Falls Church, VA–The world remains in a Goldilocks economy. As mentioned here before, although a lot of unknowns continue to puzzle investors, the majority of them still seem to see the world as a glass half full. (See SRI, 28 March 2007, The Great Unknowns.)

Although the view here has been fairly cautious, the fact of the matter is that, given the negative headlines (weaker US earnings growth being the most-recent one), no one can really say if the global markets–and economies–are or aren’t climbing the proverbial wall of worry.

For the time being, I have no main reservation–a US economic recession notwithstanding–accepting the glass-half-full view. Consequently, investors are advised to make sure that they’ve bought some insurance, which SRI’s short recommendation offers. Be more active in booking profits, and move forward.

Profit-Taking

Given the cautious outlook preferred here, I’m advising long-term readers to take profits off the table in the following stocks. This profit-taking should take place without selling the stocks outright–i.e., take any gains you have, and leave the initial capital invested.

But first, I’d like to make a couple clarifications. Regarding mechanics, the expectation here is that investors look at their profits (i.e., how much money they’ve made above the initial investment) and then calculate how many shares they need to sell in order to take these profits off the table.

If you’re not a long-term reader, chances are you probably don’t have profits to take from the specific stock; you’re unaffected by the recommendation. The fact that I haven’t advised selling the stocks outright indicates that they remain a good, long-term holdings.

Hengan International is up around 20 percent since it was added to the Portfolio at the beginning of the year. (See SRI, 24 January 2007, Just Fine.) Its long-term potential is still good, and it’s also a low beta play on China’s growth. Nevertheless, profits should be booked in Hengan International at this time.

Mitsubishi Heavy Industries has also performed well, returning more than 50 percent since I recommend it a little more than a year ago. (See SRI, 15 February 2006, The Rules Of Engagement.) Take profits off Mitsubishi Heavy Industries.

Vimpel-Communications has also done well, returning 123 percent since it was recommended last summer. Investors who haven’t taken some profits off Vimpel-Communications should do so now.

Shinhan Financial is up almost 20 percent since my initial recommendation. But given that the stock had a bad period last year, which made me reiterate my recommendation when it was trading at around USD90, profits should be taken off the table for Shinhan Financial, especially by investors who bought below USD100. (See SRI, 23 August 2006, Fall Rally?)

iShares Malaysia has returned 25 percent since it was recommended last December. (See SRI, 6 December 2006, The Money Month.) This is a more than 90 percent annualized profit. Taking some money off the table in iShares Malaysia looks prudent at this point.

Note that the above stocks will remain in the SRI Portfolios because these are long-term diversified portfolios. The investing themes these recommendations represent are still valid.

New Buys

Hong Kong-based SCMP Group (OTC: SCPXY) is a newspaper publisher and new addition to the SRI Long-Term Holding Portfolio. The group’s principal activity is the publishing, printing and distribution of the South China Morning Post and the Sunday Morning Post.

These are the leading English newspapers in Hong Kong, with a market share of more than 90 percent. Revenue from both newspaper operations accounts for around 80 percent of the company’s earnings.

Although the stock isn’t a highflier, you should benefit from Hong Kong’s continued economic strength as well from an increase in advertising growth already under way. Regarding the latter, the risks are on the upside as China is approaching the final countdown to the 2008 Olympics–always a good time for business.

SCMP’s circulation has been increasing, and given its readership–usually high-end foreign nationals that live and work in Hong Kong–it’s also been the recipient of high-end retail advertisement.

The company has almost no debt and high operating margins at close to 30 percent. It also owns real estate properties that generate strong cash flows, with a big part of the cash usually returned to stockholders. The company is also attractively valued and offers a 9.7 percent yield.

One American Depositary Receipt (ADR) represents five ordinary shares. Buy SCMP Group.

China Petroleum & Chemical Corp–Sinopec (NYSE: SNP) will also be added to the SRI Alternative Holdings Portfolio as one more way to gain exposure to oil.

