23.7 C
New York
Thursday, July 25, 2024

China, Greece, Japan – Oh My!

Tell us about it Janet...

We're back to Fed watching today as Janet Yellen goes to Congress for here semi-annual testimony.  Fed watchers are looking for any sort of hint that Yellen will hold off on raising rates until 2016.

In truth, there has been no such indication nor have there been any economic data points that would lead us to believe the Fed has changed their mind from their stated intention to raise rates in October.

Internationally, the data is questionable, at best.  And speaking of questionable data – China reported an unbelieveable 7% rise in GDP and that is unbelievable in the sense that no on actually believes it, least of all Chinese traders, who took the Shanghai composite down 3% despite the "great" news.

Economists have frequently questioned the methodology underpinning Chinese statistics, given discrepancies between regional and national growth figures, data collection shortfalls and, at times, a lack of transparency. Several economists have constructed alternate measures of growth based on freight rates, electricity output and other data. Citibank said recently that it believes China’s actual growth rate could be closer to 5%.  

“Over the second quarter, pretty much everything other than the financial sector slowed,” said Brian Jackson, an economist with data provider IHS Inc., on Tuesday, before the GDP release.

Global demand remains weak, and broad areas of the world’s second-largest economy had largely failed to respond to four interest-rate cuts and several adjustments in reserves that banks are required to hold since late last year.  Across the board, things are weak,” Mr. Jackson said.  Infrastructure spending, a staple driver of Chinese growth, has failed to gain much traction as local governments battle debt and other constraints on their outlays.

If China can't get their market back on track this month, there's almost no chance they can maintain even faking this pace of GDP for Q3.  Meanwhile, another Chinese trading partner bites the dust as Japan drops their own GDP expectations to 1.7% from 2% as inflation remains persistently low, coming in at just 0.7% despite MASSIVE stimulus from the BOJ.  

That's MASSIVE as in $648Bn being pumped into a $4.2Tn economy, which means that 15% of that 1.7% GDP growth is only there because the Central Bank is printing Yen like they are going out of style.   Actually, they are out of style, that's why the value of the Yen has declined from 130 Yen to the Dollar in 2012 to 80 Yen to the Dollar today – that's down 38% in 3 years!  

So you might get your Yen back with the 1% interest on Japanese 30-year bonds but the Yen you get back won't be worth a whole Hell of a lot when you go to change them back into real money.  That's the entire difference between Japan, who are 240% of their GDP in debt, and Greece, who are "only" 170% of their GDP in debt – Japan can print their own money to pay off their debts, Greece can't.  

Speaking of Greece – if Greece is "fixed," what's up with the Greek ETF (GREK), which is back down to the lows at $9.82 after falling 10% yesterday?  GREK was at $25 last year, so this is a whopping 60% discount, even after the crisis has, according to the MSM talking heads, been averted. 

We are, as you may have heard, a bit skeptical about the recent rally and Greece is far, far worse off than anyone thinks and this deal isn't going to solve anything – a position even the IMF now agrees with.   Still, if Greek parliament does pass the package submitted by the Troika this weekend – GREK should benefit and we need a long for our portfolio and we don't want to go long on our own indexes or China or Japan so let's take a stab at Greece in our Short-Term Portfolio and pick up the following:

Buy 50 GREK Aug $9 calls for $1.50 ($7,500)

Sell 50 GREK Aug $11 calls for 0.65 ($3,250)

This $2 spread costs us net 0.85 and is already $1 in the money so we make penny for penny along with any rise in GREK up to a maximum of $2, which would be up 138% in 37 days (the August options expiration on the 21st).  If Greece is really fixed, we'll have a $5,750 to offset the loss of our SDS position (assuming the S&P pops higher) and, if not, we already have plenty of shorts.  

Be careful out there!  



Notify of
Inline Feedbacks
View all comments

Stay Connected


Latest Articles

Would love your thoughts, please comment.x