China’s Economic Recovery Threatened By Lending Landslide

With the implementation of a $585 billion stimulus program, Chinese policymakers have managed to compensate for a huge drop in exports, which to this point have been the lifeblood of China’s economy.

But by giving state-run banks the task of financing the massive amounts of infrastructure spending contained in the stimulus package, Beijing has exposed the country’s financial sector in a way that could short-circuit that country’s ongoing economic rebound.

China’s gross domestic product (GDP) expanded 6.1% in the first quarter, the weakest pace in nearly a decade. In an effort to reinvigorate the economy and capture the 8% annual growth Beijing promised at the beginning of the year, the government in November unveiled the half-trillion-dollar stimulus, the bulk of which was designed to create domestic demand.

Investments in such tangible projects as roads, factories and houses rose 32.9% in the first five months of the year, according to China’s National Bureau of Statistics. Investments initiated by the central government were up by 28% in the January-May period, while those carried out by local governments rose 33.4%.

Also key:

• Real estate investment grew 6.8%.
• Capital spending in primary industries rose 79.7%.
• Investment in railways rose 110.9%.

This investment clearly filtered through the economy in May as industrial output and retail sales surged. Industrial output accelerated to 8.9% and retail sales soared 15.2%, the statistics bureau said.

China’s property market also continued to flourish. Sales rose 45.3% to $146 billion (1 trillion yuan) in the first five months of 2009 compared with the same period last year, and real estate investment grew at a quicker 6.8% rate. Sales grew 35.4% in the first four months. Real estate prices rose 0.6% from April to May, the third consecutive monthly increase.

“As developers run down inventory rapidly, they will soon start to buy land and increase spending again,” Frank Gong, chief China economist and strategist at JPMorgan Chase & Co. (JPM: 32.73 -0.77 -2.30%) in Hong Kong, told Bloomberg News. “Property investment, which accounts for 10% of China’s GDP and is a trigger for growth in related sectors, will become a strong driving force in China’s recovery.”

Goldman Sachs Group Inc. (GS: 139.73 -4.43 -3.07%), UBS Securities AG (UBS: 13.08 -0.20 -1.51%), and Morgan Stanley (MS: 27.48 -0.62 -2.21%) all raised their economic forecasts for China’s economy in light of the positive news.

Goldman Sachs boosted its forecast for China’s GDP growth from 6% to 8.3%. UBS Securities boosted its target from 6.5% to between 7% and 7.5% growth. And Morgan Stanley raised it estimate from 5.5% to 7%.

Indeed, the spurt of economic activity has been staggering, and many analysts believe China will carry this momentum forward and experience a ‘U’-shaped economic recovery, or possibly even a robust ‘V’-shaped rebound.  But there is also the potential for an economic collapse that could undo all of the nation’s progress to this point.

Will a Recovery be Swamped in a Lending Landslide?

Government intervention has spurred investment, but it has also unleashed a torrent of lending that is not necessarily justified by current economic conditions.

Lending in the first five months of the year totaled $854 billion (5.84 trillion yuan). That exceeds the $718 billion (4.91 trillion yuan) in loans made in all of 2008. New loans in May alone hit $97.22 billion (664.5 billion yuan) - more than double the ($46.6 billion) 318.5 billion yuan doled out a year ago.

The rapid growth of lending has been a red flag for many analysts who are worried about the quality of Chinese loans.

“The rapid growth of credit should be regarded as a warning sign,” Andrew Crockett, a member of the China Banking Regulatory Commission’s international advisory committee, told Bloomberg. “Nearly always when we have financial difficulties at banking institutions, it’s preceded by rapid growth in lending.”

Crockett is also JPMorgan’s international president.

With interest rates low, the only way for China’s banks to reach their profit targets has been to increase the number of loans they make both to consumers and corporate clients. But the banks they are doing so at a time when corporate profits have been eviscerated by a severe drop in exports.

