Saturday, January 9, 2010

China Collapse Could Have Ominous Repercussions for the United States

Politico reports that Jim Chanos is a big China Bear:

But there’s a growing group of market professionals who see a different picture altogether. These self-styled China bears take the less popular view: that the much-vaunted Chinese economic miracle is nothing but a paper dragon. In fact, they argue that the Chinese have dangerously overheated their economy, building malls, luxury stores and infrastructure for which there is almost no demand, and that the entire system is teetering toward collapse.
A Chinese collapse, of course, would have profound effects on the United States, limiting China’s ability to buy U.S. debt and provoking unknown political changes inside the Chinese regime.
The China bears could be dismissed as a bunch of cranks and grumps except for one member of the group: hedge fund investor Jim Chanos. Read the whole thing >
Chanos is reportedly attempting to short the entire Chinese economy. What's fueling the short case against China?
  • The $4.3 trillion Chinese economy is under-performing despite a $900 billion stimulus program.
  • China seems to be cooking its books. For instance, it reports that car sales are surging while gasoline consumption is flat. Is that realistic? Or are state run Chinese companies just stock-piling cars?
  • China may have too much capacity. The central planners built out productive capacity for a booming economy but China is stalling.  In nearly every sector of the economy, China is in danger of producing huge quantities of goods with no buyers.
  • China's economic and political posturing signals that its leaders have no idea what is in store for them. The result may be a surprising economic collapse, akin to what happened when the housing bubble popped in the US.

Friday, January 8, 2010

Jobs Report Lackluster, Unemployment Rate Remains at 10%!

A few things stood out to me in today's jobs report:

  • The U-6 figure, considered to be the true unemployment rate, continued to rise -- to 17.3%!
  • The household survey, which is the only one to reflect small businesses, showed another staggering 589,000 employment drop.
  • The U-3 figure, which is the headline rate, would have increased to 10.4% if nearly 700,000 people hadn't given up hope of finding employment and were no longer counted.

Thursday, January 7, 2010

I Broke the Rules

Today, I several of the laws that govern this kingdom of trading:

  1. I traded against the dominant trend in almost all the higher time frames. I was so sure that the sharp reversal for soybeans would be corrected that I took a long position in soybeans, and when it didn't confirm, I held that position. It is now down significantly.
  2. I didn't obey Phantom's Rule #1. I didn't exit when it didn't prove correct.
  3. I traded against the underlying trend and then held my position. 

It's a Soybean Sell-Off!

Surprising, given bullish fundamentals. China is buying all it can get its hands on!

On the daily chart, today's sells-off has wiped out the previous seven days' gains. Apparently, the colder weather in the Midwest is resulting in crop damage to the winter wheat, which will likely result in those lands being planted in soybeans instead.

Note: I was told after this post that the sell-off was attributed to China's central bank signaling that rates will start to rise. 

Wednesday, January 6, 2010

Energy Escalation

This is looking like a broken record of 2008!

Tuesday, January 5, 2010

Metals On Steady Course to Higher Prices

This is the weekly chart for copper. Palladium, platinum, silver, and gold have somewhat similar charts.

One Sour Sweet Tooth

The cost of a sweet tooth has doubled in the past year. The price of sugar escalated from under 14.00 cents per pound to today's price of 28 cents per pound.

Markets Drifting

Almost across the board, markets today are drifting following yesterday's stock market rally and the Dollar's slaughter. Even commodities are listless. Only treasuries show signs of life.

The Coming 2010 Sovereign Debt Crisis, Japanese Hyperinflation

from Ambrose Evans-Pritchard at the UK Telegraph:

