Hitch A Ride With Ford On The Path To Profits

by Tony Daltorio, Investment U Research
Wednesday, March 10, 2010

Ford Motor Company (NYSE: F) just celebrated its first annual profit since 2005. After losing $6.9 billion in 2008, the automaker reported a full-year net profit of $2.7 billion.

Initially expecting further losses, CEO Alan Mulally warned that his company wouldn’t be “solidly profitable” before 2011. Yet it gained last year all the same, and without any sort of Federal bailout.

Quite the contrast to its Detroit rivals, General Motors (NYSE: GM) and Chrysler, which both relied on Uncle Sam while going through bankruptcy last year.

Of course, Ford’s self-sufficiency created a bumpy road ahead. While GM and Chrysler can bask in the stacks of tax-payer funding going forward, Ford has only itself to rely on. And its $34 billion of debt and less-than desirable credit rating doesn’t help.

The company has to put the pedal to the metal in order to keep up with the competition.

Fortunately, it seems Mulally and his team have the situation under control. In addition to soundly beating its rivals, it also gained market share. Just back last month, its sales jumped 43%, marking the first time it outsold GM since 1998.

Ford’s market share should continue rising too, as industry insiders believe it’s working on Detroit’s best product pipeline.

And it also has a new focus on emerging markets – part of a larger business overhaul entitled “One Ford” – which should drive it forward even further.

Switching Gears In Asia

Ford plans to use its family of small cars to aggressively expand into Asia.

After two decades of focusing on sport utility vehicles and pick-up trucks, Mr. Mulally has decided to change direction and concentrate on new, small and mid-size cars. He plans to market them all around the world at around $7,500, since about 40% of Chinese and 70% of Indian consumers buy vehicles marked below that figure.

The company recently revealed a new version of its top-selling Focus. Contrary to past years, only the visible parts of the vehicle will change depending on local regulations and consumer trends. Meanwhile, what actually makes the car move will stay largely the same.

Ford believes the new platform will support up to 10 models around the world, accounting for 2 million annual units by 2012.

The company announced last September that it would use the Fiesta platform to build the Figo – a new small car priced at $8,000 – at its plant in Chennai, India.

It then went on to invest $500 million into the plant to boost production capacity up to 200,000 cars and 250,000 engines.

Ford only sold 40,000 cars in India last year. So obviously, it plans on expanding… big time.

It wants to grow its China market as well, where it sold 440,000 vehicles last year. So it’s re-launching the Fiesta there, as well as opening another plant in Chongqing in 2012.

Yet even with those lofty goals, Ford has even bigger sights on another emerging market…

Brazil In Overdrive

Ford can thank South America for its most recent quarterly results, where it tripled pre-tax profits. And that’s especially true in Brazil, where it has made gains for 24 straight quarters now.

All told, Brazil purchased 3.14 million vehicles last year. That 11% increase over 2008 marked an all-time record for the country. And vehicles sales and production should continue to rise from about 3 million in 2009, to 4.5 million by 2016.

Naturally, with those kinds of gains, car companies have made significant gains in the world’s fifth-largest auto market, even while losing out in more traditional areas.

For its part, Ford sold over 300,000 automobiles last year from its four Brazilian manufacturing plants. That puts it in fourth for sales, after Fiat, Volkswagen and General Motors.

And while Brazil is Ford’s third largest market – after the U.S. and the UK – it’s set to continue growing… a lot. In a country of almost 200 million people, only about 1 in 7 own a car.

To meet that rising demand, Ford has set aside $2.3 billion over the next several years to build up capacity and product development in the South American power house. That kind of funding should pay off nicely in the years ahead, as should the company’s overall strategy.

If the developing markets continue to lead global demand in this way, Mr. Mulally is probably right about his company making regular, solid profits as of next year.

Good investing,

Tony Daltorio

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A Company Riding The Asian Explosion Straight Up

by Tony Daltorio, Investment U Research
Tuesday, March 9, 2010

The American press didn’t really cover the recent, major deal in the global insurance industry.

But just because they didn’t pay it any attention, doesn’t mean that you should ignore it too… It indicates one very profitable opportunity you won’t want to miss out on.

British insurance firm Prudential Insurance ADR (NYSE: PUK) offered $35.5 billion to purchase the Asian arm of American International Group (NYSE: AIG). That branch, called AIA, is the leading pan-Asian foreign insurer. It carries 33 million policyholders across 13 countries, employs about 250,000 sales agents and makes annual operating profits of around $2 billion.

The current deal calls for Prudential to pay AIG $25 billion in cash, $5.5 billion in stock, $3 billion in mandatory convertible notes and another $2 billion in preferred stock. And if all goes well, the two companies should sign off on it by May.