“Ordinarily, falling corporate earnings are met with tightened lending, but in China precisely the reverse is happening,” Fitch Ratings Inc. said in a report last month. “This illustrates that “despite years of reform Chinese banks still retain an important policy function in upholding local enterprises.”

Fitch said that it is “increasingly wary” of China’s banking system and that it expects an increase in bad debts. The ratings agency pointed to several “early warning signals” that indicate the quality of loans may be deteriorating.

One sign is that banks are increasing the amount of money that’s kept aside to protect against unimpaired loans. That suggests lenders expect losses from loan defaults to increase. Banks are also downgrading more “special-mention” loans to nonperforming status.

Additionally, foreign banks with operations in China, which have better risk-management systems, have seen an increase in nonperforming loans.

Ma Jun, chief China economist at Deutsche Bank AG (DB: 59.86 -1.07 -1.76%) in Hong Kong, is one of the analysts who sees a ‘V’-shaped recession for China. But he still says that bank lending is nearing dangerous levels.

“The pace of bank lending is dangerous and the risks include inflation, bad loans, and economic volatility,” he told Bloomberg.

But according to Fitch, any potential credit crisis will be hard to spot in the short-term, because of the high volume of lending. Over time, though, as the global economic downturn wears on, a lack of domestic demand and declining corporate earnings could lead to a sharp spike in defaults.

Scotts Miracle-Gro Boosts FY09 Guidance

The Scotts Miracle-Gro Co. (SMG: 35.96 +0.94 +2.68%) lifted its fiscal 2009 earnings guidance, citing continued robust demand for its products in the US.

The maker of lawn and garden care products now anticipates adjusted profit of $2.35 to $2.45 per share, against the prior outlook of $2.10 to $2.30 per share.

Analysts expect the company to earn $2.34 per share, which has moved up 4 cents, or 1.7%, over the past month as 2 of 10 analysts revised higher.

CEO Jim Hagedorn attributed the enhanced guidance to coordinated marketing and promotion initiatives, higher advertising spending and increased hours spent by the sales team in retail stores.

Scotts also raised its free cash flow forecast to a minimum of $180 million from the previous guidance of $150 million to $170 million.

SMG, a Zacks #3 Rank (”Hold”) stock, has advanced more than 1% on volume of approximately 1 million, which is right around its daily average.

10 Ways To Access Middle East Growth With ETFs

The Middle Eastern region is influencing world affairs and exchange traded funds (ETFs) in a big way as global economic development becomes more and more tied to the region’s copious reserves of hydrocarbon resources.

Since 2000, the Middle East has seen growth above 5% and has become the second richest part of the emerging world, according to ETF Grind. But Mideast economies were slower to recover in the beginning of 2009 and there were concerns over the ability of the region to pay down debt accumulated in the good years.

Over the long-term period, there are several ETFs that an interested investor could keep an eye on:

