China is the second-largest economy in the world and is continuing to roll along at a nice pace. The International Monetary Fund (IMF) recently downgraded U.S. GDP growth to 2.3% this year from the previous 2.9% but concurrently raised China’s GDP growth to 9.9% this year—up from the previous 9.7%. This is why you need money in China.

The results reflect the significant growth difference between China and the U.S. and Europe. China is continuing to roll along at high speeds, but it must be controlled.

And while the growth is impressive, 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, and we know that spending is spreading like wildfire in China.

In April, the country’s consumer price index (CPI) was 5.3%—slightly lower than its March 32-month high of 5.4%, but still high by any standard. The CPI acts as a good way to gauge inflation. The average inflation rate in China from 1994 to 2010 was 4.3%, 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, so we expect more tightening via either higher interest rates or higher bank-reserve requirements in China (or both).

Moreover a report that was just released indicates that real-estate values in China continue to rise in many of the tier-one and tier-two cities. This will force the government to look at further tightening, as some of the rise is due to speculative buying.

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, since rising prices will hurt the majority of the 1.3 billion people living in China who are just trying to get by on a daily basis.

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

Overall, China is on the right path toward 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 a consumer market for it. China knows that, and so do many of the top multinational companies, including many in the U.S.

Chinese stocks are again the focus of increased attention and speculative trading. In China, the benchmark Shanghai Composite Index (SCI) had been rallying. It’s up over nine percent this year, which is encouraging given that the index lost 14.31% in 2010.

An area that we continue to see some action is in Chinese initial public offerings (IPOs), but to a lesser degree due to the negative publicity of Chinese reverse mergers.

There are so many Chinese penny stocks and micro-cap stocks waiting to cross the ocean in search of U.S. dollars and exposure. The key to successful stock picking in this area is research.

In a report compiled by legal firm Pillsbury, over 30% of the 200 companies interviewed said they would prefer to seek a listing in the U.S. About 45% preferred Hong Kong or China.

We have seen numerous successful Chinese IPOs over the past two quarters.

In December 2010, Chinese online video superstar Youku.com Inc. (NASDAQ/YOKU), which was subscribed at $12.80, surged to close at $33.44 on its first day of trading, up a staggering 161% in a day! Fast forward a few months and YOKU is trading at over $65.00, up over 400%. The attraction here is that the company has a 40% penetration rate in China’s massive Internet market in which there are over 420 million people. Can you hear the cash register?

In my view, I feel that the buying frenzy is somewhat optimistic. Another example is Chinese online real estate portal SouFun Holdings Ltd. (NASDAQ/SFUN), which debuted at $67.00 on September 17 and surged to nearly $100.00 before initiating a four-for-one stock split on February 18. The stock is holding at over $23.00, or $92.00 on a pre-split basis.

An interesting company that is set to debut here is China-based Zenix Auto International, a manufacturer of commercial vehicle wheels for China’s aftermarket and original equipment manufacturer (OEM) markets along with over 30 countries worldwide. Estimates peg the company’s market share at 16.6% in 2009, according to Frost & Sullivan. For the year to December 31, 2010, revenues came in at $485 million, up 50% year-over-year. Annual earnings were $50.0 million, or $0.31 per diluted share. The lead underwriter is Morgan Stanley.

The key to trading Chinese IPOs is to wait for several weeks and watch to see if the stock settles down in a set buying range. Buying on the first day can generate some impressive returns, as we saw with Youku.com and SouFun, but it also makes you vulnerable to profit-taking, especially if you are not one of the lucky clients who did not get in near the IPO price.

The rule of thumb is being patient: follow the stock and wait for weakness to buy. This is only fitting, as patience has been a critical trait in China for thousands of years.

What a decade it’s been.

We witnessed a terrorist attack on American soil (Twin Towers, September 2001). We’ve experienced the biggest real estate boom market we’ve ever seen (2003-2005) and the bust of that market (2007 to today). It’s been a decade of interest rates at record lows. And we’re in the biggest bear market rally in stocks since 1937.

But, through it all…stocks have gone nowhere in value.

This morning, the S&P 500 opens the trading day at 1,328—the same level it traded at in March of 2001. The stock market is at the same level today that it was 10 years ago despite interest rates falling “like a rock” since 2001.

The majority of Americans who buy mutual funds in their retirement funds with the hope of seeing that money grow through the years have followed the worst possible strategy. “Buy and hold” for the long term, I’m not sure who made up that motto, but it was terrible advice to follow over the past 10 years.

My concern: if the stock market can’t rise during a decade of dropping interest rates, what happens to the stock market over the next 10 years as interest rates rise? Where will stocks be in 2021? Not a pretty thought.

