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Three Stocks to Double Your Money in the Next Asian Market Bubble

By Tom Dyson, publisher, The Palm Beach Letter
Wednesday, July 2, 2008

Flights between China and Taiwan start this weekend. The first plane will fly from Taiwan to China on Saturday morning and then return one hour later. China Airlines, the largest Taiwanese carrier, will operate the flight.

Saturday's flight will mark the first direct scheduled flight between China and Taiwan in 59 years.

In 1949, Taiwan banned direct flights with China. Taiwan used to be part of China. But in the 1940s, China had a communist revolution. The losers of the war – the business and intellectual elite – fled to Taiwan and broke ties with mainland China. Officially, China and Taiwan are still at war.

In March, a new president won power in Taiwan. This new president wants to mend Taiwan's relationship with China... and eventually unify the two countries. This was the basis of his election platform. Restoring transport links between the two countries was his first step.

Starting on Saturday, 36 flights will connect Taiwan and China every weekend. Several airlines – from both Taiwan and China – will fly between different Chinese and Taiwanese airports.

Here's the thing: When the losers of the revolution in China came to Taiwan in 1949, they took over Taiwan by force, imposed martial law, banned all political parties except their own, restricted the press, and put large tariffs on foreign imports and luxury goods. Then they built an aggressive export economy like Japan's.

The aim of these policies was to make Taiwan rich. And they worked. By 1987, Taiwan had the fourth-largest stash of foreign exchange reserves in the world, after the U.S., France, and Japan. Taiwan had almost as much foreign reserves as Japan... even though Japan's population was six times larger. In 1987, the typical citizen of Taiwan saved 31.2% of disposable income (vs. 16.6% in Japan and 3.2% in the U.S.).

In 1987, a new president won power in Taiwan... the first native Taiwanese to head the government. The new president started loosening regulations. He encouraged citizens to buy luxury American goods. He freed the press. He allowed opposition political parties to compete for power. He let Taiwanese citizens send money abroad. And he let Taiwanese citizens travel to China to visit relatives... for the first time since the revolution.

The Taiwanese stock market loved these new policies. Between 1987 and 1990, Taiwan had one of the greatest stock market bubbles in history. Taiwan's market rose from 1,100 to 12,054... a gain of 991%... and the Taiwanese currency rose another 40%. Foreign investors would have made 14 times their money in just three years by investing in Taiwan.

Now I think we're about to see another huge rally in Taiwanese stocks. Since 1990, Taiwan's stock market has been the worst-performing major stock market in the world, except for Japan. Today the index is at 7,523. That's a fall of 38% from 1990 levels.

The new president is freeing up regulations between Taiwan and China. Transport comes first. Capital regulations will come next. Taiwan's new president has said he wants to help Taiwan's financial industry go to the mainland. Hong Kong's stock market rose 55% in 10 weeks last year after Hong Kong opened its markets to Chinese investors in August 2007.

There are also two Taiwan closed-end funds: The Taiwan Fund (TWN) trades at an 8% discount and pays a 2.75% dividend. The Taiwan Greater China Fund (TFC) trades at a 10% discount and pays a 0.16% dividend.I don't think the Taiwanese stock market will rise 990% again... but I do think it'll double over the next couple of years. The Taiwan ETF (EWT) is the easiest way to invest in Taiwan. It pays a 2.75% dividend.

Good investing,


Market Notes


We are sounding a "trading alert" in today's column. The alert is cheap gold... dirt-cheap gold.

Gold and oil respond similarly to inflationary pressures... so the two tend to trade in a "range" together. Over the past 25 years, one ounce of gold has bought, on average, 15 barrels of oil. When an ounce of gold can buy 20 barrels of oil, it's expensive and due for a fall. When an ounce of gold can buy less than eight barrels of oil, it's cheap and due for a rise.

Right now, an ounce of gold buys you just 6.5 barrels of oil – less than half its traditional purchasing power. As you can see from today's chart, the "rubber band" is pulled extremely tight.

There's no guarantee this trade will work out quickly. But it's worth keeping on the radar. If oil stubbornly refuses to correct from its levels above $140, gold could easily pop up to $1,000 and beyond in just a few days.

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