Hitching a Ride on the Hindenburg

08/19/2010 10:31 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

The Death Cross, the Hindenburg Omen, and the Double Dip: that’s a wrecking crew many would just as soon avoid, even at the cost of a negative real rate of return in savings accounts and US Treasuries.

Last week, this villainous tag team mauled global stock markets, gouging more than a pound of flesh. But equities with earnings yields above those of junk bonds refused to be pinned down for long. Some marginally stronger economic numbers got the credit. But really, it was the work of Hindy and the Double D. Those heavies shook out the weaker market hands. With popular disdain for stocks as widespread as it gets, as soon as the selling dried up, short-covering commenced.

Shanghai swung around first, cheered by some hopeful tea leaves as well as news that China had overtaken Japan as the world’s second largest economy. The slowdown in Japan is the byproduct of a stronger yen and its effect on exporters. Some big investors are positioning for a Japanese debt crisis just ahead. But the fiat currency underpinning all that debt just keeps drifting up as if to thumb its nose at such notions.

China, for one, has added to its Japanese debt holdings, while reducing its holdings of US Treasuries. Japanese bonds are actually offering better inflation-adjusted returns, to say nothing of the higher-yielding Asian bonds that China has been scooping up even more eagerly. It’s even said to prefer the euro to the dollar these days. But the choice of the dollar, the euro, and the yen only underscores the paucity of Chinese options. China shares some troubling characteristics with Japan, from the heavy dependence on exports to a population that will age rapidly in the not-too-distant future.

Its saving grace is that its workforce remains so cheap. The Taiwanese contract manufacturer that was forced to double wages following a spate of suicides at one of its coastal plants has unveiled a major expansion into the interior that would boost its Chinese workforce by nearly 50%, mainly to produce more US-designed gadgets.

At the same time China’s size draws neighbors into its economic orbit. South Korea is one example. Now Taiwan has ratified a landmark trade agreement with its onetime nemesis. Taipei stocks, which are up 12% in a little more than two months, had already voted.

China’s pent up appetite for everything including calories animated BHP-Billiton’s (NYSE: BHP) hostile bid for Canadian fertilizer maker Potash (NYSE: POT). This didn’t discourage speculation that global steel giant ArcelorMittal (NYSE: MT) might want to forge a lasting bond with US Steel (NYSE: X).

Steel stocks were bolstered by the news that Europe’s economy expanded at its fastest pace in four years during the second quarter, defying the financial panic over Greece and Spain. Germany was the star performer, boosted by exports. Germany’s current account surplus approached China’s, without the benefit of cheap labor or a pegged currency.

If some countries, scarred by past hardships, prefer to scrimp and save while others opt to spend some of their wealth, is that really so bad? The dreaded global imbalances are a byproduct of diverse cultures, political systems, and histories. Without differences, trade would be pointless and we’d all be poorer.

At this early stage, Yiannis Mostrous is looking good for recommending China and Germany as two likely outperformers during a modest economic slowdown. Peter Shearlock recommended a UK-listed provider of marine services in Brazil that’s benefiting from the inexorably rising Asian demand for crude. Ryan Irvine is partial to a Canadian wireless distributor with a decent yield and strong growth prospects. His pick soared 10% Monday after agreeing to acquire a 128-store US wireless chain. Whereas the Hindenburg Omen hasn’t made money for anyone so far.

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