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Pledge to Hedge: Dial Down Your Utility Bill With This Energy Management Product

Mar 2, 2009
Home Page, Keith Fitz-Gerald, Pledge to Hedge

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

Traveling as much as I do, I get to meet a lot of very interesting people.

Like Wayne Shipp.

Shipp’s on his third successful career and, at an age when most people have long since retired, he’s building another multimillion-dollar business with a neat little device called a STEMS Energy Management unit.

Always on the lookout for new investment opportunities, I asked him about what it does and how it helps his customers.

Shipp, the president of STEMS Energy Management, cut right to the chase: “My device helps commercial and industrial customers save big on their electrical bills without huge capital investments.”

Then he added, “I can also help residential customers save an average of $25 to $100 a month off their electrical bills and I can prove it.” Needless to say, after that, he had my undivided attention for the duration of the flight.

By way of background, the problem with most current energy-reduction efforts, Shipp explained, is that various government programs, most notably the U.S. Department of Energy audits and various utility savings programs around the country, are only ostensibly about savings. In reality, they’re focused on replacing outdated equipment with more efficient models, such as high-energy-efficient motors. In other words, replace the old with the new.

Unfortunately, most people – and this goes for industrial and residential consumers alike – simply don’t have the money to replace everything, no matter what the economic benefits may be. That’s true “especially now,” in the midst of the worst financial crisis in decades, Shipp noted.

And that’s what makes Shipp’s approach so unique. Made by the New Mexico-based Delta Group Electronics, the STEMS unit is a high-tech “band-pass filter” that blocks distortions in electrical power above and below normal signal range. It blocks out power spikes and surges, and cleans up utility-supplied power, which is ideal for U.S. AC (alternating current) electric motors. The bottom line: STEMS reduces equipment wear and increases equipment life.

Using logic that somehow seems to escape the Washington crowd, Shipp figured out a way to bring old equipment up to new efficiency levels using current technology that Shipp’s team has developed.

“It’s a far higher return on investment and one that offers almost immediate payback in most cases,” Shipp said. “It can also add to facility capacity without adding additional infrastructure.”

This means that big customers – such as industrial facilities, for example – can actually increase production, without making capital improvements or correspondingly expensive electrical upgrades. In plain English, they can do more with less.

By all accounts the results have been extraordinarily impressive to date. One of their customers, a large natural gas facility, with a water-injection plant that runs nonstop decreased their kilowatt demand by an average of 13.11%, dropped their kilowatt/hour usage by 22% and their cost for electricity from $362.21 per day to a new low of $223.91 per day, which is a savings of 38.18%.

In general, the more expensive the electricity bill, the bigger the potential savings. And that’s just as true for large-scale commercial industrial facilities as it is for individuals, Shipp noted.

Take Southern California, for instance. Shipp noted that electricity there starts at $0.14 per kilowatt and graduates all the way up to $0.24 per kilowatt. The more you use, the more you pay.

The problem is that the power is so bad and so limited that many electricity users literally can’t get enough power. And the power that users do get is of such poor quality that it prematurely ages their electronics, fries their computers, burns out their motors and trashes their compact fluorescent bulbs.

Admittedly, this is something I’d never really thought about, so I asked Shipp why the power companies would deliver “bad power.”

“It’s not that they want to,” he noted, “but the reality is that most power companies, particularly those in high-growth areas, cannot sufficiently produce, buy or supply the required power to the end-users. Many transmission lines are simply maxed out.”

You’d think the power companies could step up, but thanks to years of no new power plant construction, and limited alternative-energy programs, that’s not always possible. What’s more, the costs associated with upgrades are horrendously expensive.

And that’s where the STEMS units come in. Shipp’s technology actually makes more power available to the users without further stressing the utilities. The benefit is that consumers get to pay less and keep their electrically powered devices around longer – “which, in the end run, costs them, and the power companies, less money,” Shipp said.

The STEMS device, which uses high-powered capacitors, can not only clean up the existing power, it can actually reduce the required demand on systems where the units are installed by as much as 20% to 25%. Which means that the big and small consumers alike using them pay no more at the meter.

For large-scale customers, like factories and oil fields, this is like getting “free money, and it’s a lot higher return on investment (ROI) if they need to expand their capacity” noted Doug O’Conner, a longtime power industry expert working for Pacificorp. As an added benefit, power-conditioning like these units provide should result in lower bills and longer equipment lifespans. Which is, exactly what Shipp says will happen when people put one of his units into operation.

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Naturally, this sounded too good to be true, so I asked Shipp if we could put one of his STEMS units on our home in Beaverton, Ore., to “prove it.”

Immediately upon flipping the STEMS unit on, we noticed a 5% drop in our home’s power consumption as measured on the test-gear equipment he’d hooked up simultaneously. 

Over time, the reduction began to add up just as he said it would, and ultimately last summer over one 24-hour test period we netted a 67% decrease in the power we used. I could hardly believe my eyes. I still sometimes find myself feeling amazed by the results.

In the interest of full disclosure, I asked to leave the testing unit in place and we’re busy racking up more data that I can’t wait to report to readers later this year.

Over the several months I’ve had the unit installed, my wife and I have noted a drop in our power consumption and our bills have dropped. Anecdotally, my computer backup units, which track the power I use, reflect smoother, better conditioned electricity and as well as less transient voltage – exactly as Shipp promised. In addition, we’ve noticed fewer flickering lights in our house since we’ve had the STEMS unit turned on and we haven’t had to replace the kids’ battery chargers as often.

As good as the STEMs units are, Shipp is the first to admit that there may be places in the country where there are not measurable benefits or where a STEMS unit simply isn’t appropriate. One size definitely doesn’t fit all. As you might imagine, these are typically places with low electrical bills and cooler climates. Even so, if you’ve got a hot tub, electric dryers, air conditioners or other heavy appliances, you could still save money, but the payback may take time. In general, though, the hotter your climate, and the more expensive your electricity, the more effective a STEMS unit will be.

If you’re interested in buying a residential STEMS unit for yourself, Shipp and his team have created an easy-to-use Web site that can help you select the right unit and order it in less than 20 minutes. One size does not fit all and there may be cases where a STEMS unit simply isn’t cost effective.

The smaller unit costs $695, while the larger one is $795. Shipping for both is free. Installation should take no more than an hour of your favorite electrician’s time, according to Shipp.

Best of all, as I found out, the results truly are immediate but get better over time.

[Editor’s Note: With his ongoing “Pledge to Hedge” series, Money MorningInvestment Director Keith Fitz-Gerald is on a mission to reduce his household energy consumption by 25% through conservation - without altering or compromising his family's lifestyle. This is the seventh installment in a periodic series in which he updates us on his progress. For commercial and industrial applications please contact STEMS Energy Management at 360-904-8592.]

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Are U.S. Stocks Nearing the “Sweet Spot” for Double-Digit Gains?

Jan 16, 2009
Home Page

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

With the way stocks are being whipsawed, investors often ask me how to tell when the market is ready for a rebound. While there’s no way to ever be 100% certain, I usually just let history be my guide.

And history has a very interesting story to tell right now.

