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I am Canadian-Greek and have lived in the US for many years. I have a MSc. in electrical engineering & finance and speak 4 languages (English, French, Greek, German). I am an investor and a freelance financial writer who has accumulated over 20 years of experience investing and trading in... More
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  • These Two Facts About USA And China Deserve A Deeper Consideration

    Introduction

    Two important events during the last few days have made me try to read under the lines in order to decipher what the next phase of the relationships between USA and China will be and how I can benefit from this. The following two occurrences took place simultaneously and it could be a mere coincidence. However it might not be just a coincidence and it may be more moving parts behind the scenes. The goal of this article is to identify both incidents and provide a way for the investors to make money in case these facts are related.

    The first event is the recent Apple's (AAPL) move which show that a new trend is emerging and we are experiencing the initiation of a wave of in-sourcing as some major American producers bring part of their production back in USA. The "Made in America" logo is strengthening while the "Made in China" one starts to fade. The migration of the American factories back home has started.

    The second event is the dispute which arose between the US Securities and Exchange Commission (SEC) and its Chinese counter part, China Securities Regulatory Commission (CSRC) few days ago and sent lower several US-listed Chinese stocks.

    Apple shows the way again

    According to the news that hit the wire a couple of days ago, Apple's CEO Tim Cook brings part of the Chinese production back to USA although he was the one who oversaw Apple's shift to China in the 1990s when he was the company's head of operations.

    It is an undisputed fact that Apple's proprietary product portfolio has been the flagship of innovation in the technology sector and it has created a quite new trend on how the cell phone has to be.

    Apple is likely to show the way again leading a new trend. Apple may be opening the road for something new like Caterpillar's (CAT) Motor Graders do.

    Several factors have contributed to the last week's change on Apple's strategy. The death of cheap labor as the Chinese wages have climbed significantly during the last years, the domestic cheap energy as a result of the shale gas boom, the elimination of risks such as the currency risk or the political risk and of course the potential leak of Apple's intellectual property. The possibility for supply chain disruptions due to China's problematic infrastructure is also another concern. Thailand was hit hard by the floods last year and this caused huge delays to the biggest names of the Japanese economy. China can be next as the Chinese bridges are collapsing like they are made of sand.

    Few other companies have also said they would shift their production back to the U.S. from overseas like Caterpillar and General Electric (GE). General Electric decided recently to invest $60M in new high-efficiency washing machine facility creating 150 new jobs and boosting business for about 40 domestic suppliers. The company also plans to upgrade by 2014 all of the product lines and revitalize several facilities of its Appliance Park in Louisville, such as the GeoSpring hybrid water heater and the bottom-freezer refrigerator which is an $800M investment.

    The US-listing of the Chinese companies

    Just few days ago, the SEC threatened to de-list all China-based, US-listed companies if the internal, auditing work papers are not made available to the SEC for inspection. The China Securities Regulatory Commission (CSRC) has stated that such work papers might reveal state secrets, thus it will not allow such exposure. This being said, the billions of dollars invested in Youku Tudou (YOKU), Sina (SINA) and several other US-listed Chinese companies are at risk and these companies may leave the US markets soon.

    Youku and Sina have dropped almost 20% and 10% respectively during the last 3 days and this could be a once in a lifetime opportunity for an investor to make easy money by shorting several US-listed Chinese companies during the next days.

    Owning a position in a China-based company through an offshore entity would be like backing a stock touted by Madoff. In addition, the SEC charged the Chinese affiliates of five of the world's biggest auditing firms with violations of U.S. securities law, raising fears that it could go further and ban the affiliates from working on audits of companies listed in the United States.

    Caterpillar is one of the American companies with major Chinese operations which may find it difficult to find accountants. The construction equipment maker said in an e-mailed response: "As this issue revolves around differences between U.S. and Chinese regulators, Caterpillar hopes each side can work to resolve this issue while demonstrating mutual respect and understanding for the laws and regulations of each country".

    Conclusion

    The sun is setting on offshore manufacturing and the outsourcing looks rather outdated. In addition, it remains to be seen whether the CSRC will back down on the State Secrecy Law and cooperate in order to find common ground and reach a consensus with the SEC.

    I personally will keep a close eye on both events above to see how they unfold during the next weeks. Are they related or not? Is it the beginning of a Cold War between USA and China this time in succession of the first one between USA and Russia? If yes, then the downward pressure on the US-listed Chinese stocks will go on and I believe the investors could make some money by shorting these stocks. It remains to be seen how this will evolve but I firmly wish the outcome from both ongoing events would be beneficial for the humanity and for the markets.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Dec 10 1:31 PM | Link | Comment!
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