Sinopec is China’s leading integrated energy and petroleum company, dominating the eastern and coastal areas, which account for 74 percent of China’s total petroleum demand. It’s the most-leveraged Chinese oil company in the complex refining business, which remains an important sector for the industry–especially in Asia.

To give readers a better understanding of the importance of refining, I turned to our in-house energy expert, Elliott H. Gue, editor of The Energy Strategist:

Refiners buy crude oil as the feedstock for their operations and produce and sell gasoline, diesel and other refined products. They make money from the spread between crude oil prices and refined products prices, not the price of crude or gasoline alone.

Crude oil isn’t a homogeneous commodity; there are hundreds of different crude oil types found in different parts of the world. Typically, oils are described based on two basic properties–specific gravity and sulphur content. In the petroleum business, the standard measure of specific gravity is American Petroleum Institute (API) gravity; the higher this number, the “lighter” or less dense the crude oil.

The second key terms to understand are sweet and sour. Both terms refer to the sulphur content of the crude oil. Sweet crudes are relatively low in sulphur, while sour crudes have a higher naturally occurring sulphur content.

These measures aren’t meaningless from a refiner’s standpoint. Light crude oils are simpler to refine than heavy crude oils because your typical barrel of light crude oil will tend to yield a higher quantity of useful products, such as gasoline per-barrel refined.

That’s why light crude oils tend to trade at a higher per-barrel price than so-called heavy crudes. Similarly, sulphur is a pollutant that must be removed during the refining process; sweet crudes are easier to refine and more expensive than sour grades.

As an example, consider a standard benchmark crude oil, Brent crude. The name comes from the Brent oilfield, located northeast of Scotland’s Shetland Islands. Brent crude typically has an API gravity around 38 degrees to 39 degrees and a sulphur content of less than 0.5 percent; it’s a light, sweet crude oil.

In contrast, a common Mexican benchmark crude known as Maya has an API gravity of 22 degrees and a sulphur content of 3.3 percent; it’s a heavy, sour crude. The current price of Maya crude is about $45 per barrel, a near $20-per-barrel discount to the price of Brent crude.

Although the yield of gasoline may not be quite as high for these lesser grades, modern refining techniques boost the yield to close to the same level in many cases. Therefore, refiners can actually pay less for their feedstock. That said, there’s no difference whatsoever between gasoline refined from heavy, sour or light, sweet crude.

At this point, you can see the potential for boosting a refiner’s profit margins. Not all refiners are capable of refining heavier, sour crude oils; those that are known as complex refiners. Complex refiners have the flexibility to buy cheap, heavily discounted heavy sour grades of crude and covert that oil into valuable refined products; these companies can earn fat profit margins in the current environment.

When evaluating a refining stock, you must look not only at their total throughput capacity but the refiner’s ability to process these cheaper feedstocks. This is every bit as important in determining profitability.

It should be obvious, then, that Sinopec has a great advantage versus less-complex refiners. The company is modernizing its operations and is finally able to demonstrate better cost control in its refining business. According to management, it will continue to improve its refining operations through the implementation of technology necessary to upgrade its refineries. This will enable the company to process bigger amounts of heavy, sour crude to take advantage of the crude spreads.

The company recently reported an increase in fiscal year 2006 profits of 30 percent–8 percent higher than expectations. Going forward, profit numbers should prove even better. One ADR represents 100 ordinary shares. Buy Sinopec.

Portfolios

At this juncture, investors who like to add to positions in Portfolio recommendations should focus on the following markets, in order (for both countries and sectors): South Korea, Malaysia, Russia (telecommunications, energy), Singapore (telecommunications, banking, industrial), Europe (pharmaceuticals, oil, industrials, communications equipment, media), Hong Kong (real estate, publishing), Japan (industrials, banking), India (pharmaceutical, banking), China (consumer, power, oil), Taiwan (telecommunications, technology) and Macau.