area that is growing at an incredible rate is the mobile phone sector, where growth is enormous and there are currently more than 842 million users. Think about it. There are more mobile users in China than the population of the United States, the European Union, and Canada combined!

These are exciting times for China’s mobile market, as the regulators, in an effort to increase competitive powers, have decided to allow the operation of three major carriers in China. The adoption of the third generation (3G) and fourth generation (4G) networks will also help to drive additional growth in China’s mobile phone market, as there will be a need for new phones.

China will spend $40.0 billion over the next two years on its new 3G mobile communications networks, according to the Ministry of Industry and Information Technology.

The income demographics support the spending. In a recent research finding, Credit Suisse predicted that the household wealth in China will double to $35.0 trillion by around 2015, based on achieving sustainable GDP growth at or near the current levels. This will allow consumers to spend on more non-essential goods and services such as mobile phones.

The top mobile company in China is China Mobile Limited (NYSE/CHL). With a market cap of around $200 billion, the company is massive. By comparison, AT&T Inc. (NYSE/T) is the largest mobile provider in the U.S., with a market cap of 164 million dollars, and Verizon Communications Inc. (NYSE/VZ) has a market cap of $102 billion.

China Mobile is one of the largest companies in China and would rank high in the U.S. market. It is the market leader and can be considered a “widow” stock for long-term buy-and-hold investors. China Mobile is ranked the top brand in BusinessWeek’s “20 Best China Brands.” The stock pays an annual dividend of $1.64 for a current yield of 3.3%, based on the prevailing stock price of $49.26.

The company has nearly 600 million subscribers, or 70.6% of all mobile users in China. The company is the world’s largest provider of cellular services based on subscribers and has set its sights on expansion outside of China.

Expansion outside of China is also a focus. China Mobile owns Bertrange-Luxembourg-based Millicom International Cellular S.A. (NASDAQ/MICC), a telecom operator with about 8.4 million subscribers and 17 mobile operations in 16 countries, including: El Salvador, Guatemala, and Honduras in Central America; Bolivia and Paraguay in South America; Chad, the Democratic Republic of Congo, Ghana, Mauritius, Senegal, Sierra Leone, and Tanzania in Africa; Pakistan and Sri Lanka in South Asia; and Cambodia and Laos in Southeast Asia.

Going forward, China Mobile will benefit from its 3G and 4G telecommunications technology license in China.

You can also look at the makers of mobile accessories and builders of telecommunication networks in China. The reality is that the Chinese mobile market is massive and worth a look.

I have always been a China bull, even in spite of the market relapse in 2010. Yes, the Shanghai Composite Index (SCI) in China had an off year in 2010, losing 14.31%. And, yes, the SCI is lagging the U.S. indices this year. However, its loss is down to 0.32% to start the key Lunar New Year holiday in China, when hundreds of millions of people travel back home for a break.

In spite of continued strong advances in China’s Gross Domestic Product (GDP), the country is facing some problems with surging inflation and real estate prices. Prior to the holiday break, China Premier Wen Jiabao said that the government would focus on inflation and property values.

Chinese inflation is a real potential threat to growth and stability not only in China, but also globally with its trading partners. We could see higher-cost Chinese-made goods.

At over five percent, China’s inflation is a problem that needs to be rectified. The average inflation rate in China from 1994 to 2010 was 4.25%, so there needs to be some work done here to relieve the inflationary pressures.

Yet, overall, China is on the right path towards developing into a rising world economic power as well as a basin for incredible and sustained growth across many sectors including industrial, mining, energy, services, and technology. The reality is that if it is saleable and in demand, then you know that China will likely have the consumer market for it. China knows that and so do many of the top multinational companies, including many in the United States.

Just think about the sheer size of the country’s middle class—it is mind-boggling and clearly reflects the amazing potential in China. The World Bank estimates that, within five years, there will be 542 million middle-class consumers in China. However, this may be conservative, as I have seen top-line estimates at around 700 million.

For 2010 and 2011, China’s GDP is estimated to grow by over 10%, according to the Organization for Economic Co-operation and Development (OECD). In fact, economic growth in the Asia-Pacific region is promising, including seven-percent projected growth in the developing Asian economies and a stellar 8.3% in China’s neighbor, India. China is working hard on increasing its trade and alliance with India.

