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Made In China
The Smart Profits Report: Issue # 448
Monday, August 20, 2007
Made In China: How To Profit From China’s Tarnished Toys & Outdated InfrastructureBy Martin Denholm
Managing Editor, Mt. Vernon Research
Two types of the “Sarge” character from the movie “Cars.” Forty-four varieties of Polly Pocket toys. Eleven different Doggie Daycare sets. Four varieties of Batman toys. Two Barbie & Tanner sets. The One-Piece “Triple Slash” Zolo Roronoa figure.
No, not items on my Christmas wishlist (although Batman is pretty cool and I’m kind of intrigued by the Triple Slash dude). Instead, these are the toys made in China that U.S. toymaker Mattel recently recalled, amid fears that they contain lead paint and have magnets that kids could swallow.
In total, 18 million items were recalled - the largest recall since 1998. It also comes just a few days after Mattel yanked 1.5 million toys made in China for its Fisher-Price division). In fact, when the firm pinpointed the Lida Toy Company as culprit, an owner there committed suicide.
Let’s dig a little deeper into this story - and other news that suggests we might be starting to see a kink in the Chinese armor…
Made In China: Christmas Begins In August
Having worked in the retail industry in Britain, August is a very important month for manufacturers and suppliers. Although the holiday season is still four months away, it’s when production and distribution of goods accelerates, so stores have inventory well ahead of time.But considering that 80% of the toys sold across the world are “Made In China,” this year might not be shaping up too well.
In addition to the current recalls, back in June RC2 Corp recalled 1.5 million railroad toys and associated parts that also contained lead paint. The items were manufactured between January 2005 and April 2006 and affected 23 retailers that carried them. And just last month, Hasbro was forced into a second recall of Chinese-made “Easy Bake” ovens.
What’s worse is that an official from the China Toy Association just revealed that the industry has known about the manufacturing defects since March. And this is in addition to the high-profile tainted pet food recall and contaminated toothpaste (how the heck does anti-freeze get into toothpaste anyway?) Not the best way to inspire confidence in “Made In China” products.
In response to the Mattel fiasco, the Chinese government stepped in and banned exports of toys (including Big Bird and Elmo, no less) from two factories. But the U.S. isn’t satisfied. Accusing China of having “lax safety standards,” Senator Dick Durbin has called for third-party product checks. China has rejected the idea, but will send officials stateside this month and in September to review safety procedures with the Consumer Product Safety Commission and FDA.
Then there’s the pace of Chinese industrial production itself…
As Production Cranks At Warp Speed, China Gets Sloppy
For months - no, make that years - China’s manufacturers have cranked the production line up to warp speed. Output has soared and contributed to the economy’s massive trade surplus and double-digit GDP growth rate over the past four years. Second-quarter GDP growth barreled in at 11.9%, the fastest rate in 12 years. But maybe all the expansion and eye-popping profit has made manufacturers sloppy - hence the product recalls. And now, lower export tax rebates could be about to hit.
Let’s face it, an 18% jump in monthly industrial production is pretty darn good. That’s what China achieved in July. However, that was down from June’s 19.4% rate and lower than estimates. It was also the first slowdown in three months, as the government reduced export tax rebates on 2,831 products in a bid to cool the rapid growth.
And you can see why. The enormous amount of cash from the bloated trade surplus is partly responsible for China’s inflation rate shooting to 5.6% in July - the highest level in a decade. This could well force the central bank to raise interest rates for the fourth time this year - part of its goal to prevent economic “overheating” (but when isn’t this the bank’s goal these days?)
With manufacturers now lowering their output and overseas “Made In China” orders declining, economists now expect industrial production and exports to cool over the rest of 2007. And that’s not the only thing slowing…
Government Grounds Soaring Chinese Aviation Expansion
As China’s economy has soared, so too has its aviation industry. Air traffic is up 16% a year. In Beijing, the airport is processing 13 million more passengers per year than it was designed to handle. As a result, the General Administration of Civil Aviation of China will now make substantial cuts to flights serving the airport. China Southern, China Eastern Airlines and Air China have all cut 10 flights per day, with Hainan Airlines cutting eight.
Overall, 332 million passengers passed through China’s airports in 2006 - a 17% jump over 2005. However, that figure is expected to slow to 14% growth per year until 2010. In addition, the regulator has also announced that because the system is so overloaded already, new airline applications will be frozen until 2010, while existing carriers who want to expand will have to pass government controls. Pilots and other airport and airline officials will also have to cut their overtime hours to cool the growth, with officials worried that red-hot expansion will impact safety.
So while China’s economic boom might seem unstoppable, it’s not going to up without stopping, nor last forever. And these could be signs of cooling. The question is… how can you profit?
Will China Choke On An Olympic-Sized Bill And A Dated Infrastructure?
Sure, the Olympics have led to greatly increased spending and heightened awareness even more. But what happens when the Games are over, the people go home, and the spending slows? (Not to mention the country’s fat bill for the event). Much of China’s outdated infrastructure (water shortages being the most serious) is still straining under the weight of such expansion and the country’s growing pollution problem remains a grave health concern.
China is not an impenetrable fortress, immune to market madness. And while nobody else talks about it, my colleague Karim Rahemtulla outlined the problems that China could face over the next 18 months in the July issue of the Xcelerated Profits Report. He also gave readers a way to profit from it - and just cashed out for gains between 40% and 100% in just a few weeks - even as the U.S. stock market got battered.
Even better… having taken profits, he issued a new play that means investors are now essentially hitching a free ride on China’s downside. And with today’s volatile market, he’s constantly on the lookout for the next moneymaking opportunities in China and elsewhere. Make sure you don’t miss it - see below for details.
Best regards,
Martin Denholm
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Today’s Smart Profits Action Center
- The Federal Reserve leapt into action on Friday morning and slashed the discount rate at which it lends to banks, by 0.5% to 5.75%. Great for the crippled hedge funds that dived into the sub-prime area and got their butts kicked, but it doesn’t do much for the little guy.
But Xcelerated Profits Report subscribers aren’t complaining. Check out what a few of them had to say on Karim’s China trade…
- Karim, I just wanted to drop you a quick e-mail comment on our contrarian options play. Per your recommendation, I purchased 6 contracts on 7/23/07 for $4.00 and sold all six today 8/16/07 for a 112% gain at $8.50. This was a quick and tidy profit of $2,700 in less than 1 month. I truly appreciate your timely and informative e-mail updates that keep us in the know! Thanks Karim to you and your staff! - Robert B, Land O’Lakes FL.
- This is exactly the type of support I appreciate. Thanks for providing this guidance, as it is tough in these market conditions to make the correct decisions and your comments certainly make it easier. I exited at $7.60 and bought at $4.50 for a 69% gain in six weeks, which I take anytime. Wish I had been able to afford more than 10 contracts this time! - Joe B, Wilton, CA
- Hi Karim, I am a recent subscriber and I think you are a genius. You are making money for us when everyone else is losing. I sold for $4.70 and so my position on the $90 put is free. Keep up the great work and thank you very much. - Theresa S, San Francisco, CA
- Karim, boy you people are terrific. I took your advice on the 2 puts I got for $4.40 AND SOLD THEM THIS MORNING AT $7.60. Thus ending up with a 70% profit. I am really impressed with you people. So far you all are batting 1000. Keep it up. - Bob C, Smyrna, GA
For more information on how you can join in on these kinds of profits and become a subscriber of the Xcelerated Profits Report, click here.
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