The second quarter was a good one for commodity and China ETFs. Almost everything risk related advanced in the past three months, with PowerShares Financial Preferred (PGF) sporting a 57 percent return, the fifth best among funds in our newsletter. Other strong performers include the India ETFs and ETNs, which popped more than 20 percent in one day following the country’s election results in May. Aside from the reduced risk aversion, these funds advanced on isolated factors. Commodity and China ETFs, however, were pushed by common threads, most important among them the growth in Chinese loans.

As early as February, Chinese economists were “ballparking” that as much as one-third of the country’s loans could be headed into stocks and real estate. The percentage may still be in that neighborhood, with roughly 20 percent heading into stocks, according to a Bloomberg story, which cites Wei Jianing, a deputy director at the macro-economics department of the Development and Research Center under China’s State Council.

Some huge, hard-to-believe numbers coming from the Chinese - if I had a nickel for every time I wrote that... I could melt all those nickels, sell it on the spot market and buy enough gold to plate my new ZH decal.

But seriously - is anyone buying this? The story being put forward by the Chinese is that the government pumped in some stimulus which has been enough to get the crank rolling again and leads to statements like:

The G8 meeting is wrapping up and there have been no surprises to speak of. The global economies and financial systems appear too fragile to begin reversing the emergency measures. There were the usual platitudes about completing the Doha trade round and promises to avoid protectionism. Of note, especially in light of the various comments in recent weeks from assorted officials warning that currency appreciation would jeopardize their economic recoveries or in other ways underscored the benefits of soft currencies,the G8 encouraged countries to refrain from competitive currency devaluations.

After rejecting initiatives by the Chinese and Russians (according to news reports) to formally discuss reform of the international monetary order to reduce the role of the dollar, the G8 draft indicates support for a "stable" and "well-functioning" international monetary system.

China's equity outperformance is not a breath of hot air. The 80% rise in the MSCI China Index (C$) is underpinned by rising earnings, but price appreciation has outpaced earnings leading to rising valuations. This is not unusual at the beginning of economic recovery.

Government stimulus measures are clearly working and leading to a major ramp up in analysts' twelve-month forward earnings estimates in China. The rally is broad-based with only telecom services not participating, according to a recent report by Thomson Financial.

Duoyuan Global Water (DGW) - Began trading on 6/24 after pricing at $16 per share. The stock ran up to the mid-$20’s in the first week of trading and has held steady since. The company is a maker of water treatment equipment in China that includes wastewater treatment and water purification. One of my favorite long-term investment themes involves water and water-related stocks. The ties DGW has to China make the stock even more attractive because the country has major water issues and will have to address them in the years to come. The most recent Chinese stimulus package is actually going after upgrading infrastructure and will be a boost for DGW.

I don’t have time to do a long entry, but in my June 30 entry I marveled at the huge explosion in new lending, and claimed that credible rumors suggested that total new loans for June would be an astonishing RMB 1.2 trillion. That would bring total new lending for 2009 to RMB 7.06 trillion, nearly three times last year’s total of RMB 2.45 trillion.

Well known value investor and manager of the 3rd Avenue Value Fund, Marty Whitman has made public through his latest investor newsletter in April that 39% of his fund is invested in Hong Kong-based companies and that he sees extreme value in Hong Kong real estate companies while revealing a bearish outlook on U.S. stocks. As the Applied Finance Group (AFG) is expanding its coverage globally, we have created a report to highlight some of the companies we find attractive in Hong Kong.

Below is a look at 15 attractively priced Hong Kong stocks based on AFG’s valuation metric. These companies rank high in valuation, have a non-sell default recommendation, and are expected to improve their profitability in the next fiscal year according to AFG’s Economic Margin Framework (the company's earnings above or below its true cost of capital). Our Economic Margin Framework is a systematic approach to converting as-reported accounting data into a performance metric that is comparable across time, peers, industries and even countries while eliminating many of the accounting distortions caused by GAAP.

Rio Tinto (RTP) was one of those companies which levered up just as the economy was turning down, rushing its bottom line and forcing it into the hands of Chinalco, a large Chinese commodities company. However, as commodity prices have turned up and investors have simultaneously started buying shares, Rio was able to escape the Chinalco deal and link up with rival BHP Billiton (BHP).