The current per-capita income in China is just below $4,000 a year, yet it has more than doubled over the past few years, and wages are heading higher. Moreover, we are seeing more strikes in China, which is new to the country and something that would never have happened only a few years ago. This trend reflects the demand for higher wages and prosperity—and with this will come more spending.

It’s really simple. Consider this: at the present time, only a small fraction of China’s GDP is driven by consumer spending compared to about 70% in the U.S. China wants to drive consumer spending long-term and this will drive organic domestic GDP growth.

The moral of the story is that if you want to make above-average returns, you will need to have some capital working for you in China via direct stock ownership, U.S. multinationals, mutual funds, or Exchange Traded Funds.

China is continuing to expand at rates well beyond the world’s other industrialized powers.

The Organization for Economic Cooperation and Development (OECD) predicts that China will grow its economy by 9.7% in 2011 and 2012, which, while lower than the previous rates, is still well above the global average of 4.2% and 4.6% in 2011 and 2012, respectively. In the third quarter, China’s GDP increased 9.6%.

I view the growth of China over the past decade as akin to the Industrial Revolution that started in the United Kingdom in the 18th century and spread to Europe, the U.S., and globally.

Yet, with all the growth come rising prices or inflation. The consumer price index (CPI) was at a sizzling 5.1% in November, up from 4.4% in October. China has not seen inflation at these levels in over 25 years. The target is three percent, so inflation is clearly a problem that is serious and will require higher interest rates down the road.

Prices across the board have been rising in the country. Food prices are surging across the country due to the higher commodity prices. In October, food prices surged 11.7%.

The reality is that, when a country is growing at the rate China has been, it is not unreasonable to see inflation. The country is placing a cap on essential foods such as cooking oils to try to help the many poor people.

Real estate values, while rising at a lower rate, continue to move higher despite the government’s efforts to tighten the flow of money via higher bank reserve ratios. China increased the bank’s reserve ratio to 18.5%, representing the fifth increase in 2010 and the third in over a month. This does not appear to be working and the government may need to increase interest rates to dampen the lending demand.

China estimates that it has targeted about US$1.05 trillion in bank lending in 2011, which still appears to be relatively high, but lower than the expected $1.35 trillion in 2010. Some economists feel that the lending should be in the US$975-billion to US$1.0-trillion range for 2011.

In what I view as a bold move, China decided to increase the top range of its inflation target to four percent from the previous three percent. Imagine the Federal Reserve doing this!

In my view, this strategy indicates to me that the Chinese policy makers there are less inclined to tackle surging inflation via higher interest rates; they would rather increase the target to absorb it. Yet, with inflation surging to a whopping 5.1% in November, the government has much work ahead of it.

Nonetheless, my gut tells me that higher interest rates will likely be around the corner in China.

It doesn’t take a rocket scientist to figure out what businesses might be doing great in China. It would be nice if there were a selection of domestic growth opportunities, but there’s no denying the economic machine that is China. In that country, the entrepreneurial drive and the economies of scale make the whole thing work.

One company that’s been a great success in China is VanceInfo Technologies Inc. (NYSE/VIT). This information technology (IT) firm is a software outsourcing company. We always hear about outsourcing and this company is one of the best at it, developing software for customers in China, Japan, North America, and Europe. Corporations employ VanceInfo to develop enterprise software applications, because they provide a quality service at a lower price. With lower costs for labor and expertise, it’s no surprise that a company like this is growing like mad. It’s the whole economies of scale thing at work and it makes it tough for domestic software firms to compete.

In the third quarter this year, VanceInfo generated record revenues of 55.9 million dollars, up a solid 39% from revenues of 40.2 million dollars generated in the comparable quarter. The company cited an across-the-board improvement in sales at all its service lines and in all geographic markets. Revenues from Greater China (which include mainland China, Hong Kong, and Taiwan) represented about 44% of the total. The rest came from customers in the U.S., Europe and Japan.

Earnings during the third quarter came in at $7.7 million for a gain of 34% over last year. The company finished the quarter with 87.0 million dollars in cash and management increased its 2010 full-year sales guidance to between 208.5 million dollars and 209.5 million dollars, representing a 41% increase over 2009.