That should mean that U.S. taxpayers get back some of the money they forked over to keep AIG afloat.

As for Prudential? The $22 billion company wants to fund the purchase by offering shareholders $20 billion in share offerings in return for their financial support. If the shareholders refuse, the company’s Plan B involves falling back on sovereign wealth funds from China and Singapore, which have offered their own money if necessary.

If those funds do get involved, Asian sovereign wealth funds could end up with a substantial stake in the region’s biggest insurer.

The Asian Insurance Market

Asia is the fastest growing market for life insurance.

According to a McKinsey study last year, Asia should account for up to 40% of the global life insurance market’s growth over the next five years. And of that growth, China and India will represent about 70%.

Currently, penetration rates in these countries only amount to 4% and 2% respectively. But McKinsey forecasts compound annual growth of over 15% for the next five years.

Currently the second largest foreign insurance company in the region, Prudential already takes a third of its sales and half of its profits from Asia. But those figures will skyrocket to 80% – 90% after it doubles business by acquiring AIA.

That will put Prudential light years ahead of its foreign rivals in terms of business volume and geographic spread. With about 700,000 agents throughout Asia, the combined company will have a dominant position in most of its Asian markets. And it will be the leading life insurance firm in at least eight Asian countries, including the Philippines, Vietnam, Thailand, Malaysia and Indonesia.

Prudential obviously values the high-growth, high-margin markets there. And rightfully so, considering how they represent little-touched areas with all the right characteristics for financial success. That includes rapid economic growth, low government debt and young, growing populations. Better yet, citizens there hold little or no debt themselves, and keep their savings mostly in low-interest bearing bank accounts.

That’s the kind of potential that makes insurance companies drool.

Meanwhile, Prudential plans to move away from the more mature markets of Japan, South Korea and Taiwan, while still keeping Hong Kong and Singapore in its sights.

China and India

Of course, no discussion of the Asian insurance market would be complete without considering China and India. Already the world’s seventh largest market for life insurance, China will still provide more than two-thirds of the region’s growth in that market. And India’s growth makes it an ideal location as well.

Both economic giants tightly restrict foreign insurance input. In order to get any amount of business in either country, outside players have to work through local partners. Somehow though, AIA became the only non-Chinese company to own the necessary licenses… probably because of its presence in the country since 1919.

As for India, Prudential is already the biggest player in that insurance market through its joint venture with ICICI Bank Limited ADR (NYSE: IBN). So the AIA deal will only make it more powerful.

A Win-Win Situation

Some analysts don’t believe Prudential can pull off the deal. Short-term focused hedge funds have even pushed the stock down 20% since the two companies went public with the details.

No matter though, because investors can win no matter the outcome.

If the deal falls through, the stock should quickly regain what it lost. If it does goes through though, the stock should go up just the same, especially if the sovereign wealth funds join in. Their help will open even more doors in Asia, insuring that Prudential will be the one to beat in the Asian insurance market.

Good investing,

Tony Daltorio

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Ultra ETFs: Whether You’re Ultra-Long, Or Ultra-Short… Be Ultra-Careful

by Karim Rahemtulla, Options Expert
Tuesday, March 9, 2010: Issue #1212

If you’re looking for a simple, relatively safe, cost-effective way to diversify your portfolio, where’s your first stop?

Many investors choose the exchange traded fund (ETF) route. With the explosion of the ETF market over the past few years (there are now around 800 ETFs available), you can gain exposure to countries, sectors, industries, currencies and more. And you can do so in one single stock transaction through a regular brokerage account.

When you’re ultra-bullish, or ultra-bearish on the stock market, wouldn’t it make sense to take advantage by using “ultra ETFs?”

This class of ETFs aims to dish out two or three times the return of the underlying investment that they represent.

For example, if you think the market is heading to the moon, you can…

• Buy a long-dated option on the S&P 500.
• Buy the S&P 500 ETF itself.
• Buy an ETF like the ProShares Ultra S&P 500 (NYSE: SSO), which offers twice the daily performance of the S&P. So if the S&P were to rise by 10%, you’d get a 20% move for the ETF. Simple, right?

Not so fast…

Read the Ultra ETFs Ultra Fine Print

With all the gains that ultra-long and ultra-short ETFs promise, I often get asked why I use long-dated options instead of these ETFs.

The answer lies in the fine print.

You see, these ultra ETFs aren’t designed for long-term investing. History shows that many of them actually lose money when the market rises over a period of several months. And when the market moves lower over the same period.

That’s because they reset on a daily basis… meaning you need a continuous sustained move in one direction to really make money.