Over the past decade, the price of gold bullion has increased 427%. Imagine the next 10 years, when we will see a collapsing U.S. dollar, rising inflation, rising interest rates, and China coming on par in economic strength to the U.S.

Where will gold bullion be in 2021? My bet: a lot higher in price than it trades at today.

Michael’s Personal Notes:

Politicians, they’re all the same.

You’ve undoubtedly heard that the government will reach its maximum borrowing limit of $14.29 trillion in the next five weeks. The U.S. is the only major industrialized country that limits its debt by law. Whenever the government needs to borrow more than it’s allowed to, it must approach Congress to increase that debt ceiling.

The Obama administration is now asking Congress to increase the maximum amount of money that the government can borrow, past the current $14.29-trillion limit. Congress is balking, saying that the government has to get spending under control. The Obama people are saying that it would be irresponsible for the government not to increase its borrowing limit.

Back in 1986, President Bush requested that Congress increase the borrowing limit of the government. A young senator at that time voted against the government increasing its debt limit. That senator’s name…Barack Obama.

Where the Market Stands:

The Dow Jones Industrial Average opens this week up 7.1% for 2011. I continue to believe that the bear market rally that started in March of 2009 is alive and well. In the immediate term, stocks could rise even more, maybe another five percent to 10%, but the rally is getting tired. Short-term, my outlook for stocks remains negative.

What He Said:

“As investors, we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American-grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: Recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.

We have been hearing how the housing market is improving and how it is time to jump in and buy housing stocks. Sounds optimistic, but do not be fooled by the cheerleading. In my view, housing continues to be a cesspool for capital. Yes the housing market is better than it was a year ago, but not to the degree where I would advise jumping in and buying—of course, unless you are looking to buy real estate, which remains at distressed prices.

Want a condominium in the beautiful Tampa-Clearwater area of Florida? I just did a search and over 3,000 available units popped up for sale. Many are below $100,000. A friend of mine recently bought a nice oceanfront condo in Boca Raton for $130,000. A few years back, this same condo would have cost you over three times this amount.

What I’m getting at is that you should avoid housing stocks, but there are clearly some bargains in buying physical real estate in many of the popular destinations in the country.

If you are a buyer, the current housing market continue to afford good opportunities, whether as a principal residence or as an investment property. If you are looking for beachfront housing in Florida, there may not be a better time to buy than now. Then again, the housing market remains in a flux driven by high unemployment and record foreclosures.

The S&P/Case-Shiller Home Price Index of 20 major metropolitan areas in the United States continues to show declines. In December, the index fell one percent from November, with prices declining in 19 of the 20 cities in the index, with the exception of Washington, DC. In fact, 11 of the cities in the index are at the lowest levels since 2006 and 2007. These include Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland, Seattle and Tampa. Remember what I said about Tampa?

The NAHB Housing Market Index, an indication of the sentiment of builders, was a muted 16 in February. To tell you how bad this is, any reading below 50 suggests negative sentiment amongst builders. It has not been since April 2006 that the NAHB index has been above 50.

I remain somewhat bearish on the housing market in 2011 and into 2012. If you are a buyer—great; however, sellers may continue to face lower prices.

Add in the record foreclosures and weak home prices and there are still reasons to be concerned. There are estimated to be about five million homeowners behind on at least two payments, according to data from foreclosure tracker RealtyTrac Inc. What is more worrying is that an estimated 1.2 million homes will be foreclosed this year, above the one million in 2010.

Besides the loss of jobs, homeowners are also just walking away from their homes in many cases when the value of the home is below the outstanding mortgage.

The reality is that no one wants negative home equity and, sometimes, instead of waiting for home prices to rally, it may be just as easy to walk away. This has been what is happening.

So don’t be fooled by the media “rah rah” efforts for housing, as it remains a cesspool for capital.

Does anyone really care about the housing market anymore? The banks and developers that got stuck care. But the public doesn’t and that’s something I like.

Figures released Wednesday by the U.S. Commerce Department show that sales of new homes fell 8.1% in October to an annualized rate of 283,000—close to a 47-year low. Existing home sales did just as bad. According to the National Association of Realtors, sales of existing homes in the U.S. fell 26% in October 2010 from October 2009.

What’s going on?

It’s very simple, and it is called the “herd mentality.” Buying houses is totally out of vogue. Rates for mortgages are near record lows, the government had an $8,000 first-time homebuyer tax credit (that has since expired), and banks stopped foreclosing for a while (because of state attorney investigations), reducing the supply of foreclosures coming onto the market—and homebuyers are still few and far between.