Just take a look at the following chart. Since 1927, the markets have shown beyond a shadow of a doubt that the worst of times for the U.S. economy have literally proven to be the best of times for stocks when it comes to choosing a time to buy.

The best buying opportunities are typically found when the market is represented by points inside the box located in the lower left-hand corner of the chart. This is when valuations are most favorable, as they were in 1932, 1941 and 1982.

When the markets are anywhere above and to the right of the box, they are statistically more at risk of falling than rising. There are naturally times when the markets rise from points above the box, but those are the historical exceptions.

For instance, take a particular note of March 2000, represented by a point way up in the right-hand corner. Take a minute to drift back in time and recall just what everybody was saying then about U.S. President Bill Clinton’s “New Economy,” the Dow Jones Industrial Average heading to 15,000 (and beyond), the Internet-technology boom, etc.

Everyone was encouraged to buy in. One of the reasons why I refused to buy into that – pun absolutely intended – is because of this valuation chart. I could see that the markets were ludicrously overvalued at that time versus any other period going all the way back to 1927.

The markets certainly aren’t that overvalued now.

GDP Declines Bode Well for the Dow

Interestingly enough, this data is supported from another angle using gross domestic product (GDP) data. Since 1947, of the 11 times the quarter-over-quarter change in GDP was a minus 4% or more, the Dow was higher by an average of 25% one year later and 35% two years later.

What the data in this second chart tells us is that the latest projections suggest we’re right in line with historical norms, given that economists expect that the U.S. economy suffered a mind-numbing decline of 4.35% in the final quarter of last year. When everyone else believes the worst; that’s when you should be buying.

Obviously, we have to take this kind of phenomenon with a grain of salt, but any time one data source corroborates another, it’s worth noting – particularly when there are companies out there that meet our very strict investment guidelines.

One company in particular that I’m jazzed about is pretty phenomenal. Just today, in fact, I released a report on it to the online readers of The Money Map Report. Let me give you some specifics.

I like this particular company because it operates in a “boring” section – and yet the numbers surrounding this company are about as exciting as they come.

It’s got a $4.4 billion market cap, and it’s beaten five of the last six earnings estimates by an average of 32.35%, despite horrific market conditions

In fact, anytime I consider a stock as an investment candidate, I want to see expanding year-over-year sales and earnings figures. More so than any other indicator, I find that what a business does for and with its customers is a solid indication of how management’s handling things.

And by all accounts, this company’s score is “darned good.” Quarterly year-over-year revenue has expanded 33.6%, while earnings have increased 49.5%.

The bottom line: The stock is undervalued. And it pays a steady dividend, so we’ll be rewarded even while we’re waiting for the rest of the market to recognize this company’s inherent worth.

I’ve just released all my research on this company today (Friday) in our current issue of The Money Map Report, which is for subscribers only. But I’ll also be reporting on other opportunities like this in the weeks ahead. I’m hoping to see more of them.

[Editor's Note: Keith Fitz-Gerald is also the Investment Director of the The Money  Map Report. This story is excerpted by special permission from the February issue, being released online today (Friday). For more information on Fitz-Gerald's recommendation, please click here.]

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Unprecedented Volatility Will Continue to Rock the Stock Market in Advance of a Possible Rebound in Mid-2009

Dec 30, 2008
Home Page, Outlook 2009

[Editor's Note: With the New Year upon us and in response to the positive feedback we've received from our "Outlook 2009" economic forecasting series has received, Money Morning is taking advantage of the holiday to run several of our most popular installments a second time.]

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

In the 20 years I’ve been creating stock-market forecasts, I’ve never seen such a contradictory set of forces at work in the markets all at one time. I could just as easily make the case that we’re finally nearing a bottom, as I could that we’re in for protracted downturn punctuated by sharp, quick drops.
The only question in my mind is what shape an eventual recovery will take, for I see three possibilities:

  • A “U,” with a slow, methodical reversal that gradually transitions into a market rebound.
  • A “V,” with a quick, sharp reversal that marks the start of a powerful rebound.
  • Or a sideways “hockey stick,” in which the downward trend ends sharply – but without the immediate upward surge in stock prices that would constitute a strong rebound.

My proprietary analysis and historical precedents both suggest the “hockey stick” is the most probable scenario. At a time when earnings are slowing and all sorts of red flags are flying, there are still too many unknowns to predict a U-shaped or V-shaped rebound.
Therefore, we believe investors will be best served filling their sails with the winds from the world’s most-powerful trends than they will be by trying to catch the intermittent gales. This is a market that will be dominated by large global trends – and the blue chips that follow them – particularly at a time when the so-called “economic cycle” doesn’t matter much.

Position Yourself to Profit

A properly structured and globally diversified portfolio using the 50-40-10 allocation model (50% “base-builder” foundation investments, 40% global growth and income plays and 10% “rocket rider” speculative investments that will perform well in a recovery) we recommend in The Money Map Report – our affiliated monthly investing newsletter – will prove to be an investor’s best friend. And the reasons for that are as simple as they are compelling:

  • First, a properly structured portfolio has built in safety brakes that keep us from making overly risky decisions.
  • And second, while this allocation model was constructed to minimize our downside in markets such as the one we’re navigating right now, it also positions us to benefit when the rebound eventually gets under way.

During the past year, we’ve repeatedly urged our readers to make sure two other elements are part of their portfolio: Dividend-paying stocks and specialized “inverse funds” that gain when the markets decline.

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While dividends are important in any market, they’re downright crucial now because they add to returns during market rallies and help offset losses during market declines. And our commitment to inverse funds was rewarded during the whipsaw month of October: During a month in which the Standard & Poor’s 500 Index lost 16.8%, the Nasdaq Composite Index shed 16.3% and the Dow Jones Industrial Average dropped 13.9%, all 10 of the best-performing exchange-traded funds (ETFs) were inverse funds, which boasted one-month returns ranging from 36.4% to 66.6%, Thestreet.com reported last week.

Now those are admittedly highly remarkable returns – and clearly aren’t the norm. But it does demonstrate the point we’ve been making: It pays to protect y our downside even as you position yourself for gains. And not only do such investments as inverse funds hedge our downside, they smooth out our overall portfolio volatility and help calm roiled waters.

On a more positive note, we’re now getting to the point where true value is finally being revealed, after years of “irrational exuberance.”
But the reality is – and this is hardly new information for most investors – that global markets in general (and the U.S. stock market in particular) remain fragile, and we expect them to remain that way as long as policymakers continue to interfere with their ability to function freely.

Some readers will no doubt take issue with this, believing that the responses of the U.S. Federal Reserve and other central banks have been necessary. While we respect that opinion, we must also point out that the markets have a remarkable history of sorting out problems on their own – if left to their own devices. However, that’s a largely academic discussion that we’ll leave for another time because the government has already charted a course it believes is prudent.

Even if the world’s central bankers get their act together, the damage has largely been done. What’s more, the various bailout packages – especially the $700 billion U.S. banking bailout – while well intentioned, are almost certain to have more than a few unanticipated consequences.

