7 Speculative Chinese Small Caps

Looking for investments outside the U.S.?  You are not alone. With the dollar plummeting almost daily money seems to be fleeing U.S. shores faster than the Fed can print it.

Check out the Wild West . . .  err, I mean Wild East of stocks. East as in China, the elephant of emerging markets.  Now look at small-caps.  Scared yet?  After the Tuesday's action you should be!  Some Chinese small-caps fell 9-10%.  But wait . . . Yes, you can  find value and growth in Chinese small-caps.

Consider China Sky One Medical (CSKI) -- PE under 4, no debt, yoy revenue growth of 27%, and a Price/Sales ratio of 1.  Look at Duoyuan Printing (DYP) with its PE ratio of 1.4.  Then there is  Fuqi International (FUQI) which you can buy for only slightly more than its $6.27cash per share.  Both sell for less than 70% of annual sales and have P/E ratios less than 4.  Similar Chinese  small-cap values exist in CELM, CSR, LLEN, and UTA.

With those numbers how can you not like these stocks? . . .  I know!  I know!  Mr Market can be quite ingenious at finding ways of torpedoing the most obvious "buys".  But, like I said, this is the Wild East and anything can happen.  What goes down fast can go up just as fast.

Risks?  Where do we start?  Jim Chanos says China is the next Enron.  Sudden currency changes, an unpredictable government (I hesitate to use the word communist), and accounting irregularities are but a few of the potential negatives.   Volatility is frightening -- the smallest rumors can rocket up or torpedo prices.

Wealth management firms such as Northern Trust (NTRS), burned by the 2008 crash, play it conservative. They will never recommend these Chinese small-caps for their clients -- it would violate their fiduciary responsibility.  Individuals can, however -- if played right --, tap into some of the fastest growth markets in the world with these stocks at what by most standards are currently bargain prices.

Do you own due diligence -- small cap stocks are volatile everywhere, especially so in China.  My approach is to take small positions in several companies, sell those that fall 10% or so, but let the winners run.  Who knows?  You may tap into a Chinese superstar.

Think positive to avoid the Chinese market's Dr. Loveless like twists and turns.  James West and Artemus Gordon protected and won the day for the U.S. Maybe you can't protect the U.S. but you may be able to protect and enhance your portfolio with these stocks.

Trashed Real Estate, Soaring Gold

The prop wash from Ben Bernanke's helicopters has yet to spread dollars on the struggling U.S. real estate market.  Gold, though, up over 30% in the last year, is a major beneficiary,

Three years ago a typical Florida house (Tampa area) sold for $240,000 and gold was around $450/oz.  Now the house value has been cut in half to $120,000 while Gold has tripled and is closing in on $1,350/oz.   It took 535 ounces of gold to buy the house in 2006, today it only takes 90 ounces.  Why such a large about face?

Since both houses and gold are "real", non-printable assets one might conclude either houses are extremely undervalued and/or gold is extremely overvalued.  Is it just a matter of time before the pendulum swings back and the gold/house ratio rises again?

Gold is very much a global commodity, of course, while houses are the quintessential local asset.  You can easily move a pound of gold or more around around the world.  The real estate goes nowhere.

U.S. real estate has very low liquidity right now.  Loans are difficult to get.  Anyone can buy gold in vaious amounts easily, either through ETFs such as GLD or SLV.  Physical gold is available in the form of bullion or coins at the local coin store or numerous web sites (Be careful)!  In 2006 all you needed was a pulse to get a real estate loan while precious metal ETFs were just coming on the scene.

Years ago I went to a real estate seminar.  One of the things we learned was how to value houses using the income approach.  The "rule of thumb": A good middle class 3 bedroom/2 bath/2 car garage house in a good (not great) neighborhood is a buy if it sells for less than 100 times the monthly rent.  For example, if the house rents for $800/month a price of $80,000 (or better) makes it a good buy.