• iShares MSCI Turkey Invest Mkt Index (TUR: 35.52 +0.46 +1.31%): up 30.9% year-to-date. Turkey’s economy isn’t tied too heavily to oil. It remains dependent on exports to the EU. The country’s industrial sector can profit from its close proximity to oil producers.
• Market Vectors Agribusiness ETF (MOO: 34.06 -1.31 -3.70%): up 36.6% year-to-date. Economic develpment and population growth would make the Middle East would effect global food demand more than elsewhere since the region has little arable land. Middle Eastern countries are already securing land for a steady food supply and will need the necessary equipment and supplies.
• PowerShares Global Water (PIO: 14.44 +0.15 +1.05%): up 10.8% year-to-date. Needless to say, the region has a scarcity of freshwater. The Middle East has the biggest market for desalinization plants and expensive water engineering projects. PIO holds 29 global water resource firms.
• Market Vectors Gulf States ETF (MES: 21.25 -0.43 -1.98%): up 15.4% year-to-date. MES covers Middle Eastern countries that border the Persian Gulf. It is weighted toward finance, real estate and services. Its expense ratio is 1.00, but it is a pure play on oil related economies.
• iShares MSCI Israel Cap Invest Mkt Index (EIS: 39.97 -0.77 -1.89%): up 33.5% year-to-date. Israel has reputable pharmaceutical and tech sectors.
• Claymore/Robb Report Global Luxury (ROB: 12.92 0.00 0.00%): up 13.3% year-to-date. When crude oil rises again, Middle Eastern royals will be swiping their super platinum cards in purchasing luxury goods.
• PowerShares MENA Frontier Countries (PMNA: 14.07 -0.11 -0.78%): up 15.9% year-to-date. PMNA is similar to GULF but excludes gulf nations of Qatar, Bahrain, and Oman. It also has a higher expense ratio. It is broadly diversified with Morocco and Egyptian firms. The fund mainly invests in large and mid caps.
• Claymore/Delta Global Shipping (SEA: 12.33 -0.20 -1.60%): up 31.8% year-to-date. Recovery in oil prices and Middle East production could translate into strong earnings for global shippers. Crude oil makes up aruond 1/6 of global trade.
• WisdomTree Middle East Dividend (GULF: 15.71 +0.098 +0.63%): up 8.4% year-to-date. GULF has a broad market Middle East and North Africa exposure. It has a wider selection of holdings than PMNA or MES, a lower expense ratio, and is dividend weighted rather than capitalization weighted. But the funds competition, GULF is a little low on volume.
• iShares Dow Jones U.S. Oil Equipment Index (IEZ: 34.7827 -1.0173 -2.84%): up 39.7% year-to-date. Major equipment and service companies included in this fund have business in the Middle East. IEZ has outperformed crude oil ETFs and indexes of major integrated oil companies year-to-date.

As always, watch the trend lines to see what actually materializes.

Everything You Need To Know About The $8000 Housing Credit

That’s right, $8000.00 bucks for buying a home! Why? Because, the Government loves to give out grants and stimulus when the economy is doing poorly, and this will be a real shot in arm for a lot of people and the economy.  A strong Real Estate market would help the economy a lot right now and the Government wants people to buy homes.

This is not the first time that Government has stepped up and did such a thing. The Government really wants those people that have been on the fence about buying a home to do go ahead and buy.  If you have been considering buying a home the $8000.00 can come in pretty handy in taking the plunge.

Be careful because Real Estate prices in some parts of the countries are still falling, and there could be an even better deal next year. In fact this has happened already, in 2008 they gave out a $7500.00 tax free loan and then 2009 they upped it too $8000.00 bucks which does not have to be paid back. The Senate had initially felt that this rebate should be $15000.00, but they settled on $8000.00.

If you bought a home in 2007, make certain that you take advantage of that interest free loan, and file an amended tax return.

Here are the 9 most frequently asked questions we have received at myWealth:

Who qualifies?

You must be a first-time home buyer purchasing a primary residence. The home purchase must occur on or after January 1, 2009 and before December 1, 2009.  The homes purchase date is the date is when closing occurs and the title to the property is transferred to the home owner.

Does everyone qualify?

Not everyone, but almost everyone! If you are single and making less than $75,000.00 a year or married filing jointly making less than $150,000.00.   If you are close to these amounts you may still qualify for the full credit or a partial credit. Seeking a tax advisor may be very worthwhile here.

Is it really $8000.00?

It can be less, but most people will qualify for the full $8000.00 If you buy a home for less than $80.000.00 it would be reduced since it is the greater of $8000.00 or 10% of the purchase price.

How do I claim the Credit?

You claim the credit on your tax return, in which you fill out Form 5405. If you bought a home recently, or are considering buying a home you may want to seek a tax advisor/preparer to make certain you are taking full advantage of this credit.

