Jim Trippon's  Instablog

With the recent news that China's trade surplus was lower in September, many have observed that China's trade surplus momentum is slowing down. The export advantage China has routinely had was lower in September as its trade surplus was $14.5 billion. August figures showed a trade surplus of $17.8 billion while July saw a $31.5 billion surplus.

As we detailed last week in one of our articles, China has been pressured by the west, notably the US, on the currency front recently, as the US has accused China of artificially holding down the value of the renminbi. An undervalued renminbi, or yuan, contributes to being able to sell goods globally in exchange for higher valued currencies such as dollars. The US has maintained that China's undervalued currency is a large factor in the huge trade gap between China and the US, and has proposed tariffs on Chinese goods unless China will allow the value of its currency to rise. China, for its part, maintains that it is allowing the value of the yuan to rise gradually, and that there are other systemic reasons in the US for its lagging trade balance with China.

Factory In Wenzhou, Coastal City In Eastern China Depends On Export Trade

A Closer Look At The Trade Numbers

A look at more of the latest trade numbers shows that China's imports for September were $155.1 billion while its exports were $169.6. Although China's trade surplus fell from August and July, which was the highest in two and a half years, September's exports may have reached a new high. The surplus for China trade with the US rose to $19.9 billion, an 11.2 percent increase year over year for the same month. China trades even more with Europe than it does the US. China's trade surplus for September with the European Union was $12.9 billion, a decline of 7.2 percent. So although China's trade surplus has decreased, it's clear that it's still putting up impressive numbers in its trade activity, as its absolute export number shows.

The Three Pressures

China is currently facing economic pressure on three main fronts. Most noticed is the political pressure from the US regarding the currency. The yuan, which had actually risen against the US dollar slightly in the last year and a quarter, was deliberately weakened to 6.37 to the dollar from 6.35 to the dollar by China as a recent protest against the US Senate passage of the currency exchange reform act. There had been yuan appreciation to as high as 6.1 earlier in the year.

Beyond the currency pressure, China has been fighting its own inflation pressures. With its annual growth rate still in the 9. 5 percent range, China has been attempting to dampen its too rapid growth via interest rate increases and other measures to bring down its growth rate to a more manageable level. The inflation rate for September was 6.1 percent, while in August it was 6.2 percent, both down from a three year high in July of 6.5 percent. China's benchmark interest rate was reported at 6.56 percent after a quarter point increase in July. This was the third increase this year, the fifth in the last twelve months. China would like to see an inflation rate at 4 percent, which is roughly what the rate was at the beginning of 2011.

China's Interest Rates

The third pressure China's economy faces is the global slowdown in demand. As an export economy, China relies of course on selling its products to its trading partners. This is where the recent figures on the trade surplus come into play. The world's financial markets read the lower trade surplus figures for August as confirmation that global growth of the economy is indeed slowing dramatically. This shouldn't have been any surprise, as the US and Europe, the two largest trading partners with China, have been experiencing sluggish growth in the case of the US and, Europe, stagnant growth, as the European Union grapples with Greece's debt.

Some Dependency On China Demand

As a sidebar to the slowing of the global economy, some in the financial markets were looking for Chinese demand to help pull the world's economy out of its doldrums. This might even be called a fourth pressure, and is ironic as much of the world is looking to an exporter to keep its importing robust. Despite its status as an export country, China's economy has supplied certain demand in the last couple of years: iron ore for its steel industry, as well as natural resources for energy such as coal and oil. The markets looked at China's potential growth slowing and have been worried about this demand slacking off.

Consumer Discount Mall In Beijing

What To Expect

China will no doubt still be under pressure regarding its currency, although the likelihood of a trade war with the US is still, at least hopefully, remote. That presumes that cooler heads will prevail, particularly in the US. As far as the complex picture of the global economy, China's trade is still doing quite well, thank you, so the picture is far from gloomy there. The key is if all the pressures sort themselves out more gradually rather than through wrenching changes. If things happen gradually, China and all the global economies will be better off than going through the difficulties of the equivalent of economic shocks.

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As the third quarter ended nearly two weeks ago, we are beginning to see earnings reports file in. Traditionally, major companies such as Alcoa (NYSE: AA) kick off the slate, and its report can be a important window into industrial demand and output. Some of the major financial stocks follow up, and each quarter investors begin their ritual of scrutiny on companies and their performances, all to get a handle on stocks and the economy.

Along with the earnings announcements, many companies around this time also announce dividend increases. Some companies, such as McDonald's (NYSE: MCD), whose increase we wrote about recently, tend to do this the same time each year. So, many investors look to the fall in anticipation of a McDonald's dividend increase. Many dividend investors closely watch stocks they've picked out and follow them, noting the dividend increases and carefully use this along with the fundamentals such as earnings to determine whether, when or how much of a dividend stock they're going to buy. We do the same, of course, and pass on some of the news here.

The Value Of Dividends, Once Again

Dividend stocks often look to the untrained eye as if there's nothing happening, but this is completely wrong. Dividend stocks are often like the smooth waters of a pond, where nothing much appears to be happening compared to fast moving growth stocks which make all the waves and attract most of the media attention. But underneath the surface, there's often a steady current of increasing income or improving fundamentals. It's been repeated so often that it's probably ignored, but dividend paying stocks are responsible for much of the total appreciation of S & P stocks, and on average, dividend paying stocks do outperform non-dividend paying stocks in the aggregate. So that's a creed dividend investors know well.

