Why the Chinese Stocks Will Remain Winners

“Profit Confidential” Column, by Michael Lombardi, CFP, MBA

How China has been dealing with its economic “steroid” growth has been nothing short of impressive. If only our government could have taken a chapter out of China’s book on Economics 101.

For the second time in a month, the Chinese government has asked its banks to set aside more deposits as reserves. This move is widely seen as a measure to cool the accelerating growth of bank loans and to cool an overheating Chinese property market.

(Comparatively, when the American real estate market was at a speculative phase in 2005, our government did not even recognize the problem, let alone do anything about it.)

The importance of China in the world economy was underestimated by economists going into the world recession, which we are apparently now exiting from. While the U.S. and Europe have continued to struggle economically, there is no doubt that China is leading the world out of the global recession.

Look at it this way: if it weren’t for China’s strong economic growth (with all its demand for commodities), the global recession would have been much worse. GDP in China was a mind-boggling 10.7% in the fourth quarter of 2009. Economic dominance continues to shift from the Americas to Asia.

When I look at all the stock-picks we made in Lombardi Publishing advisories in 2009, the biggest winners in terms of profits for investors were either stocks in the gold mining sector or stocks with operations in China; what we call the Chinese stocks.

With a month under our belt for 2010, I doubt the trend of which stocks did best in 2009 for investors will change much for 2010. I’m very impressed with how China is moving to curb the boom pockets in its economy.

Michael’s Personal Notes:

I’ve been very impressed with the action in the gold market. After hitting a high of $1,218 an ounce on December 3, 2009, gold fell back to a low of $1,059 this year. Top to bottom, gold lost $159.00 an ounce, or 13%.

The move by gold to the downside was enough to scare newcomers and speculators in the gold bull market. From my point of view, we have just witnessed a strong, healthy correction in gold.

In my opinion, it has been truly remarkable (and important) that gold has stayed at about the $1,000 per ounce level. I see a huge base being creating by gold bullion at the $1,050 to $1,100 an ounce range, which will act as support for gold’s next move upward. The 10-year chart of gold bullion continues to be very bullish.

Where the Market Stands:

This must be one of the most difficult stock markets for day traders to make money on.

After the Dow Jones Industrial Average hit a post-crash high of 10,428 in January of this year, and the market then started to move lower, speculators and traders were quick to short the market (i.e. bet it would go down more), because they were convinced the bear market rally was over. Not so fast.

The market has come back the past few sessions, with the Dow Jones narrowing its low for 2010 to only 2.7%. In fact, the Dow Jones is now only a shrinking 284 points from its 10-month high.

Sure, the economy is still very sick and could get worse. Sure, the real estate market is still crippled. And millions of Americans are unemployed. But everyone knows these facts.

The job of a bear market rally is to convince the majority of investors that “all is okay.” The bear failed to do so when it hit its high in January. And this is why I have continued to believe the bear market rally that started in March 2009 had more life left to it.

What He Said:

“Over-built, over-speculated, over-financed and overdone. This is the Florida real estate market right now. For those looking to buy for personal use or investment, hold off! The best deals are yet to come. I continue with my prediction that the hard landing in the U.S. housing market, which is now affecting lenders, will have significant negative effects on the U.S. economy.” Michael Lombardi in PROFIT CONFIDENTIAL, April 3, 2007. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.