by Tony Daltorio, Investment U Research
Monday, March 8, 2010

Mention Japan to any global money manager and he or she will probably react with a frustrated look and a weary sigh.

That’s because too many investors have lost fortunes trying to call Japan’s market bottom ever since the Nikkei 225 index began falling from its peak of 40,000 in 1989. So naturally, skepticism runs deep about any real improvement over there.

But this time may be different.

Really.

After all, Japan has a new government with new ideas of how to run the country. In taking office last September, the Democratic Party of Japan (DJP) officially ended more than half a century of dominance by the Liberal Democratic Party (LDP).

The last time such a large political switch happened was in 1867 when Japan’s imperial court toppled the long-ruling Tokugawa Shogunate. That action successfully catapulted the country into modernity. And this newest change could have a similarly significant affect, possibly even driving the Japanese stock market to greatness once again.

Sure, as Investment U’s Small Cap and Special Situations Expert, Louis Basenese, recently said, betting on Japan “is about as popular as a geek on prom night.” But he still concluded that investors who want low risk and high return “can’t ask for a better opportunity.”

I couldn’t agree more. Contrarian investors need look no further than Japan.

Why It’s Worth The Heckling

Anybody who puts money into Japanese small-caps should expect at least a few weird looks or snickers, and maybe even a less flattering name or two. Those stocks are too often illiquid, little researched and family-dominated. And savvy investors know that.

Yet by ignoring them altogether, they overlook some of the cheapest opportunities in the world. Japan’s small-cap market abounds with companies valued at deep discounts to their assets. More than 60% of them currently trade under their book value… exactly the kind of discounts that made Warren Buffett rich.

Just take Katsuragawa Electric, which makes wide-format printers. It has annual sales of about $200 million, $55 million net cash on its balance sheet and total net assets of about $190 million. And at its recent peak in 2007, it made a net profit of around $17.5 million.

Yet the company’s full valuation on Japan’s Jasdaq stock exchange amounts to less than $40 million. That means that every one dollar put into Katsuragawa shares yields $1.39 in net cash and $4.81 in net assets, while costing the investor only a little over twice the company’s peak earnings.

Enticing, right?

Return On Equity

Of course, there’s a reason why those small companies cost so little.

Japanese brokerage firm Nomura estimates a mere 4.7% return on equity for small caps this year, as compared to 6.6% for all Japanese companies and 13.4% for stocks in the developed world.

Fortunately, a projected earnings recovery over the next few years could push return on equity to 7%. That, in turn, could rally small-cap share prices up more than 50% just to keep up with other markets. And even if it doesn’t, low return on equity indicates a lot of room for improvement, something investors should pay attention to.

Let me explain…

Investors who put their money into highly valued stock market like the U.S. depend on real earnings growth to push their shares upward today, despite already historically high profit margins. But investors in Japanese small-caps only need companies to start using their balance sheets more efficiently to wow everybody and collect the resulting profits.

For that to happen, management needs to start viewing shareholders as vital pieces of their businesses instead of nuisances as they have in the past.

The evidence points to them catching on slowly but surely.

In 1992, only 12.1% of small Japanese companies even bothered with investor relations meetings. But Nomura reports that by 2007, that percentage rose to 63.7%. Likewise, the government is actively trying to improve minority shareholder rights and corporate governance in a number of ways, including requiring independent, non-executive directors.

Those efforts on both the political and corporate side should change Japanese business for the better and in turn, benefit the markets.

Four Ways to Invest in Japan’s New Revolution

American investors who want to buy Japanese small-caps have a few options, including purchasing specific exchange traded funds (ETFs).

• Despite having different holdings, iShares MSCI Japan Small Cap Index (NYSE: SCJ) and SPDR Russell/Nomura Small Cap Japan (NYSE: JSC) have very similar sector weightings.
• For that matter, so does WisdomTree Japan SmallCap Dividend (NYSE: DFJ), an ETF that Investment U Chief Investment Strategist Alexander Green mentioned in his own article on Japan last month.
• Or for those interested in closed-end funds, Japan Smaller Capitalization Fund (NYSE: JOF) trades at a discount to its net asset value of about 10%, giving investors a further discount on already deeply discounted stocks.

My contrarian bet is that those deeply discounted stocks will rise as Japan puts itself back together.

Good investing,

Tony Daltorio

by Alexander Green, Chief Investment Strategist
Monday, March 8, 2010: Issue #1211

I’ve often said that it’s not possible to predict stock markets, commodity markets, bond markets or currency markets consistently and accurately.

But there is an exception: when both valuations and sentiment reach severe extremes simultaneously.

That’s what happened with the dollar a few months ago. And, seeing the planets in alignment (as I’ll explain), I immediately wrote a column, predicting that the greenback would soar in the months ahead.

As is the case with most contrarian calls, my message was met with immediate catcalls and derision from respondents. Readers e-mailed me that a weaker dollar was a “no-brainer.” With the size of our budget and trade deficits and nearly $60 trillion in unfunded liabilities, they insisted, the U.S. currency had nowhere to go but down.