So, with that in mind, how do things look today?  The above central Florida house, renting for $800/month, can again be had -- with some negotiation -- for about $80,000 or less.   In 2006 the house was valued at about $160,000 -- way above the "rule of thumb" above -- an obvious red flag to those who paid attention.

I believe real estate is now in the process of bottoming and will eventually follow gold higher.  Inflation, as evidenced by increasing commodity prices, now seems to be edging out deflation.  Real Estate appreciation will follow.  However, it will be slow due to liquidity issues and the poor U.S. economic recovery.

Disclosure: I own real estate, no positions in ETFs mentioned

America's National Parks and the U.S. Dollar

"No one is speaking English" whispered my companion. as we hiked through the Bryce National Park last week. We encountered a surprising stream of hikers on the back country trails.

Young (take it with some perspective, I'm 61), fit, and friendly, the trekkers seemed everywhere. Germans, Dutch, Asians, Australians, and people from I have no idea where, all cheerfully waving as they strode by. Americans that actually live in the USA?  Well, I'm sure some were around, but if so, they made themselves scarce -- perhaps whiling away the time in nearby Las Vegas.

The torch of leadership in the world is changing.  The U.S. still has its natural wonders  and a flood of visitors  is eager to see the unrivaled beauty of the American West.  The allure of the wild west draws back which fled over seas.

Consider:  It is hard to believe you could mail a letter in the U.S. with a 1 cent stamp at one time. Now it takes 44 cents (with rumors of more to come).  At least National Parks haven't devalued like stamps and other paper assets such as the U.S. dollar.
The U.S. still has its natural wonders.  A flood of overseas visitors  is eager to see the unrivaled beauty of the American West.  The Wild West entralled Europeans 150 years ago.  Now, the rest of the world has joined them.
However, the torch of leadership in the world is changing.  The U.S. dollar has lost 10% of its value just since last June. Our leaders seem hell bent on devaluing it even more as they try to perpetrate the illusion that we can have $30/hour manufacturing jobs and compete with people who work for $3.00/hour or less.

We are a deeply indebted nation and Asians (remember the "starving Chinese" your mother told you about) are calling the shots.  Fortunately, we grow,  most of our own food, so no need starvie.  Yet selling food overseas may soon become more profitable.

You got this crazy scheme:  The U.S. government prints money and then lends it to banks at zero percent interest (ostensibly to "stimulate" the economy).  The banks take the cheap money, buy longer dated treasuries (who else would buy them?) for risk free profits on the spread as they try to repair their balance sheets.  With the possible exception of "Cash for Clunkers" very little ends up in the hands of the American public.  The longer this charade goes on, the more impoverished America becomes.

We simply cannot afford social security, national healthcare, high minimum wages, highly paid government employees anymore but our leaders don't seem to get it.  The dollar is strong only when European crisis erupts -- they have similiar, possibly worse problems.

Even more disturbing a weakening dollar robs Americans of their savings by stealth. The bank statement may look good but the dollars buy less and less.  Forget about traveling overseas.  Cash and treasuries are a loosing game to everyone but the banks.  Most of us just aren't aware of it yet.
As the U.S. continues to sink into a recessionary quagmire you might consider investing in international blue chips, commodities, and emerging market ETFs, assets which have more than paper backing them.

Nervous about picking foreign stocks?  Use ETFs!  Since ETFs invest in multiple companies, most practically eliminate corporate risk by investing in dozens if not hundreds of companies.  You may wish to consider EEM (ishares MSCI Emerging Markets Index), GMF (SPDR S&P Emerging Asia Pacific), BKF (ishares MSCI BRIC Index), or DGS (WisdomTree Emerging Mkts SmallCap Div).

Its a little riskier but TBF and TBT provide protection and profit opportunities against the inevitable rise in U.S. interest rates as reality sets in.  And the flood of overseas tourists visiting the U.S?  Thank them!  They are returning some of the vast amount of dollars that have fled to foreign shores in recent years.


Disclosure: Long BKF, DGS, TBT