Why is China loading up on US Treasuries? At first glance that seems strange because the dollar keeps falling. Doesn't a falling dollar mean that inflation is on the way? Not necessarily. The Labor Department reported that prices of imported goods fell 15% in August from a year ago, this after a 19.2% drop in July. These numbers are telling us that there is no inflation coming in the near future. The Fed has plenty of wiggle room. It can afford to keep interest rates at historic lows.

So then why is the dollar weak? We know what the answer is. The Fed has pledged $12 trillion dollars to bail out the bankers, housing and the mortgage market, just to name a few areas where the money is going. Then too, we have sky high deficits. The current account deficit will rise to 3.2% of GDP in 2010 and 3.5% in 2011.

While the growth in China is slowing, the fact remains that things are still fairly robust – especially compared to many other global economies. As a result, investors still want to put money into the country. After all, with China's huge domestic economy, there is likely to be strong long-term growth.

So this week, Bank of America (NYSE: BAC) agreed to exercise its option to double its position in China Construction Bank (CCB), which is the #3 financial institution in China. The stake comes to about 19.1%.

Keep in mind that Bank of America got a sweet discount on the option. Thus, the position is in-the-money – the investment has tripled in value to $14.5 billion -- and it may be tempting for the firm to start dumping shares. In fact, shares of China Construction Bank have taken a hit because of the this possibility.

And, as for Bank of America, it could be a savvy move. Of course, the firm had to slash its dividend and must integrate the huge acquisitions of Merrill Lynch (NYSE: MER) and Countrywide. At the same time, Bank of America's stock price continues to deteriorate. So, bagging a couple extra billion is probably a good bet right now.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

The European Union has decided to get serious about having sovereign funds from Asia and the Middle East pledge that their investment in the region are "financial" and not "strategic."

According to the Financial Times, "Peter Mandelson, the European trade commissioner, said the code would set out basic standards of governance and transparency for the funds."

Sovereign funds have made large investment in banks and brokerage houses in Europe and the United States and the regulatory authorities do not want these dollars to become a way for the funds to push their nation interests.

The request is a bit two-faced. Funds and corporation from the West have been putting money into Asia and the Middle East for years. Big U.S. companies are not required to sign documents disclosing their intentions when they make investments overseas. Plans by Congress and the EU to push legislation to regulate capital from abroad may back-fire. When U.S. and Europe banks need more cash, sovereign funds may simply elect to invest elsewhere.

Douglas A. McIntyre is an editor at 247wallst.com.

Some senators from the South still wear linen suits and believe that foreign interests should not own land or a part of any business in the U.S. They also probably still smoke and eat fatty foods.

But the serious side of congressional concern about overseas investments in big U.S. companies and financial firms is that sovereign funds could find a more and more hostile reception to their investments in companies like Citigroup (NYSE: C).

According to the FT, "The Treasury, which considers the discussions with the funds a priority, hopes it can pursue its agenda through the International Monetary Fund, which is drawing up a code for SWF investments, expected in draft form in April." The document is probably no more than a "feel good" piece of paper that Treasury can wave around in the offices of Congress and regulators.

The fact of the matter is that the government here would like sovereign funds to have different rules than those that govern people like Carl Icahn. If a raider can take over an entire company and break it into pieces, why can't the same be done by rich interests from Kuwait, if they have the money? Any "state secrets" at a firm like Citi can be burned before the process starts, in the name of keeping important government data confidential.

The bonfire from the documents can warm the management as they leave the building.

Douglas A. McIntyre is an editor at 247wallst.com.

Make that two positive data points for the markets and the international financial system on Wednesday.

Shortly after word broke that regulators at the New York State Insurance Department met Wednesday with U.S. banks to discuss raising new capital for bond insurers, Saudi Arabia announced that it plans to start its first sovereign wealth fund with about $6 billion, Bloomberg News reported Wednesday.

Saudi Arabia, the world's largest oil producer and holder of proven oil reserves, said the new fund would probably invest primarily in equities, Bloomberg News reported.

Petrodollar wealth

Like many Persian Gulf states, and other oil producers, Saudi Arabia has seen a surge in petrodollars amid oil's more-than-80% increase in price during the past three years. Most analysts say Saudi Arabia can pump oil profitably for about $3-$5 per barrel. Oil closed Wednesday down $2.22 to $86.99 on renewed concerns of moderating oil demand growth, due to the likely U.S. economic slowdown.

With the U.S. stock market off to a pretty rough start to 2008, investors can take comfort of sorts in this: foreign investors are buying stakes in our companies at a record pace.

According to the New York Times, "With a growing share of investment coming from so-called sovereign wealth funds -- vast pools of money controlled by governments from China to the Middle East -- lawmakers and regulators are calling for greater scrutiny to ensure that foreign countries do not gain influence over the financial system or military-related technology. On the presidential campaign trail, the Democratic candidates have begun to focus on these foreign funds, calling for international rules that would make them more transparent."

