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Monday, April 15, 2024

World of Worry Wednesday – The China Syndrome

Strap in kids, it's going to be a bumpy ride!  

Nomura Holdings joined Goldman Sachs in advising investors to cash out of China and that sent the Hang Seng down 478 points for the day (2%) along with another 2% loss on the Shanghai.  “The likelihood of a re-introduction of price controls on food is growing,” Nomura's Sean Darby said in a report today. “The recent run-up in agriculture prices worldwide and signs of hoarding appear to have pushed the authorities to reconsider draconian measures.”  Premier Wen Jiabao confirmed on state television that the cabinet is drafting measures to counter overly rapid price gains.  “Command style economic principles generally mean much lower multiples over time on the sector and stocks,” said Darby.

The US has it's own "command style" economy with B-B-B-Bennie and the Fed commanding our inflation to go higher while China is trying to get their 4.4% inflation under control.  The joke is, like Sidney Poitier and and Tony Curtis, our economies are shackled together through the Yuan peg as well as our codependent trading relationship.  That has the World's #1 (falling) and #2 (rising) economies engaged in a Global tug of war that threatens to tear the rest of the World to pieces and it's just getting worse every day.    

ith the US pushing top-down QE2 inflation and China's Premier calling for consumer price controls on food (and soon fuel too as a severe winter is forecast for China) it's not surprising that Carlsberg's Chongquing Brewery Company fell limit down (10%) on the Shanghai this morning along with several other food and beverage distributors.  Copper, sugar and rubber also went limit-down in China with copper dropping all the way to $3.60 (down 10% in a week) into China's close at 3am.  

Meanwhile Bernanke is like the Sorcerer's Apprentice: Given the magic hat – he commands his broom army to fetch buckets of dollars to inflate the economy the easy way but his lazy solution quickly turns into disaster as the waters start rising and he finds he has no way to stem the rising tide of inflation.  Already, the rest of the world is drowning and not many have China's ability to bail themselves out.  This is not likely to end well…

Europe (who are caught in the middle) is already under tremendous strain with Matt Lynn saying:

The euro has turned into a bankruptcy machine. Once the markets have finished with Ireland, they will simply move on to Portugal and Spain, and after that to Italy and France.  There is a domino effect at work, and, with each rescue, the fault lines within the euro grow wider and wider. This process isn’t going to stop until the euro is taken apart.

Matt pegs Portugal as the next domino to fall, something we discussed in Member Chat last week.  Portugal has a deficit of 9.3% of GDP (as bad as the US) and a  Bloomberg poll last week showed 38% of Global investors thought Portugal was "likely" to default.  That is nothing compared to Spain, also with a 9.3% deficit to GDP ratio but with the World's 9th largest economy, at $1.5Tn, it's 7 times bigger than Portugal and quite a bit more difficult to bail out, even if Germany (GDP $3.3Tn) wanted to.  Check out this interdependent mess!

Graphic: Web of Debt 

 

Portugal faces various structural deficiencies,” Morgan Stanley said in a note to investors last week, looking at which country would need a bailout next. “In Greece, the key issue is fiscal indiscipline, in Spain a credit-fueled housing boom- turned-bust, similarly in Ireland but coupled with an outsized banking sector.”  The EU economies are just too different to allow a single central bank to manage all of them. Interest rates are always wrong everywhere. How that expresses itself varies. In Greece, it was a fiscal crisis. In Ireland, a banking collapse. In Spain, a construction bubble that burst. In Germany, a massive trade surplus. But, like a river looking for the sea, it always comes out somewhere.

Speaking of bursting construction bubbles: SRS has been on the march lately but we're still gun-shy after playing them last year.  We have been considering it again and shorting IYR has finally worked out as well as VNO and BXP so maybe it is time to listen to Charles Smith (Of Two Minds) who calls CRE in America a "Slow Motion Cliff Dive that's Gathering Spreed."  Smith warns:  "With some $1.7 trillion in CRE loans needing to be refinanced in the next few years, a continuing decline in CRE values could push the still-fragile banking system into a new crisis and the economy back into recession as early as next year." 

We never felt we were wrong about CRE, just early and Smith has 7 points for why Commercial Real Estate is in for a very had landing next year including the very obvious: "Now that head counts have been cut, then empty office space which cannot be sublet is the next target to be eliminated as old leases roll over." 

The IYR Jan 2012 $55/45 bear put spread is $4.50 with a $5.50 potential upside (122%) and is a nice way to hedge your real estate investments.  On the plus side, HOV is still our favorite as we like their positioning in the Northeast market.  A nice "set and forget" play on HOV is the 2013 $2.50/5 bull call spread at .90, selling the Jan 2012 $2.50 puts for .50, which is net .40 on the $2.50 spread that's $1.30 (up 225%) in the money already – not bad for your first day!  If HOV holds $2.50 through next Jan, your margin is released and you have a very cheap bullish play on a residential recovery so it makes a nice pair trade with the IYR short play.  

Last Wednesday, I titled the morning post "Will We Hold It Wednesday – The Global Perspective" and, of course, as we expected, we did not hold it.  I had three free trade ideas in the morning post.  One was shorting oil futures at $87.50 and we got down to $82.50 yesterday at a whopping $5 per penny per contract.  For non-futures players, the idea was to go for the USO Nov $37 puts at .41 – those are now $1.60, up 300% so I am certainly doing my best to help cushion those market blows!  

In Member Chat on Wednesday we re-upped those USO puts at .41 and that's kind of our plan for today if we get a pop into inventories.  Criminal Broadcasters Boosting Crude is doing it's best to get a rally going this morning as they release the TBoone, who now sounds like quite the broken record with his relentless $100 oil predictions.  They pulled the OPEC card, they pulled the China card, they even discussed the declining Dollar – ANYTHING to get people to buy some of the 159M barrels worth of oil contracts that NYMEX traders are still stuck with with just 4 days left to trade the December contract.  

Oh wait, that was 2 of our 3 free trade ideas (we're promoting the new newsletter, don't get used to it!).  The fourth was the short sale of the PCLN Jan $450 calls at $16.  Those are now $9 up a quick 43% in a week.  In Member Chat we had a similar play on NFLX as they ran up, selling the Nov $175 calls for $4.50 and those fell to .85 at yesterdays close, up 81%.  We love these quick plays with the sideline cash because, as I said to Members at lunch on Wednesday:  

I will point out that even a person who has $500,000 to play with, if they make $200 once per trading day for a year, will still make $50,000 and that’s a 10% pop to your virtual portfolio so why on earth wouldn’t you be happy to take those quick profits?

Hit and run is the nature of the markets at the moment so that's the way we're playing it.  Fundamentally, I'm very bearish but short-term, you simply can't fight the Fed – not every day, at least.  That's why, yesterday, we took a couple of long flyers but, as I mentioned in the morning post – we're not enthusiastic about them, just taking defensive positions.   

Mortgage Applications were down 14.4% this week as the 30-year fixed went from 4.28 to 4.46% – that's all it takes to grind housing to a halt – how do you think they'll feel about 8% mortgages?  Consumer prices were up just 0.2%, which is not good for producers, who are getting hit with huge increases and simply can't pass the pricing along.  Housing Starts were down with Mortgage Apps at -11.7% and it's no wonder with October Hourly Earnings down 0.1%.  

I'll say it every single day if I have to – this is not a good market environment to be bullish in.  CASH, CASH, CASH is the best way to go.  Make some quick plays, make money, get back to cash.  Try it – you might learn to like it!  

 

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