There are different ways to actually start receiving the monetary benefit of this credit. Such as filing an amended return, or just decreasing you withholding on your paycheck.

Can I get it the $8000.00 credit as a down payment?

This is possible. HUD (Housing and Urban Development) has approved the way for you to apply this anticipated credit to the home purchase rather than waiting until you file your tax return. FHA approved lenders, will be able to provide a short term loan of up to $8000.00.

Do all homes qualify?

Pretty much, even Mobile Homes and House Boats qualify as long as they are first time home purchases. Vacation homes and Investment properties do not qualify. It must be your primary residence.

I haven’t owned a home in 5 years would I be considered a first time home buyer?

As long as you and your spouse have not owned a home in the last 3 years you will qualify as a first time home buyer. If you purchase a home with a brother, sister, parent or friend, you may qualify while your buying partner does not. Assuming they own, or have owned in the last 3 years.

I do not itemize my return can I still get the credit?

You do not even need to itemize, in fact you do not even need to owe taxes. This is a refundable credit in which you can owe zero taxes and still get the $8000.00. A non-refundable credit requires tax to be owed in order to receive a monetary benefit. A refundable credit is better than a non-refundable credit, and much better than a deduction.

What’s the Catch?

The catch is that in the long run this $8000.00 dollars upfront may not be worth your while. Everyone knows that the Real Estate market has fallen off a cliff in the last couple of years and interest rates are starting to surge which could further depress this market.

Anders Geersten Ph.D one of our contributing writers at myWealth has a very gloomy outlook on Real Estate.

Homeownership should be the goal for most people, but like anything you need to crawl before you walk.   A home comes with a lot of expenses, and sometimes people get in over their head, and the financial security in which they seek backfires on them.   Make sure you recognize the mistakes that many people have made in the past, and be certain you are ready for homeownership.

For more information go to: IRS Q&A and the IRS scenario page.

We Are On The Edge Of Something Big

I wouldn’t believe it unless I saw it myself.

After seeing it though, I’ve felt more confident than ever that the markets will be able to hang onto recent gains and add more over the next few months. Let me explain.

Every six months, hundreds of CEO’s, investors, and commentators focused on the microcap stocks on the TSX Venture Exchange gather in the lovely city of Vancouver, Canada (your editor’s part-time residence) for a conference.

It’s one of the largest conferences for junior resource stocks in the world. There are a lot of happy handshakes - even more so in a market like the TSX Venture Exchange where hope and greed are propelling junior stocks higher every week.

There’s a lot of salesmanship. After all, it takes a lot of work to convince someone why some plot of land with a lot of magnesium in it in Kazakhstan is better than another plot of land with magnesium in it in Peru.

There are a lot of fun and interesting people to meet there too. It’s a very Libertarian, anti-government, pro-liberty event and it’s something worth seeing - at least once.

But the thing is everyone there is always looking for the “next big thing.”

In past years the next big thing has been the more obscure metals/elements like uranium, molybdenum, potash, or tungsten. This time I was expecting a lot of folks looking for lithium projects. Or rare earth metals. Or manganese…maybe. All are plays on hybrid batteries.

There’s always something “new” and there’s always a buzz. Even six months ago, when it looked like the financial world was on the verge of collapse, attendance was actually up. Gold and silver were the hot topics.

So this time around I’d expect there to be something exciting.

But there was nothing. In fact, there was nobody there.  And it’s the poor attendance that has me so excited about what the junior resource stocks will do in the months ahead.

Could it get Any Better?

Think about what has happened in the world in the past few months.

The Federal Reserve has publicly stated it is buying Treasury bonds at auction (a.k.a. monetizing the debt).

The U.S. government is facing its largest deficit in history.

Congress and the Executive branch are reaching deeper into private business dealings than ever before.

That’s just for starters. There is still legislation pending on cap and trade, semi-socialized medicine, and even discussion of a European-style value added tax (the equivalent of a national sales tax). If it goes the way the European V.A.T.’s have gone, we could be looking at an 18% to 22% tax on practically everything.