But, oh, how times have changed…

Less than three months later, the euro has plunged 10% against the dollar. And it will almost certainly fall further.

Fortunately, there is plenty you can do to protect yourself – and profit. Here’s how…

Spanish Decisions… Made in Germany

Anyone taking even a sidelong glance at the news knows that huge budget problems in Greece are undermining the euro. In response, Athens is proposing serious austerity measures to shore up the country’s finances.

But this is just a finger in the dike. There are other leaks in the euro that are ready to spring in Portugal, Italy, Ireland and, especially, Spain.

Imagine for a moment that you’re a Spaniard:

• Your country has a 19% unemployment rate,
• A deflating housing bubble,
• Enormous debts
• And a gaping budget deficit.

Your economy contracted 3.6% last year and is likely to shrink again this year, leaving Spain in its deepest and longest recession in more than 50 years.

But there’s a bigger problem…

Because Spain is a member of the 16-nation eurozone, it can’t devalue its currency to make its exports more attractive, or its sunny beach resorts cheaper. Why? Because the euro’s value is driven by Germany’s bigger, more competitive industrial economy.

Furthermore, Madrid can’t slash interest rates or print money to spur borrowing or spending, because the European Central Bank now makes those decisions in Frankfurt.

In other words, “Goodbye, Spanish autonomy… hello, recession.” And “Tim-ber!” for the euro, which is vulnerable, overvalued and is now enduring concentrated attacks from hedgers, speculators and hedge funds.

The Eurozone’s Dangerous “One-Size-Fits-All” Policy

Don’t get me wrong. The euro isn’t going to collapse like the British pound did in 1992 when George Soros booked a $1 billion profit in one day by shorting the euro.

The euro is an extremely deep market, with over $1.2 trillion in daily trading volume, dwarfing the British pound’s daily volume in 1992.

But the euro has a major structural problem – one that investors were much more wary about when the currency made its debut 15 years ago. You have widely disparate European economies all tied to the same central bank policies. And now the cracks are beginning to show…

The eurozone economy will grow much more slowly than the U.S. economy this year. And Fed chairman Ben Bernanke is likely to start raising short-term interest rates sometime in the second half of the year.

(Bear in mind, the rate increase won’t be due to a substantial increase in inflation. That’s unlikely. Bernanke will raise rates to signal that the world economic crisis is abating and to put some arrows back in his quiver. After all, you can’t cut rates if they’re already at zero.)

And this move will be bullish for the U.S. dollar. So what should you do?

Three Moves to Combat a Strong Dollar-Weak Euro Scenario

As I’ve said for the past few months, here are three moves to combat a strong dollar-weak euro scenario…

• Pare back on holdings of euro, pound and yen-denominated bank accounts and bonds. A stronger dollar will hurt these the most.
• Maintain your exposure to European and other foreign equities. If you own the right stocks, especially exporters, their capital appreciation can outstrip a negative move in the local currency.
• If you want to be even safer, there is one – and only one – exchange-traded fund (ETF) that hedges away all currency risk for dollar-based investors. It’s called the WisdomTree International Hedged Equity Fund (Nasdaq: HEDJ).

Expect to see it near the top of this year’s top-performing international exchange traded funds.

Good investing,

Alexander Green

Editor’s Note: Whether you want to gain broad exposure to a certain country, sector, industry, or currency, ETFs are an excellent way to diversify your portfolio safely and cost-effectively through one simple transaction.

But what if you want to maximize your profit potential and invest in the most promising foreign companies directly? This is easier said than done, however. Getting reliable facts, detailed information and essential knowledge on foreign countries/companies can be a tricky task, as data often isn’t as readily available as U.S.-based research.

That’s why Alexander Green set up The New Frontier Trader – an advisory devoted exclusively to finding the most profitable foreign stocks. And as the track record shows, he knows exactly where to look to get the most profitable information. Get all the details about how you can diversify abroad and profit for yourself in this report.

Tony Daltorio, Investment U Research
Saturday, March 6, 2010

Wall Street seems obsessed with pigs these days.

PIIGS, that is – Portugal, Ireland, Italy, Greece and Spain – the smaller economies in Europe.

Many people worry whether these countries can honor their sovereign debt because of high, already-existing debt levels. And the U.S. Senate might even investigate Goldman Sachs (NYSE: GS) for allegedly hiding Greek debt from European regulators…

Talk about locking the barn door after the Trojan horse has already bolted.

Also foolishly, investors have vilified every single company in those countries. Fears have spread that neighboring economies are suspect as well, by association. And in response, investors have either backed away from that region altogether or full-out shorted related stocks.

Either way, they don’t know what they’re missing out on. But not to worry. That very panic leaves excellent deals for those smart enough to pick them up.

The Relative Performance of European Companies

Speaking about the situation in Europe, Robert Parkes, equity strategist at HSBC, recently summed it up well:

“The macro factors are affecting the relative performance of companies. Companies in weaker peripheral countries will be hit by their poorer economies. They may also face higher taxes and lose competitiveness with overseas rivals.”

