First, what not to do.

I’m solidly of the opinion that most private investors can’t consistently successfully pick individual international stocks over time. Why? The access to “truthful” micro-economic data is too controlled, misleading or non-existent. Insiders with that information will beat you most every time in a rigged situation. So stay away from picking individual stock where you have less than complete and reliable information.

So how do you rise above that and use this situation to your advantage?

Like making sausage, let the companies in remote parts of the world do their back door deals with their governments, hide their disasters from the public, and their creative financing deals. You let them fight their micro economic battles and you focus above that at the macro-economics of the regions of the world. Mutual Funds are the obvious best choice to mitigate or spread your micro-economic risk and still get good macroeconomic alpha (increase) assuming you picked a good growth segment. Picking winning segments is, in most cases, easier to choose than individual stock in foreign countries.

In a nutshell, what about Europe, the US and China?

Europe

There are always ways to make money in any market if you have the right information. However, for the average individual investor, Europe is full of red flags and unknowns. I see a sea of red flags in every corner of Europe. Like a cinder block tied around the boot of Italy, the PIGS are dragging the Brits and Germans down. Putting perfume and lipstick “PIG(s)” that can’t/won’t get to a revenue and expense neutral budget is still a “PIG(s)”.

USA

Not to get too political, the election is key to the long term prospects. The US could be on the same slope as Europe. Yes, the USA has been resilient in its history. Four things worry that should worry you:

1. We now have so much debt which limits our options. Can the Fed continue to use it’s tools to manage macro economics? Debt and inflation can reduce their effectiveness.
2. How much pain (cure) can the American people take to pay down the debt?
3. The election will determine the will of the people on the direction.
4. Entrepreneurs are the best chance to bring back the USA’s economy. Government regulations are limiting the growth and speed of which the entrepreneurs will save the USA. The Obama administration I now seems to understand this but I’m not sure the bureaucracy.

China

It’s ironic that the Communists are “out-free-enterprising” the USA or at least “out-enterprising”. But there are now some small chinks in the Chi-Coms armor-plated economy. In spite of the government will to control pricing, they are becoming a classic victim of their macro-economic success and over expansion. Wages and costs are apparently rising in China as evidenced by the beginnings of the resurrection and slight resurgence of the furniture industry in North Carolina. The delta between the price the of furniture manufactured in China and the costs of making furniture in the US has narrowed to the point that some US firms are beginning to restart plants even in this economy.

In addition, the housing market in China has been over inflated and there is a glut of empty individual housing in China. Another indicator that the China economy is exhibiting more signs of moving towards a more mature economic stage.

In Conclusion

The big advantage that I see from a macro-economic perspective is the Chinese have the flexibility to make changes faster to react to the changing market conditions. The US still has too many regulatory constraints on the American entrepreneurs. I’m sure the vast majority of Obama’s bureaucrats (as well as all other administrations) are implementing well meaning policies in their area but there are just too many unintended consequences. The US bureaucrats appear to be looking at their regulatory space of responsibility where the entrepreneurs forced to look at the totality of burdensome requirements. The sad result is that many entrepreneurs may make the logical decision to not move forward and not risk their capital on a job creating venture, and instead, just live off their $3 million investments.  As far a Europe goes, the best case is that the PIGS redo their social programs to match their revenues…… Me either.

Update (5/9/12)

With French people electing left-wing leadership my macro-economic predictions are unfolding as I predicted….. I’m sad to say. The outlook is looking dimmer for Europe.

The Author: Mike Dunn

An entrepreneur at heart, Mike Dunn launched his first computer training and software development business when he was just 21 years old. With Bachelor’s degrees in both Finance and Information Systems with minors in Economics and Psychology from Appalachian State University, Dunn embarked on a sales career for AT&T/BellSouth. He soared to the top of his field, matching customers’ corporate goals and objectives to bleeding-edge technology. He has leveraged his 20+ years of leadership in the sales field to help others succeed through his training company, PowerfulSalesSkills.com. As a thought leader in Internet-related finance, Dunn has been at the forefront of recognizing and acting on game-changing strategies. He melds his expertise in sales and finance in order to quantify return on investment for what Nassim Taleb termed Black Swan Events. Dunn’s current project, Mutual Fund Marketing Services.com, focuses on helping Mutual Fund Companies leverage Social Media/Call Center and Mutual Funds sales best practices into a powerful combination to help mutual fund companies achieve and exceed their corporate metrics and goals.

Yes, the Chi-Coms (Chinese Communists) have clearly been practicing free enterprise better than the USA. That’s hard to argue. These aren’t your fathers Chi-Coms.BUT…. We are starting to hear reports that the housing bubble in Chinese cities may be being propped up. The report from “Calculated Risk” Blog says that “Han Jing, a Beijing realtor, Bauman learns that she bought her own apartment for the equivalent of $80,000 five years ago. It's now worth $400,000, she says. Yet she can only rent it for the equivalent of $600 a month. ... Bauman's conclusion? Beijing prices and its glut of vacant apartment buildings seem as fishy…”

We can only assume that the government is propping up the price of housing. Yet, the rental market only supports a $600.00 rental payment. Hence, Adam Smith’s Invisible Hand (the free market) is in conflict with were someone (can only assume the government) wants the price to be.So it’s the tide vs. the sea wall with the free market being the tide and the sea wall being the Chinese Government.

In contrast, how the USA market is operating.

