Monday, December 6, 2010

Smokes and Railroads in Asia

The head of South Korean intelligence says that the recent North Korean attacks are a result of Kim Il Un's ongoing efforts to takeover the North's leadership. The younger Kim has been purging the N. Korean Army of disloyal generals. It is very difficult to go into any large and powerful military organization and start killing top generals. So the N. Korean generals who survived the purge were given a cookie: the wanton slaughter South Korean civilians (Karl Marx would have been proud). This all makes sense but I have a different take on recent events.
Thanks to WikiLeaks we know that China has an open air corridor running from North Korea to Iran and through Beijing. This air route is used to funnel North Korean military technology to Iran and thereby guaranteeing China a ready supply of Iranian oil. Yes North Korea is paid for the military technology but this is vastly outweighed by economic loss from US sponsored sanctions. In other words, North Korea is China's puppet. Also, consider that China's big bone of contention with the rest of Asia is a group of islands in the South China sea that it is trying to steal from Japan, plus other islands that it wants to steal from other Asian countries. Consider the symbolism of the North Koreans shelling a S. Korean island in contested waters. Long story short: America has a China problem not a Korean problem.
Happily within days of the North Korean shelling the USS George Washington aircraft carrier battle group had surrounded the S. Korean island in question. It is difficult to overstate how powerful the battle group actually is. It could shred the People's Liberation Army Air Force into confetti. China is building its own aircraft carrier fleet and designing huge anti-carrier missile batteries that will eventually line its coast. But all this is in the distant future, so for now the US Navy has control over the Pacific. Any major conflict with China will be fought at sea, not on land, and the sea is not China's friend. It is important to ignore the hysteria of the popular press, i.e. China will rule the world the day after tomorrow, the sky is falling. The bottom line: Asia is still where its at for investing.
Which brings us to specific stocks. Kopper Holdings (KOP) is the largest supplier of railroad cross-ties to Asia. Phillip Morris International (PM) is the largest supplier of cigarettes. It is impossible to run an Asian country without plenty of cigarettes and expanding railroads. Both pay big dividends and when the US Congress extends the Bush era capital gains tax cut it should help dividend paying stocks.

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