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Mandarin Monday – China Tightens, Snow Chills Markets

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Here’s the latest Stock World Weekly (archives here) We hope all of you had a great holiday weekend! –Ilene

Mandarin Monday – China Tightens, Snow Chills Markets

By Phil of Phil's Stock World 

It's going to be another light trading week.

Europe is off 1.25% this morning (8am) as the Shanghai fell 2% and the Hang Seng dropped 0.3% on news that China was raising rates 0.25% for the second time in 2 months - weeks ahead of what most considered a fairly aggressive tightening schedule.  Chinese Premier Wen Jiabao voiced confidence Sunday that his government can contain rising prices.  

Speaking to listeners during a visit to state radio headquarters, Mr. Wen acknowledged that recent price increases have "made life more difficult" for middle and lower-income Chinese.  But, pointing to measures the leadership has taken in recent months, he said: "As it looks now, we are completely able to control the overall level of prices." The remarks, in a session where Mr. Wen was asked repeatedly about prices, reflect the issue's political sensitivity for Beijing.  

Our futures would certainly be taking a much bigger hit if the dollar wasn't down half a point since Friday, inflating the prices of stocks and commodities and giving us the illusion of stability in what can easily become a rough morning.  Of course we felt that last week's zero-volume move higher was fake, Fake, FAKE but, when the acting is that good, there's nothing else you can do but sit back and enjoy the ride.  One long we did take on Thursday was a long on the VIX as we expect volatility to perk up in January.  We took a short position on FCX at 2pm ($119) as a proxy for shorting gold and copper and we have an obvious exit point if they hit $120.  

On the other side of the tape, I put up 4 major inflation hedges for 2011 that will serve us all well in a runaway market this year (along with one strategy that can give you up to a 50% discount on an Annual PSW Membership). These are, of course, bets that Chairman Wen is wrong and prices cannot be contained.  After all, what difference does it make how much China tightens if The Bernank has the spigots in the US running full blast and flooding the World with Dollars?  The more dollars he prints, the more dollars are demanded to buy oil, gold, copper, cotton, silver, corn and whatever other dopey thing Goldman Sachs can buy low and sell high and those dollars go to producers like OPEC, who spend them new cars and donate them to Terrorists, who in turn put that money back in circulation to buy plastic explosives, detonators and airline tickets - isn't the global economy wonderful?  

Let's not kid ourselves folks, oil is up $20 a barrel since September and that gives Ahmadinejad $84M PER DAY extra cash which he can use to help defeat the Great Satan.  They are pumping the same oil as they were before - simply for a lot more money thanks (as usual) to Goldman Sachs, JP Morgan and the other patriotic speculators who are willing to bankrupt the people of their own countries in order to scrape a few extra dollars of commissions and profits off their energy trading.  At $90 and 4.2M barrels a day, Iran gets 138Bn American Dollars a year to spend however they think is best and, if they thing that money is best spent buying roadside bombs for their militant friends in Iraq - well that's just good old fashioned Capitalism at work, right?

[CHIRATES]The entire GDP of Iran is $331Bn so almost half of that is oil money.  If you ever wonder why Iraqi people are pissed off - their GDP is $65Bn and they pump 2.4M barrels a day, which at $90 times 365 days equals $78.8Bn so SOMEONE is getting ripped off in Iraq, don't you think?   Even Nigeria gets a better deal than Iraq does with a GDP of $173Bn and 2.2Mbd of oil pumped out daily.  We're still short oil - there is no shortage, just hype and speculation that will run its course.  The question is, when?  

Wen, is the question everyone needs to be asking as China's last round of rate tightening, also spurred on by ridiculous rises in energy prices that the government was determined to put a lid on, was a trigger that collapsed the global economy in 2008.  As you can see from the chart on the right, the last series of rate hikes took them from 6% to 7.5% in just over a year but, from their perspective, were not aggressive enough as oil soared to $140 a barrel in 2008 because Bush was giving away stimulus money as fast as China could remove it from the system.  

Obama and the Bernanke have already teamed up for a $2Tn money drop in 2011 and that $20 that oil has risen since The Bernanke announce QE2 in September is $20 per barrel that China has to subsidize for their people, who pay a fixed rate.  So take the $30Bn bonus that we're shipping over to Iran and multiply that by about 4 and that's what it costs the Chinese government to cover that extra $20 per barrel.   Believe me, they DO NOT want to see $100, let alone $140 again, no matter how much CNBC, GS et al salivate over the possibility...

Somehow, the MSM seems to think American Consumers have an extra $400M a day to spend on oil and that, of course, is just 20M barrels times $20 extra or "just" $146Bn a year that will be spent on oil instead of ITunes.  Of course, then you have refining mark-ups (great for our VLO, who are up 20% since Sept) and ancillary inflation in food, heat, electricity etc and you can easily double that to $300Bn.  Figure each $10 rise in oil costs US Consumers $150Bn more to consume the same food and fuel that they did before and then contemplate that the bottom 90% of wage-earners in this country are making 5% LESS than they did in 2005 AND that 10% of them have no jobs at all.  

That's why, in my very humble opinion, anyone who tells you that oil will be over $100 AND the economy will recover - is on crack!  The Fed cannot create money fast enough and the Treasury cannot print money fast enough to wallpaper over rising food and fuel costs (which are, of course, not part of the "core" CPI) and give us a consumer-based recovery at the same time.  

