Invest in China's Version of the 1896 Dow

Invest in China’s Version of the 1896 Dow

Jan 11th, 2008 | By Christopher Hancock | Category: Commodities, International

On May 26, 1896, Charles Dow, Wall Street Journal editor and co-founder of Dow Jones & Co. Inc., compiled an index to track the performance of the American stock markets. The original index included 12 of America’s most fundamental industrial stocks.

America’s industrial revolution required the basic commodities and raw materials essential to a nation’s growth. So it’s no surprise that the original Dow Jones Industrial Average consisted entirely of companies that produced goods like cotton, sugar, tobacco, gas, lead, coal and iron…

These are the resources developing countries like China can’t live without. The “China story” is nothing new. It’s been played time and time again. Southeast Asia’s insatiable appetite for a limited supply of natural resources will continue to rise right alongside its staggering annual growth rates.

In 2005 alone, Beijing approved the development of 168 new power plants. These facilities alone have the capacity to provide enough electricity to power all of Italy. More importantly, the same basic commodity the Chinese have been burning for roughly 6,000 years — coal — will fuel the vast majority.

In many ways, the world hasn’t changed. Peel away the layers of technology, the Internet, the PC, the television…all the way down the line. What are you left with?

You have nations and their economies, war and commerce. These are the constants in the evolution of modern civilization.

In our digital age, in which every human desire is a simple click and several nanoseconds away from instant gratification, something as elemental as commerce — trade between nations — seems terribly outdated and inefficient.

But until we reach a stage of technological innovation in which the major staples of trade — things like corn, rice, soybeans and oil — in other words, basic commodities — can be disassembled one molecule at a time and instantaneously beamed to another location, our current means for commerce will remain the most efficient.

So it’s no surprise that the majority of the Dow 30 are still “smokestack” corporations. Even with all the hype surrounding the Googles, eBays and Amazons, our country still rests on the shoulders of the seasoned giants like General Electric, Procter & Gamble and JP Morgan.

Right now, the world is struggling with the adjustments of globalization. Specifically, energy security has prompted many nations to issue threats, assess strategic positions and begin to retrench to protectionist tendencies.

Energy security will be the No. 1 topic for years to come. Congress stood up in arms when a Chinese oil company attempted to purchase America’s Unocal. And it’s standing up once again as Dubai Ports World (owned by the United Arab Emirates) positions itself to buy an American port.

The Russian-Ukrainian natural gas dispute appears to be just a taste of what’s to come. Russia (Siberia, in particular) is full of natural gas, and competition for access to those deposits is getting fierce between Europe and the energy-hungry nations of the Far East.

Now more than ever, countries are dependent on global markets to supply essential resources. In turn, I believe nations will begin to reassert state protection of the resources that will remain vital to their domestic needs.

China’s insistence, in particular, on protecting its domestic oil market will remain one of Beijing’s very top priorities.

Oil is much more than the commodity that fuels our cars. Petroleum-based products undoubtedly serve as the most important commodity driving domestic economies. Domestic stability rests on its relative availability. Consequently, Beijing will certainly protect the vested interests of the two large energy companies, PetroChina (PTR: NYSE) and Sinopec (SHI: NYSE).

I believe these companies will provide consistent long-term returns with minimal risk. While companies like these may not offer the kinds of returns known to penny stocks, in the uncertain world we live in, they might be your best bet.

Until next time,

Christopher Hancock
January 11, 2008

P.S.: Here at Penny Sleuth, we spend a lot of time on the smallest of U.S. companies. But in a world of uncertainty, we sometimes have to look elsewhere. That’s where I come in.

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

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