Topics to Watch

The reality is that these bailout programs remain with us, meaning we must factor them into our efforts to scout out profit opportunities. And on that point, we see five primary areas of change and opportunity:   

  • The U.S. Dollar: By pumping an estimated $3 trillion into the global financial system, the U.S. government is setting the stage for the mother of inflationary conflagrations. According to classic economic theory, the greenback should be in an actual freefall right now – especially in the current low-interest-rate environment, where there’s the potential for still more rate cuts and for additional capital outlays by the U.S. government. And that’s just with the current administration. President-elect Barack Obama has made it clear that if an additional stimulus isn’t announced before he takes office, he’ll make that one of his first official acts. What’s saving the dollar, at least for now, is that there’s so much global uncertainty that the dollar is retaining its reputation as a “safe-haven” currency. And, for now, at least, a safe U.S. dollar trumps inflationary concerns. However, should global investors regain confidence for whatever reason, expect the dollar to decline sharply.
  • Oil: Many people are focused on declining oil prices as a function of a perceived slowdown in global demand. We think that’s an erroneous analysis for three key reasons. First, oil is still largely priced and traded in U.S. dollars. That means that as the dollar has risen, oil has become correspondingly cheaper. In other words, much of the price decline we’ve seen can simply be attributed to a rise in purchasing power associated with a stronger dollar. Second, China, India and other newly capitalist (and still-reasonably robust) economies are still increasing their oil consumption at a rate that more than offsets the decline in consumption we’re seeing here in the United States and in other developed markets. And third, Brazil aside, there hasn’t been a major new discovery capable of offset global demand on anything more than a temporary basis for more than 30 years, and most major oil fields are in decline or soon will be. Increasing demand and diminishing supply are clearly bullish influences over the longer term. More immediately, however, a stronger dollar negates this and may well keep oil under $100 a barrel for much of 2009. Obviously a terrorist attack would change the ballgame significantly, meaning we could see a spike to levels exceeding our multi-year target price of $225 a barrel. A year ago at this time, we called for oil to spike well up over $100 a barrel, and touch $150, which it essentially did. Even with recent price declines, some energy-industry insiders are starting to subscribe to our bullish outlook: The Paris-based International Energy Agency (IEA) last week projected that long-term oil prices would reach $200 a barrel (although we think that will happen much sooner than the IEA does).
  • Commodities: The story is much the same for commodities, in general, and we expect that longer-term investors will be amply rewarded. More immediately, the popular – though erroneous – assumption that a global slowdown will negate demand is driving prices lower, and may continue to do so for the next six months. Gold will be the most obvious casualty in this arena, as hedge-fund-redemption requests and margin calls continue to mount, which is why we expect the price of the yellow metal to remain lower far longer than most people expect (We’ll focus specifically on gold in an upcoming installment of the “Outlook 2009” series). When it does rebound, however, the returns will be high.
  • Global Markets: There’s no doubt that the global markets have taken their share of lumps along with their U.S. counterpart in recent months. But we don’t expect them to suffer forever. Countries with high cash reserves as a percentage of gross domestic product (GDP) – such as China, India and Brazil – are becoming less dependent on the fractured U.S. consumer almost daily, and the economic decoupling we’ve seen developing for several years may really take hold in the New Year. This stands in direct contrast to the situation a decade ago, when the Asian Rim and South America were economic train wrecks and the United States and Europe held all the cash. Companies with significant global exposure to the Asian Region, Latin America and Europe – in that order – remain the best bets for relative safety and growth in 2009.
  • Stocks in General: Many investors are questioning the wisdom of being in stocks at all. While we certainly understand the pain that sentiment is based upon – and are hurting, too – it’s important to remember that the last time stocks really performed this badly was during the 1930s. Investors who decided to “get out” entirely then missed the investment opportunity of their lifetime. Don’t make the same mistake. Data shows, unequivocally, that investors who buy when the world is going to hell in a hand basket –think 1932, 1942, 1982 and 2003 – enjoy the largest returns. That’s even true if you’re “early,” and buy ahead of the specific market bottom. However, history also demonstrates that investors who pile in at the market’s peaks – such as 1928, 1969, 1999 and 2007 — tend to incur the worst returns.
  • Global Stocks in Particular: Led by cash-rich China, we expect global blue chips to remain the best relative bets for safety, income and appreciation potential in the New Year. We are especially focused on companies involved with infrastructure projects and with firms that derive substantial portions of their revenues from Asian consumers. The first is a no-brainer. According to the latest studies from a variety of sources, planned global infrastructure expenditures in this area exceed $40 trillion by 2030. There is not a bigger, more unstoppable trend on the planet today. If you want proof, notice that a big portion of China’s just-announced half-trillion-dollar stimulus package is devoted to infrastructure projects. Infrastructure companies there will certainly benefit. So will consumer-products firms that are positioned to benefit from the rise of an increasingly Asian consumer base, which boasts significant savings and pent-up demand. Many of the best companies are beaten down to the point that they now feature single-digital Price/Earnings (P/E) ratios – lower than we’ve seen in decades. Some are actually trading for less than cash value, despite a strong history of growth. And the companies we’re studying have solid cash flow – and excellent prospects of maintaining it.

Now for the $64,000 question – when could we see a rebound?

We don’t know for sure. Nobody does. History demonstrates that the first and second years of any newly elected U.S. president’s term are almost always problematic. When taken in isolation, we could see a scenario where this is countermanded by President-elect Obama’s planned stimulus, but given the potent combination of flagging earnings and slowing U.S. growth, we’re leery of doing so. [For a story that outlines what an Obama stimulus package could look like, check out this related story on the outlook for the U.S. economy elsewhere in today’s issue of Money Morning.]

On the other hand, for a variety of reasons, history also suggests that if we are to see a rebound, however nascent, the probability is highest for a resurgence starting in the middle of next year. First, since the 1970s, the time between the first and last market lows in any given bear market is an average of seven to eight months. If historical trends hold true, this suggests we could see a bottoming out by the middle of next year. That’s consistent and plausible, especially since other data shows U.S. recessions, on average, last 14.6 months – which also points to a bottoming out in late spring or early summer.

But the biggest indicator of all that we may see a bullish rebound in late spring or early summer – however slight – is admittedly based on emotion. Literally. Small investors have fled the stock markets in droves, and so far they’ve yanked more than $175 billion from the markets, with nearly 50% of that coming out during October alone. Granted, this is a mere 3.2% of the $5.5 trillion invested in stock market funds, according to Forbes, but it’s the first year that net equity flows have been negative since … a drum roll please … 2002.

History shows that small investors may be the most telling of all Contrarian indicators. According to TrimTabs, the Investment Company Institute and our own proprietary research, individual investors have a remarkable habit of rushing in near market tops and fleeing near market bottoms.

That means that long-term investors seeking the best wealth-building opportunities should find the immediate price declines we see ahead to be some of the most compelling buying opportunities of their investing lifetimes.

Now for the caveats – and you knew this was coming – we see three wildcards in 2009, and any one of them could prove to be a joker:

  • The continued de-leveraging of hedge funds and other financial institutions.
  • More credit-default-swap valuation problems.
  • And unknowns associated with the ongoing U.S. and global-economic-system bailouts.