Also not surprising with this kind of growth is VanceInfo’s stock price performance. In 2008, this stock didn’t do anything, partially due to a correction in domestic Chinese equities, as well as the financial crisis in the U.S. But, from a low of under $5.00 a share in early 2009, this stock has been on fire and is now trading close to a record-high share price of $41.00. That’s almost a 10-bagger in just under two years.

Not only this, but the company’s been able to sell shares in itself and the stock still stays strong. VanceInfo just sold 2.53 million American Depositary Shares to finance its expansion.

Even if you aren’t a shareholder in VanceInfo, it’s worth your time to review the stock and the wealth it has created. When you get close to a tenfold return on your investment, it’s a fortune-making opportunity. It also reiterates in my mind the attractiveness of surveying the marketplace for stocks trading around their 52-week lows. Among all the failures, there are always diamonds in the rough.

The key in China will be the rapid growth of the country’s middle class. In a recent research finding, Credit Suisse predicted that the household wealth in China will double to $35.0 trillion by around 2015, based on achieving sustainable GDP growth at or near the current growth rate.

The extra Renminbi means more cash to spend on non-essential goods and services. This includes furniture, real estate, vehicles, and travel.

I have been a big supporter of the Chinese auto sector. You don’t have to tell General Motors Corporation (NYSE/GM) to go to China and look for growth opportunities. In fact, you don’t have to tell anyone.

The world’s automakers know that, to grow, you need to have a presence in China’s auto sector, whether in a venture with a Chinese company or as a stand-alone manufacturer of vehicles. The auto sector in China remains strong, as the country is the world’s largest auto market, with an estimated 16.5 million vehicles this year, according to the Chinese industry association. Foreign auto companies looking for growth are expanding in China.

General Motors, a rising player in China, reported an 11% year-over-year rise in its November sales to a record monthly 196,990 vehicles. GM and its Chinese partners have sold over two million vehicles in the first 11 months of 2010, well above the company’s U.S. sales. 

Germany-based Volkswagen said it would invest about $8.0 billion in China over the next three years. Volkswagen is aiming for sales of two million vehicles by 2018. Japan-based Nissan Motor wants to sell 900,000 vehicles annually by 2012, according to Bloomberg.

And, with only about 41 in 1,000 Chinese owning a vehicle according to some industry pundits, there is clearly ample room for growth, especially as the income levels continue to rise. This trend will continue to drive vehicle sales going forward, to the point where China will likely remain the top auto market in the world.

The area of expensive or luxury vehicles is also booming in China. The middle class is growing at a staggering pace, with more millionaires being created. When consumers find wealth, a big-ticket item they buy is a vehicle. The richer they become, the more they spend on vehicles. The sale of luxury cars is surging in China, according to auto industry researcher J.D. Power and Associates. The rate is well above what we are seeing in other industrialized countries.

There are numerous ways to play the Chinese auto sector. You can buy an auto company with exposure to China, such as the major global automakers. Alternatively, you can also buy Chinese auto-parts makers. Some Chinese auto plays that I have covered in the past include Brilliance China Automotive Holdings (OTCBB/BCAHY.PK), China Automotive Systems Inc. (NASDAQ/CAAS), Wonder Auto Technology, Inc. (NASDAQ/WATG), SORL Auto Parts, Inc. (NASDAQ/SORL), and AutoChina International Limited (NASDAQ/AUTC).

The sovereign debt issue has to be put to bed for stock prices to really accelerate in a meaningful way. It may take fourth-quarter earnings season to get investors distracted from the issue, but it has to be dealt with in order for equities to begin a sustainable new trend. This is a lingering issue and will remain a significant risk to global capital markets over the next few years. Governments just have too much debt and large, annual deficits for any investor to disregard the issue. Someday it will become a currency breaking event if not dealt with.

In this equity market, it’s pretty clear that China is running the show now. By this I mean that domestic and foreign equity markets are trading off China’s economic data. That country’s stream of news is now a leading factor shaping domestic investor sentiment and it’s now affecting day-to-day trading action.

One of the things we have to keep in mind as investors is that the stock market always likes to speculate on the future. This means that stock prices can go up, even when unemployment goes up or housing prices go down. This is what’s happening right now. The key going forward is corporate earnings and the outlook for corporate earnings in 2011. Currently, the outlook is quite favorable and many large-cap businesses cited improving business conditions in the third quarter.

