Sure, the world markets (as measured by the MSCI World Index) have pulled back by around 4 percent from recent highs reached a couple weeks ago. But this is a pause to refresh, not the beginning of a new downturn. A rally could prove more sustainable than the majority expects. I’ve made this argument before, and it’s held true through the current market turmoil.

And, if the rally continues, expect a more explosive move upward as a “short squeeze” comes into play. Complacency has left a lot of investors reshuffling, and very few can afford to miss another leg up, especially as we near the end of the second quarter.

China could provide the spark that ignites a new rally. Authorities are assessing the economic slowdown, closing in on its ongoing credit tightening policy. Many economic players favor such a move because China has been hit by two big disasters this year–a snowstorm and an earthquake–and the Olympic Games are just around the corner. The latter should serve as a feel-good period for the Chinese and should also have a positive effect on market sentiment.

If this scenario materializes, the Chinese market will explode to the upside and will take the rest of Asia–and the world–along with it. Stay tuned.

Dalian Port’s (Hong Kong: 2880) operation at the southern tip of Northeast China 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 Northeast China. It’s also relatively protected from the US economic slowdown. The majority of containers traveling to and from the port come from the US.

In 2007, the Port of Dalian handled 3.7 million twenty-foot equivalent units (TEU) of container boxes and 34.4 million tons of oil. And the company is on track for a similar performance this year. Oil contributes 50 percent of earnings with revenues growing 20 percent year-over-year.

Source: Dalian

Looking ahead, Dalian Port is finishing construction on 16 new crude oil storage tanks that will substantially increase the company’s revenues and earnings visibility. Crude oil storage is a high margin and stable business.

Profit margins were as high as 75 percent last year, and contracts for oil tank leasing are usually negotiated on a five-year basis. In addition, the company plans to increase tariffs for foreign trade by 7 percent later this year.

The stock is playing catch-up with its peers as investors start realizing its growth potential and the company’s defensive characteristics. As with the majority of Silk’s portfolio recommendations, view this play as a strategic investment, and remember to remain patient.

Once again, buy the stock in Hong Kong, and stop wasting you time with incompetent brokerage outfits. Hong Kong is easily tradable through serious brokers, and I strongly recommend you buy the stock locally. Dalian Port, a new addition to the Silk Portfolio, is a buy below HKD6.

Source: Bloomberg

I’ve made the case for Japan’s long-term potential on numerous occasions. To recap, the main idea is that the current economic cycle in Japan will be stronger and more enduring than most market observers anticipate. This view is based on the structural changes taking place in the Japanese economy (including changes in government financial institutions) and the eventual end of deflation. See Silk, 30 April 2008, It’s a Rising Sun.

But Japan’s bond market continues to sell off as yields rise. And as the 10-year government bond yield gallops toward its all-important 2 percent resistance level, now’s the time to add to our exposure. See the chart below.

Source: Bloomberg

Banks are my favorite play to gain exposure to this potentially rewarding outcome, and Mitsubishi UFJ Financial (Japan: 8306, NYSE: MTU) is my long-standing recommendation.

Insurance is one more sector of the financial industry that will benefit as the economy normalizes. It’s been rallying for sometime, but I expect the trend to hold. I’m adding T&D Holdings (Japan: 8795, OTC: TDHOF), a life insurance company, to the Silk Portfolio. Buy T&D Holdings at current prices.

As I mentioned above, buy shares locally. Japan is another market that any reliable broker will able to access for you at no additional cost.

Source: Bloomberg

Two weeks ago, I recommend shorting HSBC Holdings (NYSE: HBC). I made this recommendation before, but it didn’t play out well for us. The argument is the same this time around: HSBC holds 63 percent of its loans in the US and UK, and its stock hasn’t suffered nearly as much as the rest of the global banks.

I still expect it to be hit in a downturn, and it’s a good hedge to our long positions. Short HSBC Holdings at current prices, and place your stop at USD100.

The investment process is constant. So if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the Portfolio tables for details.

• Russia (energy, telecommunications)
• Hong Kong (banking, real estate, infrastructure)
• India (pharmaceuticals)
• Taiwan (ETF)
• Philippines (telecommunications, real estate)
• China (consumer, telecommunications, port, machinery, oil, e-commerce, coal)
• Japan (banking, insurance)
• Singapore (banking, telecommunications, industrial)
• South Korea (banking)
• Cambodia (casino/hotels)
• Macau (casino/hotels)