The political aspects and long-term questions aside, the rapid growth in foreign investment would seem to indicate that U.S. equities are undervalued.

The factors driving down stock prices may be short-term or localized, but record foreign investments demonstrate that cash-rich investors think they're a compelling value -- and maybe we should too.

You know that an economic issue has jumped the shark when the New York Times's op-editoraliste Maureen Dowd (MoDo) devotes her Sunday column to it. What's unleashed MoDo's moxie is how Sovereign Wealth Funds (SWFs) -- those government investment funds estimated to control between $2 trillion and $15 trillion -- are buying up chunks of the U.S. banking system.

The problem against which MoDo rails is that thanks to the policies of George W. Bush, the price of oil has quadrupled and the dollar has plummeted -- thus putting the U.S. at the mercy of those Arabian SWFs whose owners he groveled to this week to lower the price of oil. And while W. was grovelling, so were the CEOs of Citigroup Inc. (NYSE: C) and Merrill Lynch & Co. (NYSE: MER) -- seeking capital to shore up their Collateralized Debt Obligation (CDO)-tarnished balance sheets. MoDo is right that with Bush's $2.4 trillion worth of wars and $1.3 trillion worth of tax cuts, the U.S. has gone from being the world's creditor to its debtor.

But another New York Times article sheds more light on the phenomenon of foreign investment in the U.S. -- suggesting that with their $414 billion worth of 2007 purchases in the U.S., foreign investors, including SWFs, spent a record amount of money buying up the U.S. last year -- up 90% from 2006. The Times suggests that this foreign investment comes in different forms -- some of which are beneficial. How so?

Citigroup (NYSE: C) is about to raise $14 billion, but the press is a bit unclear about who is putting in the money.

The Wall Street Journal reports that Prince Alwaleed bin Talal, currently one of Citi's largest investors, will put in capital along with the China Development Bank. The CDB piece is probably $2 billion.

According to the FT.com "Under the proposal being discussed, the bulk of the money -- roughly $9bn -- would be most likely to come from China, people familiar with the negotiations say. The Kuwait Investment Authority would contribute about $1bn, while $2bn to $4bn would be raised through a public placement of shares."

Leaving aside the fact that two big newspapers have different accounts of the same news, Citigroup may be faced with a challenge from Congress over whether it is OK for such a large U.S. financial institution to have big blocks of its stock owned by foreign entities. Citi's role in lending, underwriting, and trading might be considered "strategic" by the U.S. government.

To investors, that matter of who owns what is hardly important. The big bank's market cap is down to $142 billion. Another $10 billion is significant dilution. In theory, it could push the Citi shares from $29 to $25 of below. The shares have a 52-week high of $55.55.

If the federal government is against having investors from overseas, the Fed should lend Citi $10 billion on its own.

Douglas A. McIntyre is an editor at 247wallst.com.

MAJOR PAPERS:

• As early as today, The Blackstone Group LP (NYSE: BX) may announce that they are buying the New York hedge fund GSO Capital, reported the Wall Street Journal. Terms were not disclosed.
• The Wall Street Journal also reported that Merrill Lynch & Co Inc (NYSE: MER) could receive a chunk of the $3B to $4B they need from a Middle Eastern government investment fund, while Citigroup Incorporated (NYSE: C) may get as much as $10B from foreign governments.
• JP Morgan Chase & Co (NYSE: JPM) is has hired former British Prime Minister Tony Blair as a part-time adviser to the company, the Financial Times reported.

OTHER PAPERS:

• Time Warner Inc (NYSE: TWX) has made an undisclosed investment in Web-based social community Gaia Online, the New York Post reported. The site, aimed at teenagers, has other investors that include The Walt Disney Company (NYSE: DIS) and Sony Corporation (NYSE: SNE).

The Dow plummeted 221 points on its first trading day of 2008. Since nobody who knows what's moving the market on any given day will talk to the media, we are left to guess why it fell today. Four possible reasons:

• Bad news on the manufacturing front as the purchasing managers' index declined to 47.7 from 50.8
• Oil broke the psychologically painful $100 a barrel barrier due to a drop in supply and lingering geopolitical fears -- from violence in Nigeria to instability in Pakistan
• Gold hit a recent record of $860 an ounce
• The Dollar tumbled as the Euro rose to $1.47

Do any of these explanations account for the decline in the Dow or is it just portfolio managers taking some profits after clearing off some window dressing they took on so they could report to shareholders that they owned stocks that had done well in 2007?