Also, we are likely only a few weeks away from the launch of the Public-Private Investment Program (PPIP). If you recall, the PPIP is the scheme where the U.S. Treasury (via TARP) and five select private investors (still don’t know who?) put up about $100 billion to buy $500 billion in Toxic Legacy assets with $400 billion (hot off the Fed’s presses) and all guaranteed by the FDIC. No one talks about it much anymore, but according to Financialstability.gov the program is still a go.

Then there’s the stimulus spending. This, if President Obama is going to create the 600,000 jobs he recently promised quickly, is going to have to get doled out fast.

It’s creating the perfect environment for junior resource stocks to soar. It’s tough to imagine a much better scenario.

This level of government spending and money printing has created massive inflation every time in the past 150 years. For instance, in our analysis of why inflation will win out over deflation the inflation rates that followed these levels of deficit spending (Civil War, WWI, and WWII) were annual rates between 15.7% and 50.3%.

This is the type of environment where investments in real assets perform exceptionally well. And when real asset stalwarts like the major gold miners and oil stocks do well, as they have been, the junior mining stocks eventually follow. And when they begin to follow the upward path, they can catch up very quickly.

Still though, there were very few people who seemed to care enough to come to the conference.

Contrarian Investing 101

That’s why I’m becoming more and more bullish on these junior penny stocks.

As we looked at the other day in The Greenest Shoots of All, everything is in place for a big run in these small penny stocks.

Oil prices have recovered quickly. The price of gold, silver, copper, agriculture commodities, and most other real assets has done exceptionally well too. With the exception of natural gas and a few other more obscure metals, real assets have been doing remarkably well.

Inflation is coming and, although everything we’ve found points to inflation coming much farther away than most people expect, there will be some pretty big consequences for the economy. But the important thing is to get in early and be prepared.

This is the time you want to buy these types of stocks.

But hey, that’s part of investing successfully. You have to buy what no one else wants. It’s the first step in buying low and selling high.

All this just shows investors are still very, very timid. Frankly, I don’t blame them. If you’re a few years away from retirement and your retirement account has been cut in half, it’s a natural reaction.

Of course, the “natural” thing to do when it comes to investing is to run with the herd. It feels safe. You have a bunch of people around who agree with you.

The World is Not Coming to an End

Of course, that kind of mentality couldn’t be more dangerous.

Right now, the majority of investors still believe the whole financial world is coming to an end or they’re waiting for a pullback to buy.

To be fair, with the problems facing commercial real estate, interest rates, and the value of the US dollar, it’s tough to imagine how there is any way out of this mess. Over the long term, the only solution is a painful reallocation of resources. That will involve shutdowns of factories making things people don’t want. There will be a sharp (and natural) period of unemployment as workers are forced to learn new skills and find jobs in fields where there is a need. And plenty of other painful steps necessary to right the economy.

Over the short term though (the next year or two), there are so many other factors which can override the long-term factors. That’s why we focus on the strong bearish sentiment that’s still in the markets, the massive amounts of government spending getting pumped into the economy, and the $3.7 trillion of cash still in money market accounts. Everything is in place for the markets to continue on their way higher.

The key is the $3.7 trillion sitting on the sidelines. All of that doesn’t have to go back into the stock market to keep this rally going. Frankly, all of it is not going back into the stock market. Part of it will be spent by consumers.

The effects of it will be two-fold. First, the part that does go into stocks will keep this rally going. The other part will go a long way to keeping the economy going.

This is just another reason to be buying stocks now. Most investors are still waiting on the sidelines waiting for the next leg of the downturn to buy in or avoid the next collapse.

In the end, nothing in the markets rarely happen when everyone is watching for it. If this poorly attended conference is any indication, there is still a lot of life left in this rally. It will end, but that’s a long time away.