There are still huge questions regarding who owes what to whom, how large the debts are, and exactly who’s going to get what help and when. History shows that the most effective bailouts are those that recapitalize institutions and that allow the weak to fail, which is why we are especially leery of the U.S. government’s plan to acquire bad debt while rewarding weaker institutions that should be put out of their misery.

What’s more, as a Money Morning investigative story demonstrated, many banks are using the government bailout money as takeover capital, and not to boost their lending, which at least would have had an expansionary benefit for the U.S. economy. With most of the bailout programs, and through no fault of their own, U.S. taxpayers and investors have been caught in the middle – or left on the sidelines altogether.

The Outlook 2009 Action Plan

For investors who want to get a head start, it’s important to bear in mind that the markets tend to begin their rebound in earnest anywhere from two months to six months before an actual economic bottom. While that doesn’t suggest going “whole hog” into stocks, it does speak to the need to take some steps now to get ready. Here are the top moves to make now:

  • Rebalance Now: As markets have declined, many portfolios have done out of kilter, too – not only in terms of value, but in terms of balance. And that lack of balance can seriously dampen returns, even as we await the market recovery – and even more so once the market begins to rally. It’s far harder to catch a moving train than most investors think.
  • Think Safety First: There’s no need to rush into the markets. It’s not clear we’ve hit bottom yet. Keep your powder dry for the better days and easier trades we see developing ahead, while bargain-hunting for those stocks with true upside, and that are positioned to capitalize on the strongest global trends.
  • Spread your buys over several days: When you’ve found something to buy, wait for a particularly bad day, then place your order in the last half an hour of trading. Leverage the lower prices (and maximize your returns) by spreading your purchases over several days or weeks. That way you won’t get tripped up by committing your entire nest egg when the market looks cheap and will probably get cheaper.
  • Go Global: China is still on track for 9.6% growth this year and may, in fact, slow to a “mere” 8.0% next year. Even that reduced growth rate will probably be about eight times the growth rate of the U.S. economy – if we’re lucky. Consider adding exposure to the Asian Rim as part of the rebalancing process, or as a primary focus once the recovery begins in earnest.
  • Get Inverted: Continue to use specialized inverse funds to hedge downside risk. We’re not out of the woods by a long shot.
  • Stop Your Losses – with Stop Losses: By all means include trailing stops to control small losses before they become catastrophic ones. This market could easily fall further before it gives way to the rally that history suggests is in the making.

[Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald, a former professional trade advisor, has been following the global financial markets for many years, and is an world recognized expert on China, Japan and other key Asian markets. Last year, Fitz-Gerald headed a two-week investor tour into China, an excursion that put him in touch with insiders in business and government, and enabled him to touch base with many of his longstanding sources in those markets. And share those with readers. Fitz-Gerald is also an expert forecaster, thanks to an uncanny ability to ferret out powerful trends and because of a proprietary system he developed that’s based on “Chaos Theory.” With the U.S. financial markets in such disarray, Fitz-Gerald is using our affiliated monthly newsletter, The Money Map Report to ferret out profit opportunities beyond U.S. borders. In our newest report, we’ve discovered a corporate gem that’s riding the profit wave of the most-powerful global trend we’re following right now. If you act immediately - as an added bonus - you’ll also receive a free copy of CNBC analyst Peter D. Schiff’s New York Times best-seller, "Crash Proof: How to Profit from the Coming Economic Collapse.]

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Pledge to Hedge: Three Ways to Lock in Low Gas Prices Right Now

Dec 17, 2008
Home Page, Pledge to Hedge

By Keith Fitz-Gerald
Editor, Geiger Index
Investment Director
Money Morning Investment News/The Money Map Report

Many of my neighbors here in Oregon are enjoying the big decline in gasoline prices, particularly those who still own SUVs, pickup trucks or any of the other fire-breathing, piston-clanking monstrosities I’ve seen on the road recently.

And no wonder. Gasoline prices in our neck of the woods have fallen between 60% and 70% since July, when oil closed at a peak price of $145.29 a barrel. Here in Oregon, that means that my wife and I don’t feel like we’ve been mugged every time we fill up.

But what happens when the prices start going up again? Global demand for oil will fall this year for the first time since 1983 as the world financial crisis saps demand, the International Energy Agency said a week ago. That has some people believing that prices will remain low.
But I wouldn’t bet on it – at least not for long.

The Organization of Petroleum Exporting Countries (OPEC) is making loud noises that it wants to see $75 a barrel again soon, which would represent a 70% increase from the $43.60 a barrel where oil closed yesterday (Tuesday). OPEC, supplier of more than 40% of the world’s oil, is ready to make a “big” cut in supplies when it meets in Oran, Algeria, today (Wednesday), Venezuelan Oil Minister Rafael Ramirez told journalists.

How much of a production cut we’ll see is anybody’s guess, depending on who does the cutting and who actually abides by the agreement over time. But we’ll know very shortly.

Russia recently announced, after years of going it alone, that it wants to actually join OPEC. Now OPEC has asked Russia to cut oil output by between 200,000 and 300,000 barrels a day to help revive prices, OAO Lukoil Chief Executive Officer Vagit Alekperov said in Moscow on Monday. And Russia may well do just that.

A price of $60 to $80 a barrel would be consistent with a global production cut of about 2.5 million barrels, and that’s a figure apparently supported by OPEC representatives we spoke to.   Leonid Fedun, OAO Lukoil’s deputy chief executive officer, noted in a recent Bloomberg News report that “there is a consensus [among members] to reduce production.”

This highlights something that’s often missed in the Western media, where the price of oil is typically associated with the price of gasoline and how that price impacts driving habits. According to CNN, MSNBC and a whole host of others, evidently that’s what matters to us.

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But in OPEC-producing countries, it’s a different story. There the price of oil is more typically associated with external trade relationships and hard currency requirements that are policy level decisions often made at the expense of individual concerns. And I don’t have to remind you that most OPEC member countries don’t exactly specialize in freedom of choice, so the odds are high that what the energy ministers want, the energy ministers will get … but that’s a story for another time.

Here’s one other point to consider: With all the media’s focus on OPEC, there’s been little mention of China, India and the whole host of emerging markets that are still experiencing double-digit growth in oil demand. That’s not going away.

The bottom line here is that it would behoove interested investors (and people who like to drive less fuel efficient cars) to hedge any potential future rise in gasoline prices sooner rather than later. Here’s one quick and dirty way to do it.

If you drive 20,000 miles a year and your car gets 30 miles to the gallon at a time when fuel costs $1.75 a gallon, you are looking at an annual fuel bill of $1,166.67. If OPEC gets its wish and oil rises by 70%, gas prices may rise in tandem. Therefore, buying the equivalent share value of your projected annual fuel expenditure in such exchange-traded funds (ETFs) as the United States Oil Fund LP (USO), the iPath S&P GSCI Crude Oil Total Return Fund (OIL) or the United States Gasoline Fund LP  (UGA) could be just the ticket.

As prices rise, so, too, will the value of your investments. If prices fall further, you’ll obviously lose money, but you’ll be paying less at the pump at the same time.