For example, just take the relative performance of Portugal Telecom (NYSE: PT) and Deutsche Telecom (NYSE: DT), two large European telecom companies over the past three months.

• Since the middle of November, PT shares have underperformed rival DT by 5%.
• During the same time, PT’s bond yield widened about 20 basis points versus the benchmark German bund. DT’s barely moved.
• PT’s credit default swaps nearly doubled to about 140 basis points. DT’s fell from 75 to 70.

And all of this occurred in spite of their similar credit ratings and businesses.

Companies in the utilities and banking sector are showing similar divides across Europe. Since mid-November, the Greek stock market tanked about 25%. Portugal’s fell 11%. But France and Germany’s dropped a mere 4% and 3% respectively.

So what does that all mean?

It indicates that right now, investors care more about location than balance sheets or earnings.

And that is just plain stupid.

Euro Gems

What sort of companies should investors look to pick up while Wall Street sits transfixed by the repeated showing of My Big Fat Greek Deficit?

Fundamentals are always important. But also look for businesses with big exposure to the emerging markets. Those up-and-coming economies are growing much faster than the industrialized world, which is saddled with high debt.

Despite its base in Greece, Coca-Cola Hellenic Bottling ADR’s (NYSE: CCH) share price jumped nearly 10 per cent in the past three months, helped along by continued strong demand for non-alcoholic drinks in countries like Poland.

The previously mentioned Portugal Telecom and its Spanish rival Telefonica ADR (NYSE: TEF) have a large presence in Brazil. And that connection makes them both worth buying into.

Telefonica also controls the Sao Paulo-based, fixed-line phone company, Telesp ADR (NYSE: TSP). And it jointly owns Vivo ADR (NYSE: VIV) – Brazil’s largest mobile phone operator – with Portugal Telecom.

If you enjoy playing with more risk, look into large Spanish banks with major exposure to Latin America. That includes Banco Santander ADR (NYSE: STD) and Banco Bilbao ADR (NYSE: BBVA).

Those companies should weather the sovereign risk storms much better than others in the region that focus exclusively on domestic economies.

It comes down to this: If a lot of a company’s revenues come from the emerging world, its location is simply not important. So while Greece and the other PIIGS might be in over their heads, the companies based there might not be… especially if they deal with strong economies elsewhere.

Those kinds of businesses have been unjustifiably beaten down and represent excellent buys right now.

Good investing,

Tony Daltorio

by Tony Daltorio, Investment U Research
Friday, March 5, 2010

It’s safe to say that the financial media is obsessed with four subjects these days: Economic stimulus, healthcare reform, Greece and China.

And let’s face it: After the eighth, seventeenth or twenty-fifth article on the same topics, it starts to get a bit boring.

Combine three out of those four subjects together though, and it becomes much more interesting… especially considering that unlike what the United States implemented, China’s $586 billion stimulus package focused on repairing the weak links in its economy, including its healthcare system.

Over the next three years, the Chinese government pledged $123 billion towards a variety of medical programs, including ones that target waste and distortions in prescriptions and treatment.

China also plans to use 2010 to build some 29,000 medical centers and 2,000 hospitals, while upgrading existing ones. And Health Minister Chen Zhu recently pledged a clinic for every village by the end of 2011 and universal health insurance by 2020.

The Treatment Needed For An Unhealthy System

China has known for 30 years now that it needs a social security network to replace its former communist command economy.

When Beijing began market reforms in 1978, the regime’s universal health coverage disappeared, leaving only about 20% insured by the mid-1990s versus the 90% that had it before.

The government ran regional tests and pilot projects for years before settling on a social insurance program for urban workers in 1998. But by 2005, patients still paid 52% of expenditures out of pocket due to strict coverage caps, while public insurance policies covered 40% and private ones handled 8%.

That especially affected China’s countryside, where many areas still lack even the most basic medical infrastructure since the government only started rebuilding rural health insurance in 2003.

Although the majority of rural residents do technically have insurance again, it doesn’t cover much and patients have to pay up front before they receive any financial help whatsoever.

As a result, the country’s poor can’t afford to treat many serious illnesses, and a full 30% of that group point to healthcare costs as the main cause of their poverty… with good cause, since a single doctor’s visit costs them 83% of their monthly income in 2003, with only minimal improvements since.

Adding to the problem, China has a rapidly aging population in increasing need of medical attention.

The country’s median age is fast approaching 35, compared with 20 in 1970. And within the next five years, analysts expect the 60+ crowd to comprise nearly 20% of the population, while in 1990, it only accounted for 10%.

A Good Kind Of Growth

Beijing also wants to bring about structural changes in its healthcare system, particularly when it comes to pharmaceuticals, which Chinese clinics and doctors have always relied on for most of their income.

But that has led to distorted treatment patterns, corruption and waste. In 2003 alone, pharmaceutical expenses amounted to 40% of total healthcare costs, nearly three times that of other global powers.

