Dear Fellow Investor,
For the past month, I've been telling my China Strategy subscribers that countries from around the globe needed to follow China's lead in order to survive the global financial crisis.
In mid September, the Chinese government slashed interest rates by 27 basis points and lowered the reserve-requirement ratio for banks by 1%. This action showed that China's leaders understand the severity of the current financial and economic problem plaguing global financial systems.
By cutting interest rates a month ago, China made it clear that it was focusing on economic growth, because the cornerstone in overcoming the financial crisis is a strong economy. China learned this lesson the hard way just four years ago when its banking industry was near collapse.
At that time, China's government flooded the financial system with a lot of money. And after that, government leaders focused on strong economic growth so that the country could grow its way out of the problem. Which is exactly what the U.S. needs to do now.
And U.S. government leaders have finally started taking the right steps to surviving the current financial crisis. Three important steps -- based on China's example -- have been taken in recent weeks:
- Last week, the U.S. Senate, House of Representatives and President Bush all approved a $700 billion bailout plan, which was the first step to flooding our financial system with funds and rejuvenating our economy.
- Then on Tuesday, the U.S. Federal Reserve stated that it would create a special fund to purchase commercial paper, which will help companies fund their payrolls, inventory and other cash needs.
- And on Wednesday, the Fed along with other central banks from around the globe finally saw the necessity of a global coordinated rate cut, and slashed interest rates. The U.S., Europe, England, Switzerland, Canada and Sweden all cut rates by a half percentage point. And China knocked another 27 basis points from its key interest rate.
Although the Fed's rate cut came a month after China's initial rate cut and it was only the 50 basis points that everyone was expecting, it was still a step in the right direction.
Where Do We Go From Here?
Despite the global coordinated rate cut and the U.S. government's positive action toward overcoming the financial crisis, stocks continue to remain mixed this week. Intraday volatility has been nothing but dramatic. Just yesterday, the Dow traded in a 700-point range. And we're seeing much of the same today.
The reason for the continued volatility? Well, the rate cuts may have come too little, too late, to create the effect needed to restore confidence and stabilize the markets. If the U.S. and Europe had followed China's example back in mid September of cutting interest rates, I doubt the credit crisis would have escalated to its current position. Also, since the U.S. stuck with the expected 50-basis-point cut, the shock and awe factor was non-existent in the markets yesterday and today.
Plus, the SEC removed short-selling restrictions today, which also happens to be the Jewish holiday of Yom Kippur. So, hedge funds have been taking advantage of the thin trading and pummeling financial stocks with relentless short sells.
Now, although we're likely to continue to see the markets trade in a back and forth pattern for a little while, I'm growing more optimistic that a rally is near. The breathtaking intraday swings and very heavy volume are exactly the type of action that you expect to see near market bottoms.
That doesn't mean that you should be bottom picking, but it does mean that you should be purchasing shares in strategic companies that will benefit the most from a fourth-quarter rally. And as I recommended last week, you're not going to want to wait forever either – the fourth-quarter rally could ensue any day now.
In today's China Strategy dispatch, I advised my subscribers to pick up shares in four of my recommendations. To learn which companies you should be buying now to prepare for the fourth-quarter rally, join China Strategy today!
Robert Hsu
