Dear Fellow Investor,
The past two weeks have truly been ones for the history books.
The financial crisis that has wreaked havoc in the U.S. markets all year finally came to a head within the past two weeks. As you know, it all started with the overhaul of Fannie Mae and Freddie Mac just two weeks ago.
And then after the bailouts of those two companies, financial giant Lehman Brothers was the next to falter. It filed for bankruptcy, sending the global markets in a downward spiral. The Dow, alone, plunged around 500 points on September 15.
But the bad news didn't end there…
The world's largest insurance company AIG threatened collapse. But thankfully, the Federal Reserve realized the extreme repercussions this would have on the global financial system–if AIG failed, it would create a domino effect with other financial institutions crashing as well–and stepped in with a $85 billion bridge loan.
Aside from Lehman Brothers and AIG, Merrill Lynch announced that it was also under extreme pressure and on the verge of bankruptcy. So Bank of America stepped up to the plate and bought the financial institution at a steep discount–$44 billion.
And that was just last week!
Next in line: Morgan Stanley and Goldman Sachs. These two investment banking giants admitted that their shares were under pressure. So with a little help from the Federal Reserve, Morgan Stanley and Goldman Sachs became banks.
What's interesting about this event was that it marked an historic end to Wall Street. With Morgan Stanley and Goldman Sachs now bank holding companies, the two will not be able to take the same amount of risk that they did in the past. But the survival of these two firms is critical to the stability of the global financial system and stock markets everywhere. And the Fed realized this.
What's Next?
Well, your guess is as good as mine. But honestly, I think we're in a much better position now than we were just a week ago. The risk of systematic collapse is much less likely. Plus, just this afternoon, the U.S. Congress has come to an agreement regarding Secretary Henry Paulson's $700 billion bailout plan.
This plan was presented after Federal Reserve Chairman Ben Bernanke proposed last week that the government needed to shore up banks' balance sheets that guarantee money-market mutual funds. And now the history-making bailout has been approved by Congress. So, we are just waiting on the Bush administrations approval–which will likely come in the next few days.
If the plan is indeed passed, it will greatly reduce overall financial market systematic risk and help rebuild the mortgage securities marketplace. And despite the plan's flaws, I think it should actually work, supporting the country's economy and stock market.
In the meantime, though, investors continue to debate the affects of the $700 billion plan. Just yesterday, the markets had another volatile trading session, with the Dow and S&P 500 trying to make a move, but then closing down 0.27% and 0.20%, respectively. And then what happens today? Investors send the markets back up–with the Dow up more than 200 points.
Looking forward, I think there is more whipsaw action to come. But as I said above, market fundamentals are now stronger, the bailout plan is on track for approval, and it may be time to start buying shares during market sell-offs.
What Should You Be Buying?
With the markets selling off so strongly this year, there are great bargains everywhere. Fundamentally strong companies are selling at steep valuations. But that doesn't mean we can close our eyes, pick any company out of the bucket and expect to make great profits. We still need to be cautious and only take advantage of the best opportunities for our money.
And the best place to be investing your money right now is in China. Here's why…
Emerging stock markets are trading at extremely oversold levels–and that's even after global central banks pumped cash into the system and sent all stock markets in the Asia-Pacific region higher at the end of last week.
That included impressive gains in the Chinese stock markets. Hong Kong's Hang Seng index advanced 9.6%, the H-Share China index surged 15.5% and China's CSI 300 index jumped 9.3%.
Along with global central banks flooding the system with funds, the Chinese markets popped higher because of some quick and strategic moves by the Chinese government. It has cut interest rates and eliminated stamp tax for buyers in order to boost the economy. China slashed its one-year lending rate 27 basis points and lowered the reserve-requirement ratio by 1%. This was the first time in six years that China eased its monetary policy.
And with the government focusing on stimulating economic and stock market growth, I'm expecting it to continue with similar measures as needed. All of these types of measures will boost the Chinese economy and greatly contribute to a year-end rally in Chinese stocks.
In fact, I expect the Chinese stock markets to be the first emerging market to turnaround. And I think they will actually lead other emerging markets higher in the next six to nine months. The Chinese stock markets have led the past two global market moves, and I look for them to do that again.
Don't expect the coming rally to be the start of a new bull market, though. The upmove I'm expecting in the next six to nine months will be a rebound. Considering the turmoil we have experienced this year, it will take a lot for the markets to move back into bull market territory.
So we likely won't see a complete market turnaround this year. But I'm still expecting a strong fourth quarter and a decent market bounce off the current bottoms in the next six to nine months. I like to refer to this move as "the worst is over" rally.
To start preparing for this upcoming rebound, I've already advised my subscribers to begin loading up on my favorite picks right now–China's leading medical device manufacturer and the largest insurance provider in China. Both companies have shown resilience during the financial storm, and should be leading the charge higher in Chinese stocks.
So let me help guide you through the rest of 2008 and lead you to the most profitable plays to take advantage of the upcoming rebound. The road is not going to be smooth and there will be bumps along the way. But as a member to my China Strategy service, you can rest assured that I'll be with you every step of the way. Join China Strategy today!
Robert Hsu