Now that the government is stepping in, that should hopefully change. And if all goes well, sales should actually increase from the paltry $20 billion generated last year to something much more significant.

Health consultant IMS Health predicts that China will have the fastest growing pharmaceuticals market in the world, expanding at 20% per year. And by 2013, it could rise from the ninth largest in value terms… to the third.

Within just a few decades, China could easily become the largest. Bar none.

Healthcare Opportunities To Die For

Many of the foreign pharmaceutical companies involved in these changes come from Europe, including Novartis ADR (NYSE: NVS), which plans to invest $1 billion into expanding its Shanghai laboratories in order to turn China into its third pillar of global research and development capabilities.

French drug firm Sanofi-Aventis ADR (NYSE: SNY) and British drug companies GlaxoSmithKline ADR (NYSE: GSK) and AstraZeneca ADR (NYSE: AZN) have also expressed solid interest in the country.

And China’s medical device industry is easily set to profit from any changes. Pharmaceutical market researcher Episcom predicts that it should hit $28 billion by 2014, double the figure it stood at two years ago.

That puts both Mindray Medical International ADR (NYSE: MR) and China Medical Tecnologies ADR (Nasdaq: CMED) in enviable positions of growth and revenue as the new decade dawns.

As the country sets forward to improve healthcare availability to its 1.3 billion people, its domestic healthcare industry can only expand, reaping serious profits for any investors who get in early.

Good investing,

Tony Daltorio

by Martin Denholm, Senior Editor
Friday, March 5, 2010

A “lost decade” of “permanent retrenchment.”

Quoted on Stateline.org, that’s how economist Raymond Scheppach, head of the National Governors Association for the past 26 years, sums up the “State of U.S. States.” He argues that when the recession began in December 2007, it kicked off a decade of deep spending cuts, job losses and a struggle for states to generate revenue.

So far, he’s right.

Since December 2007, U.S. states have collectively run up a $300 billion budget gap, according to the National Conference of State Legislatures.

And although the U.S. economy has rebounded strongly over the past two quarters, America’s states are still in big fiscal trouble. The first year or two after a recession is historically the worst time for states, as they try to recover and re-adjust their budgets.

For example, Stateline reports that…

• Over the next 25 years, Minnesota’s state revenue will grow at half the rate of the 1990s.
• It may take five years for New Jersey’s revenue to return to 2008 levels.
• Arizona has sold and leased back its main government building in order to raise money.
• Michigan can no longer afford its state fair.
• In Hawaii, 500 residents donated their own money to keep a public library open that the state planned to close, due to budget cuts.

Add in double-digit unemployment and the negative effect that it will have on consumer spending and you can see that this post-recession climate is arguably the worst that U.S. states have faced in post-war history.

As Susan K. Urahn, managing director of the Pew Center on the States, which tracks states’ fiscal health says: “This recession has cut too deeply. There’s no question that states are going to consider changes that in some cases could be dramatic.”

Investment U publisher Robert Williams digs deeper into the budget crises facing U.S. states in this eye-opening column about the fiscal state of emergency…

Best regards,

Martin Denholm

by Dave Fessler, Energy and Infrastructure Expert
Friday, March 5, 2010: Issue #1210

As the old sixteenth-century saying goes, “You can’t make a silk purse from a sow’s ear.”

Translation: Sometimes, you can dress something up as much as you want, but it doesn’t change what it really is.

Or in the case of biofuel, what it isn’t.

And to coin a more recent adage, “putting lipstick on a pig” is exactly what biofuel advocates continue to do.

I’m interested in all forms of energy – fossil fuels, renewables, nuclear, etc. And like most Americans, it’s my wish to see us weaned off Middle Eastern oil in my lifetime. For example, in the following ways…

• By moving towards renewable energy resources like wind, solar and geothermal.
• Nuclear fuel is also a viable way to gain greater energy independence – despite the issue of how to store the spent fuel.
• The United States is blessed with a 100-year supply of natural gas – the second-largest reserves in the world.

But biofuels aren’t viable. Here’s why…

The Biofuel Brainwash

A “Greendoggle.”

That’s how I’d describe the misrepresentation of the biofuel industry.

Even with its high greenhouse gas emissions, burning coal represents a better solution than biofuels. Especially when you consider biofuels’ detrimental factors.

Right off the bat, it doesn’t make much sense to take the world’s main food staples – corn, wheat and rice – and turn them into fuel.

But just five years ago, bio-ethanol, bio-diesel and bio-gasoline were billed as America’s solution to imported oil. And all it took to drive prices skyward was dwindling crude oil supplies, rising prices, increasing global demand – and a healthy dose of biofuel hype.

On the surface, biofuels seem like a great renewable energy idea. The argument is that carbon produced from biofuels is “better” than carbon from fossil fuels. Why? Because when the plants (i.e. fuel) are grown, it offsets the carbon production.

