by Will Hepburn

China

CHINA — It is very much a present influence. Wait until you see to what extent China is going to influence our future. (Thanks to Richard Russell, of Dow Theory Letters)

China’s population is five times that of the U.S. China has one of the world’s oldest civilizations with a long history of innovation. The Chinese invented gunpowder, and paper money. Although isolated for centuries, China is rapidly joining the rest of the world.

China’s Communist leaders, like leaders in any nation, want to remain in power. Since the Internet makes communication increasingly available in China, the Chinese leaders realize that to remain in power, they can no longer do it solely by force. Instead, they must raise living standards in China. Well aware of the power of nationalism, China’s leaders are determined to show the Chinese people as well as the rest of the world that China will soon rival the great Superpower — the U.S.

Oh yes, China’s leaders have one powerful problem. They must provide jobs for 25 million Chinese that enter their work force every year. 25 million! The Chinese leaders are dictators and will do anything they can to succeed. Theft of our intellectual property is being allowed, perhaps even encouraged by the Chinese government. Bootlegging CDs and software is small potatoes compared to how China has picked Boeing’s pocket for critical technology and is now competing with Boeing by selling mid-size passenger planes to other nations. Chinese autos are next. When China’s huge economy needs steel, concrete and oil, and it needs a lot of it, prices go up here. The U.S. owes China a huge amount of money and must borrow more each month to continue buying their doo-dads. And there is a big military build-up going on over there, too, with one report discussing a Chinese fleet with 85 submarines by 2010. Yikes! At what point our interests will clash, I don’t know, but there are many potential problem areas.

So that’s the picture as briefly as I can put it. China, a growing colossus, building assets and expanding both its economic and military power. They hold a lot of cards — and the US, a Superpower that is the world’s number one innovator, but also the world’s biggest consumer and debt-builder which gives them more leverage over us every day. Where will it all lead? Frankly, I don’t know. Politics is not my business. But investing is. So we have begun following several Chinese investments so that we can take part when the politics begin to affect the investments.

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Noise vs. Information

I have good news! No, I did not save a lot of money on my car insurance (actually I shopped those folks few years back, and found that I am in good hands where I am).

The good news is that I have just completed the biggest upgrade to my Adaptive Strategies software since I wrote it over six years ago, and the results are really exciting.

As you may remember, each day, we download pricing on 195 securities into the Adaptive Strategies software and it tells us what is happening in 70 different markets and industries. Because of this program I don’t have to pore over the Wall Street Journal, or decipher every word reported on the financial news station. In seconds I get beyond all of the “noise” published in the media and see what truly IS.

Noise is a not-so technical term for all that important sounding stuff that really doesn’t mean a thing in the long run. What I have realized over the years is that most of the information we receive is not meaningful at all and some of it is downright damaging if relied upon.

Have you ever tried to discern what will go down in history by watching the nightly news? Well 99.9% of the news will never make it into the history books. It is just not important. It is what I call noise. Only that tiny fraction of the news that is significant is what we should be focusing on, but how does one separate the noise from the true information. It is hard to do at close range, when things are first being reported with attendant sensationalism and sales pitches. It is much more effective to wait for the passage of time to see what turns out to be truly important.

However, in business, we don’t have the luxury of waiting to see how things will turn out. So, we need another way to separate the noise from the information. That way is our Adaptive Strategies program. In seconds I can see which segments of the market are moving up and which are moving down and at what rates.

In the six years that I have used this program, new classes of investments have been created that give us much greater access to international and industry specific investments. These have been added to the Adaptive Strategies program, along with indicators that will literally change from green to red to signal us that changes are occurring. It is still up to us to interpret these changes, but the refinements to the program put a vast amount of information at our finger tips that was not as readily available before.

Our active management programs established their fine reputation in the terrible markets of 2000-2002. We know they can keep us out of trouble. We also believe that these new improvements can help us do even better in up markets as well. We know we will have lots of both kinds of markets in years to come, and now we are better equipped to serve you than ever before.

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Market Technicians Association Retreat

Every few years I have been fortunate enough to be invited to join an especially stimulating group of professionals. Last month it was the Market Technician’s Association Retreat in San Diego.

Market Technicians are those who utilize charts, graphs and indicators to analyze investment price movement rather than simply predicting what the market ought to be doing based upon earnings, valuations, etc.

Being the first MTA Retreat it was not well publicized and I found myself one of only 40 money managers there, and in the company of many industry legends. At lunch I sat with Richard Russell who has been writing the Dow Theory Letters daily for almost 50 years. Richard is an icon in the business whose opinion I respect greatly.

I spent one-on-one time with Ralph Acompora, head analyst for Prudential. Also with the head of research for Morgan Stanley, the managing director of research for the New York Stock Exchange, MIT’s visiting professor for Market Research and more. Most of these men have written books or are the subject of them. I felt like the runt of the litter sometimes.

But, oh did I get some great insights that will benefit my clients.

Stay tuned.

Will Hepburn is a private investment manager who specializes in active investment strategies. He owns the Prescott Center for Adaptive Market Strategies, and is President of Hepburn Capital Management, LLC, a Registered Investment Advisor. He may be reached at 2069 Willow Creek Road in Prescott, AZ or by calling (928) 778-4000 or emailing Will@HepburnCapital.com.

Copyright 2004. 

The information contained in this newsletter is derived from sources believed to be accurate. You should discuss any legal, tax, or financial matters with the appropriate professional. Neither the information presented nor any opinion expressed constitutes a solicitation for purchase or sale or any security.