Image by Ethan Bloch via Flickr

Today’s Big Story: Chindia calls the shots.

As you know, one of the biggest trends we’re following these days is the rapidly growing economies of China, India, and their Asian neighbors – Chindia, for short.

Chindia’s affect on American businesses is a two-edged sword. If an American manufacturer is competing with Chindia, heaven help it. But on the other hand, companies that can successfully sell to Chindia will grow rich beyond the dreams of Midas.

Friday’s news offers us a perfect case in point.

Maytag (MYG) is a stock we’ve been recommending investors sell short. On Friday, it announced a loss of $14.1 million, or 18 cents per share for the last quarter of 2004. That’s down from a gain of 30 cents a share the previous year. In response, Standard and Poor’s lowered Maytag’s debt rating to BBB-minus, and said it may further reduce its bonds to junk status at a later date.

The result: Maytag shares dropped 10.5% on the day.

What went wrong? Basically, Maytag’s sales dropped 8%, because of the increased competition in the industry. Companies like Best Buy and Home Depot are choosing to give more retail space to Chindia-based companies, such as LG of South Korea. Maytag’s refrigerators and washers may be dependable, but it’s price that counts. And with Chindia’s low labor costs, LG can make appliances more cheaply.

Score one for Chindia.

On the other side of the equation, Proctor and Gamble (PG) announced it’s purchasing Gillette (G) in a $57 billion deal that will transform the company into the world’s biggest manufacturer of consumer products.

It’s a merger that has been blessed by Warren Buffett – allowing us the privilege of dropping his name for the second week in a row.

Berkshire Hathaway, Buffett’s company, is the largest shareholder in Gillette – owning a 9.7% stake. Calling the merger “a dream deal,” Buffett has not only decided to keep all his Gillette stock – equivalent to 93.6 million shares in P&G – he also plans to increase his holdings to 100 million shares of P&G sometime this year.

Why is Buffett so pleased about the deal? Apart from the fact that Gillette’s shares rose 5.92% on Friday, adding half a million dollars to Berkshire’s balance sheet – a paltry sum for a man like Buffett – the major reason has to do, once again, with … Chindia.

You see, Gillette’s weakness was that it did not have a meaningful distribution channel for its products in Chindia. But Proctor and Gamble does. So the combined company will be able to capture a significant share of the vast Chindia market.

Score two for Chindia.

As you know, I have been recommending Proctor and Gamble as a long-term buy for some time (along with Berkshire Hathaway). So I am patting myself on the back a bit here. But it’s a well deserved pat. After all, this is undeniably one of the greatest consumer companies ever created.

So I am hereby repeating my firm recommendation of P&G as a company that will benefit strongly from its exposure to Chindia. The stock could be held back somewhat over the next few months because of arbitrage. But it’s one that we must regard from now on as one of the greatest long-term investments in the world.

As for Maytag, Fast Track will maintain its short position in the company for now. I believe the shares will fall further because Maytag simply can’t compete with cheap products coming out of Chindia.

What’s more, let me remind you that this will be the pattern going forward. Companies competing with Chindia will falter and collapse. But those selling to Chindia will find that the world’s their oyster.

News From the Muni-bond conference.

On Friday I was a keynote speaker at the FSA Municipal Leadership Forum in Carefree, Arizona. I had a chance to speak to all the major Municipal players in the country there. Collectively, this group controls $100s of billions.

One of the other speakers at the conference was Barry Bosworth, a Senior Fellow of Economic Studies at the Brookings Institution. Bosworth’s speech concerned clear and solid evidence that the U.S. dollar is going down. It’s just a question of whether it falls rapidly or slowly. Right now, he’s hoping for slowly – as am I.

It’s human nature that people who agree with you sound more intelligent. So I feel Bosworth knows what he’s talking about, because I’ve been saying the same thing for some time.

Coincidentally, Bosworth’s story fits well with what I was telling you last week – that America needs to start looking more at the long-term picture.

In 1996, Bosworth wrote a paper for the Brookings Institute on the aging of America and how that would lead to higher budget deficits. At the time, he believed the problem could easily be solved. All it would take was for Americans to immediately increase our savings rate by 5% of GDP.

Saving is of course a time-honored strategy used by people who think ahead. It lets you be prepared for the challenges that frequently arise – such as getting old, or ill, or downsized.

But saving money offers no appeal for people whose attention is firmly fixed on the near term. As Bosworth put it then …

“Thus far, political leaders have been unwilling to confront issues that extend beyond the next elections. It is far more likely that they will ignore this one until the financing problems become more pressing. But then the option of funding [saving] will have passed, and the political battle will return to the divisive one of benefit reductions and tax increases.”

Today, the average personal savings rate in the U.S. is 0.3% of income – pretty close to zero. So it looks we chose to put our money into bigger houses, SUVs, and plasma screen TVs instead.

As a result, Bosworth’s colleagues at the Brookings Institution now believe the budget deficit has spiraled out of control. What’s more, closing the fiscal gap now “would require an immediate, permanent 40 per cent increase in revenues [taxes] or 35 per cent reduction in outlays [Medicaid, Social Security, etc.].”

Neither of these choices strikes me as politically acceptable. So the outcome will be bad for the dollar. Which is why we should invest in companies that make money overseas, foreign currencies, and (to a smaller extent) gold.

As for my own speech, I covered my favorite topic … energy.

I gave a very sobering address saying that no matter how you look at it, supply and demand just doesn’t match. Demand is outpacing supply, and that means higher energy prices going forward.

Yesterday’s Iraq election seems to be a success. However, the probability that the unrest and violence will continue remains high. So our military will remain committed to trying to keep a lid on the world’s most explosive region for some time. It’s the only way to maintain our access to oil.

But let’s be realistic. We cannot let ourselves stay forever dependent on the kindness of rogue nations. OPEC and Russia are the two major energy suppliers to the world right now. And while they may have some capacity to increase production, they themselves may need much of the energy supplies they develop. And there’s no guarantee that they’ll develop it in the first place. Chindia’s rapidly growing demand for energy will force prices to keep rising. We’re really in a tough situation.

Nonetheless, one thing does give me hope. And that was the reception my speech got at the conference. People generally took a great interest in what I was saying, and I feel I may have changed a couple of minds.

It was a big relief. The energy squeeze is a huge problem. But what has made it worse so far has been that no one recognizes it.

The fact that such influential people were willing to listen has made me a little more optimistic. I hope that some of them will now take a serious look at funding alternative energy projects.

If America’s movers and shakers soon wake up to the fact that alternative energy is something we must act on, then it may not be too late to save the day. But we must start a crash program now.

Just to reiterate, our favorite alternative energy plays remain FPL, Entergy, Excelon, and GE, because of its wind energy technology.