I don't know the answer but reports I've been reading today suggest that there are tens of billions worth of bank write-downs and thousands of bank layoffs in the works. If a credit crunch is in the cards and oil prices keep rising, I think foreign oil stocks might be the place to look for investment profit in 2008.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Merrill Lynch (NYSE: MER) may be worse off than expected. A report in The Wall Street Journal says that the sovereign fund of Singapore, Temasek Holdings, may put $5 billion into the investment bank. The news would be an indication that Merrill is facing huge losses in the last quarter of the year.

The price action in companies like Citigroup (NYSE: C) and Bank of America (NYSE: BAC) has been bad the last two days. Credit agencies have indicated that there may be more financial company downgrades and bond insurance firms may lose the ratings levels that have made them such useful backstops.

The question now is not whether Merrill and its peers will need more investment capital. It is whether the process will repeat itself once or twice more next year if the mortgage market gets substantially worse.

Douglas A. McIntyre is an editor at 247wallst.com.

What does the coming year hold for the economy? BloggingStocks' Peter Cohan considers five issues that will factor heavily in 2008.

Sovereign Wealth Funds (SWFs) are estimated to be between $2 trillion and $15 trillion. That's a wide range, but even at the low end, it's a lot of money. The SWFs are potentially economic and political Trojan horses. They are using the current problems in the credit markets as a chance to buy stakes in U.S. banks for relatively paltry sums. It remains to be seen whether they are getting in at the bottom or whether they're foolishly buying in way too soon.

However, if they get big enough stakes in strategic industries in the U.S., they will be in a position to influence U.S. policy. For example, if the funds do not like U.S. Middle East policies, they can threaten to withdraw their capital. If that capital is hard to replace, the U.S. will find itself needing to choose between imperiling the survival of its banking system or changing its foreign policies.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

After reviewing Wednesday's post, Bush administration pushing dollar down or allowing it to fall? IMF chief sounds alarm, I thought of one more point that is of paramount importance. Either many people are ignoring or do not understand how a devalued dollar facilitates our giving away the country wholesale, even if in the short term it appears to help with our trade deficit.

This concept does not seem to have resonated in Washington and, along with his advisers, our president is either ignorant or avoiding the issue altogether because he does not want to discuss the remedy: everyone tightening their belt financially and taking some economic pain.

Warren Buffett has sounded the alarm many times about this subject, and I will, too. When the dollar falls in value, say 30% (each currency varies), that gives foreign investors 30% more buying power here. Yes, it is true they buy more when our goods and services are "on sale" (and we buy less of theirs). However, what if instead of buying perishables, they buy income-producing property and companies. As long as this trend continues, they would be wise to buy more and more.

A simple example: They buy a company that makes widgets in the United States. They are able to sell (export) more widgets along with their American counterparts because of the devalued dollar. Who makes a higher return on invested capital? The foreign investor, of course, because they paid 30% less for the widget company!

This is the eighth in a series of trend-spotting tips from Hilary Kramer's newly-released book, Ahead of the Curve.

More than ever, we should turn our trend-spotting eyes to beyond our borders. In our increasingly globalized economy, there is money to be made everywhere. Trends that used start in the United States can be seen starting in China, India, Japan, Germany, Argentina... to name but a few countries. Right now, the dollar is weak, so investing in foreign companies may make more sense than ever.

Looking outside your borders, you will see that China is growing in leaps and bounds, which means it needs more and more water systems, but it has a serious pollution problem.

Goldman Sachs (NYSE: GS) is heading toward Japan in a partnered bid with Aetos Capital LLC to buy Japanese property company Simplex Investment Advisors in a 65% premium share bid, for the equivalent of about $1.1 billion to $1.35 billion, depending on your price calculations in current and closing prices of yen on the Japanese stock prices versus closing prices. The bid is for at least 80% of Simplex, and it appears that Nikko Cordial, part of Citigroup Inc. (NYSE: C) in Japan, is selling its 42.5% stake to the venture.

If you think the U.S. property weakness has been bad, the situation in Japan has been worse. Japan experienced its own bubble back in the 1980s, and only in recent years have things seemed to get better. Goldman Sachs has already been active in buying commercial and recreational properties in Japan over the last decade, but this would mark a larger leap into a property market that may hold relative values.

Goldman Sachs was Jim Cramer's #2 Value Pick for 2007, and he recently said he thinks its stock could go to $300.00 per share next year. If you look at how Goldman Sachs recently crushed earnings by betting against mortgages, you'll know why.

Goldman Sachs has raised over $4 billion this year for property acquisitions, so you can assume more land grabs are coming. Bloomberg has a pretty detailed piece that gives more background on the ongoing landgrabs in Japan. If you want to look up more data on Simplex Investment Advisors, it trades under the numeric stock ticker "8942" on the Tokyo Stock Exchange.

Jon Ogg produces the Special Situation Investing Newsletter and he does not own securities in the companies he covers.