In the absence of earnings reports, the market does tend to overemphasize other news, because it has no choice. But, the most important news we can go on as investors is what corporations say about their businesses. The investing marketplace is a fickle bunch and memories are very short. Domestically, all you really have to do is listen to what the railroad companies are saying and you’ll have a great sense as to the current state of things.

The stock market can experience solid near-term uptrends in an environment that’s full of confidence-sapping investment risk. There’s a reason why individual investor participation is low in equities and it’s that there’s no real certainty to go on. There’s no defined trend to latch onto (other than gold) and individual investors are rightly sitting on the sidelines.

In the majority of cases, all the action that European leaders have taken to get a handle on the sovereign debt crisis has been met with selling by large, institutional investors. I wouldn’t be surprised at all that a whole new set of rules is created over the next few years to govern the euro currency and a new central bank for the entire block. Without it, the currency may very well come apart and create havoc in global capital markets.

The majority of the news is on Ireland and the fear that the debt issues there could spread throughout Europe and further dampen growth there.

But I have talked enough about Europe and will swing my focus to China—my favorite growth region for growth investors looking to increase portfolio returns.

The numbers don’t lie.

The Organization for Economic Cooperation and Development (OECD) predicts that China will grow its economy by 9.7% in 2011 and 2012, which, while lower than the previous rates, is well above the global average of 4.2% and 4.6% in 2011 and 2012, respectively. In the third quarter, China’s GDP increased 9.6% on higher inflation.

Given the high inflation of 4.4% in October, which is above the country’s top limit of 3.0%, China wants to slow down its growth to between 8.0% and 9.0% over the next five years and focus on quality, according to South China Morning Post.

The country’s foreign direct investment (FDI) surged 7.9% in October to $7.66 billion, according to the South China Morning Post. FDI in the first 10 months of the year amounted to $82.0 billion, up 15.7% versus the same period in 2009.

In my view, the key in China will continue to be dependent on the rapid growth of the country’s middle class. In a recent research finding, Credit Suisse predicted that the household wealth in China will double to $35.0 trillion by around 2015, based on achieving sustainable GDP growth at or near the current levels.

There are many areas of growth in China; whether we’re talking commodities, industrial, auto, technology, travel, or education, the list is broad.

Take a look at China’s cell phone sector, with over 770 million users. That’s nearly more than the population of the United States, the European Union, and Canada combined!

These are exciting times for China’s telecommunications market, as the regulators, in an effort to increase competitive powers, decided to allow the operation of three major carriers in China as of September 2008. The introduction of the next generation 3G and 4G networks will also help to drive additional growth in China’s cell phone market, as there will be a need for new phones. China will spend $40.0 billion over the next two years on its new third-generational (3G) mobile communications networks, according to the Ministry of Industry and Information Technology.

The top mobile company in China is China Mobile Limited (NYSE/CHL). With market capitalization in excess of $200 billion, the company is massive. For instance by comparison, AT&T Inc. (NYSE/T) is the largest mobile provider in the U.S., with market cap of $166 billion. Verizon Communications Inc. (NYSE/VZ) has market cap of $92.0 billion.

Chinese stocks listed on both U.S. exchanges and across the Pacific in China are again under some selling pressure, after the benchmark Shanghai Composite Index (SCI) failed to hold above the key 3,000 level. At one point, the SCI was down only about four percent for the year, but it has since retrenched back to a 12% loss.

The volatility in Chinese stocks and the uncertainties with the Chinese government make it nerve-wracking, yet I continue to be bullish on China and take opportunities to buy and accumulate on dips in Chinese stocks. Longer-term, you will not be disappointed.

Are we seeing signs of the perfect storm arising in the stock markets? Not only do we have growth issues in the United States, but Europe and Asia continue to pose issues. I’m not saying the good times are over, but, for now, the market risk is higher. The inability of the major stock indices to break back to the previous highs was a red flag in my view.