The Chinese are naturally sour, despite earning a nice deal breakup fee. The question is whether their displeasure has taken a dangerous turn. At the weekend, four Rio executives in China were detained. Now, one is being held on suspicion of spying.

Notwithstanding that the Chinese economy already contains inherent strengths and is highly competitive, it is gaining further traction from a $586 billion stimulus package announced by the government at the beginning of 2009. Of the $586 billion, $259 billion is allocated towards infrastructure, earthquake and housing with a further $219 billion allocated to transport and power infrastructure.

We had some large developments in the commodities market yesterday with the biggest news being that China has agreed to accept Rio Tinto's (RTP) iron ore contract prices of a 33% cut rather than the 40% to 50% China was looking for.

Surely this is another "loss of face" for China; in fact, you almost feel it is now red in the face from being slapped down again.

I have been discussing the steady progress of China in setting up the RMB as the reserve currency for a long while, and have proposed that it is fast moving towards success (though success is not guaranteed). Economists like Nouriel Roubini have suggested that this is going to be a long term process:

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

We’ve been keeping a close eye on copper. The red metal has recently fallen to near two-week lows. But as we’ll see, this losing streak is likely to be a temporary pullback

Pretty outrageous behavior and relatively problematic if accurate. Rio (RTP) canceled a planned deal with a state owned Chinese company and the Chinese are balking at signing long term contracts for iron ore.

Fascinating. Via FT:

In talking to the FT’s Gillian Tett, Hugh Hendry of The Eclectica Fund makes the hilarious metaphor of China as Santa Claus bringing gifts to a world constrained by excessive Western government debt issuance. But, Hendry thinks the Asian surplus countries are the most exposed and most vulnerable because they are excessively dependent on foreign demand for economic growth. Basically, Hendry sees China as a “deep out-of-the-money call option on America.” Santa is not coming to town. And, if he is, he’s bringing lumps of coal.

Below is the video and two others of Hendry talking China, the Fed, Bonds, and Equities. By the way, Hendry is bearish on equities, bullish on bonds.

“Whoever is careless with the truth in small matters cannot be trusted with the important matters.”
~ Albert Einstein

At 4:15AM this morning, I was driving down Highway 95 listening to President Obama’s address to Russian students. No matter what your politics, Americans should be proud of this man’s oratory skills. On that score, he is truly gifted.

If you need more proof that the commodities world is changing just take a look at how historical patterns have shifted. The graph below shows the 5-, 15- and 30-year patterns for copper prices.

click to enlarge

Hardware

• Panasonic Corp. (PC) said its domestic home-appliance unit may exceed its sales forecast this year, helped by government incentives to buy energy-saving products. The company expects the program to boost demand and help sales beat a projection of 640 billion yen (US$6.7 billion) in the year ending March 2010, according to Jun Ishii, the head of Panasonic Japan’s marketing division for home appliances. The home-products unit overall was the most profitable of Panasonic’s four main businesses last year, outdoing divisions making televisions and stereos, electrical components and homes. The July-to-September quarter will be critical for the Japanese unit’s results, Ishii said, after the government introduced incentives in May to boost spending on appliances as a part of Prime Minister Taro Aso’s plan to spur economic growth.
• Suning Appliance would pay 800 million yen (US$8.3 million) for 27.36 percent of Laox, making it the loss-making Japanese electronics retailer's biggest shareholder. Suning would pay 12 yen for each of 66.67 million shares and get two seats on the Laox board. Chinese firms have been looking for bargains in their efforts to expand abroad, but Suning said this was the first time a mainland firm had purchased a stake in a listed Japanese company. Suning hoped to return the flagging Laox to profit within a year or 18 months. Suning aimed to use Laox's expertise in the highly competitive Japanese consumer electronics retail market to help it improve business practices such as pricing policies, store layout and customer service.
• Sony Corp (SNE) is considering developing a cellphone-game gear hybrid in a bid to better compete with Apple Inc's (AAPL) highly popular iPod and iPhone. The Japanese electronics and entertainment conglomerate launched its first Walkman three decades ago, dominating the portable music player market, but it has been running far behind the iPod and iPhone in recent years. Sony plans to set up a project team as early as July to develop a new product that combines functions of its portable game player and Sony Ericsson's mobile phones. Sony Ericsson is a cellphone joint venture between Sony and Sweden's Ericsson (ERIC). A growing number of game-makers including Capcom and Square Enix are now offering software for the iPod and iPhone to take advantage of the Apple products' popularity, posing a threat to Sony's PlayStation Portable and Nintendo Co Ltd's DS.