Granted, what I am proposing is not a perfect hedge. Among other things, there are potential capital gains to contend with when you sell 12 months from now – taxes, transaction costs and a whole host of other variables that could come into play. At the same time, you could simply alter your driving habits, which, of course, would change the value of your calculations midstream.

None of that really is material, though. Hedges are never perfect.

But they do offer you a chance of “being in the neighborhood” when it comes to protecting your wallet from what could be vastly higher oil prices to come.

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is on a mission to reduce his household energy consumption by 25% through conservation - without altering or compromising his family's lifestyle. This is the seventh installment in a periodic series in which he updates us on his progress.]

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Pledge To Hedge: Travel Tips “They” Don’t Want You To Know

Aug 12, 2008
Home Page, Keith Fitz-Gerald, Pledge to Hedge

[This is the fifth installment of an ongoing series.]

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

I don’t know about you, but I’m sick and tired of the airlines grumbling and whining.

I’m also frustrated with the endless list of new surcharges the airlines have come up with. Especially when there’s plenty of evidence that the airlines are just getting started and that they’re actually busy cooking up new ways to nickel and dime us.

Airline representatives and apologist analysts claim the new “fees” are necessary to help offset high fuel costs and to ensure the airlines’ survival. Baloney. The airlines can no more surcharge their way to profits than I can go to the moon.

The way I look at it, the “surcharges” that are being imposed are a sort of “management incompetence tax” that’s being foisted on us to make up for 40 years of airline mismanagement and perennially unprofitable performance.

It’s clear, to me anyway, that additional charges for water, boxed lunches, luggage, and booze are just the beginning.

Once passengers get used to these new “fees,” we can only expect to pay more. A lot more and probably for stuff we took for granted. Want a pillow? That will be $3. Maybe even $5 if you actually want a clean one. Blankets are the same deal. And if you actually want a cushion to sit on, that’ll be an extra $10 bucks, $20 if you want a seatbelt to go with it. 

Airline representatives will no doubt take issue with my observations and undoubtedly so will my fellow frequent fliers who expect to be “above it all.” Get over it guys. Try flying anywhere with your families in coach the way I do.

Gerald Kinder, a Florida Money Morning reader who has been keenly following this series – not to mention my family’s efforts to make each dollar count – shares my sentiment. And that’s why he sent me a video link to the classic comedy skit, “No Frills Flying,” featuring comedians Tim Conway and Harvey Korman.

The fact is that there are precious few alternatives to the airline’s new “fees” if you plan to keep flying.  But here are a few I’ve picked up in my wanderings that may be helpful:

  • Baggage Charges: Obviously the simplest solution is the most elegant – carry it on. But pack lightly. Newer airframes and cabin designers are taking steps to make overhead bins and storage areas smaller. If you’ve got to check bags, try flying one of the few remaining airlines with free first bag policies. And be prepared to shell out $15 to $50 for a second suitcase.
  • Drinking Water: Bring an empty nalgene water bottle and fill it at the drinking fountain after security. Many of the bottles come with clips you can easily attach it to your bag. If you can’t be bothered to carry anything else or simply don’t want to mess with it, there’s always bottled water in the terminals available for purchase. But those bottles are often even more expensive than the ones available on the plane.
  • Frequent Flyer Charges: Sadly, airlines are busy reducing the value of accumulated miles faster than U.S. Federal Reserve Chairman Ben S. Bernanke can print money. This means that even seasoned frequent flyers like myself are not immune. Case in point: Many airlines are now charging booking fees of $100 or more simply to claim award-based fares. At the same time, they’re increasing the number of miles necessary to obtain free flights. There’s really not much to do here except spend the miles on merchandise, which doesn’t seem to depreciate in the rewards bank as fast. If you’re determined to “bank” the miles for travel, now’s a good time to concentrate your efforts on a single program to build up miles as consistently as possible.

Just because airlines are sticking it to us, doesn’t mean we can’t save a little money.

[Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald is on a mission to reduce his household energy consumption by 25% through conservation - without altering or compromising his family’s lifestyle.]

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Pledge to Hedge: A High-Tech Way to Boost Your Vehicle’s Gas Mileage

Jul 22, 2008
Home Page, Keith Fitz-Gerald, Pledge to Hedge

Editor’s Note: This is the third installment of an ongoing series.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

I begin today with a startling number: 5.2.

That’s the percentage my gas mileage improved when I added Pulstar Pulse Spark Plugs to my 1991 Mazda Miata.

Made by the Albuquerque, N.M.-based Enerpulse Inc., Pulstar Plugs are the latest in a series of innovative new products that I’ve employed as part of my stated goal of cutting my family’s household energy and resources budget by 25%. These aren’t actual endorsements, but are instead anecdotes aimed at telling you what my family and I have done, and the products and technologies we’ve employed in our attempt to hit our goal.

My research told me that Pulstar Plugs represent a new technology that increases a car’s gas mileage, as well as its power and performance – all of which reduces greenhouse-gas emissions. In the context of my overall budget-reduction goal, a 5.2% increase in gas mileage doesn’t seem like a major attention grabber, but when you realize that it’s the equivalent of a few free gallons of gasoline every month, we’re all over it.

If you’ve never heard of Pulstar Plugs, or Enerpulse, it’s only because the company is just starting to really accelerate. According to the company, which was founded in 1996, the so-called “Pulsed Power Technology” (PPT) that’s central to the spark plugs was developed by Enerpulse with the assistance of the nearby Sandia National Laboratories.

Originally, the plugs were developed for the high-performance after-market. But as fuel prices moved higher, Enerpulse increasingly viewed them as a potential replacement for the 1.5 billion spark plugs sold each year, Chief Executive Officer Daniel Parker said in an interview last summer.

To help with its shift toward the consumer market, Enerpulse last July raised $5.5 million in second-round venture financing (the company has raised $8 million overall, according to published reports). By December, Pulstar Plugs – which previously had only been sold online by the company from its Web site – were being sold at retail through The Pep Boys (PBY) auto-parts chain. According to some reports, the company is now growing at a rate of 20% a month.

According to my research, what makes Pulstar plugs different from traditional spark plugs is the capacitor-based circuit mounted inside each plug. It captures the energy that’s normally wasted by traditional plugs and produces a spark that’s 10 times “brighter” and more efficient.

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The net gain is a huge jump in the fuel that’s actually burned with each discharge – in two billionths of a second. Not only is the ignition process made more precise, but the higher energy pulse typically results in a cleaner, faster burn that translates into better fuel economy, more power, and lower emissions.

I noticed immediately that my car ran smoother and is faster when running through the gears, while my wife noticed that the garage didn’t smell as much when I first fired up the Miata’s motor.

In contrast to my simple anecdotal testing, Enerpulse has conducted very scientific, well-documented analysis on a variety of vehicles, with consistent results. And cars from Corvettes to Mercedes have shown improvements.

The company said it even made a Toyota Prius greener to the tune of 6% to 8% in additional miles per gallon.

I find that to be most impressive considering that the 2005 and 2007 “hybrids” Enerpulse tested already get more than 50 miles per gallon. So is the 5% increase in acceleration, particularly when you consider that hybrid owners typically give up performance in their quest for high mileage.

