Before the Tape: 9-13-11

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The market has become dominated by rumors. The primary rumor is of China supporting Europe.


Italy turns to China for help in debt crisis


Italy’s centre-right government is turning to cash-rich China in the hope that Beijing will help rescue it from financial crisis by making “significant” purchases of Italian bonds and investments in strategic companies.


According to Italian officials, Lou Jiwei, chairman of China Investment Corp, one of the world’s largest sovereign wealth funds, led a delegation to Rome last week for talks with Giulio Tremonti, finance minister, and Italy’s Cassa Depositi e Prestiti, a state-controlled entity that has established an Italian Strategic Fund open to foreign investors.


We saw similar rumors in 2008 for Wall Street banks.


CIC [China Sovereign Fund] buys into Morgan [Stanley]


The US Federal Reserve approved Tuesday China Investment Corp's (CIC) takeover of 10 percent voting shares of Morgan Stanley. The decision follows an agreement signed during the onset of the US sub-prime mortgage crisis in December 2007. CIC's total investment in Morgan Stanley has reached $6.8 billion with the new takeover. The Fed said that CIC had promised not to influence operation of Morgan Stanley.


Qatar wealth fund keen to buy US Citi's shares


Qatar Investment Authority, the country's sovereign wealth fund, is keen to buy part of the US Treasury's stake in Citigroup, the Financial Times reported in its Wednesday edition.


Citing people familiar with the matter the paper said QIA was considering purchasing some of the U.S. Treasury's 27 percent stake in Citigroup, but warned any deal would be dependent on price and market conditions.

Should Middle East Funds Own U.S. Banks?


In November, United Arab Emirates' Abu Dhabi Investment Authority invested $7.5 billion in Citigroup.


In January, Kuwait's fund, the Kuwait Investment Authority, and the Singapore Investment Corporation were among the investors in the $12.5 billion Citi deal.


The same month, Merrill Lynch raised money from the Kuwait Investment Authority as part of a $6.6 billion preferred stock deal that also included South Korea's Korea Investment Corporation.


Those purchases all resulted in massive losses for the funds in question. And yet we are seeing similar rumors inciting large rallies in stocks today, this time the rumors pertaining to China and Japan buying Europe.


As a reminder, the China rumor has spread multiple times in the last year. But the Euro has collapsed regardless:



The China story needs to be re-examined. We have many accounts of China building ghost cities and other infrastructure projects. We have multiple accounts of a real estate bubble in China. And we have multiple accounts of Chinese fraud companies in the marketplace.


With fraud so rampant in China’s economy and Government… why does the China “brand” continue to carry so much weight in the marketplace?


There are major potential surprises to the downside for the People’s Republic. We can’t help but wonder if it might turn out to be the “Soviet Miracle” of the 21st Century (throughout the Cold War, the Soviet Union was thought to be far stronger economically than reality as its subsequent collapse illustrated).


As for Japan’s involvement in Europe:


Japan to Buy Euro Bonds, Joins China to Avert Crisis


Japan plans to buy bonds issued by Europe’s financial-aid funds, its finance minister said, joining China in assisting the region as it battles against a debt crisis that prompted bailouts of Ireland and Greece.


“There is a plan for the euro zone to jointly issue a large amount of bonds late this month to raise funds to assist Ireland,” Finance Minister Yoshihiko Noda said at a news conference in Tokyo today. “It’s appropriate for Japan to make a contribution as a leading nation to increase trust in the deal. We want to buy more than 20 percent.”


Japan has the highest Debt-to-GDP ratio of any developed nation. They’ve also just experienced one of the largest earthquake disasters in history. How is the “Japan” brand still viable as a solution for other nations?!?!


The market currently is pricing a Greek default as more than 99% likely.  Germany is preparing for Greek defaults. The EU in its current form is finished.


A Greek default (deflation) will be negative for Gold and Silver in the short-term. We’ve noted previously that Gold is highly overstretched and susceptible to a sharp correction:



The 34-week simple moving average has maintained Gold throughout its bull market. The precious metal is currently more stretched above this line than at any point in the last decade.


Emerging markets are also facing a potentially sharp correction.



Indeed, when we price the Emerging Markets relative to the S&P 500, we find a massive triangle pattern that looks to have just broken out to the downside suggesting we are entering a period when US indexes will dramatically outperform their emerging market counterparts:



Back in the US, the US Census dropped a bomb illustrating one of our key ideas: incomes are key for economic and housing recoveries to take place:


Since 2007, the year before the most recent recession, real median household income has declined 6.4 percent and is 7.1 percent below the median household income peak that occurred prior to the 2001 recession in 1999. The percentages are not statistically different from each another.


The nation's official poverty rate in 2010 was 15.1 percent, up from 14.3 percent in 2009 ? the third consecutive annual increase in the poverty rate.  There were 46.2 million people in poverty in 2010, up from 43.6 million in 2009 ? the fourth consecutive annual increase and the largest number in the 52 years for which poverty estimates have been published.


            Census Bureau: U.S. poverty rises to 15.1%, highest since 1983


The U.S. poverty rate has risen to 15.1%, the highest since 1983, the U.S. Census Bureau reports.


We continue to believe the market is due for a greater correction. As such we urge a defensive position.




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