Is China Caving?

The Dow Industrials cruised past 10,000 yesterday. Clearly, the news that Germany may be coming to Greece’s aid was a big relief for investors. The euro rallied against the U.S. dollar as well, an important catalyst for stock and commodity prices on U.S. exchanges.

Some stability in Europe and progress on a jobs bill in Congress will be good for stocks. Earnings are already solid and I suspect there is more upside coming.

I got on the phone with TradeMaster‘s Jason Cimpl to see if yesterday was the type of bullish activity he wanted to see from the market. He noted that although the market got a nice bounce (TradeMaster Daily Stock Alerts members closed short positions worth 15% and 5%), the close was very weak.

Typically, indices in a bull trend would have made a push higher into the close. Despite the weak close and his growing pessimism, he did note that market internals were "spectacular." The advancing volume data showed us that the upward action was more than just shorts covering their downside positions – it was also bottom feeders nibbling at the low stock prices. He’s watching the 1085 level on the S&P 500 as an important resistance point this week.

There’s also some significant news from China today. Credit Suisse is suggesting that instead of letting the yuan appreciate, it may raise wages for Chinese workers. That’s important on a number of levels.

First, higher wages for Chinese workers removes some of the competitive edge that China enjoys because it makes their goods more expensive. This move would also put more money in the average Chinese citizen’s pocket, which serves China’s bigger goal of supporting domestic demand for Chinese goods.

Being an export economy is an unsustainable model, and China knows this. It must transition to a more balanced economy. I’ve noted in the past that China needs some form of social security to unlock the massive amount of saving in that country. Higher wages is a step in that direction.

Obviously, if wages in China are higher, it will help the U.S. manufacturing sector as well. This is one of the pleasant outcomes of globalization. Ultimately, we will see a more level playing field as the standard of living in emerging economies rises.

The final takeaway of this move is political. It’s no secret that President Obama has been putting some pressure on China to remove unfair trade advantages. I won’t call it "caving in", but the fact that China would take steps to remove some of the advantage that its exports enjoy clearly shows the country is sensitive to the demands of its trading partners. Who knows, maybe China will also find a solution that lets Google stay in the country?

As with the U.S., I suspect there’s some upside coming for Chinese stocks. And from currently depressed levels, you could nail down some decent gains in the short-term and be well-positioned for long-term profits as well.

Some of my top Chinese stock recommendations in the SmallCapInvestor PRO portfolio are trading with P/Es of 8, 9, and 10. That’s cheap by any measure.

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And don’t forget, the Wyatt Investment Research 2010 Economic Predictions and Investment Outlook Special Report has been released to all of my subscribers.

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