Telecommunications

• NTT Docomo Inc. (DCM) will launch a new service jointly with Mizuho Bank to enable subscribers to transfer money via mobile phone handsets without opening new bank accounts. Rival KDDI Corp. (KDDIF.PK), the operator of the 'au' brand mobile phone service, has already been offering a similar banking service, but its service requires its users to open new bank accounts. Under NTT Docomo's money transfer service, subscribers input the receiver's phone number and part of their surname to make a payment of up to 20,000 yen (US$208.28), which will be charged on their monthly bills with a fee of 105 yen (US$1.09). The recipient can use the transferred money to pay their phone bills or put into their bank accounts via Mizuho Bank.

Semiconductor

• NEC Electronics Corp's (NELTY.PK) semiconductor orders would increase several percent this quarter, helped by demand for chips used in cars and liquid-crystal displays. Orders in the quarter probably jumped one and a half times from the previous three-month period, as manufacturers emerged from a period of excessive inventory cuts. NEC Electronics in May planned to cut labour and research costs by 90 billion yen (US$936 million) this financial year to break even at operating level this fiscal year. The company was increasing production to meet a recovery in demand. The factory-utilisation ratio, a measure of how close the plants are to operating at full capacity, would probably rise to 60 percent this quarter, from about 50 percent last quarter and 43 percent in the first quarter this year.
• Elpida Memory (ELPDF.PK) confirmed that it would receive 160 billion yen (US$1.6 billion) in aid and loans from the Japanese government, its Taiwanese partner and financial institutions after falling chip prices led to a record loss in the past fiscal year. The company would sell 30 billion yen in preferred shares to the state-run Development Bank of Japan by the end of next month. Taiwan Memory, a chipmaker set up by the island's government, planned to invest an additional 20billion yen by March 31, the bank said, while banks would lend the balance of funding. Elpida is Japan's last hope in personal-computer memory chips in an industry dominated by South Korea's Samsung Electronics and Hynix Semiconductor. Makers of computer memory worldwide are seeking funding to survive the chip glut that drove Qimonda to seek bankruptcy protection and resulted in a record loss at Elpida last fiscal year.
• Shareholders at Japanese specialty chip maker Rohm Co. Ltd. voted against a US$156 million share buyback proposal by U.S. investment fund Brandes Investment Partners. Brandes, which has US$42.4 billion under management, had proposed that cash-rich Rohm buy back up to 2.5 million of its own shares for a maximum 15 billion yen (US$156 million).

Korea

Media, Gaming and Entertainment

• TU Media, the country's sole operator of satellite-based digital multimedia broadcasting (DMB), said the number of its subscribers topped 2 million, four years after it launched the service. More than 20 million terrestrial DMB devices, including mobile phones, were also sold as of the end of May. The numbers suggest that about 45 percent of South Korea's 49 million population enjoy mobile TV service. South Korea first launched its DMB service in 2005, the first country in the world to do so, with the development of digital radio transmission technology. It has since become a ubiquitous feature of society thanks to a tech-savvy population and widespread cellular phones and laptop computers. Dubbed "TVs in hand," the mobile service allows people to surf TV channels via palm-sized monitors built into their cell phones while sitting in an underground subway or traveling via train. Various modes of public transportation such as buses, trains, and subways have also begun to equip vehicles with monitors broadcasting programs at all times.

