China Still a Buy, Amazing Government Moves, The Sucker Rally, A Global Currency and More!

by Addison Wiggin & Ian Mathias

  • Citi’s chief economist, forecaster of housing tranquility, headed for White House post
  • Barney Frank insists China is “bluffing,” won’t sell Treasuries
  • Wayne Burritt on why investing in China is still a good bet
  • Markets continue to rebound… Bill Bonner reminds us “This is NOT 2003”
  • Plus, major foreign power pushes for global currency

  This sounds promising. Former Citigroup economist Lewis Alexander just got a job as Treasury Secretary Tim Geithner’s “counselor.” If his role as Citi’s chief economist from 1999-2008 didn’t raise an eyebrow, check out his forecast for the housing market in 2007:

"I think that’s not going to spill over more broadly into the economy,” Alexander told PBS in February of that year. “I think we’re going to have a normal kind of housing cycle that’s going to last through the middle of this year.”

Terriffic… he’ll fit right in. Lunch conversations between he, Geithner and Bernanke ought to be scintillating.

  “We do want foreign capital to come in here and we want private capital,” our favorite stammering rep, Barney Frank, said yesterday. After emerging from a House Financial Services Committee meeting, Frank found a few mics to spit into… and the off-the-cuff pontifications proffered forth. This was our favorite:

“We just had the Chinese raising the specter of not buying our Treasuries. Well, that would be troubling. I think they’re bluffing, personally.”


Bluffing? We thought bluffing meant you were acting strong despite a lousy hand… like this:

This game is played with the cards up… and China’s holding all aces.

  China’s economy will grow 6.5% this year, the World Bank estimates today. The bank lowered its previous estimate of 7.5%, mostly due reduced private investment and weaker exports.

"The fundamentals for China,” said Louis Kuijs, a World Bank economist, “are strong enough to ride out this storm, and it may be just as appropriate to shift the focus as much as possible to the medium- and long-term challenges, instead of a very narrow focus on short-term growth objectives.”

  “The way that one of the most robust investment juggernauts of my lifetime — China — has been thrown out the door is simply mind-blowing,” writes options analyst Wayne Burritt. “In fact, if you listen to just about anybody out there, you’d think this Asian powerhouse was falling apart at the seams. The fact is nothing could be further from the truth. And that’s a huge plus for us.”

Wayne sent over a bounty of reasons to still be bullish on China, echoing the World Bank’s call for continued long-term growth. Here are our highlights:

  • China’s gross domestic product (GDP) grew at a 9.4% pace during 2008. And while that’s down from its blistering 11.9% during 2007, it’s far better than what other global participants are booking
  • During the first two months of this year, China’s retail sales grew at an astounding 15.2% annual rate. By themselves, these numbers are outstanding. But compared with the dismal 10.3% shrinkage in the U.S. retail market during the same period, they’re simply sensational
  • During February, China’s vehicle sales surged a stunning 25%. Compared with a bone-crushing 38% drop in car sales in the United States during the same month — including both domestic and imported brands — it’s clear that China’s car-buying public is in excellent shape
  • New lending in China quadrupled to 1.07 trillion yuan ($157 billion) in February. That means that with only two months under its belt during 2009, China has already driven halfway toward its 2009 5 trillion yuan lending goal
  • During January and February, China spent a whopping 1.03 trillion yuan ($150 billion) on urban fixed-asset investment — things like roads, bridges, railways. Not only was that a staggering 26.5% improvement over the year-ago spending, it also blew away expectations by 5%!
  • Construction equipment sales in China are earmarked to rise a solid 20% during the second half of the year. And that tells me that infrastructure business in China is here to stay
  • China’s investors are smiling, too. The Shanghai Composite is up 15% this year.

“Bottom line,” says Wayne, “Mind-blowing GDP… outstanding retail and vehicle sales… robust lending and infrastructure spending… solid stock market returns… an exploding middle class, unmatched manufacturing prowess and a work ethic that’s second to none. They all add up to a healthy China that no one’s talking about. And with this Asian powerhouse a key driver of growth here in the United States and around the world, that’s good news for us as stock and option investors.”

  American stocks continued their recent winning steak yesterday. The Dow popped 2.5%, the S&P over 3% and the Nasdaq — the laggard of late — made back Monday’s losses with a 4.1% jump. The three indexes are now 13-15% above their recent lows.

  “It’s NOT 2003,” Bill Bonner would like to remind you, “just in case you had any doubts.

“You remember 2003? After a phony recession in ’01-’02 came a phony boom in ’03-’07. Stocks had driven into a ditch following the crash of the Nasdaq. The Dow had fallen down to about 7,500. And then, when it looked like they were going nowhere for a long time… along came Alan Greenspan’s friendly towing service. In a jiffy, he winched the economy back onto the road… and it was soon flying along at the fastest speeds ever recorded. The Dow went all the way to 14,000 and beyond… before crashing into a stone wall.

"And now the financial media is on ‘bottom watch.’ We’re not talking about the kind of bottom watching you do on a Brazilian beach… we’re talking about looking for the end of this bear market.

"Are stocks and oil bottoming," asks a headline at Seeking Alpha.

"‘How will we know…’ when we hit the bottom? asks The New York Times.

"The answer: We will know when we no longer want to know…

"In 2003, a quick cut in interest rates — along with a boost in federal spending — produced a fast turnaround. Within months, prices were rising again. Consumers didn’t even pause… they kept spending and borrowing all the time. This time, the world has never seen stimulus efforts of such huge magnitude — and still no real uptick. This time, consumers are running scared… they’re losing their jobs and closing their wallets. This is the real thing. It won’t end quickly… or easily.”

  The national debt officially crested $11 trillion yesterday. We mentioned it last week, when it seemed inevitable… you can read our thoughts here.