For example, if the S&P were to move up by 3% in one week – uninterrupted – the ETF would perform as perceived. But any hiccup in that period and the ETF would head down.

So due to the daily reset feature, buying one of these ultra funds doesn’t automatically position you for big profits if the market moves in your favor. These funds were only created to take advantage of short-term market moves.

Here’s a better way…

Three Reasons to Pick LEAPS Over ETFs

A couple of weeks ago, a reader asked about the short trade I suggested on the euro in this article. He wanted to know why I recommended LEAPS (long-term options) and not the short euro ETF.

Simple. I’m looking for a longer-term decline, rather than just a short-term dip.

And in this case, a LEAP option is a much better way to go – for these three primary reasons…

• It gives you the chance to benefit from a sustained move lower or higher.
• It requires much less cash upfront, which provides greater leverage.
• It gives you more time for the move to play out as you want it – up to three years in some cases.

Here’s a good example of how it works in reality…

Want “Ultra” Gains? How About 2,000% Potential?

A few months ago, I advised my 400 Report readers to buy LEAP options on US Airways (NYSE: LCC).

• Specifically, we went for the January 2011 $7.50 calls.
• We bought between $1.30 and $1.40 per contract when LCC shares were trading around $6.

Initially, LCC moved lower, taking our options down, too. But because we had time and little cash at risk, we were able to wait it out.

When the shares began to turn higher at the end of last year, we closed our LEAP position for gains of more than 60%. It put a “free trade” in motion – which could return us more than 2,000% by January 2011.

It’s something we wouldn’t have with an ETF of any type.

In short, there are many ways to play this market. But unless you’re a day trader, stay away from “ultra” ETFs that promise much more than they can ever deliver.

Instead, stick to strategies that allow you to bet on the market (or stocks) where the ground rules are crystal clear.

For more information, check out this report, which has all the details regarding the power of LEAPS – and my investing service dedicated to them, The 400 Report.

Good investing,

Karim Rahemtulla

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Japanese Small-Caps Hold Big Rewards For Contrarian Investors

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

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

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

But this time may be different.

Really.

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

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

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

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

Why It’s Worth The Heckling

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

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

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

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

Enticing, right?

Return On Equity

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

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

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

Let me explain…

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

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

The evidence points to them catching on slowly but surely.

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

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

Four Ways to Invest in Japan’s New Revolution

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

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

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

Good investing,

Tony Daltorio

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Why It’s “Mayday” For the Euro… And What You Should Do

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

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

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

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

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

But, oh, how times have changed…

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

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

Spanish Decisions… Made in Germany

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

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

Imagine for a moment that you’re a Spaniard:

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

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

But there’s a bigger problem…

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

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

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

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

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

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

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

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

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

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

Three Moves to Combat a Strong Dollar-Weak Euro Scenario

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

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

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

Good investing,

Alexander Green

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

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

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

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My Big Fat Greek Deficit

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

Wall Street seems obsessed with pigs these days.

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

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

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

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

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

The Relative Performance of European Companies

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

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

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

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

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

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

So what does that all mean?

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

And that is just plain stupid.

Euro Gems

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

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

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

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

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

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

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

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

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

Good investing,

Tony Daltorio

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How to Profit From Health Care Reform… in China

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

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

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

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

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

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

The Treatment Needed For An Unhealthy System

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

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

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

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

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

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

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

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

A Good Kind Of Growth

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

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

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

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

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

Healthcare Opportunities To Die For

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

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

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

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

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

Good investing,

Tony Daltorio

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50 States… A $300 Billion Black Hole… And 10 Years “Lost”

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

A “lost decade” of “permanent retrenchment.”

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

So far, he’s right.

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

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

For example, Stateline reports that…

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

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

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

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

Best regards,

Martin Denholm

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Biofuels: Don’t Let This Alternative Energy “Greendoggle” Fool You

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

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

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

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

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

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

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

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

The Biofuel Brainwash

A “Greendoggle.”

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

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

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

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

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

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

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

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

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

But back the corn truck up…

Biofuel Reality Check

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

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

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

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

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

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

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

Speaking of insanity…

The Backwards Way to Boost Biofuel

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

There are two things wrong with this…

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

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

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

Good investing,

Dave Fessler

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

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

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

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I’m Formally Declaring a Fiscal State of Emergency…

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

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

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

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

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

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

At the last tally, 44 states face budget shortfalls.

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

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

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

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

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

No Jobs… No Revenue… But a Boatload of Bonds

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

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

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

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

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

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

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

So what’s the answer?

Want Muni Bonds? Head to These 10 States…

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

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

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

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

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

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

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

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

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

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

Ahead of the tape,

Robert Williams

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

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

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