Keep your money in U.S. markets — and away from Manny Backus
By Malcolm Berko December 30, 2011 10:18AM
Updated: January 8, 2012 9:50PM
Dear Mr. Berko: I have $64,000 invested in Chinese stocks, and I’m ahead by $6,000. What do you think of the Chinese market today for the next three years? Are there any Chinese stocks you would recommend?
Also, what do you think of Manny Backus, who has a program called First Hour Trading advertised in Money Magazine? Backus claims he can show us how to make $500 in the first 59 minutes of every trading day. Do you know Mr. Backus? Would you recommend his trading program?
Dear BD: There are about 246 different languages spoken in China — they range from Achang to Zhuang — and perhaps as many dialects spoken by 1.4 million Chinese, many of whom make jet planes, computers, building products, automobiles, medical equipment, TVs, heating systems, machinery, trucks, paper, clothing, furniture, toys, chemicals, food products, etc., for export. There are some 3,300 public corporations in China ranging in name from ABA Chemicals to Zuoan Fashions; that’s about 13 corporations for each spoken language, dialects not included.
I looked at 42 Chinese corporations trading in the U.S., and each is rated as a “buy” by U.S. analysts. There seems to be an overwhelming belief that China cannot fail, even though the Shanghai Composite Index has been off 16 percent in the last 12 months and the Hang Seng Index has fallen 24 percent in the same time frame.
And with so many languages spoken, it’s difficult to form a knowledgeable opinion about what’s really happening on the inscrutable mainland. Most readers know that I very much prefer to read annual reports and peruse balance sheets and income statements in my native tongue and to collect dividends in dollars rather than yuan, pesos or francs. Most Chinese companies are Greek to me, and I’m told by professionals whom I respect that many Asian analysts are forcefully pressured to produce positive reports on companies they cover.
So I think you should sell every Chinese company you own. Do it now, and don’t wait, because when the Great Economic Wall of China cracks, your nest egg will become chop suey.
In 2011, China’s real GDP grew at 15.6 percent, and Chinese stocks reflect this impressive number. If one includes the appreciation of the yuan, however, China’s GDP grew at a single-digit 8.9 percent. It’s still an impressive number, but sure as shootin’ and certain as sin, China’s sales to Europe and the U.S. accounted for 39 percent of its exports in 2011. The recession in the U.S. and Europe has reduced demand, and falling exports may reduce China’s GDP growth to 5.2 percent in 2012. But most Chinese stocks currently trade at multiples that can be justified only by a 15.6 percent GDP.
I don’t trust Chinese analysts, I don’t trust the Chinese business model, I don’t trust Chinese accounting, I don’t trust China’s banks, and I don’t trust the Chinese corporate culture. But I do trust my instincts, and they say, “Sell.”
If you insist on Chinese exposure, buy a Chinese restaurant in Indianapolis. Many restaurants go out of business in a bad economy, but Chinese restaurants have staying power. Have you ever seen a “closed” or “out of business” sign on a Chinese restaurant door or window or even on a Chinese laundry? Their food costs are low, labor is primarily supplied by the family that own the business property, and their employees don’t join unions.
There are so many good U.S. stocks. Why must you invest overseas?
As for Manny Backus, I’m surprised that Money Magazine would stoop as low as Sirius or XM Radio and run his ridiculous advertisement. And I’m disappointed that Money’s editors would compromise their standards for advertising revenues. The truth is that nobody “makes money in the first 59 minutes of every trading day.”
Manny’s “First Hour Trading” thing is a sweet scam. He doesn’t promise enormous profits of hundreds of thousands of dollars or wide-eyed returns of 1,600 percent from two or three stocks. Manny’s claim appears reasonable, credible and tenable; you can make $500 every trading day just by following his advice, which’ll cost you $300 a month.
If you believe this, then I have a split-level stilt house in a wadi with riparian rights at a bargain price just for you. Or I know a guy who wants to sell an original reproduction of an un-retouched goldmine map sketched by an old Dutchman who got lost wandering the Superstition Mountains in the 1870s.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or e-mail him at email@example.com.