The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system.
As the great bear rally of 2009 runs into the greater Chinese Wall of excess global capacity, it will become clear that we are in the grip of a 21st Century Depression – more akin to Japan's Lost Decade than the 1840s or 1930s, but nothing like the normal cycles of the post-War era. The surplus regions (China, Japan, Germania, Gulf ) have not increased demand enough to compensate for belt-tightening in the deficit bloc (Anglo-sphere, Club Med, East Europe), and fiscal adrenalin is already fading in Europe. The vast East-West imbalances that caused the credit crisis are no better a year later, and perhaps worse. Household debt as a share of GDP sits near record levels in two-fifths of the world economy. Our long purge has barely begun. That is the elephant in the global tent.
We will be reminded too that the West's fiscal blitz – while vital to halt a self-feeding crash last year – has merely shifted the debt burden onto sovereign shoulders, where it may do more harm in the end if handled with the sort of insouciance now on display in Britain.
Yields on AAA German, French, US, and Canadian bonds will slither back down for a while in a fresh deflation scare. Exit strategies will go back into the deep freeze. Far from ending QE, the Fed will step up bond purchases. Bernanke will get religion again and ram down 10-year Treasury yields, quietly targeting 2.5pc. The funds will try to play the liquidity game yet again, piling into crude, gold, and Russian equities, but this time returns will be meagre. They will learn to respect secular deflation.
Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.
Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China's yuan in the beggar-thy-neighbour race to the bottom. By then China too will be in a quandary. Wild credit growth can mask the weakness of its mercantilist export model for a while, but only at the price of an asset bubble. Beijing must hit the brakes this year, or store up serious trouble. It will make as big a hash of this as Western central banks did in 2007-2008.
The European Central Bank will stick to its Wagnerian course, standing aloof as ugly loan books set off wave two of Europe's banking woes. The Bundesbank will veto proper QE until it is too late, deeming it an implicit German bail-out for Club Med.
More hedge funds will join the EMU divergence play, betting that the North-South split has gone beyond the point of no return for a currency union. This will enrage the Eurogroup. Brussels will dust down its paper exploring the legal basis for capital controls. Italy's Giulio Tremonti will suggest using EU terror legislation against "speculators".
Wage cuts will prove a self-defeating policy for Club Med, trapping them in textbook debt-deflation. The victims will start to notice this. Articles will appear in the Greek, Spanish, and Portuguese press airing doubts about EMU. Eurosceptic professors will be ungagged. Heresy will spread into mainstream parties.
Greece's Prime Minister Papandréou will balk at EMU immolation . The Hellenic Socialists will call Europe's bluff, extracting loans that gain time but solve nothing. Berlin will climb down and pay, but only once: thereafter, Zum Teufel.
In the end, the Euro's fate will be decided by strikes, street protest, and car bombs as the primacy of politics returns. I doubt that 2010 will see the denouement, but the mood music will be bad enough to knock the euro off its stilts.
The dollar rally will gather pace. America's economy – though sick – will shine within the even sicker OECD club. The British will need the shock of a gilts crisis to shatter their complacency. In time, the Dunkirk spirit will rise again. Mervyn King's pre-emptive QE and timely devaluation will bear fruit this year, sparing us the worst.
By mid to late 2010, we will have lanced the biggest boils of the global system. Only then, amid fear and investor revulsion, will we touch bottom. That will be the buying opportunity of our lives.

Monday, January 4, 2010

Contrarian Indicators Show All Bulls -- An Ominous Sign!

Babak at Trader's Narrative shares some interesting information about equity market sentiment, which suggests a great deal of bullish complacency among bullies and resignation for the bears. 

But the bullies' exuberance and bears' hibernation might be facing an interesting test in the weeks and months ahead, as the monthly US$-adjusted S&P 500 is at resistance near the '03 low:

The NASDAQ appears to be nearing completion of an Elliott Wave b wave of a C wave within a larger corrective descending horizontal triangle:

The S&P 500 exhibits a similar pattern compared to the S&P 500 in 1929-49:

Today's increasingly bullish sentiment is consistent with a B (or 2) wave, which would imply a setup for the most destructive (for financial wealth and confidence) phase of a C-wave decline, lasting 2-3 years.

The Big Guys Begin to Cut Risk Exposure to U.S. Debt

from Bloomberg:
Jan. 4 (Bloomberg) -- Pacific Investment Management Co., which runs the world’s biggest bond fund, is cutting holdings of U.S. and U.K. debt as the two nations increase borrowing to record levels.
Pimco is “more cautious” on corporate bonds and holds fewer mortgage-backed securities than the percentages in the benchmarks it uses to gauge performance, wrote Paul McCulley, a portfolio manager and member of the investment committee, in his 2010 outlook. The company is also underweight Treasury Inflation Protected Securities, according to the report on Newport Beach, California-based Pimco’s Web site.
“This all leaves us with portfolios that appear, more than at other times, to be hugging the benchmarks with no bold positioning,” McCulley wrote. “We’re making a very active decision to run light on risk.”