Hardware

• LG Electronics (LGERF.PK) aims to overtake Sony as the second-biggest this year, driven by stronger than expected demand. The company was maintaining its LCD television shipment target of 18 million units this year, which would be achievable, said Simon Kang, the head of the firm's home-entertainment division. Global revenue from LCD televisions would drop 6 percent this year to US$76 billion, researcher DisplaySearch said last week, higher than its previous estimate of US$66 billion. Worldwide LCD television shipments will rise 21 percent to 127 million units, compared with an earlier prediction of 120 million sets, because of higher demand from China and as more consumers replace bulkier glass-tube sets. LG aimed to increase sales of flat-panel televisions by as much as 42 percent this year and boost market share with new products and technologies. Shipments of LCD television sets might rise 50 percent to 18 million sets this year, while those of plasma models would probably climb 7 percent to 3 million sets.
• Tokyo-based Idemitsu Kosan has entered into a strategic alliance with South Korea's LG Display to develop high-performance organic light-emitting diode displays. Their agreement encompasses the cross licensing of patented technologies related to OLED, and mutual collaboration on OLED technologies. The alliance is seen as mutually beneficial, with Idemitsu securing a global display leader as a customer by supplying high-performance OLED materials and device-structure proposals to the Korean display maker, and LG Display gaining the tools to accelerate its growth in the OLED business. Idemitsu turned its attention to phosphorescent materials as well as fluorescent materials. The company has been active in joint development with device manufacturers Sony and Toshiba Mobile Display, in parallel, and expects its new partnership to further strengthen its OLED-material business.
• Samsung Electronics (SSNLF.PK) has won a ruling from the U.S. International Trade Commission against Japan-based electronics company Sharp over patented technology for liquid crystal displays. The ITC found that Sharp infringed one of Samsung's patents in its LCD televisions and displays and ordered a ban on their import into the U.S. market. Samsung filed a complaint with the ITC in 2007 to investigate Sharp's products for infringing four of its patents. Sharp filed a counter-claim in March 2008. Earlier this month Sharp won a ruling from the ITC that found Samsung to have violated four Sharp patents and ordered a ban on the import of its LCD televisions, computer monitors, and professional displays in the U.S. market. In March Samsung won a LCD patent infringement suit against Sharp in the Tokyo District Court in Japan. In January the ITC ruled that Sharp infringed two Samsung LCD patents.

China

Hardware

• Lenovo Group (LNVGY.PK) raised the compensation of former chief executive William Amelio by 54 percent last financial year, after the mainland's biggest personal-computer maker posted a record annual loss. Mr. Amelio, who resigned on February 5, was paid US$17.6 million in the year to March, including US$3.25 million as compensation for loss of office as director. The document also showed Mr. Amelio's total compensation was US$11.4 million a year earlier. Yang Yuanqing, who replaced Mr. Amelio as Lenovo's chief executive, received a 42 percent increase in total pay to US$7.2 million for the financial year to March. Mr. Yang was previously the chairman, a title now held again by Lenovo founder Liu Chuanzhi. Mr. Amelio, who joined Lenovo from Dell in December 2005, had resigned in the aftermath of the firm's first deficit in almost three years - a net loss of US$97 million for the quarter to December last year, a reversal from a net profit of US$172 million the previous year.
• Samsung Electronics' Greater China sales volume reached US$44.5 billion in 2008, while its China region purchasing volume rose 27 percent year-on-year in the period to US$27.2 billion. Samsung expects China region purchasing volume to climb to US$32 billion in 2009 and currently has more than 4,500 domestic suppliers.

Telecommunications

• Ericsson has won contracts to provide fixed broadband to China's three telecom operators, China Mobile (CHL), China Telecom (CHA) and China Unicom (CHU). The initial contract will provide fiber-to-the-home (FTTH) networks for services including high-definition TV and high-speed broadband in Shanghai and eight provinces: Anhui, Guangdong, Hebei, Heilongjiang, Hubei, Liaoning, Shandong, and Sichuan.
• China Mobile Ltd. is still applying for approval from Taiwanese regulators on its plan to take a stake in Taiwan's Far EasTone Telecommunications Co. The Taiwan Affairs Office is under the State Council, China's highest executive body, and is in charge of cross-strait affairs. State-owned wireless carrier China Mobile agreed to pay about US$527 million for 12 percent of Far EasTone, which would be the first deal between telecommunications companies in China and Taiwan if it is allowed. Far EasTone shareholders have already approved the deal. Taiwan opened 100 sectors to investment by mainland Chinese companies, but didn't include the politically sensitive telecommunications sector, indicating the investment is unlikely to be approved by Taiwanese authorities.
• China Telecom's 3G brand e-Surfing opened a 3.6 million-handset tender. 70 handset manufacturers - including ZTE, LG Electronics, Samsung Electronics, Nokia, Huawei and China Wireless Technologies subsidiary Yulong Coolpad submitted bids to supply the handsets, which will retail for around 1,000 yuan (US$146.3).