The other thing really worth noting here is that the three mile-per-gallon increase for each of the Prius models tested translates into 1,344 pounds of carbon dioxide greenhouse gas emissions that won’t foul the planet over the next four years (which is the projected life of a Pulstar plug).

At $24.95 per spark plug, Pulstar Plugs clearly aren’t cheap – that’s five to eight times the cost of a conventional plug, a ceramic-and-steel device that lacks any circuitry at all.

If you’re a longtime “Gearhead” like I am (Here’s a Money Morning secret…Executive Editor Bill Patalon is equally afflicted), there’s another benefit worth noting: At $8 per horsepower gained, Pulstar Plugs are one of the cheapest ways to increase horsepower, costing even less than such traditional “bolt-on” horsepower boosters as nitrous oxide, exhaust headers, or low-restriction exhaust systems.

Best of all, Pulstar Plugs are perfect replacements for factory plugs, meaning you should be able to install them easily in just a few minutes – without having to make any modifications to your car’s motor.

You can visit www.pulstar.com to learn more.

In closing, please allow me to thank you all for the many letters, e-mails, and comments we’ve received on this column. Please keep those comments coming. We’ve enjoyed learning about your personal conservation efforts and if our discoveries along the way seem to warrant it, we could end up publishing a guidebook of what we’ve learned along the way – including the best tips we’ve received.

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is on a mission to reduce his household energy consumption by 25% through conservation - without altering or compromising his family's lifestyle. This is the third installment in a periodic series in which he'll update us on his progress.]

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Cashing in on Commodities: Two Ways to Profit From the World’s Newest Markets

May 30, 2008
Commodities, Home Page, Keith Fitz-Gerald

Editor’s Note: This is the fourth installment of a new Money Morning series highlighting investment opportunities in the global bull market in commodities.
By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

Many people are in sticker shock thanks to high gas prices and oil that punched through the $135-a-barrel level recently, before sliding back.

And many investors are feeling left out because they haven’t been part of the incredible bull run energy companies have enjoyed in the last few years.

But have no fear.

It’s not too late to grab a piece of the pie.

The trick is that you’ll have to look beyond the obvious choices like major oil companies, drillers and other sectors that are hopelessly bid up right now. And you can play various types of funds, as well as stocks, as we’ll demonstrate.

The Four Factors Giving Life to the Commodity Bull

But before we tackle the how, let’s tackle the why:

  • First, it’s important to understand that high oil prices are simply going to go higher, still. There will be inevitable pullbacks, but as we’ve written so many times in the past, the math is very simple – people are simply using more oil than at any time in history and worldwide demand is accelerating.
  • Second, it’s also important to note that we haven’t had a major new discovery of any substantial size in the last 30 years. And by substantial, we mean big enough to change the balance of supply and demand and, by implication, to reverse the runaway increase in prices. The lack of any new discoveries, then, also points to higher prices.
  • Third, absent an immediate, cost-effective and widely available substitute, oil is increasingly nationalistic in nature. This means that oil producers – and particularly the tyrants with spigots – will begin holding back production for their own use. That will reduce the supply available on world markets, further enhancing the upward pricing pressure.
  • And fourth, while higher prices are finally inducing some drivers in modern industrialized countries to drive less, developing nations don’t give damn about conservation and are guzzling gasoline like there’s no tomorrow – which, for them, is entirely true. For these nations, access to energy and to petroleum is the literal equivalent to survival and they’ll do everything they can to ensure it. So any drop in demand we’re experiencing is almost immediately offset by higher consumption in such markets as China, India and many parts of South America. And that offsetting consumption may well persist for years.

That’s a very painful reality to face. But it does bring us to the fun part of this commentary: The profits.

New Markets = New Profit Opportunities

Any time you have sustained supply-and-demand imbalances, you also the potential for huge profits. And what’s happening now is no different.

Viewed in that light, higher oil prices can actually be a good thing for the stock markets, just as the rising price of such “commodities” as gold, copper, cotton, silk and spices have been for various nations since the dawn of time.

The reason is that excess profits that would ordinarily flow to Caracas, Moscow and Riyadh, are being recycled into the best global stocks on the best first-tier global stock exchanges, including the New York Stock Exchange, the Tokyo and Hong Kong stock exchanges, and the Frankfurt, Euronext and London exchanges.

But that may be coming to a head as trillions of dollars are chasing a diminishing number of high-quality stocks, which over time will propel those shares to excessively high valuation levels.

So what’s an investor to do? Savvy investors will once again have to go with the (global money) flow, ferreting out markets that haven’t yet hit “mainstream” radar screens, but that still are likely to benefit from rising oil prices.

We refer to them as “frontier” markets and they include such mineral- and resource-rich places as Nigeria, Sudan, Egypt and Bangladesh among others. They’re obviously beyond the same old BRIC choices that have become so popular in recent years.

Most of these markets are so small that many investors overlook them altogether – but they’ll soon become very popular because of the tremendous upside they offer.

Even with political upheaval, hyperinflation, open warfare and catastrophic human and natural disasters, frontier markets are piling on stunning returns. Most are benefiting significantly from rising commodity prices that, in turn, produce higher corporate profits.

As a case in point, consider the Standard & Poor’s/IFCG Frontier Markets Composite Index posted a mouth watering 43.3% return last year. And individual markets did even better. Bangladesh turned in 128.3% while Cote d’Ivoire nailed down a 122.7% gain. The index’s worst performer, Estonia, plunged -14.2%.

Clearly with a range like that, so-called frontier markets aren’t for everybody especially since they’ve gotten so expensive as more money has flowed into them. Data shows that many are trading at Price/Earnings (P/E) ratios that range from a high of nearly 100 for Vietnam to a “mere” 35.9 in Slovenia.

Still, even at these valuations, we can make the case that higher commodity prices will allow these markets to grow for years to come – especially given that they are starting from such a small base.

Which makes them a logical choice for adventurous investors who want to get in before they become hot on the country club cocktail circuit.

Two Moves to Make Now

Unfortunately, the path to them is not as easy as we’d like to see and investment choices remain extremely limited for now.

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If you’re part of the über-wealthy set, you can probably get first dibs via high-net-worth asset-management plans and institutional offerings. And you will reap the greater rewards of having invested early.

If you’re part of the normal working class – like us – here are two very solid possibilities:

  • The T. Rowe Price Africa & Middle East Fund (TRAMX), which carries a $2,500 minimum investment.
  • The SPDR Standard & Poor’s 500 Emerging Middle East and Africa (GAF) exchange-traded fund (ETF), which tries to closely match the performance of the S&P®/Citigroup® BMI Middle East & Africa Index.