The current market action indicates caution and uncertainty. The one-day rally on November 18 appears to have been an isolated event based on the market action I’m seeing in the two days following. The DOW was down over 130 points on Monday before rallying in late day trading, but the selling bias continued on Tuesday, with the DOW down over 150 points in the morning to as low as 11,017, and breaching its 50-day moving average (MA) of 11,021.

Markets had rallied on November 18 on the news of a potential remedy to the debt situation in Ireland, which will be asking for about $137 billion in bailout funds to try to avoid a debt collapse that could have a domino effect on the European Union. As I have said, the expected solution in Ireland is encouraging, but it may be masking a much bigger issue in Europe as far as the mounting debt and deficit levels are concerned.

While the capital infusion will help remove some unwanted uncertainty from the market, I feel the remedy will merely disguise a much more significant issue in Europe in relation to the region’s mounting debt and deficit levels in several of the weaker countries. The issue I see is that problems in one country impact Europe and take away from achieving stronger growth due to the need to rescue a member. This cannot be good for Europe, which is struggling to grow.

Also watch the tighter lending in China and the country’s desire to rein in growth, which would impact other global economies. The current concerns in China continue to be regarding the high, bubble-like real estate prices, but consumer inflation at 4.4% in October is also a serious problem that needs to be dealt with.

The Organization for Economic Cooperation and Development (OECD) predicts that China will grow its economy by 9.7% in 2011 and 2012, which, while lower than the previous rates, is still well above the global average of 4.2% and 4.6% in 2011 and 2012, respectively. In the third quarter, the country’s GDP increased 9.6% on higher inflation.

China wants to slow down its growth to between eight percent and nine percent over the next five years and focus on quality, according to South China Morning Post. The country’s foreign direct investment (FDI) surged 7.9% in October to $7.66 billion, according to the South China Morning Post. FDI in the first 10 months of the year amounted to $82.0 billion, up 15.7% versus the same period in 2009.

The apparent pursue of slower growth in China is not what the other global economies want to hear, as it will also impact economic renewal in countries that trade with China, and there are many.

My advice is to look at market weakness to accumulate shares. Also take some profits and consider using Put options to hedge against downside weakness.

China overtook Japan as the world’s second largest economy in the second quarter and, in about 15 years China is expected by pundits to become the world’s largest economy. In the second quarter, China reported GDP of $1.34 trillion versus $1.29 trillion for Japan, but far lower than the $15.0 trillion GDP in the United States. China is experiencing continued growth in its per-capita income and spending. Consumer spending only accounts for less than 20% of China’s GDP, compared to around 70% in the U.S. The Chinese need to spend and this is what domestic and foreign companies are hoping for to help drive some growth.

Clearly, in the emerging markets of Asia, it has become a tale of two cities. While China continues to report double-digit GDP growth despite increased concerns of some slowing, Japan reported a weak 0.1% rise in its second -quarter GDP and continues to be impacted by decades of stagnant growth.

In reality, while Japan has faltered over the past two decades, China has used the opportunity to put itsmassive cheap labor workforce to use and create colossal manufacturing capacity for the world’s manufacturers looking for cheap labor and lower costs to produce goods.

As we said, China’s GDP is predicted to slow to the high single digits. The country’s GDP is pegged at 9.2% in the third quarter on dwindling stimulus, according to The State Information Center. China could see two straight quarters of declining GDP, albeit the growth is still far ahead of the U.S. and Europe. In the first quarter, China reported impressive GDP growth of 11.9%, and 10.3% in the second quarter. Pundits estimate GDP growth of eight percent at the end of 2010.

Evidence of slowing in China was demonstrated by the slowest increase in industrial output in July of 13.4% year-over-year and a slower rate of Foreign Direct Investment (FDI) in July. The FDI still grew at a 26.2% year-over-year at $6.92 billion in July, but well off from $12.5 billion in June.

China is also working on reining in speculative loans that have driven up property prices to bubble-like conditions. The fear is that a real estate collapse could wreak havoc on the Chinese banks. While property prices jumped 10.3% in July, its 14th straight month of gains, the increase was slower.

For some, the reality of playing the Chinese capital markets involves excessive political and economic risk. However, as we have said, you need to be well-diversified, which would enable you to play some Chinese growth stocks, especially those of the small-cap variety.

Our Chinese stock recommendations, while losing some ground, continue to show some strong gains. We remain long-term bullish on China, but you should watch for the short-term volatility.