Congress bought the hype, passing a law, mandating 35 billion gallons of ethanol production a year by 2017. And to grease the wheels, lawmakers tossed a $0.51 per-gallon subsidy at ethanol producers. Bio-diesel producers received even more – $1 for every gallon produced.

Farmers jumped for joy at the prospect of making some serious dough. Crop rotation plans were dumped in favor of one thing: Corn. And lots of it.

Ethanol production plants popped up across the Midwest. Between 2000 and 2008, the number vaulted from 50 to 140. Sixty more were under construction.

Who knew that America’s solution to imported oil was in U.S. soil all along?

But back the corn truck up…

Biofuel Reality Check

In the quest for energy independence, politicians overlooked a few key details…

• As farmers piled all their resources into growing corn for ethanol, just about every food made with corn rose in price.
• Food producers then found themselves paying three to four times what they paid for corn just a few years before. And they did what any business does: passed the costs along to consumers.
• Aid organizations cut food donations by 50% (more in some cases).

A Wall Street Journal editorial said: “Cornell’s David Pimental and Berkeley’s Ted Patzek found that it takes more than a gallon of fossil fuel to make one gallon of ethanol – 29% more. That’s because it takes enormous amounts of fossil fuel energy to grow corn (using fertilizer and irrigation), to transport the crops, and then turn that corn into ethanol.”

A University of Minnesota study in 2008 was even more sobering: “Converting forests, peat lands, savannas, or grasslands to produce food-based biofuels in Brazil, Southeast Asia, and the United States creates a huge biofuel carbon debt. When land-use changes are taken into account, 17 to 420 times more CO2 is released than the reductions gained when these biofuels displace fossil fuels.”

As demand for corn and other biofuel stocks soared, farmers just started planting corn, ignoring a century’s worth of data on the benefits of crop rotation.

And due to the glut of corn, soybeans, wheat and rice were all in short supply, causing their prices to rise, too.

For example, soybeans had to be grown elsewhere. That turned out to be Brazil. But large-scale deforestation in the Amazon Basin (to increase the available land for soybean production) just adds to the insanity of biofuels.

Speaking of insanity…

The Backwards Way to Boost Biofuel

In Sumatra and Borneo, nearly 10 million acres of forest have been burned to create fields for palm oil plantations for biofuel. In Malaysia and Indonesia, they’re about to erase 25 million acres of prime forest.

There are two things wrong with this…

1. Burning the forest produces 93 times the greenhouse gases that burning the fuel produced on them would.
2. The trees are nearly twice as efficient absorbers of CO2 than the palm plants grown for fuel stock.

The expiration of the $1 per gallon federal biofuel tax credit in January means many biodiesel companies are no longer commercially viable – and might signal the end for this biofuel “Greendoggle” in the United States.

However, some members of Congress are trying to reinstate it. One can only hope that saner heads will prevail.

Good investing,

Dave Fessler

Editor’s Note: Forget biofuels and ethanol plants… there’s a new “green power plant” that is the real deal. It’s known as the Fredonia Reactor, which is 62 times more powerful than a traditional nuclear reactor and runs on what the International Energy Agency calls “the most advanced of the ‘new’ renewable energy technologies.”

Not only that, the Department of Energy states that this resource “could supply one-fifth of all electricity in the country.”

For more details, check out this report – and see for yourself why the independent Hulbert Financial Digest has ranked The Oxford Club’s Communiqué fifth in the United States for risk-adjusted returns over the past 10 years.

by Robert Williams, Publisher
Thursday, March 4, 2010: Issue #1209

“Three years of record tax increases coupled with an economy on the mend have lifted the financial fortunes of all but six states.”

That’s an excerpt from an Associated Press article that ran on January 28, 1984.

Back then, the United States was emerging from the oil shortage-induced recession of the late 1970s, caused by the new regime in Iran. And U.S. states were leading the way back to prosperity, with only six of them running fiscal deficits. Twenty-seven states had budget surpluses!

Regrettably, that’s not the case today. If anything, states are further thwarting any meaningful recovery from taking hold. The sobering statistics tell the tale…

The Land of the Free… And the Home of Debt-Laden States

At the last tally, 44 states face budget shortfalls.

California’s plight is well documented. Already sporting a deficit in the billions, it expects to spend nearly 50% more than it will generate in revenue this fiscal year. Scary.

Nearly as dire are the situations in Arizona and Illinois, where budget gaps are above 40% of general fund spending. (Arizona even has its state office buildings on the market, with hopes of raising $700 million in cash. Talk about desperate measures.)

It doesn’t look good in Alaska, Nevada, New Jersey and New York, either. Each state faces spending gaps of at least 30%.

Softening tax revenue is the main culprit here. Roughly 30 states raised taxes in their most recently completed fiscal year, yet collections over the first three quarters of 2009 (which represents the latest data) plummeted to their worst levels in 46 years.

How’s that math work? It doesn’t. Here’s why…

No Jobs… No Revenue… But a Boatload of Bonds

The United States has lost 8.4 million jobs since the recession began – the deepest cut since the Great Depression.