[Editor's Notes: In Money Morning's "Cashing in on Commodities" series we have written about uranium and coal, crude oil and timber. Next up: Look for our story on high-end commodities on Tuesday and gold on Friday. While oil and other commodities have dominated the headlines, they're far from the only investment opportunities available. And some of the other profit plays are more lucrative, and less risky. If the economic uncertainty - or the volatile markets - of recent months have you at a loss over the best moves to make next, check out Money Morning's first book, "The Essential Investor's Playbook for the Next 12 Months." At 118 pages, our just-published global-investing guide provides an insider's look at the Top 16 global trends you're likely to face over the next year or more, and contains a special chart that details more than 50 profit opportunities. And it really is a playbook: No matter what the market throws at you, you'll find a play you can call to maximize profits.]

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The View From China: As it Continues to Change, China Offers a Growing Number of Profit Plays to Investors Who are Willing to Look

May 14, 2008
China, Home Page, Keith Fitz-Gerald

Money Morning Investment Director Keith Fitz-Gerald – an Asia investing expert – has been leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part VI – the final installment – of a short news series detailing his observations and discoveries.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

IN THE AIR, ENROUTE FROM HONG KONG TO JAPAN – The fiery orange sunrise I see out my window is mesmerizing.

I’m always filled with awe over the dawn of a new day, especially during those long trips when sunrise jolts me awake from the kind of cramped, restless sleep familiar to travelers the world over.

On this day, however, I’m wide-awake. It’s the start of the newest leg of my Asian adventure. I’m tucked into seat 11A, and am quickly lost in thought. I keep thinking about different parts of the 15-day investor trip I just finished leading through Mainland China and into Hong Kong.

In fact, we’ve been off the ground for only five minutes and already I find myself watching the landscape below, which is falling away by the minute as our jetliner climbs steeply out of Hong Kong’s International Airport on its way to Japan.

After nearly a month apart, I’m certainly going to be glad to join my wife and kids at our home in Kyoto (we also live part of the year in Oregon). Even so, there’s so much going on in China that I don’t really want to leave, yet – not even for a minute.

As I look around the plane, I can’t help but wonder if my fellow passengers feel that way about the Red Dragon. Most passengers are slouched in their seats, determined to ride out the fairly long flight. The other passengers appear oblivious to the economic miracle that I’ve spent two weeks studying. One guy has a magazine folded in his lap, while several are already asleep on those tiny things airlines refer to as "a pillow." One guy – an executive, from the look of him – has his hands resting across the tray that folds down out of the seat before him.

Here and there the bluish tint from a personal computer or iPod bathes the cabin like a landing beacon giving away those who can’t or don’t want to sleep.

When I think about all that I learned about in China – and all the things that I’m going to be telling you about here in Money Morning (and in our monthly sister publication, The Money Map Report) – I can hardly get more excited than I already am.

The Pathway to China Profits

Imagine landing in New York or Boston on the eve of the Industrial Revolution and you get the idea.

China is at once a land of contradictions and a contradiction in and of itself. It’s also enormously complicated which is why even after I’ve spent 20 years in the Pacific Region, I feel like I’ve only scratched the surface.

The change China has undertaken is simply without precedent. And so is its government.

Contrary to what most Western investors believe, Beijing is growing stronger and wiser with each passing day – even as it continues to build upon the Communist pathway it established in 1949. It’s also proven itself to be remarkably prescient and pragmatic, which is why China will travel a path all its own in the years to come.

And that’s why China’s future will be very different from its past.

I realize that’s a hard pill for Westerners to swallow, but it’s one that investors must accept in order to lock in long-term profits from China.

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The key, of course, isn’t in latching onto a specific trend or direction in China, but rather in identifying investments with enough flexibility and profit potential to flourish from China-based trends.

There’s a big difference between the two mindsets. The former – always looking for ways to invest directly in China – may lead to quicker, short-term profits. But the latter – looking for powerful trends and using them to profit from China – is much more robust, since it’s capable of surviving the twists and turns that will inevitably take place along the way.

The Reality of the "New" China

After centuries of isolation and comparative solitude, China has re-entered the world economy with a bang. In the process, it’s making itself over, shedding its identity as a Cold War-oriented power player, and evolving into one of the most efficient capitalist economies the world has ever seen.

And there’s no turning back.

The prospect of a strong China clearly scares the dickens out of a good portion of America, particularly the "experts" who want to portray China as a long-term military problem. The reality here is that we are probably far better off in the long run working with China, than we are continuing to regard it as a Cold-War-type enemy. With such an enlightened philosophy, we could be investing with China in the Pacific Rim, rather than constantly figuring out how to defend against its military might.

But nothing happens quickly here. Not the airplane ride that brought me to China from the United States on the first day of my journey, and certainly not the type of U.S.-China alliance that I’m suggesting.

That means that no agreement will be reached overnight. There will be no single negotiation that "does the trick." Instead, it will take a series of negotiations – possibly over the course of several years – that will include trade talks, economic interaction and deals that build trust and understanding.

But it could all be very worthwhile. In reality, China may wind up not being our worst enemy, but our best friend.

[Editor's Note: "The View From China" has been an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's journey through Mainland China. Fitz-Gerald last wrote about the modernization of China's securities laws. For more information about China-focused investments - especially specific stocks - see how you can obtain a free copy of investing guru Jim Rogers' new bestseller, "A Bull in China, a new offer from Money Morning.]

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The View From China: As its Securities Regulations are Modernized, the Red Dragon’s Profit Potential Will Soar

May 13, 2008
China, Chinese Investments, Home Page, Keith Fitz-Gerald

Money Morning Investment Director Keith Fitz-Gerald has been leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part V of a short series detailing his observations and discoveries.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

HONG KONG – The question came to me as I was standing on the floor of the Hong Kong Stock Exchange here. I’d be willing to wager that quite a few investors – both within China and back in the United States – are wondering about this, as well.

Here it is: Will China implement a long-rumored capital-gains tax, and risk (another) major sell-off as a result?

Only Beijing’s inner circle knows for sure, and that only stokes investor speculation. The uncertainty can lead to rampant, knee-jerk sell-offs each time the scuttlebutt of an "imminent" tax surfaces. And those rumors have been surfacing over and over again – since 1994. That’s the year that Beijing’s Ministry of Finance pronounced that income derived from stock trading was exempt from personal income taxation.

That means that billions of dollars have changed hands – tax-free – as far as Beijing is concerned. For westerners accustomed to normal taxation and mature financial markets, this is almost incomprehensible. Yet, for the Chinese government it makes sense. Not only does this tax-free status encourage active market participation from Chinese consumers who otherwise would almost certainly not bother, but it also attracts foreign assets to a market like a porch light attracts moths on a hot summer night.

This foreign capital has had two beneficial effects. It helps ensure that there’s an active market that’s always awash in liquidity. And it’s probably also helped China keep its economic growth rate at around 9% per annum, many economic experts and other commentators say.

But what’s good for the goose is not good for the gander. Turns out that as much as 40% of the profits reported at the corporate level on the Shanghai and Shenzhen stock exchanges in 2007 were derived from investments in other publicly traded companies – and not from ongoing operations in their "core" businesses.

No wonder western investors are scratching their heads in amazement at the volatile stock prices. Not only are huge chunks of the market driven by individual investors who don’t have to report their activities, but also corporations and other investors – many of who have transformed securities manipulation into a new art form – have been able to trade with relative anonymity for years.