Media, Entertainment and Gaming

• The9 (NCTY) President Xiaowei Chen has renewed her contract with the company for another two years, reports National Business Daily quoting an unnamed source close to Chen. The9 announced that its full year 2008 income, to be reported on Form 20-F on or before July 15, will be 55 percent to 75 percent lower than net income for the same period reported in its Form 6-K on February 24. The9 has incurred charges related to the loss of its operating license for 3D MMORPG World of Warcraft. Activision Blizzard division Blizzard Entertainment has licensed the game to NetEase for mainland operation following the expiration of The9's contract.
• Shanda Games Ltd. (SNDA), subsidiary of local online game operator Shanda, announced that it's struck a deal with Japanese peer CyberStep. Inc. to operate the latter's two MMORPGs, GetAmped and CosmicBreak, in China. GetAmped and CosmicBreak are both 3D massively multiplayer online role-playing games, with the former a combat game and the latter a shooter. CyberStep is a Japanese game developer which has been involved in the market for the past 10 years and GetAmped has been operating in over 10 countries so far.

Software

• Oracle Corp. (ORCL) is expected to commence its most important marketing campaign on the mainland this year following the global launch of its long-anticipated Fusion Middleware 11g suite of products. On the back of the mainland's economic stimulus initiatives, Oracle anticipated that enterprises in various industries are expected to be well positioned to adopt the software release, which includes key technologies brought by Oracle from its many acquisitions. The take-up will start in the telecommunications sector, where mainland network operators are building their nationwide 3G mobile infrastructure, and in the public sector, thanks to continued government spending. The central government announced in November last year a 4 trillion yuan (US$585 billion) economic stimulus package, including support to 10 strategic industries.

Semiconductor

• A8 Digital Music Holdings has teamed up with semiconductor firm MediaTek to target the potentially vast number of 3G handsets being produced for the domestic market. A8 Music has agreed to have its proprietary software, A8 Box, embedded in the Taiwanese firm's chipsets destined for 3G mobile telephones made on the mainland. Liu Xiaosong, the founder, chairman and chief executive of A8 Music, said the deal would boost the penetration rate of A8 Box in the mainland mobile market. The company, which owns more than 60,000 original works of music on the mainland, designed the A8 Box software to enable mobile users to easily access and buy content from its large online database and various digital music service providers.

Alternative Energy

• Yingli Green Energy (YGE) has been selected by State Development and Investment Corp. subsidiary SDIC Huajing Power Holding, to supply PV modules for a 10MW on-grid solar plant to be located in Dunhuang, Gansu Province. SDIC Huajing Power Holdings and Yingli made a combined bid to operate the similar-sized government project in Dunhuang.
• LDK Solar (LDK) expects second quarter shipments to come in between 220MW and 230MW, above previously issued guidance of 200MW to 220MW, while revenues are expected to be US$215 million to US$225 million. In the first quarter of 2009, LDK booked a net loss of US$22.5 million on revenues of US$283.3 million and 206MW of wafer shipments. LDK Solar has secured a one-year principal loan of 500 million yuan (US$73 million) from The Export-Import Bank of China, as well as a three-year 500 million yuan (US$73.1 million) loan from Huarong International Trust to support polysilicon plant construction. LDK Solar had more than US$250 million in cash as of June 30. The company's annualized wafer capacity reached 1.5GW by June 30. LDK saw strong demand for wafers in the second quarter and plans to resume wafer plant expansion to reach 2GW of annual capacity by the end of 2009.
• ReneSola Ltd. (SOL) announced that its operating subsidiary, Zhejiang Yuhui Solar Energy Source Co. Ltd., has qualified as a high technology enterprise and will receive a reduced income tax rate of 15 percent for three years, starting January 1, 2009. The current statutory tax rate is 25 percent. China's central government awards the high technology classification on the basis of the number of patents and propriety technologies held by the company, as well as its R&D facilities.
• Trina Solar Ltd. (TSL) has secured a new credit line of US$57 million from Standard Chartered Bank (China) Ltd., bringing Trina's total credit to roughly US$520 million. The company aims to use the credit for raw material procurement and product sales.