Sovereign Wealth Fund and Commercial Real Estate

The AP is reporting that China has trimmed its holdings of U.S. Treasury’s by $5.8 billion in January. I’m sure members of the doom and gloom economic faction will point to this as solid evidence that the U.S. is losing its ability to fund spending and is inching ever closer to default.   


In my opinion, this line of thinking is completely unrealistic.  


China still holds $889 billion in T-bills. It’s clearly not “dumping” American debt. And as I discussed last week, there is evidence that China is moving to more direct investments in the U.S.   


China’s state-run investment company, the China Investment Corporation (CIC), is already involved in a buyout offer for shopping mall owner General Growth Properties (NYSE:GGP) through Brookfield Asset Management (NYSE:BAM)  


And according to a Financial Times article from this morning, China’s not the only country who’s getting involved. Sovereign wealth funds from Qatar, Canada, Australia and Abu Dhabi may be getting in on the bid for General Growth Partners.   


I find the burgeoning interest in U.S. commercial real estate fascinating. It’s clear that foreign investors are helping support the economic recovery. China may sell some U.S. Treasuries, but a direct investment in commercial real estate will help cash-strapped companies restructure their debt and lift a major overhang off the market.   


Still, the news that inflation is picking up in China is a bit worrisome. China has been an important driver of economic growth for the last year. As China moves to slow its economy, it’s possible that global growth will suffer.   


One option for China is to revalue its currency higher. That would have the net effect of making it more expensive to do business with China and help offset inflation. But China never signals anything, so we have no way of gleaning any clues about a potential Yuan revaluation.   


On the subject of China, it appears that Google (Nasdaq:GOOG) may be close to a decision as to whether it will continue to stay in China. You may recall in January, Google accused China of hacking into its systems and stealing information. Google threatened to leave the Chinese market if China didn’t stop censoring search results.   


China appears to have made its stance to Google clear. The ball is now in Google’s court. And judging from the 7% move from Chinese Internet and search company Baidu (Nasdaq:BIDU), investors seem to think that Google will follow through on its threat.   


Such a move is potentially bad news. The last thing we need right now is an even more contentious trade environment with China than we have now.  


But on the other hand, it may be overvaluing Google’s importance to think that it could significantly impact trade between China and the U.S.   


Merger and acquisitions have been an important catalyst for stock prices. Today, CONSOL Energy (NYSE:CNX) said it would buy Dominion Resources (NYSE:D) Marcellus shale natural gas assets for $3.4 billion. And Phillips-Van Heusen (NYSE:PVH) will buy Tommy Hilfiger for $3 billion.   


A steady stream of merger and acquisition deals is important for several reasons. It suggests that companies see attractive valuations, it suggests companies see growth ahead and it suggests that companies are able to get financing.   


All three are good signs for economy and a continued advance from the stock market.  


Also, the amount of deals taking place in the energy sector is particularly interesting. It’s easy to see why companies would want to acquire natural gas assets. My question is: why would any company want to sell?   


I’m about to add two companies to the Energy World Profits portfolio. One is a $500 million oil company in the Gulf of Mexico that has a forward P/E of 6 and generates nearly $100 million in free cash flow. Currently priced around $12 a share, I expect this company will be fetching $18 a share in the not-too-distant future.

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