The Current Dividend Landscape

We'll look at some specific stocks in a moment, and while not all of these are raising their dividends currently, nor do all of them necessarily pay a very high yield, keep in mind that there are all kinds of combinations of investment strategies you can employ with dividend stocks. A combination of income and capital appreciation is one way, while just buying the stock to collect the income is of course another. But first it helps to sketch out what the dividend playing field looks like right now.

A recent release by S & P Indices mentioned that yields increased to an average of 2.99% by the end of the third quarter this year, which was an increase from 2.51% and 2.39% during the second and first quarters of 2011 respectively. The report stated that for the third quarter in 2011, 350 stocks increased their dividends compared to 299 stocks during the third quarter of 2010. Only 23 companies reduced dividends during this time, fewer than last year. Forty percent of stocks paid a dividend, compared to 37.9 percent which paid at the end of last year.

Searching For Prospects

One of the most enjoyable things about being a dividend investor is the constant search you can undertake to uncover gems. With over 2,000 stocks paying dividends, that's a lot of ground to cover, but many attractive stocks are actually highly visible. We mention Corning (NYSE: GLW), which just last week announced a quarterly dividend increase to $0.075 a share from $0.05 per share. This is a 50% increase in the payout, and boosts Corning's yield to 2.2% from 1.5%. Now that's not a high yield, but the increase is significant. Critics would point out that Corning has warned that its earnings for the third quarter will come in at 25% to 30% lower than its second quarter earnings, but long term, this is a company that's an industry leader. It announced a $1.5 billion stock buyback and despite momentary weakness and supply chain disruptions in the LCD tv panel business, Corning has strong cash flow and grows its earnings at more than 10% annually. The stock is selling near its 52-week low at a 6 PE.

Corning Inc. One Year Stock Chart

Some Other Prospects

Consulting firm Accenture (NYSE: ACN) is another company that probably flies under the radar of many, but it shouldn't. It recently raised its quarterly dividend payment to $0.68 a share, an increase of 50%. The company has a load of cash on its balance sheet, more than $5 billion, no debt, and its expertise is in demand in the high efficiency environment that permeates corporate business today. The yield is not spectacular at 2.5%, but this is a stock to look at for a combination of capital appreciation and yield. Investors might want to wait for a lower entry point, though, as the stock has been run up this year and is still trading toward its higher end.

Defense contractor Lockheed Martin (NYSE: LMT), on the other hand, does have a significant yield of 5.3%. This stock is heavily institutionally owned at around 90%. The stock is trading relatively near its 52-week high, but still trades at a PE under 10. Earnings growth, despite the uncertainty of defense stocks, should be around 10%, and its PEG is 0.95. Lockheed is trying to diversify its business, though it generates $46 billion in annual revenue now. It raised its dividend by one third, adding to its already rich payout.

Lockheed Martin One Year Chart

We'll feature more prospects as we continue our never-ending search for attractive stocks of good companies which pay dividends. Remember, the dividend increases mean more cash for you, the investor.

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A lot of folks have been asking me lately what my thoughts are on the market. Not surprisingly, it seems like I get more of those questions the more chaotic the market gets. Even the the future Mrs. Shriber's parents recently asked my thoughts on the current state of affairs in the financial markets. Hey, at least that situation lets me know that they actually like me. Kidding aside, believe me when I say I understand why the recent goings on have folks feeling a bit discombobulated and confused.

I know how you feel. August and September were bloodbaths and October got off to an inauspicious start. Now in the past five days, we seen some very strong up days and two down days that some would argue indicate the bears are losing their vigor. Up and down we go and it leaves a lot of investors feeling like they need to invest in pharma stocks to find a cure for their market-induced heartburn.

Don't fret because there is a silver lining: There are a lot of good ETFs on sale right now. You just need to know where to look. The future Mrs. Shriber would say these days for ETF investors are a lot like Nordstrom or Neiman Marcus the day after Christmas. All the fancy designer stuff is still there, it's just being offered at substantial discounts. To us as investors that's called value.

Of course, the slippery slope between value and value must be observed. When it comes to searching for bargains in the ETF bin, I like to shop for those funds that have been beaten up to the point where I can say the repudiation has been too harsh. And yes, I like to embrace ETFs that have been ensconced in controversy because the more controversial something is on the way down, often times we'll see that security generate more alpha on the way up.

Here's where I'm looking now for value plays in the ETF universe that have the potential to deliver massive percentage gains over the next 18 months.

 

Yes, I said it and yes, I'll admit this ETF has been slammed this year. So why do I like it? For starters, URA's recent woes have nothing to due with Japan or other negative nuclear industry headlines. Second, the long-term outlook for the uranium sector is compelling. Trading for less than $9, URA is now a call option with no expiration data on the coming uranium sector rebound.

I'll eschew making a black cloud joke here, but that's exactly what KOL and the coal sector has been under lately. Negative profit and production revisions from KOL constituents and a dour environment for high-beta ETFs has punished the ETF. However, KOL's rebounds after its previous beatings have been substantial. Volatile and home to an iffy chart, scaling into KOL is the best way to play it.

When an ETF devotes nearly 81% of its weight to the materials and energy sectors, it's easy to understand why it has fallen out of favor recently. HAP's holdings are less controversial than KOL's and URA's, but no less prone to rebound hard and fast when the risk on trade returns. HAP is probably the best bet on this list for the more conservative investor.

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