On the chart, the Shanghai Composite Index (SCI) rallied after declining to below 2,350 in early July. The chart looks more positive now than the same time last month. Since then, the SCI has broken above its 20-day moving average (MA) of 2,636 and 50-day MA of 2,550 on a rising MACD. The 20-day MA has also broken above the 50-day MA, which is bullish, but remains well below the 200-day MA of 2,912. The SCI is in a sideways channel between 2,575 and 2,700. A strong break above could drive the index towards the 200-day MA.

It continues to be risky investing in Chinese stocks, but we know that, in the longer term, patience will pay off for us. We continue to favor China for growth investors who have long-term views.

There have been some decent trades lately in the equity market. The action isn’t great, but there’s been some good price action related to earnings news from U.S.-listed Chinese stocks.

This is a group that’s worth watching now, because there is value in this sector. With a lot of these companies, those that are profitable have a tendency to be highly profitable and valuations for a number of these businesses are attractive. The trading action is nowhere near as robust as was the case a few years ago. But, despite all the headlines about China, there remains significant growth in that economy for businesses to exploit.

If you want to do yourself a favor, put together a list of all the U.S.-listed Chinese stocks that recently hit new 52-week lows. I guarantee you’ll find some attractive businesses in that list. The thing with this group is that the trading action is event-driven. This is especially the case now, because domestic Chinese equities are in the doldrums. You can’t know when some big corporate development is going to happen, but you do know when earnings are going to be reported. Trading U.S.-listed Chinese stocks around earning news is a good strategy for speculators. The returns might be modest, but these stocks can also gap up nicely as well. Don’t forget; it is a bear market for stocks.

Right now, there’s really no point in being an equity investor, with the exception of gold stocks. I think you’re better off as a near-term trader, playing the news. There’s just too much that can go wrong with the economic data. Just look at the news from the Fed. Sentiment in this market is changing on a dime.

Now that second-quarter earnings season is over, all the equity market has left to trade on is global economic news. While it never used to be this way, China’s economic reports are affecting domestic equities. I still have a tough time dealing with this reality considering how fundamentally different the U.S and Chinese economies are. But, if that’s the way the market wants it, then there’s no point in ignoring it.

No doubt, equity investors are desperate for growth and they are willing to look anywhere to find it. There is growth in the mining business and there is growth in China. The key, of course, is always the risks.

07/21/10 — China may be the most significant growth market in the world, but there are some real issues that need to be addressed or there could be further weakness going forward.

There are increasing signs of a potential slowdown in China. There have been downward revisions in the country’s Gross Domestic Product (GDP). The People’s Bank of China suggested that GDP could slow to two percent to three percent in the first half. The country’s purchasing managers’ index, similar to the gauge used in the U.S., fell to 52.1 in June from 53.9 in May, while the rate of the country’s crude-oil refining output slowed in June.

A decline in infrastructure spending in China will impact GDP, yet there continues to be new spending programs aimed at developing the previously overlooked western regions in China. The country’s central government will invest over $100 billion across 23 new infrastructure projects in western China spreading to Inner Mongolia in the west. Projects include railways, roads, airports, coal mines, nuclear power stations, and power grids.

In spite of the potential slowing, China continues to grow well above other industrialized countries in both Europe and North America. The Organization for Economic Co-operation and Development (OECD) predicts that China’s GDP will rise over 11% this year, but will slow to over 10% in 2011. These are impressive growth metrics, however you look at them.

And, if all pans out, China could become the world’s biggest manufacturing country in 2011 based on output and surpass the United States, according to IHS Global Insight. The research showed that the U.S. is accounting for about 19.9% of global manufacturing output in 2009, compared to a close 18.6% in China.

We all sense the move by China to the position of top dog will inevitably take place, like it has in the areas of Internet users, auto sales, and cell phone users

So, while it remains a frustrating time for holders of U.S. and Canadian-listed Chinese stocks, I remain long-term confident and bullish on China despite the short-term risk. Yes there will be some rough sailing in the short term, but you would expect this. The key in my view is to look at companies that you like and accumulate positions on market weakness. This may be an initial position or dollar cost averaging. The fact is that Chinese companies continue to report excellent operating results and growth, but have suffered due to the issues in Europe and China.

