What Yuan Revaluation Means for You

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Well, Friday’s Daily
was certainly timely. In case you missed the piece titled Is
China an Afterthought?
, I said
"I won’t be surprised to see
China do both –
raise rates and incrementally revalue the yuan."

Just two days later, China announced that it will completely remove the yuan
from its dollar peg. That news sparked a global rally for stocks last night,
and Chinese stocks in the
U.S. are moving higher as well.

Even though China has dropped its U.S. dollar peg, which meant that
one dollar was worth 6.83 yuan,
China will now peg the yuan to a basket of currencies that
includes the dollar.

In other words, the yuan is
not trading freely. It is still pegged. But
China is letting its currency appreciate against others.
And that’s good news for the
U.S. economy, stock prices and commodities.

stock markets posted +1% gains on the news of the yuan revaluation. Part of the
reason for that is the potential for European (and
U.S.) exports to be more competitive with China. But there’s also a confidence angle.

China would not let the yuan appreciate and potentially hurt its export
economy if it were not confident in its economy. And like I discussed on
Friday, there has been plenty of concern expressed about
China‘s economy.

So China‘s move should provide a confidence boost, especially
for commodities investors.
China is an important end market for iron ore, coal, oil,
copper, etc.

Today, we are seeing a
strong move for oil prices. And gold is selling off (if only temporarily). That
is exactly how the market should be responding if investors are indeed seeing
China‘s move as a show of confidence in its economy.

The best
way top play the yuan revaluation is through commodities. And the best
commodity to buy is oil. As you know, my energy policy is "buy oil stocks

Last week, I said I thought
oil prices were heading back to the $80 range. Today’s move certainly makes $80
a barrel look imminent.

I have three of the best oil
stocks you can buy anywhere in the world in the Energy World Profits
portfolio. These companies are all producing oil in
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Current Energy World Profits subscribers
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ran a very interesting article this morning that makes the point that the most
hated stocks have made the biggest moves higher during the economic recovery.

Case in point: Huntington Bancshares
HBAN). Twice as many analysts rate it a "sell"
as a "buy." And yet the shares are up 66% this year.

Barry James, chief executive
officer for James Investment Research Inc. in
Xenia, Ohio says “The crowd tends to get you off into the wrong
area at the wrong time…When the analysts are all on board saying only good
things can happen, it’s already built into the price. There’s not a lot of
upside left.”

This is an important
observation for investors. If you simply follow analysts’ ratings, your
investments will very likely underperform. And that’s not because you made a
bad choice, it’s because stock prices usually reflect sentiment. If sentiment
is overwhelmingly positive, then the valuation will almost certainly be

Conversely, you’ll find the
most upside potential in stocks when there is extreme pessimism. And that’s why
readers enjoyed such success with commercial real estate company
Maguire Properties (NYSE:MPG).

Now, I’m not advising that
you run out and buy the worst stocks in the stock market. Just that investors
would do well to trust their own instincts and analysis, and don’t be afraid to
move off the well-travelled path.

Another aspect
to the Bloomberg story concerns risk. Don’t think of risk as a four-letter.
Rather, think of it as opportunity. When the stock market is recovering from a
recession induced crash, there is more opportunity for investors, and taking on
risk means buying stock.

We can think of risk in
terms of interest rates, too. When interest rates are low, it means money is
cheap. It also means bond yields are low, and may not even be keeping up with
inflation. So investors who borrow cheap will seek out risk so they can get an
acceptable return on their money. In other words, they buy stock, because
that’s where they can literally get the biggest bang for their buck.

The Fed knows this, and
that’s why it maintains its pledge to keep rates low for an extended period of
time. Money sitting in Treasuries doesn’t help the
U.S. economy. Money that supports asset valuations does
help the economy.

I used to hammer this point
home a lot in Daily Profit during the early stages of economic recovery. But
it’s still true and we should remain keenly aware that the Fed wants asset
prices, including stock prices, to be stable at worst, and higher, at best. And
remember, don’t fight the Fed.

There is a floor to the
stock market, and it’s probably somewhere between 900-1,000 on the S&P 500.
If the S&P 500 were to fall that low, the Fed will come up with new
stimulus for the economy. It may seem risky to be a bull in the current
environment, but it’s more risky to be a bear.

Finally, thanks
for all your comments and keep ‘em coming to [email protected]

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