I remember quite well 1999 when everyone was buying tech-stocks. The market for tech-stocks collapsed in 2000. But the decade which followed brought some of the biggest gains from tech stocks in history.

In 2002, at under $300.00 U.S. an ounce, no one was interested in gold. Today, you’d have to pay $1,000 more to own an ounce of gold. Gold mining companies, which couldn’t raise a dime in the early 2000s, are the stock market darlings of today. Companies with no gold mine production, just reports saying they have found gold, are raising millions of dollars from investors again.

In March of 2009, the financial world was falling apart. Investors dumped their stocks in groves. Today, stocks are about 70% higher than they were in March of 2009. And retail investors, because of the herd mentality, have missed the boat again.

I’ve been a real estate man for almost 25 years. I’ve seen real estate booms and busts. But I’ve never lived through a bust like we have today. Housing prices in Florida are down about 47% from their peak, according to various published reports. Properties are being sold for well below replacement cost.

In my life, I’ve always made money betting against the herd mentality. While housing could have another 10% to 20% to fall, we are getting close to the bottom. Hopefully, you do not take this too generally, but the greatest fortunes in history have been made by buying when the masses are selling and selling when the masses are buying.

There is no doubt that 2011 will be a very challenging year for the economy. But it will also present an unprecedented opportunity for smart real estate investors who have the guts to go against the trend and buy. As ridiculous as it may sound today, 2011 will be a great time to buy property in the U.S.

Michael’s Personal Notes:

My co-editor Robert Appel recently had these wise words to say about the market and the economy, and I thought they were important to share with all my PROFIT CONFIDENTIAL readers:

“If this were an investment report written in Biblical Times, we would simply say ‘the market struggle-eth.’ After taking a mighty haircut from key resistance, as predicted, the stock market has a chance to base here. The Dow Jones Industrials may even (shockingly) retest 11,500 (or thereabouts) at some time.

“But our job is to be frank, and in 2011 we see more bad news than good. Especially in the bond pits.

“Because Bernanke seems to believe that the endless ability of the Mint to print money will enable him to stop yields from rising by the sheer force of his will. Just like King Canute tried to stop the tide from coming in.

“As impressed as we are by the amount of dollars the U.S. is minting—in the last four years, they took on more debt in the country’s entire history prior to that period—we think it is only a matter of time before reality intrudes.”

Where the Market Stands; Where it’s Headed:

Traders went into the U.S. Thanksgiving with fat stock portfolios. On Wednesday, instead of the market selling off, as traders often close their positions before a long weekend, the stock market rallied.

Let’s face the facts: if it were not for the pathetic housing market, the Dow Jones Industrial Average would be at a new all-time high. Corporate profits are strong, retail and big-ticket (car) sales are strong, interest rates are low and the money supply is easy. What else could a stock market ask for?

The bear market rally in stocks that started in March 2009 continues.

What He Said:

“Any way you look at it, the U.S. housing market is in for a real beating. As I have written before, in the late 1920s, the real estate market crashed first, the stock market second and the economy third. This is the exact sequence of events I believe we are witnessing 80 years later.” Michael Lombardi in PROFIT CONFIDENTIAL, August 27, 2007. “As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in PROFIT CONFIDENTIAL, November 21, 2007. Dire predictions that came true.

If you’ve ever been to Hollywood, Florida (half an hour north of Miami Beach), you’d think it was a dump (at least, that’s what my wife says). The town sits on five to six miles of Atlantic Ocean beach, riddled with old motels, old condominiums, and just about every else old.

A few developers have tried to build tall, skyscraper-type full-service condominiums on the beach in Hollywood and Hallandale (the first town south), I assume because the land is cheaper than rare beach front parcels in Miami, Bal Harbor or Sunny Isles. But it’s not all negative; the Diplomat Hotel has been successful with its new property in Hallandale.

About a year ago, my wife and I took a leisurely Sunday afternoon drive up to Hollywood from Miami. And there it was…a beautiful, tall and contemporary condominium building right smack on the ocean in Hollywood, Florida…none other than Trump Hollywood. A stunning, 200-unit luxury condo project. This building is gorgeous. The units were being sold in the range of $900,000 to $7.0 million.

But no more.

News broke late last week that the developer, Related Group of Florida, has lost the property in a 225-million-dollar foreclosure. Donald Trump simply licensed his name to the building. Only 25 units in the building were sold. What was once marketed at $600.00 per foot will likely be available soon for $200.00 to $300.00 a foot. Great deals.

A classic real estate story: Market booms, developer builds beautiful building in the wrong area, developer loses the property, lenders take haircuts, and new buyers come in to pick up great condo deals significantly below construction cost.

