Investing Daily

In the article "Cautious Euphoria," I encouraged investors to take some profits of the table at a time when many investors deemed the rally unstoppable. Although the market went higher after that recommendation, equities have stumbled to levels seen at the end of May and appear weak. At present, the market is ready to go either way; investors should avoid making heavy bets.

That said, cutting the beta in your portfolio might be difficult for some investors; stocks that exhibit high betas are those that have gone up the most during the rally. For Asia-oriented investors in particular, shorting US financial stocks can also offer a good balance to your long holdings. Readers of the Silk Road Investor should also use the portfolio hedge recommendations.

Speaking of US financials, it was interesting to read recently in the New York Times that "Citigroup plans to raise workers' base salaries by as much as 50% this year to offset smaller annual bonuses." The gulf between economic realities and the banking sector remains huge--and that's not even the biggest problem. Taxpayers have rescued these institutions with little to show, both in term of the assets they have been indirectly buying or a viable working framework for the industry.

Investors should also pay close attention to developments in the US Treasury market for potential hedging opportunities; I continue to maintain that the government's response to the crisis ultimately will beget a period of deflation. This view becomes more credible by the day, an outlook buttressed by the former Chairman of the Federal Reserve's recent comments to the contrary in the Financial Times.

I have no insight as to how readers responded to the article, but it would be interesting to know if they are any market participants that still pay attention to the opinions of central bankers--especially former ones.

Recent developments in the global economy have demonstrated that the oft-maligned outsourcing and offshore manufacturing embraced by Western multinationals allowed Asia to export low inflation to the US, making it easy for central bankers to keep interest rates low. The outcome of these decisions is now well known.

Long-term investors should continue to be long Asia; every significant market pullback should be viewed as a buying opportunity. As I discussed at some length in the latest installment of Silk Road Investor, China's ports will prove to be good bets going forward and are an attractive option when the market hiccups.
The ports are still in the recovery process, but declines in container volumes have been improving. By the beginning of the fourth quarter the recovery will be well in hand, and 2010 should bring positive growth in container volumes.

Container throughput was better than what industry observers were expecting, down only 10.8 percent in the first four months of the year. The reasons for this were a less-than-expected decline in activity at Shenzhen and more resilient growth at the Northern ports, which benefited from relatively strong domestic demand.

Source: Ministry of Communication

My favorite company to gain exposure to the sector is Dalian Port (Hong Kong: 2880, OTC: DLPTF). The port had a decent year thus far, suffering only a 3.3-percent decline in container throughput growth.

Operating on the southern tip of Northeast China, Dalian Port is benefiting from the region's revitalized economy and has become one of the mainland's biggest oil hubs. The Port of Dalian is one of China's four strategic oil reserve bases and the largest oil/liquefied chemicals port in the region. Its oil terminal business (45 percent of earnings) should improve in the second half of the year; China's demand for oil remains strong.

The company is also relatively protected from the US economic slowdown; the majority of containers traveling to and from the port do not come from the US.

The stock has performed well this year, up 60 percent--not as much as its larger peers but impressive given its size--and now trades at 10.7 times trailing earnings and 13.7 times expected earnings for 2009. Meanwhile, its growth potential, for this year and the next, appears sanguine.