With 10% of the workforce sitting at home – the first time that’s happened in a quarter of a century – no matter how high you hike tax rates, tax revenue has nowhere to go but down. Dramatically.

As CNN reports, state and local governments have already cut 132,000 jobs in an effort to save their budgets. And while billions in federal stimulus money provided additional relief, those funds will slow to a trickle by the middle of this year. (I can almost hear the local legislators’ cries for help.)

Now here’s where investors need to really take notice…

To make up for the enormous shortfalls, local and state governments have resorted to issuing gobs of bonds. Analysts expect another $400 billion worth to be pushed forth this year.

And presently, there’s little fear of default. Which is crazy.

Given the already sick financial state of the issuers, it’s only a matter of time before we begin seeing defaults. Bank on it.

So what’s the answer?

Want Muni Bonds? Head to These 10 States…

If you insist on tapping the muni market for yields, I can’t stress enough that you stick with bonds from states with the highest rating (usually AAA-rated by Standard & Poor’s, Moody’s, or Fitch).

Specifically, that means bonds from Delaware, Georgia, Indiana, Iowa, Maryland, Missouri, North Carolina, North Dakota, Utah and Virginia.

And do it for the foreseeable future, because a solution to this fiscal calamity is no easy matter.

It’s Time to Bring the Gavel Down on Dangerous State Bidding Wars

The ensuing economic recovery is the best elixir. But requiring states to balance their budgets, without exception, would go a long way to help matters. Many states have such restrictions written into their constitutions, but aren’t upholding them.

Equally as urgent would be to put an end to the bidding wars between states in order to woo big business. This practice is a fool’s game, which often just adds to the deficit.

North Carolina is the poster child for this movement. It’s used customized incentive packages to convince tech giants Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL) to collectively spend $1.6 billion to build new data centers in the state.

However, the numbers suggest that actually recouping such colossal incentives is a shaky venture at best.

In fact, a prior deal of massive proportion has already gone bust. Last fall, Dell (Nasdaq: DELL) announced that it was closing a computer manufacturing plant in Winston-Salem, NC. It collected $280 million in incentives as part of the 2004 deal.

If this trend continues, states are doomed. And if that worries you as much as it does me, make sure you discourage your local legislators from heading down the same slippery slope.

Ahead of the tape,

Robert Williams

Editor’s Note: Despite the financial problems plaguing many American states, your own finances need not suffer the same fate. The Oxford Club’s flagship newsletter – the Communiqué – has five separate portfolios, each with different aims and tailored to investors’ individual goals.

The track record speaks for itself, leading the independent Hulbert Financial Digest to rank the Communiqué fifth in the United States for risk-adjusted returns over the past 10 years. Check it out right here.

Tony Daltorio, Investment U Research
Thursday, March 4, 2010

Back on January 28, I wrote an article about Google’s big failure in China. I detailed exactly why the giant tech corporation fell so hard over there even while doing so well in the Western world.

My analysis stirred up a real hornet’s nest – if you read it, I’m sure you can understand why – and generated a lot of comments.

Let me begin by saying that I appreciate the positive replies and I understand the negative ones. Any subject matter dealing with China and free speech – in any form – is bound to raise blood pressures.

So let’s go over some of the main issues brought up, clarifying a few points as we go along.

Planet Google

First of all, I don’t believe that Google (NASDAQ: GOOG) has any plans to leave China completely. It would risk massive future growth and revenues if it did, since China still represents the world’s largest mobile phone market.

Knowing that, Google should still launch its Android phone in China sometime this year. And it will probably also keep its research and development arm, and/or its sales and engineering teams.

It might, however, shut down its Google.cn business.

Believe it or not, that kind of action really wouldn’t hurt Google very much.

You see, the majority of its financial intake from China doesn’t come from Adwords, Google’s online advertising. Most of its revenue comes from Chinese companies advertising on the U.S. Google site. Analysts even estimate that the company’s business there accounted for only $200 million of its $17.5 billion in annual revenue last year.

Not very impressive, and it does bring me right back to Google’s failure. If the company had a dominant position like it does in other countries, it wouldn’t be threatening to shut down Google.cn in the first place.

Go anywhere else, and you’re living on Planet Google. In China, not so much.

Incidentally, if you click on that last link, it shows how the company has maybe 30% market share in China. Yet by its own internal estimates, it only accounts for a mere 20% of searches… putting it well behind the market leader, Baidu ADR (Nasdaq: BIDU).

Frankly, those statistics have to embarrass the all-mighty Google. Covering them up with ringing cries of “Freedom!” is a much easier out than admitting the truth.

With that said, freedom is an extremely important issue, of course, so let me address that too…

China’s Dance in Shackles

The situation is particularly complex in China, where Baidu’s design chief, Sun Yunfeng, summed it up in a now-erased blog post:

“For the normal man on the street, the most crucial information is not secrets from Zhongnanhai [the residence of Communist party leaders] but normal economic, cultural and technology information… In China, every company and every individual must dance in shackles.”