Never one to give up on a good deal, all weekend, I was after my wife to get down to Hollywood, Florida, to see some units in the building, Trump Hollywood. But my wife is not interested.

I say, “Honey, it’s a Trump, with all the Trump quality of built-in wine cellars, sub-zero fridges, “Miele” appliances, and breathtaking ocean views.” She says, “I don’t like the area. It is in the middle of nowhere. I’m not going there.”

And she’s right. The old real estate adage, “location, location, location” becomes “stupid, stupid, stupid” during real estate booms.

Michael’s Personal Notes:

This morning came the news; Ireland has become the second euro country to seek aid from the European Union. Who will be next? Portugal, Spain, Italy? More importantly, is the euro a currency of the past? I think it is. But the nail on the coffin for the euro will only come once Germany pulls away from the euro and goes back to its own currency.

The smartest woman standing this morning has to be the former Prime Minister of England, Margaret Thatcher. She swayed Britain from adopting the euro as a currency because she believed that, in the long term; the euro would not be able to reflect the interests of so many diverse countries. She was very, very right.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this week up 7.4% for 2010. Throw in the index’s dividend yield 2.5%, and, if all else remains unchanged, stocks will be up about 10% for 2010. Not as good as a return as 2009, but a respectable return in a year that could have easily resulted in a double-dip recession.

For 2011, I’m concerned about a faltering greenback, rising U.S. debt and rising domestic interest rates. But, for now, with corporate America still delivering strong profits, with the holiday season looking like the best in three years for retailers, I’m still bullish on stocks.

What He Said:

“Starting two years ago, I was writing how the housing boom would go bust and cause the U.S. economy to suffer sharply. That’s exactly what is happening today. From what I see happening in the U.S. economy, I’m keeping with the prediction I made earlier this year: By late 2007/early 2008, the U.S. will be in a homemade recession. Hence, I expect housing prices to continue declining, soft auto sales, soft consumer spending, and a lower stock market.” Michael Lombardi in PROFIT CONFIDENTIAL, August 15, 2007. You would have been hard pressed to find another analyst predicting a U.S. recession in the summer of 2007. At the time, the stock market was roaring, with the Dow Jones Industrial Average hitting its all-time high of 14,164 in October of 2007.

The stock market’s been very strong since the end of August. Now it’s consolidating, which is healthy. But I have to repeat my steadfast view that investment risk for equities investors remains very high in the current environment. We can’t ignore the sovereign debt issue anymore.

Investment risk is always present in equities. Stocks are secondary shares that are sold to a trading marketplace. When a stock comes to market, the owners of the business are cashing out. Equities are inherently volatile and mispriced on any given day. Anything can happen to a stock at any time even in the best of trading environments. No matter what the expectation is in the broader market, equity investors need to be prepared to get sideswiped by a corporate event or an outside catalyst.

Naturally, the level of investment risk rises the smaller the underlying business. It’s difficult to imagine that a company like Procter & Gamble (NYSE/PG) would completely collapse, but it’s never out of the question. During the stock market bubble in 1999 and 2000, P&G reported quarterly earnings that didn’t meet consensus estimates and the stock lost half its value. That was a tough pill to swallow if you were a shareholder at that time. The company didn’t all of a sudden start selling half of its usual product volume. It took years for the stock to recover and only now it is barely trading above the level it was 10 years ago.

It’s no fun thinking about risk, but investors have to keep investment risk fresh in their minds all of the time. Currently, the biggest investment risk to capital markets is the sovereign debt issue facing Europe, other countries and the U.S. The issue has the potential to be a cascading event that could easily sap global financial markets of any positive sentiment. I can’t emphasize enough just how destabilizing this issue could turn out to be. For a lot of people in this economy, the new age of austerity was abruptly imposed. And now, entire countries are facing the same imposition.

I have always operated with the attitude that, at any given time, there are very few if any attractive investment opportunities in the marketplace. My stockbroker strongly disagrees. I always ask myself, why is now the best time to buy these stocks? The fact is, it almost never is.

I’ve learned over the years that there is no bandwagon that’s worth jumping on. I like to buy low and sell high, not buy high and sell higher. From my perspective, the key to making the most money from the stock market as a speculator is to wait and watch until all the factors (corporate, monetary, investment risk, value, market sentiment, etc.) come together around the same time, and then you pounce. All the factors don’t come together very often.

I don’t know where the broader stock market is going to go over the next month. I do know that investment risk in the equity marketplace is very high. In summary, I’m in waiting-and-watching mode, getting ready to pounce on a trade that has yet to present itself.