In my view, the risk is much higher now. The key is patience to withstand the market jolts and believing in the long-term prospects of China.

— “Ahead of the Street” Column, by Mitchell Clark, B. Comm.

It’s pretty difficult to come up with a solid reason why the stock market is going up right now. There is earnings optimism among large-cap companies of course, and I suppose that big institutional investors don’t really have anything else to do but buy stocks. There’s no other mandate for the vast majority of mutual funds.

I view Dow 11,000 as basically being a full recovery from the financial crisis. In 2007, the Dow got up to the 14,000 level, but was really ahead of itself in terms of price relative to earnings. When we get to 11,000, a solid consolidation around this level would be a healthy development for the market. I think we can tick higher yet if we don’t get sideswiped by another crisis of confidence in global capital markets.

Going forward, we have to keep a close eye on what happens in China. That country now has the financial strength to affect global markets, and any major changes to expectations for China’s growth would immediately hurt domestic investor sentiment. China has a lot going for it of course, but with growing power comes growing responsibility. So, if the bubble were to burst, rather than be deflated slowly, the rest of the world would be in trouble.

A big part of China’s story is the country’s voracious demand for commodities. If you haven’t noticed, Chinese companies have been buying up a number of global precious metals producers in order to guarantee the long-term supply of raw materials. We’re also seeing significant commodity price strength in items like sugar, coffee and copper, with gold and silver staying relatively strong at current levels. All this price strength is due to increasing demand from China and other Asian countries, combined with static levels of supply. This is definitely an inflationary signal for the future.

One of the best ways to follow the equity market action in China is to watch the iShares FTSE/Xinhua China 25 Index (NYSE/FXI). This highly liquid U.S. dollar exchange traded fund mimics the FTSE/Xinhua China 25 Index, which represents 25 of the most liquid Chinese companies, all of which trade on the Hong Kong Stock Exchange. A lot of these large-cap companies are names you might have heard before. They include PetroChina, China Construction Bank, China Telecom, China Mobile and Industrial & Commercial Bank of China, to name a few. I like to follow this index on a weekly basis, because it gives me a good sense as to what is happening in the Chinese equity market.

Just recently, China approved the trading of its own stock market futures contracts. On April 16, Chinese stock futures will begin trading on the Shanghai and Shenzhen stock exchanges and this represents a real maturation for the Chinese equity market.

If you want to know what’s happening with Chinese stocks, follow FXI on the New York Stock Exchange. If you want to know what’s happening with China’s Main Street economy, follow China Agritech, Inc. (NASDAQ/CAGC), E-House (China) Holdings Ltd. (NYSE/EJ), and China Automotive Systems, Inc. (NASDAQ/CAAS) on U.S. stock exchanges. Make no mistake; the prices of food staples like coffee and sugar are going up for a reason — demand exceeds supply. The inflation storm is on the horizon.

— “The Financial World According to Inya” Column by Inya Ivkovic, MA

One could say that China does not respond well to pressure, especially if the pressure is coming from the U.S. and if it is about finally letting the yuan exchange rate float freely, or as freely as China is capable of letting it. How does China typically respond? Let’s just say that its typical response led to the rift between the country’s central bankers and politicians deepening yesterday.

When two new kids on China’s central bank’s block called for allowing the yuan to continue on its path of measured appreciation against the U.S. dollar, the Commerce Minister Chen Deming hit them with a dire prophesy that, if further appreciation were to be allowed, China’s trade surplus with the U.S. would still be the height and width of Mount Everest, providing little to no help on the front of balancing export receivables and import payables.

The only problem is that the clock is ticking towards April 15, when the U.S. Treasury is supposed to make up its mind whether China is manipulating its currency on purpose to keep a competitive advantage over its exports and to keep its artificially created superior status in global markets. As my 19-year-old son would put it, “Duh!” Regardless of what some may think is obvious and what is not, and if the U.S. Treasury rules China’s foreign exchange policies are indeed manipulative, the next step will likely be for the U.S. legislators to introduce laws that would impose tariffs on Chinese goods. The only thing that might prevent the “Buy American” sanctions against China would be China allowing the yuan to go up.