In recent years, the Internet has provided a curious twist to modern Chinese society, with its mix of market economics and strict governing. Naturally, the World Wide Web makes it a bit difficult for the government to censor its citizens, though it certainly tries. Chinese users even voted “blocked” as the key word for 2009.

But Chinese citizens – especially the younger generations – have an uneasy acceptance about that censorship. Curious about the larger world, they rely largely on the Internet for a connection to the outside. And they know the tricks of the trade that help them get around government blocks.

Making it easier, the “Great Firewall of China” has a multitude of holes. Even if it didn’t though, the Chinese are becoming more skillfully defiant as time goes on. Determined users can bypass censors by going onto outside search engines – such as the U.S. Google site – through proxies or virtual private networks (VPNs).

It isn’t an easy process by any means, but many young, savvy Chinese see it as a badge of honor to dodge those restrictions.

The End Of The Story… Kind-Of.

Censorship or not, the Chinese government still uses the Internet as one of its many ways of appeasing the middle class.

Don’t expect that to change anytime soon, either. Internet access has become a part of regular life for China’s citizens to just give it up anytime soon. Instead, they naturally want more of that tantalizing freedom… and more and more. The government won’t be able to repress that demand for too much longer without damaging what it has worked so hard to build up.

So while Google might have failed from a profit standpoint, it may have actually helped to weaken government control, even if only by a little.

Was that the business’ main plan? Doubtful.

But the Chinese seem to be happy with the results all the same. And in the end, I remain optimistic that other forces will continue working to create a more free China as time goes on.

Good investing,

Tony Daltorio

Tony Daltorio, Investment U Research
Wednesday, March 3, 2010

The China bulls and bears have been going at it lately.

The bears argue that the country is creating a nasty bubble, especially in its infrastructure and real estate markets. Famous short seller Jim Chanos has even called China’s real estate market “Dubai times 1,000… or worse.”

Of course, the bulls staunchly decry that statement. But when people like Jim Chanos speak, investors should take a second look at their positions. Could the bulls be wrong and the bears be right?

Investors need to look into the matter further before they can safely invest in China.

The Investing Community’s Bubble Fears

The trading community has a few good reasons to dislike China…

For one, the Chinese economy used to depend on investments for 25% of its GDP. But that number is fast climbing towards 50%, fueling fears of overcapacity.

However, the investment-to-GDP ratio is similar to Japan’s several decades ago. The smaller Asian country invested heavily in the same areas during the 1960s. And that strategy worked out just fine for it at the time, regardless of what happened later on.

But even faced with those facts, many bears still side with Mr. Chanos. They think that too much money infused into any market so quickly creates real estate and other kinds of bubbles.

They’re quick to point out examples too, like the newly built town of Chenggong. Practically empty right now, it lies close to the large city of Kunming in the Southwest.

Yet while critics jump on it as proof of a bubble, they should look a bit closer before they leap, specifically at Kunming’s vastly overcrowded conditions. Since Chenggong provides a close commute with more breathing room, it will attract families and businesses alike. In fact, the local government already has plans to move many offices there over the summer.

It also hopes to reduce Kunming’s traffic issues by building 15 new bridges and a light-rail network connecting Chenggong to the city center. And China has plans to build a high-speed rail line spanning the 1,250 miles between Kunming and Shanghai. That will bind the once isolated area even closer with the national economy.

Those types of projects simply mark China’s new focus on previously underdeveloped regions. It already devoted significant time and resources to the eastern coastal areas… Now, it’s the southern and western sections of the country’s turn.

The bears worry that regardless of the reasoning, the flood of lending from China’s local governments especially could turn into bad debt very easily. Northwestern University’s Victor Shih believes they have debts of around $1.67 trillion… more than double the official estimate, and equivalent to a third of GDP.

Fortunately, that lending should pay off though.

The Reasons Behind China’s Investment Boom

China intends its investment boom to push exports more heavily on its up-and-coming southeastern Asian neighbors instead of the floundering U.S. It believes that improving those links could potentially double its trade with them.

With that in mind, it already finished one bridge linking Kunming to Bangkok, Thailand. And it has almost completed another between Kunming and northern Vietnam.

Of course, the Chinese government also has a few other reasons for investing so heavily. Already in the process of creating an airport for Kunming, it wants to turn the city into a tourist hot spot.

And on a larger scale, the nation is trying to cope with the results of its one-child policy. As the working population declines, analysts see savings dropping as soon as 2015. When that happens, its graying society won’t be able to produce the finances needed for such bold projects. So China wants to get as much done as possible in the next five years.

Two Picks for China

In the end, Jim Chanos can read into China what he likes. But he seems to be interpreting the story incorrectly, just like so many before him have.

Over the last decade, investment gurus have raised the alarm about the same issues. Yet back then – as now – the Chinese economy continued to steam along. Returns on capital remained stable and corporate profits increased.

Bearish investors lost out on the opportunity to make significant money over the last 10-15 years. And they’ll continue losing out for the next decade or so if they keep ignoring that high rates of economic growth can solve overcapacity and overinvestment issues. In addition, with $2.4 trillion in foreign exchange reserves, China can easily recapitalize its banks if necessary.

