12/21/2005
In the last several years, we have all watched China's evolution play out right before our eyes. The country has literally exploded in terms of its economic growth. The truly stunning news that came out a couple of days ago is that China has just revised its growth numbers upward by an amazing 20%! It's time for you to get in on the action in China.
The size of China's economy has surpassed Great Britain and Italy. China is now the 4th largest economy in the world and will continue to expand beyond that level. China could handily surpass Germany and Japan and, no doubt, will someday overtake the U.S., as well.
Now, you know that I have advised my readers to get more involved in the global markets by investing in international ETFs. The importance of investing in the international arena cannot be overstated. Foreign economies, especially China's are growing at an alarming rate. In fact, Alan Greenspan announced just last week that the worldwide standard of living is increasing, particularly in Asia.
So how can you capitalize on the explosive growth that is happening in China and India? Well, there's a specific strategy I am employing for my Successful Investing subscribers and it's one that I would like to share with you now. The tricky part about investing to capture profits linked to the growth in China is to not invest in China. Sound confusing? Let me clarify: the Chinese government owns about 70% of all businesses in China. As a result, you are a fairly helpless investor when you invest in companies in China because they can do whatever they want and you are powerless. So, the best way to get in on the China growth story is by buying international ETFs in the countries who stand to gain the most from China's expansion, namely Brazil and Australia. Additionally, Canada has some involvement in the China story, as well.
The profit potential far outstrips the opportunities here domestically. The international economic playing field is changing and the U.S. is not leading the charge in either safety or profits right now. Going forward, the real profit opportunities are abroad and you need to get educated on how to play it. Why not get 6-months of the Fabian Trend-Following Plan that will give you the recommendations and the insights that will help you make the most of all of your investments? Right now, we have a nice mix of some of the top-performing sectors both here and abroad. Click here to learn how you can get in on the profits:
http://www.fabianssuccessfulinvesting.com/order.php?offer=12
The market is not delivering the big rally we have all come to hope for and expect as investors get into the buying mood at this time of year, even on Wall Street.
Homebuilders expressed some sour sentiment about the prospects for their business in the New Year, and that news was not received well by the equity markets, especially those in the riskier areas, i.e. the tech stocks and small caps. Rising mortgage rates and softening demand are cited as the culprits for putting a damper on their prospects going forward.
I am still looking for the Dow to make a run at the 11,000 mark before the end of the year, but if the market weakness continues, Fabian followers may end the year in a more defensive posture. The key support levels here are 1250 for the S&P and 2200 for the Nasdaq. Should those indices break below those levels, we will be watching our positions carefully for weaker markets ahead.
We sold our biotech position in the Successful Investing Plan last week, but we remain nearly fully invested with positions in both the broad market and the international indices. I am of the opinion that we will undergo a market decline as a result of the economic landscape. However, when such a decline will actually unfold remains to be seen, so we watch and we make money while the opportunity is still there to do so.
As you prepare to ring in the New Year, I want you to seriously consider what equity positions you plan on carrying with you into 2006. I am somewhat guarded about what's ahead for the New Year in the equity markets. I believe we are looking at about a 60% chance of a down market next year with a 40% chance the market will rise next year.
We have all heard Alan Greenspan's warnings about the extremely painful adjustments. In fact, I touched on the issue of "extremely painful adjustments" last week and it generated dozens of inquiries as to how investors can prepare their finances. I would like to provide some details as to the reasons why Greenspan is so concerned and the potential outcomes.
Greenspan has taken the opportunity at select public speaking opportunities to express his concerns over the future of our economy if both the massive trade and budget deficits do not stage a dramatic course of reversal and runaway spending is not reined in.
The budget deficit for this year is running at $318 billion. Last year's deficit ran up to a record high of $413 billion. Meanwhile, the national debt will hit $8.2 trillion before you receive this letter. That's about $27,000 for every man, woman and child living in this country.
The trade deficit is the amount of money we spend when we buy goods from overseas that what we sell to other countries. The trade deficit grew by a margin of 4.4% just last month alone. That's a really scary number considering that before we all bought TV's from China, Greenspan was already warning about the problems that lie ahead if we don't slow down our spending overseas.
Okay, so we all hear this intellectual banter on the evening news about the budget deficit and the trade deficit and how it's not good. The big question for most everyone is, So, how does any of this mean anything to me? Does it really matter?" The short answer is: it matters a lot.
When Greenspan refers to "extremely painful adjustments," what exactly does that imply?
Well, it could imply the following:
1) If foreign countries become oversaturated in American debt, the dollar could drop in value. Not a good thing for those invested in U.S. markets.
2) Interest rates could rise dramatically in the attempt to keep foreign investors interested in our debt.
3) Home values could drop and foreclosures could see a drastic increase as the U.S. seeks to keep foreigners interested in our paper by raising rates.
4) A recession would be a likely outcome as interest rates rise.
5) A bear market is the inevitable fallout.
WHAT CAN YOU DO ABOUT IT?
So we arrive at the most significant aspect of this discussion. How can you prepare your investments for the "extremely painful adjustments" that will take the shape of a weaker economy and all of the fallout that comes with it? Specifically, how can you protect your investments against a bear market loss, a loss that averages 35% of an entire portfolio's value?
The answer is elementary, yet crucial. You have to be proactive and you have to have a plan. In fact, before you ever buy a stock, mutual fund or ETF, the plan for your exit strategy has to be firmly in place. A simple way to avoid a catastrophic loss is to set a 10% stop loss from your purchase price. As the price of the equity rises, you can set a trailing stop loss in order to protect gains. And you have to proactively monitor your investments to make certain they are continuing to fit your overall profit objective. This is how I recommend my Successful Investing subscribers manage their money and it is also the direction we take with every Fabian Financial managed client. In fact, we call this strategy the Fabian Safety Net.
We have no idea when Alan Greenspan's prediction of "extremely painful adjustments" will come to fruition. It could be in three months, or it could be in three years, but we do know that he is always right and we are in for some rough sailing in the future. That is why we need to make the most of the current market environment which continues to be robust. We also need to know, in no uncertain terms, we will exit this market when the waters become rough.
You simply cannot grow your assets if you are left exposed to bear market risk. If you fail to develop the appropriate plan that prepares you for a well-timed exit from your positions when the market erodes and these "extremely painful adjustments" occur, you simply should not participate in the equity investing. The stakes are just too high for the ill-prepared.
Some people just don't have the time or the inclination to proactively monitor their investments, but they still want to benefit from equity investing. And they especially want to grow their portfolios while protecting them against bear market losses. I recommend such individuals speak with Ed Foster, President of Fabian Financial, or with me about how Fabian Financial can assist you with the daily proactive management of your nest egg. You can reach Ed and me toll-free at (866) 432-2426.
My dear friends, as you gather together with your families and friends over the holidays, enjoy those precious moments together and always remember: this is what we've worked for all year and it's just going to get better and better. HAPPY HOLIDAYS and ALL THE BEST.
DOUG