FALLS CHURCH, Va.–After the 25 percent drop from its late October highs, Asia looks ready for a rally, bear market or otherwise. Pessimism reigns supreme, and analysis of how the region’s being distracted is in full swing.

Speculators point to a bear market, but the jury’s still out on that one for the time being. However, there are indications that we may have entered one already. On the other hand, everyone now knows the US is headed for a recession and that fiscal and monetary authorities are trying to make it as smooth as possible.

As I noted in the beginning of the year (see Silk, 2 January 2008, The Year of the Rat):

According to the Chinese Zodiac, 2008 is a year of danger. And although superstition isn’t good company for an investor, last year was quite rewarding, just as the Chinese Zodiac forecast.

Nevertheless, caution is warranted. The subprime crisis has turned into an assault on the world’s credit structure, but the synchronized efforts of central banks will keep the system alive. The markets aren’t powerful enough or willing to fight the central banks of the world, especially when they act in concert.

This doesn’t mean the global economy won’t slow or the US will avoid a recession of some sort. All it means is the world’s financial system won’t collapse.

This analysis is still valid. Increased volatility will be the name of the game this year, but there’s opportunity in volatility. Investors who are willing to understand this will have another good year.

When it comes to Asia, the risks are big. But the region’s fundamentals are also strong and will allow its economies to weather the storm much better than before.

As I’ve said before, Asian economic decoupling doesn’t mean that they’ll pull the US out of recession or that these economies and markets are immune from the global economic cycle. It means that they won’t be blown to pieces. And if the US avoids a deep recession, they’ll continue to support economic growth, just as they’ve done since mid-2006 when the US economy started slowing in earnest.

Fundamentals are, after all, extremely important during times of uncertainty. The fundamentals of the Asian economies are strong enough; selectively building positions in these markets during times of weakness is of paramount importance for the long-term investors. (See Silk, 16 January 2008, A Billion Here, A Billion There).

Expect these economies and markets to come out of the economic downturn much stronger than a lot of market observers now expect and to lead global economic growth once again.

Portfolio Moves

I’m adding China Mobile (Hong Kong: 941, NYSE: CHL) to the Long-Term Holdings Portfolio.

The company is one of the largest mobile service providers in the world and has a subscriber base of more than 300 million. It operates mobile telecommunication services in 31 provinces and municipalities in China.

In today’s market environment, China Mobile’s high earnings visibility and skilled management are great qualities that distinguish it. Furthermore, China’s potential in the area is huge: The nationwide penetration rate is around 40 percent and is growing rapidly. In rural areas in particular, which are becoming the government’s economic priority, the penetration rate is around 19 percent.

I expect this will be the company’s next growth driver. After the current selloff, valuations have also become more reasonable. Buy China Mobile.

I’m also adding the iShares Investment Grade Corporate Bond Fund (NYSE: LQD) in the Permanent Hedges of the Alternative Holdings Portfolio. Corporate credit has been beaten down over the past few years, and now is the time to start buying into it. Buy iShares Investment Grade Corporate Bond Fund.

If you don’t want to commit fresh funds in this hedge, you can do so by taking some profits from iShares Lehman 7-10 Year Treasury (AMEX: IEF) hedge that has done well for those of you who’ve been invested in it for some time.

Melco PBL Entertainment (NSDQ: MPEL) is one of the worst-hit stocks since its original recommendation.

One reader noted in an e-mail: “When you said that it is a risky play, you were not kidding.”

True, but I wasn’t expecting such an outcome.

Nevertheless, the stock is attractive at current levels. It’s been hit a lot recently as risk appetite has diminished in the global markets. However, at current prices, the market is pricing almost zero growth in Macau gaming, which won’t be the case.

The company is solely focused in the VIP market. And since its hotel– Crown Macau–started operating on a full scale, it’s been steadily improving cash flows. The casino has been able to capture 15 percent of the market in the first three weeks of the year, up from 9 percent in 2007.

The company is the only pure Macau gaming company listed in the US and is a joint venture (JV) between two prominent Asian gaming/entertainment companies, Hong Kong-based Melco and Australia-based Publishing & Broadcasting (PBL). The JV was formed in 2004 and was set up exclusively to develop and operate casino gaming and entertainment resorts in Macau. For more on the Macau story, see Silk, 7 February 2007, Got Patacas?

Melco PBL Entertainment is a buy at these levels, and Macau will also move up in the Fresh Money Buys.

I’ve been pointing out that the Fresh Money Buys is a guide that you should use if you have enough funds to allocate to more than a couple recommendations. The Fresh Money Buys are fairly balanced, offering a mix of defensive and aggressive recommendations.

As a reminder, when the order of the list changes you can rebalance some of your positions, especially if I haven’t recommended selling out of stocks outright. In other words, I may still favor a particular stock or market, but there may be better opportunities elsewhere.

I always flag such changes, but a quick look at the Fresh Money Buys can give you an instant picture of where I stand regarding allocations.

For those of you who prefer to cherry pick, I recommend starting with the stocks that also offer higher yields. Chunghwa Telecom (NYSE: CHT) is my top pick among them. Also consider Singapore Telecom (OTC: SGAPY) and Philippine Telephone (NYSE: PHI).

In the current market environment, reduce your exposure to cyclical sectors and companies. One example is Keppel Corp (OTC: KPELY).

I’m still fond of the company; it’s a great long-term holding in any portfolio but could be hit more if things turn uglier. This is the reason Singapore dropped down the list of Fresh Money Buys in the beginning of the year. Those of you with well-diversified portfolios should be more relaxed, especially if you’ve been able to take some profits of the table during the past month.

During the November market turmoil, I recommended shorting the Chinese insurers for extra protection. See Silk, 13 November 2007, Flash Alert: Hedging the Portfolios.

My US trading recommendation was to short China Life Insurance Co (NYSE: LFC). The profit was around 30 percent as of Jan. 22, 2008. If you’ve shorted China Life Insurance Co, stay with the position and set your stop-loss at USD67. This is a hedging trade for a long-only portfolio, which is why the stop-loss is fairly loose.

Fresh Money Buys

The investment process is constant. So if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the portfolios on the left-hand side of your screen for details.

• Russia (energy, telecommunications)
• Hong Kong (real estate, banking, infrastructure)
• South Korea (banking, electric power)
• Philippines (telecommunications, real estate)
• India (pharmaceuticals)
• China (consumer, Telecom, coal, e-commerce, oil, water)
• Singapore (banking, telecommunications, industrial)
• Taiwan (telecommunications, ETF)
• Malaysia (ETF)
• Macau (gaming)
• Europe (industrials, communications equipment)
• Japan (banking, industrials)