It has before. Successfully.

Investors who want to take advantage of the bullish view can look into two solid exchange-traded funds.

The new Emerging Global Shares China Infrastructure Index Fund (NYSE: CHXX) consists of 30 Chinese companies that work in the sector. And the Claymore/Alpha Shares China Real Estate ETF (NYSE: TAO) tracks over 40 companies in both the Hong Kong and Chinese real estate sectors.

Down nearly 20% from its peak, you’d better believe it’s a steal.

Good investing,

Tony Daltorio

by Marc Lichtenfeld, Healthcare Expert
Wednesday, March 3, 2010: Issue #1208

Last weekend, I was in Costco when I noticed what represented two Americas:

• America #1: As I was in line at the checkout, I thought I recognized someone from a television commercial. One of those health ads where they show 70-year-old men with the physiques of 30-year-olds. The man, clearly in his 70s, was in great shape. I looked in his shopping cart. It was filled with fruits, vegetables and some salmon. There was clearly a reason this gentleman looked the way he did.
• America #2: On the way out of the store, I was behind an overweight couple – probably in their 40s. The minute they got outside, they lit up cigarettes. They heaved their cart over to their SUV, where they unloaded cases of Dr. Pepper, Red Bull, Winston cigarettes and pre-packaged snack foods.

Such a stark contrast made me think about the “Health of the Nation” and the seemingly eternal effort to come up with a healthcare reform bill.

In the end, Republicans and Democrats can squabble all they want, but here’s the deal…

Hit the Gym, America!

You won’t find many politicians brave enough to say this (they’re too busy bickering and playing politics), so I will…

If we’re talking about a health insurance and healthcare overhaul, what really needs to be overhauled is some Americans’ lifestyles. Not much is going to change for America’s healthcare system if some folks don’t change their habits and make better choices.

I’m not taking an unnecessary shot at overweight people here – the latest data from the Centers for Disease Control and Prevention tell the tale…

• In 2008, 34% of American adults were classified as “obese.” (That’s about 30 pounds or more over their healthy weight.)
• By gender, 32.2% of men are obese, while 35.5% of women hold that unwanted tag.
• In children, the obesity rate is 31.7%.

And the bottom line is that it’s an extreme burden on the economy. Because of the additional risk of associated illnesses like heart disease, diabetes and other problems, obese Americans cost the country $147 billion in 2008.

And we’ll continue to pay those healthcare costs in future – either through higher taxes, higher insurance rates, or both.

A More Personal Kind of “Healthcare Reform”

If some brave politicians truly want to help Americans live better lives, some kind of incentive or discount for leading a healthy lifestyle will be included in a healthcare reform package.

But a practical solution like that is clearly too much to ask for from our elected officials, who would never dare tell the people who elected them that they have to do anything unpleasant.

Regardless of Washington’s ineptness, though, Americans are likely to start adopting healthier practices as they age. All it takes is a cholesterol reading over 200 for the first time to scare some people straight.

Up until now, however, you’d be committing financial suicide to bet against firms like tobacco maker Altria Group (NYSE: MO), or fast food companies like McDonald’s (NYSE: MCD).

But going forward, as an aging population starts to worry about their health, some stocks are poised to benefit…

Four Stocks to Profit As America Fights the Fat

When people think about healthy eating, one area that springs to mind is organic foods. And there are four firms that offer investors as much choice as they offer health-conscious Americans…

• Safeway (NYSE: SWY)

While Whole Foods (Nasdaq: WFMI) is the leader in the organic foods field and has vaulted in popularity, the company’s valuation has soared, too. Shares are expensive, trading at 37 times earnings.

Safeway is a cheaper alternative and has been building up its organic offerings for a while. The stock trades at just 12 times earnings, below the grocery stores industry average of 15. And it pays a 1.6% dividend. People who are mindful of their health tend to cook at home more, so that could benefit Safeway and other grocers.

• United Natural Foods (Nasdaq: UNFI)

Food distributors should also benefit from a pick up in the grocery business. United Natural specializes in organic and natural foods. The timing is good here, too – shares got pounded on Tuesday after the firm’s earnings results fell below analysts’ expectations. That gives investors the chance buy at a lower price.

And despite the earnings miss, quarterly profits still climbed 15%. The company has also scooped up $100 million in new business over the past six months.

• Nash-Finch Company (Nasdaq: NAFC)

If you’re looking for a cheaper, smaller and more diversified food distributor, consider Nash-Finch. It sports a P/E ratio of just 9 and has a 2% dividend yield.

• Monsanto (NYSE: MON)

This agricultural powerhouse provides seeds and genomics to farmers. An increase in demand for vegetables should benefit Monsanto.

In my house, we’ve begun to change our diet and exercise habits. It’s not just that I want to feel good and save money on healthcare, I’m also vain enough to want to be the healthy guy in the commercial 30 years from now.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

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