What we are seeing this holiday season is consumers RE-leveraging for the holidays.  Now, I'm a little early with this, you won't hear about it until the data comes in later in the month - just like I told you about the Muni Debt months before it became a popular theme so let's just consider this something we'll need to watch out for in 2011.  

As you can see from the chart on the left, we are in a contraction on CMI (Consumer Metrics Institute's) data, which takes into account broad consumer spending trends and clearly indicates we are in no way out of the woods yet.  As Housing Time Bomb points out: "The CMI goes on to explain how the majority of our growth in 2010 was as a result of massive government stimulus combined with improved exports thanks to a falling currency."  Or, as I said last week - we have fooled almost all of the people some of the time in 2010 - whether that will last into 2011 or not is the question we must ponder for the new year. 

Meanwhile, baby it is cold outside in the Northeast and that, of course is bad news for retailers, who want consumers to come out and cash in those gift cards.  It also stops air travel and keeps people at home and not driving - all bad for oil prices but we're not expecting them to fail $90 as long as we keep getting short-shipped over 10M barrels a week from our good friends at OPEC - a trick they've been using all of December to create artificial draws in US crude supplied.  Last week, 8.7Mb of oil were imported per day and at least that was some improvement over the prior week's 7.7Mbd of imports, quite a bit below our 5-year average of 10Mbd.  

This effectively shorts our inventories by 10-15Mb PER WEEK so it doesn't matter whether you try to conserve oil or not, they will just short-ship us and call  the draw-down in energy "consumption" because that is the totally BS way they measure it. As I said, we are short oil and short the markets at the moment as we still aren't quite seeing how they can keep all these balls in the air - no matter what, it's going to be an interesting New Year - but let's try to get through the week first!  

Be careful out there!  

 

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Mon, 12/27/2010 - 22:41 | 832661 David99
David99's picture

China's fiscal revenue growth likely to slow
China's fiscal revenue growth is likely to slow, and the nation will face more fiscal pressure in 2011. That's partly due to planned taxation reforms, said Xie Xuren, minister of finance.
China to continue proactive fiscal policy in 2011
China to raise reserve ratios and interest rates every alternate months in 2011

Mon, 12/27/2010 - 21:58 | 832604 RobotTrader
RobotTrader's picture

Mon, 12/27/2010 - 21:49 | 832592 David99
David99's picture

Hong Kong opened - 327 points in red

Mon, 12/27/2010 - 21:39 | 832576 David99
David99's picture

Sorry, I don't know how my one post got repeated so many times?

Tue, 12/28/2010 - 00:42 | 832807 VeloSpade
VeloSpade's picture

Its because you are a fucking sporadic posting moron like me.

Mon, 12/27/2010 - 21:35 | 832574 David99
David99's picture

New ROK drills add to tension on peninsula

Koreas

The announcement by the Republic of Korea (ROK) of naval drills, starting on Monday, has again escalated tension on the Korean Peninsula.

The ROK military plans to stage live-fire drills at 23 locations off its coast from Dec 27 to Dec 31, the ROK Joint Chiefs of Staff said on Sunday

Mon, 12/27/2010 - 21:37 | 832569 David99
David99's picture

Just look at the chart below

Year 1900 = 3.05 % of GDP spending
Year 2010 = 43.85% of GDP spending

http://www.usgovernmentspending.com/downchart_gs.php?year=1900_2010&unit...

And it has nothing to do with FED's spending

Mon, 12/27/2010 - 21:25 | 832545 David99
David99's picture

China opens in red again today

Japan in red as well

Mon, 12/27/2010 - 19:34 | 832388 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Ben is 100% certain that HE can contain inflation. Wen is "completely able to control the overall level of prices".

These guys are good.

I know there's a play here ... not in investments necessarily, but with the Ben-Wen thing. Absolute control.

Cheap SPY puts for the US. Not as cheap as two months ago Hong Kong EWH puts. But who has the cajones to short AUDUSD when the BenWen sees all ?

Market information is now hermeneutical.

Mon, 12/27/2010 - 17:45 | 832243 sethstorm
sethstorm's picture

Perhaps it would be time to make China regret its hasty action.

Mon, 12/27/2010 - 16:12 | 832032 Sudden Debt
Sudden Debt's picture

Like I said before, if China gets the expensive oil, it needs to inflate more and production costs and logistic cost will make sure that work will move. Maybe they won't all come back but if 1/10 does, so 10 chinese get the can for 1 American or European, that's a good deal.

Expensive oil might cost us but it cost them even more and we'll profit from it in the long run.

 

Mon, 12/27/2010 - 16:10 | 832031 Ancona
Ancona's picture

2011 is going to be a hell of a ride, so buckle up and put on your big boy pants.

Mon, 12/27/2010 - 16:16 | 832047 Sudden Debt
Sudden Debt's picture

I think so to. This hard winter is hell for the roads and as reparation funds have been cut we'll be driving from pothole to pothole...

 

... you where talking about the roads he?...

Mon, 12/27/2010 - 16:09 | 832024 Not Sure
Not Sure's picture

RE-leveraging for the holidays  So true.

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