FALLS CHURCH, Va.–The Chinese financial authorities continue to try everything possible in their efforts to cool down the local stock market. At this point, identifying and analyzing all the measures makes no difference because there are so many, and it seems that new ones are introduced on a daily basis.

For the time being, the market’s animal spirits seem unstoppable; sooner or later, though, the market will slow down. The majority of the tactical indicators I follow seem to be out of breath, and a correction in China’s can be the perfect excuse for profit-taking in other markets as well.

My view since the beginning of the year has been that investors should be ready for some turbulence in 2007; I now think that the markets should be viewed with extreme caution, especially for the next three months. Consequently, investors who feel they have big profits to protect should start to lighten their positions.

Should this outcome materialize, it should be viewed as a short-term drawback in the context of a bull market because, as I’ve noted before, absent a US-led global recession the global economy is expected to perform decently this year, allowing for the markets to reach new highs by year’s end.

I still think that the US economy will avoid a recession this year, and the rest of the world will be able to pick up the slack, as it’s been doing since the US economic slowdown began in mid-2006.

Political developments in the US and abroad continue to be the major threat to the global economy. The latest potential problem comes from Washington, where the second round of the Strategic Economic Dialog between China and the US concluded last Friday.

As was expected, the Chinese weren’t prepared to allow their currency to revalue at a faster pace, as has been the constant request of the US, mainly the Congress. Gradually, the revaluation of the Chinese renminbi is becoming one of the major “weapons” in almost every politician’s arsenal, and it will be used extensively in the upcoming elections.

Nevertheless, don’t expect the Chinese to give in on the issue for the simple reason that they can’t; China’s unique social and economic position calls for a gradual approach to everything, including currency appreciation.

Chinese leaders will eventually have to pass measures intended to boost domestic demand, which will lead to a stronger renminbi and lower surpluses. Until then, China will have to find ways to absorb investment growth that will often be directed to ill-advised projects.

This is why US-China cooperation remains at the center of the global economy–a mutual understanding will solve each other’s and the world’s problems.

The US will play a vital role in this transition because the two countries have reached such a level of economic integration that cooperation is the only viable alternative. As Secretary Paulson has said in the past, “The relationship between the US and China is the most-important bilateral economic relationship in the world today.”

China has come a long way since it opened its economy and its market in 1978; the beneficiaries have included US companies and the US economy in general. I still think it’s unlikely that the two sides will go too far to the extreme and destroy all the progress that’s been made. But as things stand now, the risk is firmly on the downside.

The above information further illustrates why (as long-term readers are well aware) geopolitical developments are an integral part of the SRI strategic investment process; I offer my Geopolitics & Investing reports to SRI readers because such issues are critical to long-term profits.

Given recent global developments (e.g., Iraq, Iran, China and Russia etc), now’s a good time to read–or re-read–those reports. The long-term benefits should more than justify your efforts. (See The Dragon And The Eunuch: Wars, Spies And Profits In 21st Century Asia and Still Playing The Great Game: Business, Investments And Politics In Central Asia.)

Fresh Money Buys

If you’d like to add to your positions in Portfolio recommendations or allocate new funds, focus on the following markets, in order (for both countries and sectors): South Korea, Hong Kong (real estate, publishing, infrastructure), India (pharmaceutical, banking), Malaysia, Russia (telecommunications, energy), Singapore (telecommunications, banking, industrial), Europe (pharmaceuticals, oil, industrials, communications equipment, media), Japan (industrials, banking), China (consumer, power, oil, water), Taiwan (telecommunications, technology) and Macau.

SRI Mechanics

I often include some notes regarding how I view the investment process. Long-term readers who have a grasp on how we do things can take a break, but those who are unclear on such issues should read on.

The SRI Portfolio has been constructed around the view that domestic economic demand and investment are driving Asia’s economic ascent. The areas I’m looking at for investment ideas continue to be mainly property, infrastructure, financials, retail, telecom and utilities.

I’ve noted repeatedly that the Portfolio should be viewed as a whole rather than an assortment of stocks. It’s my hard-earned assumption that investors seldom follow such advice, so I also offer some direction in an effort to assist with the decision-making process, under the Fresh Money Buys section.

That said, Portfolio recommendations should be taken at face value, in the sense that, if a stock is recommended as a buy and trades below the price indicated in the Portfolio tables, then the recommendation stands for new readers as well as longer-term ones.

Occasionally, I recommend–as I did in the beginning of 2007–that long-term readers take profits off the table. I wrote:

I also advise long-term readers to take profits from ICICI Bank and Dr. Reddy’s Laboratories–without selling the stocks outright. Take any gains you have and leave the initial capital invested.

I’d like to make a couple clarifications. Regarding the mechanics of the above advise, I expect investors to 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.

Second, 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 stock outright indicates that it remains a good, long-term holding.

SRI has one main portfolio, the Long-Term Holdings, and an alternative, the Alternative Holdings-Permanent Hedges. Investors should look first to the Long-Term Holdings for asset allocation in the markets covered here.

In the Alternative Holdings-Permanent Hedges Portfolio, readers can track permanent hedges and shorter-term recommendations. It also includes companies I’ve recommended for longer-term or more fundamental reasons, and they represent additional exposure to favored investment themes. For example, Lukoil provides extra exposure to a favored theme–Russia and energy.

On the left-hand side of the Web site’s main page, under the title Portfolio Performance, readers can get a snapshot of the Portfolio’s return compared to other major indexes.

On the Portfolio page, you can click on the asterisk next to each holding to review the original commentary and recommendation. I plan to enhance the Portfolio table with extra features and welcome comments and suggestions.

Finally, many new readers have asked, “What do we do when the market drops substantially?”

Since SRI’s inception, I’ve been skillful and lucky to either have booked profits before the fall, in which case I recommend sitting still, or issue a flash alert to sell if a substantial selloff is indicated, as was the case a year ago. (See SRI, 15 May 2006, Silk Road Investor-Flash.)