That changed in November, when China’s Ministry of Taxation required investors to report income derived from stock trading even though it remains untaxable. Understandably, smaller investors fear that this is another "Big Brother" scenario like so many others that they’ve seen through the years. And corporations are being dragged – kicking and screaming – into a new era of greater visibility and more-complete financial transparency.

And that brings us full circle.

By western standards, China’s markets are still highly primitive on many different levels – including those related to individual reporting requirements. Yet they remain full of promise, too. And the increasing regulation – including the new reporting requirements we’ve detailed here – are another in a long and ongoing series of steps needed to bring China’s securities markets up to global standards.

Those changes are all very positive. And they’re ongoing. That’s why we have faith in the long-term potential for China’s stock market. And that’s why we believe you should, too.

[Editor's Note: "The View From China" is an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's current journey through Mainland China. Fitz-Gerald last wrote about the mindset U.S. investors must adopt to profit from China's form of capitalism. Next up: What we can learn from China. For a detailed look at China stocks, please take a look to see how you can obtain a free copy of investing guru Jim Rogers' new bestseller, "A Bull in China."]
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The View From China: The Single Secret That Will Put You on the Pathway to Profits

May 9, 2008
China, Home Page, Keith Fitz-Gerald

Money Morning Investment Director Keith Fitz-Gerald is currently leading an investment trip through China, taking in that country’s culture and scenery, as well as its investment opportunities. Here is Part IV of a short series detailing his observations and discoveries.

By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

BEIJING, CHINA – Whether you’re trying to invest profitably in the region here, or are just trying to understand what’s going on, there’s a single secret that will virtually guarantee your long-term success.

And I’m going to tell you what that secret is.

Stop making the same mistake most Westerners make. Don’t waste your time trying to figure out just where China will fit into our future. Instead, try and figure out where we will fit into theirs.

That’s more than an exercise in semantics. Think of it more as an investment screen that will determine which countries from "our world" will advance enough to be relevant to China’s future. Those are some of the companies that you’ll want to go with – the companies that will profit "from" China without having to actually be Chinese companies.

The problem with trying to figure out where China’s headed is that the changes are just too dramatic. I mean, 35 years ago China was like North Korea is today; 30 years ago it was like Cuba. Now it’s like no place on the planet.

That’s why the so-called "Panda bashers" – who view this as one huge economic train wreck that’s just waiting to happen have got it all wrong.

Look, I’m not saying that there won’t be challenges or corrections along the way – indeed, we’ve been experiencing just that over the past few months – but one visit here is all it takes for a person to fully understand that the proverbial genie is out of the bottle, and there’s no putting it back.

The Big Buildup

The first thing you’ll notice here is that China looks like one big construction zone. There hasn’t been an infrastructure boom like this one anywhere on earth since the Marshall Plan reconstructed much of Europe after that region was devastated by World War II.

Everywhere you look you see piles of building materials – bricks, pipe, cable, wiring, lumber and glass (and that’s merely a sampling) – just waiting to be installed in buildings all over this capital city. Some will renovate small family housing units in Beijing’s ancient and narrow hutongs, while much of the rest will give life to the modern new high-rises reaching skyward from the construction sites arranged like chessboard squares in almost every key city here in China.

It seems like the entire country is going "up," which is why I was not surprised to hear from one of my local contacts that as many as 50% of the world’s high gantry construction cranes are now being used in China.

The East Coast city of Shanghai – with its modern, almost-Western atmosphere – already has more than 4,000 skyscrapers; that’s twice as many as New York City, and Shanghai has another 1,000 on the proverbial drawing board.

China’s also going "out." And in every direction.

In the late 1980s, Beijing had only two beltway-style "ringed" highways encircling the city. Now it has six – to serve the 14.5 million people who live here.

Two decades from now, China will have more than 50,000 miles of freeways – more than our entire interstate system – and even that won’t be enough.

Incomes are on the march. Everywhere I’ve been in recent days, I’ve seen my share of Gucci, Dior and Rolex – and not just the "knockoffs." As we’ve reported repeatedly, China’s consumers are becoming more and more brand-conscious, especially in the first-tier cities like Beijing and Shanghai (Money Morning editor Bill Patalon has dubbed this "The Baywatch Effect," and only partly in jest), but also in second- and third-tier cities, as well.

The escalation in traffic has been breathtaking, simultaneously choking the roads and the pedestrians on the sidewalks. And it’s only going to get worse.

In 20 years, China will have more cars on its roads at any one time than we do in our entire country, running or parked. At the moment, Beijing alone is adding 14,000 vehicles a day to its rolling roster (For China’s government, a “vehicle” is basically anything with wheels and a gasoline motor, including scooters, motorcycles, cars, trucks and buses. The actual number of cars that are newly introduced to the capital city’s macadam each year is more like 1,500, insiders estimate).

If all these new cars were the small, economical, fuel-efficient cars you typically see in emerging economies, that would be one thing. But the growth in incomes and in wealth has enabled many China consumers to buy luxury cars, just as they buy luxury goods.

On this trip, shiny black Audi A6s (at $43,000 to $73,000 a copy in the U.S. market, depending upon the model and options picked) in particular seem to be ubiquitous. So are Buick sedans. I’ve even spotted a few Hummers.

If you look at several of these brands – Audi, Buick and Hummer – you’ll get a poignant illustration of how well it pays off to become part of China’s future, and the risks of waiting for that country to become part of yours.

Here’s what I mean.

The "Secret" Pays Off

Let’s first look at Audi. Some of the Audis are being built by a China operation managed by Volkswagen AG. VW became one of the first foreign companies to begin manufacturing facilities in China when it started operations there in 1982. Audi AG and both VW long ago decided to make itself part of China’s future – and now it’s reaping the rewards. The German carmaker actually holds a 10% stake in the FAW-Volkswagen Automotive Co. Ltd. operation that produces the Audi cars in China. And  Audi just this week announced plans to expand its dealer network in China from the current 132 to 220 by 2012, underscoring again the importance it places on that market.

Hummers are appearing because they confer status on China’s "new money crowd." If you have a Hummer, everyone knows you’re successful. There’s a real value in that in most societies – and China, where status is important, is certainly no different.

But Buicks? That one doesn’t quite compute, yet. You see, when it comes to China, my sense is that parent company General Motors Corp. (GM), was a bit late to the party – like most U.S. carmakers – in terms of embracing the reverse mindset of success that I outlined above.

But at least they’re working to redress that. For instance, GM last fall announced plans for a new $250 million research-and-development center in Shanghai. The facility will serve as GM’s headquarters in the China and Asia-Pacific regions, and will work on China’s pollution problems through research on such eco-friendly technologies as alternative fuels, hybrid cars, and more-efficient power trains, including those utilizing new technologies.

[Editor's Note: "The View From China" is an investing travelogue chronicling Money Morning Investment Director Keith Fitz-Gerald's current journey through Mainland China. Fitz-Gerald last wrote about how China's version of capitalism affects the lives of its consumers. Next up: A look at Hong Kong. For a detailed look at China stocks, please take a look to see how you can obtain a free copy of investing guru Jim Rogers' new bestseller, "A Bull in China."]

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