Of course, neither side can act gracefully, holding their respective guns against each other’s heads. On one side is the U.S. and what China calls its unwarranted threats of tariffs, and on the other is China and what the U.S. calls manipulative foreign exchange and international trade policies. Who is right and who is wrong? The way I see it, neither side is either right or wrong…absolutely. As it so often happens, the truth is in the eye of the beholder.

To be fair to China, it is walking a very fine line between a rock and a hard place. It is still an emerging economy that needs to grow to claim its place in the world. One way to do this is through exports, thus channeling its internal macroeconomics onto the world. To keep its exports competitive, foreign exchange has to be favorable, which means keeping the yuan as low as practicable against the U.S. dollar (to which the yuan is pegged). However, China’s central bank needs a stronger yuan, so it can have one more tool in its shed to handle various economic tremors and/or quakes, regardless of whether they’re already experienced or are still looming ahead.

All of this is happening against the backdrop of China being the world’s largest holder of U.S. Treasuries, which means that, while the U.S. needs to borrow money from the world’s powerful lender, China needs the U.S. to keep on buying its cheap products so it can fund the U.S. national debt. It is a fine line, indeed, and, since the 1970s, China has not walked it alone.

Over the years, tough rhetoric from Washington towards China has yielded little to no results. If China decides to loosen its grip on the yuan, it won’t happen because Washington has said so. In fact, China’s yielding on the currency front to global economic or political pressures is not expected at all, apart from allowing only limited yuan appreciation on the premise that signs of economic recovery are holding and Chinese exports are not jeopardized. For the time being, China is showing little interest in promoting flexible monetary policy, other than on an academic level.

— “Calling the Trend” Column, by George Leong, B. Comm.

The benchmark Shanghai Composite Index (SCI) continues to hover around 3,000, but is down about eight percent this year. The recent correction was driven by concerns of a real estate and credit bubble forming in China and the decision of the Chinese government to halt lending by banks. The action is feared to hurt economic growth in China, but, at the same time, it may be the right move to avoid a financial collapse in the country. I feel that the fact the SCI is holding at 3,000 reflects the support for the move.  

China is continuing to grow well beyond the growth rates in North America and Europe. Yet with the growth comes inflation. The Chinese government knows this and is staging its own battle to combat uncontrollable growth. 

China wants to see its economic engine surge forward, but at the same time we must understand that, without control, it can become sort of like a runaway train. Government officials may force the People’s Bank of China to increase interest rates there in order to curb the growth.

The country is targeting GDP growth of eight percent for this year, which is below some estimates that peg GDP growth at over nine percent. The key is to maintain growth without causing problems with inflation and surging property values. “Improving people’s well-being is the fundamental goal of economic development,” said Wen Jiabao in a report to the National People’s Congress.

The country’s manufacturing sector remains strong and will continue to drive China’s economy forward over the next decade. China’s Purchasing Managers’ Index (PMI) came in at a seasonally-adjusted 52.0 in February, below the estimate and the reading in January, but continuing to point to expansion.

The problem in China remains the threat of an asset bubble, but it is only a threat. The International Monetary Fund recently suggested that there is no serious risk of asset bubbles and that China could see GDP growth of 10% in 2010, according to The Wall Street Journal. 

China does not want to risk major impact to its growth and would rather slow it down a bit to avoid a potential meltdown. But with consumer prices surging 2.7% in February from a 1.5% increase in January, there is a fear of inflation and uncontrollable growth. On the producer side, the producer price index increased 5.4% in February from 4.3% in January. The readings are somewhat high, but the CPI is still within the target of three percent set by the Chinese government. We could see higher interest rates if inflation continues to grow. The People’s Bank of China said that it would “…gradually guide monetary conditions back to normal levels from the counter-crisis mode” in its quarterly monetary policy report, according to Bloomberg.

And, unlike in the United States, property prices are surging in China, up 10.7% year-over-year in February, according to the National Bureau of Statistics. On a positive note, to avoid a housing bubble, the sales volume of residential properties fell to 37% in January and February, down from the 50% growth rates at the end of 2009.

The bottom line is that playing the Chinese capital markets involves excessive political and economic risk. Yet, as I have said, you need to be well-diversified, so this would enable you to play some Chinese growth stocks, especially those of the small-cap variety.