We give credit to Matt Drudge for putting this story at the top of his site today. Otherwise, we suspect the large majority of Americans wouldn’t know. Getting them to care, well, that’s another story.

  More mixed messages on the housing front today. First, homebuilder sentiment remained near an all-time low in February, reports the National Association of Homebuilders. Their index of confidence scored a dismal 9 last month, on a scale of 0-100. That’s just one point higher than January’s all-time low of 8.

  But at the same time, mortgage applications soared over 21% last week, says the Mortgage Bankers Association today. Refis led the way, with a 30% pop, thanks to some of the lowest rates in MBA history.

The average 30-year fixed carried a 4.89% rate last week, the lowest since at least 1990, when the MBA started keeping track. Personally, we’re holding out for 4.5%. Think we might see it by May.

  Meanwhile, mortgage fraud cases hit a record high in 2008. Despite all the talk of fraudulent lending practices during the subprime boom, fraud cases jumped 26% last year, to an all-time high, says the Mortgage Asset Research Institute.

Even stranger, Rhode Island was the mortgage fraud capital of I.O.U.S.A. in 2008.

“With fewer loan originations today, the data suggest that the economic downturn may have created more desperation, causing more people than ever before to try to commit mortgage fraud,” said Denise James of LexisNexis.

The most popular form of fraud last year was application dishonesty… 61% of all cases involve applicants lying on their applications. Tax-related mortgage fraud came in second.

  Consumer prices (CPI) ticked up 0.4% in February — their biggest monthly gain sine last July, thanks mostly to rising gas prices and a surprise jump in clothing. Unlike yesterday’s PPI consumer prices are actually up for the last 12 months. According to the government’s sandbagged estimate, goods are 0.2% more expensive now than they were a year ago.

  After taking a run at $50 a barrel yesterday, traders are taking profits on oil today. Light sweet crude has backed off about $3, to $47 a barrel as we write.

  More of the same in the dollar world today: Stocks up, dollar index down. The index has fallen to 86.3 today, about a point below yesterday’s high. And as investors head back into stocks, they’re selling their gold. The spot price is around $905 today, down $15 from yesterday.

   “The International Monetary Fund should investigate the possible creation of a new reserve currency,” writes The Moscow Times this morning, characterizing a statement released by the Kremlin ahead of the G-20 meeting on April 2. The Russians will suggest the IMF use its Special Drawing Rights, or SDRs, as a “superreserve currency accepted by the whole of the international community." The SDR was created by the IMF in 1969 for use in assisting member countries with capital needs.

Yeah, yeah.

“The Kremlin has persistently criticized the dollar’s status as the dominant global reserve currency,” says the Times, “and has lowered its own dollar holdings in the last few years. Both President Dmitry Medvedev and Prime Minister Vladimir Putin have repeatedly called for the ruble to be used as a regional reserve currency, although the idea has received little support outside of Russia.”
"This is all in the realm of fantasy," Sergei Perminov, a chief strategist at Rye, Man & Gore, told the paper. "There was a situation that resembled what they are talking about. It was called the gold standard, and it ended very badly.

"Alternatives to the dollar are still hard to find," he said.

Exactly the point, isn’t it?

  “Chris Mayer normally has good advice, and Invest Like a Dealmaker is great reading,” writes a reader, referring to Chris’ advice on stop losses in yesterday’s 5. “But as far as stop losses are concerned, he’s dead wrong. I use stop losses on and off. I hate being stopped out automatically, but I know that most of the time I will not be available or not have the discipline to get out of a losing position on my own.

“Warren Buffett, et al., cannot use stop losses, because it would take them days or weeks to exit a position. Stop losses are one of the few advantages we little guys have over the big guys. Believe me, I threatened to fire my broker if he couldn’t get me that 10% convertible accumulative preference shares that Buffett got from Goldman or Harley — but he only laughed and suggested I go talk to my Harley dealer.

“I hate being stopped out of my positions, but last year, as I gradually got stopped out of many positions, I ended up with a 15% loss on my closed positions and was 9% up overall. I feel thankful for my stops, and it has left me in a position to benefit from Chris’s picks in C&C, as well as many other high-quality companies that are now selling up to 35% off their true value.
“Indeed, any small investor who has set well-planned stops — based on historic volatility of that stock — will have done better than the wise of Wall Street and the genius of Mr. Buffett.”

The 5: Even Mr. Mayer would admit there are many ways to skin a cat.

  “It is obvious to me the only way to pay executives, such as AIG, is at the back end,” writes a reader of this AIG bonus fiasco. “The argument that good people will depart unless you pay them a bonus is bogus. What you need to do is pay them when assets they manage are sold at fair prices and the government is paid back its loans. This way, they will stay, as the reward on back end can be more than jumping ship now and taking the easy way out.”

The 5: Wow… that’s radical. You actually want to bonus people on performance? Hmmmnn… wonder why no one in Washington or New York has thought of that?

  “Finally, we are stopping the onslaught on our forests,” writes a reader in regard to the slow destruction of the printed newspaper. “Let them all go bust. We can read the news in The 5 Min. Forecast just fine!”

The 5: Heh. So long as you don’t print it first, we guess.


Addison Wiggin
The 5 Min. Forecast

P.S. We’ve been telling you what a hot streak Steve Sarnoff has been on lately. He called the uptick in financials to the hour. Traders in Options Hotline saw Steve’s recommendations rise 103%, 222% and 186% over the last two weeks. Because he’s been on fire, we were offering a steep discount and an aggressive guarantee for new subscribers to kick the tires of the service. But that offer will end tomorrow at midnight. If you’re interesting in giving options trading a try, there’s no better way than to take advantage of this great deal, right now. Don’t wait… it’ll be midnight tomorrow before you know it.



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