INVESTNG IN THE DELTA

Capitalism rising in the east and setting in the west – Todd Jordan

With Keith McCullough unavailable today, it is once again my turn at bat. I recently spent a week in China so it seemed to be the appropriate topic for this morning’s note.

“Go west young man” – John Soule, 1851



Horace Greeley may not have coined this phrase but he certainly popularized it. That was in the second half of the 19th century. The first half of the 21st century is a very different time. My advice to our junior generation would be to “Go East Young PERSON” or at least look Eastward. One has to be politically correct here in the west, but not in China where capitalism is not an evil word.

So if you’re a young capitalist, go where you can be you. There is no shortage of opportunities. As reported by the China Daily there is a paucity of individuals with global financial experience, particularly in the investment arena. Shanghai banks are looking to Wall Street to fill that void.

I’m not suggesting China is actually a freer economy than the USA, yet. But on the margin, we are moving more towards socialism and China is moving the right way. Yes, China is an authoritarian regime and no, the country is not free.

But we invest in deltas here at Research Edge and the China delta is now positive. Keith was on the correct side of the China trade for most of this year and I’ve been negative on Macau, but when facts change, we change. One theme you will be hearing from us is China’s transformation from an industrial based economy to one that is based on consumption. Singapore made this transition and now generates per capita consumption 15x the rate of China. Now that is a huge potential delta.

In my narrow world of gaming, lodging, and leisure, it’s the Pearl River Delta that matters. Macau resides on this Delta and will continue to benefit from the capitalist delta sparking mainland China. One casino market, serving over a billion people with rapidly rising incomes and a cultural propensity to gamble; if there is one other gaming market with a decent growth profile, I’d like to know.

Here in the US, notwithstanding the recent government interference in our free markets, I see many signs of a leftward economic shift in our country. Not to be outdone by the free spending Bush administration and Republican congress, Democrats will have their own agenda to pursue, rather easily under Obama I might add. Get ready for a curbing of free trade, windfall taxes on profitable industries, higher overall taxes and even more spending, nationalized healthcare, government interference in mortgage contracts, equal pay legislation, onerous environmental restrictions, prescription drug controls, higher minimum wage, etc.

I’m making a purely economic argument. I’ll leave the discussion of whether there are social benefits that may accrue from some or all of those initiatives to Keith Olbermann and Bill O’Reilly to argue about. What I can say with some certainty is that a socialist agenda is bad for business, it’s bad for the economy, and it’s bad for the stock market.

Two other items I haven’t mentioned yet are more near and dear to my sectors: regulation and union power. Look, I’m all for regulation. Regulation of the government, that is. We could’ve used that earlier this decade with Fannie and Freddie but that was thwarted at every turn by Barney Frank-Lin Raines and “their” band of “ownership society” boosters, Democrats and Republicans alike.

The union issue is a big one, although I don’t know if executives and investors fully grasp it. We have written extensively on the prospects and ramifications of “The Employee Free Choice Act”. People don’t know this but the original name was “The Act To Eliminate The Cornerstone Of Our Democracy: The Secret Ballot”. That was too long so I see why they went with the shorter name.

Unions will prosper under Democratic control and “The Act” is a major tool of that newfound prosperity. The Employee Free Choice Act will be at the top of the 2009 legislative agenda. It will pass and it will affect businesses, particularly consumer businesses. In an environment with declining consumer spending, higher labor costs will deliver a near fatal blow to many companies.

The choice seems pretty clear. One can invest in a socializing market priced for capitalism or a capitalizing market priced for socialism. I think you know where we stand.

Todd Jordan
Managing Director


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