From Freddie Mac: Fixed Mortgage Rates Up Sharply Following Jobs Report

In the USA, mortgage rates slightly increased but are still on a 60 year low.  Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates up sharply from the previous week's record-setting lows following a better than expected employment report. Despite the sharp increase, mortgage rates remain near their 60-year lows. Freddie Mac has it's valid issues and critics but it now seems to be operating in a more open and informed market than the Chinese housing market.

Why is this important?

Clearly, Chi Coms controlling a market is not a surprise. However, like the US FED, any information how the Economic Ministers in China operate is critical in making investment decisions in the far east and around the globe. Moreover, since China is such a large economy and owns some much of the US debt, it's even more critical to understand how decisions are made. If they are controlling this high end housing market, how are they controlling other markets and what are their motivations. And who and how are the decisions being made.

The Conclusion

This not a bad news per se. Any free market will go up and down with supply and demand. Any partially government controlled market will just react slower. However, further over supply in high end housing may be a leading indicator that the Chinese economy is nearing a mature economic stage as inflation creeps in to cool the growth curve. The hidden learning here is trying to understand what and how the Chinese bureaucrats are controlling markets. If you can understand that, you will be well on you way to seeing future profitable opportunities and avoiding investing mistakes.

Mike Dunn - Senior Partner Mutual Fund Marketing Services.com Copyright 2011. All rights reserved. mike@mutualfundmarketingservices.com

An entrepreneur at heart, Mike Dunn launched his first computer training and software development business when he was just 21 years old. With Bachelor’s degrees in both Finance and Information Systems with minors in Economics and Psychology from Appalachian State University, Dunn embarked on a sales career for AT&T/BellSouth. He soared to the top of his field, matching customers’ corporate goals and objectives to bleeding-edge technology. He has leveraged his 20+ years of leadership in the sales field to help others succeed through his training company, PowerfulSalesSkills.com. As a thought leader in Internet-related finance, Dunn has been at the forefront of recognizing and acting on game-changing strategies. He melds his expertise in sales and finance in order to quantify return on investment for what Nassim Taleb termed Black Swan Events. Dunn’s current project, Mutual Fund Marketing Services.com, focuses on helping Mutual Fund Companies leverage Social Media/Call Center and Mutual Funds sales best practices into a powerful combination to help mutual fund companies achieve and exceed their corporate metrics and goals.

There are a few key pieces of critical new macro-economic information that you should consider in making decisions on Chinese Mutual Funds.China has one of the fastest growing consumer and industrial markets in the world. Growing markets and maturing financial markets mean financial investment opportunities.

 


Reasons to be Positive in the Chinese Investing Global Picture

1.     The Chinese economic engine is booming.

No news here. They are excelling in both low tech and high tech manufacturing.

2.     China owns much of the US debt.

China is buying most of our treasury bonds while the US is currently spending more than we are taking in in taxes. Hence, they can now apply pressure on our economy and government more than ever before.

Reason to be Neutral in the Chinese Investment Picture

1.     Manufacturing wages are apparently rising in China.

It was just announced in the first week of September 2011 that Cochrane Furniture, based in Lincolnton, NC will be reopening their main plant in 2012. The reason cited was that the manufacturing cost delta fell under 50% due to the rising labor costs in China.  This is also huge. You heard this here first.  So credit “Mike Dunn, President  MFMS”.

2.     The rate of the trade deficit dropped sharply in July of 2011.

Good for the USA but not as good for China. The deficit is still huge but a change of

direction is still very important actionable information for an investor.

Source: Calculated Risk

3.     With the USA’s credit rating going from AAA to AA+ the risk of the United States missing a debt/interest payment has ever so slightly increased.

The less financially stable any government or business is the more they have to pay in higher interest to get investors to buy their bonds or debt.  If you have a stable government or business and you have another government or company that is less stable and they offer bonds at the same price you will by the more stable organization’s bonds 100% of the time. Therefore, the less stable seller of bonds/debt has to slightly raise their interest they will pay until they reach a point where investors think the better deal is to assume the extra risk for the extra money. In economic terms, they need to move up the indifference curve to sell their debt bonds.

4.     The cost of doing business in China is still less than the USA.

As long as it cost companies less to make their products in China and ship them to their markets, they will continue to manufacture product in China and the Far East.  If a companies competitor’s begin manufacturing in China they don’t and find out they can’t successfully compete for business, they will be forced to make hard decisions. Hence, the reason for the explosion of manufacturing in China.

Reasons for Pause in the Chinese Investing Global Picture

1.     The Chinese Government seems to be adhering to more free enterprise concepts than the current US administration.

However, they are still communists and have a growing military that is a traditional foe. By the Chinese being the USA largest creditor, does that make us safer in a perverse way? I think so, but there are too many variables and too much history to eliminate a significant risk premium. How much is that risk premium? No one really knows. So that is a question you must consider and how much you bid on Chinese stocks and mutual funds.

In Conclusion

I’m still a fan of any highly productive economy. Currently, China has the gold standard.  Clearly neither I, nor most anyone on the planet, have access to good information to make consistent individual (micro-economic) stock calls on individual Chinese companies. Therefore, I would encourage individual investors interested in Chinese companies to consider mutual funds as a financial investment vehicle to reduce risk and only average the return.

Other Related Links

Mutual Fund Coupons – Get A Discount On Your Next Mutual Fund Purchase

Investment Tips – Get Refining Your Investing Strategy for 2011

Mutual Fund Directory – List Of The Top Mutual Fund Companies for 2011

Mike Dunn, President, Mutual Fund Marketing Services.com

The above blog are opinions only. I encourage you to consult your financial advisor before making financial decisions.
Copyright 2011. All rights reserved. Mike Dunn, Mutual Fund Marketing Services.com