China & U.S. Debt, Most Important Short Term Factor, New Trading Pattern, Emerging Markets and More!

by Addison Wiggin & Ian Mathias

  • China slows down reserve purchases… why the Far East is losing its taste for U.S. debt
  • Likely the most bipartisan effort of the crisis… 2009 budget deficit nears $1 trillion
  • Dollar trade reverses… has a new trading paradigm emerged?
  • Why Rob Parenteau is “concerned” with emerging markets
  • Amoss reveals “the single-most important factor in short-term stock market movements”

 

  A sign of the changing times: According to the Chinese central bank this morning, China’s foreign reserves grew “only” $7.7 billion in the first quarter — the slowest pace in eight years.

During the first quarter of 2008, the Chinese bank bought $153 billion in FX reserves — more than 21 times what they’ve bought over the last three months. It’s fairly safe to say the Chinese are losing their taste for the dollar. How long before they sour on “toxic” Treasuries?

Here’s a clue: Uncle Sam’s go-to banker sold more U.S. debt in the first two months of 2009 than they bought. In March, they about-faced and bought it all back… presumably once bond yields returned to less ridiculous levels.

But even a slowdown in purchase of Treasuries from Beijing puts the whole Obama bailout-stimulus strategy on thin ice.

  Seriously though, it’s no wonder why the Chinese are getting fussy. The federal government announced on Friday they’d posted a budget deficit of $192 billion in March — blowing both Wall Street and congressional expectations clear out of the water.

Thus concludes the first half of the fiscal year 2009. George W. Bush, Barack Obama, their administrations and Congress have teamed up for what was truly the most bipartisan effort we can recall — six straight months of budget shortfalls to total a record $956.8 billion.

If you’re keeping score at home, that’s the government going into debt around $60,000 a second — three times the pace of ’08’s historic pace. Good thing the public has AIG bonuses and degenerate automakers to occupy their time, eh? Otherwise, they might get really ticked…

  We were a guest on the Ron Smith Show, which boasts Baltimore’s largest talk radio audience, on Friday. Ron was all aflutter about the Tax Day Tea Parties being organized for Wednesday in every congressional district in the country.

“Revolution is brewing,” the host site boasts. A Facebook entry suggests 108 people plan to attend the Baltimore Tea Party. No tea is planned to be dumped. Yet.

  Last week, we let our weary pens rest and dedicated some quality time to our editorial team and the search for new investment themes. While we were at it, stocks capped off their best rally since 1933.

The S&P 500 rose for the fifth straight week, now 27% off its low in early March. You’ll have to go back to the Great Depression to find a 23-day rally that sizable.

Thursday alone, the Dow ended up 3.1% — back above 8,000 for the first time since early February.

  And with this historic run, we see a peculiar new trend for the U.S. dollar. Observe:

Throughout this crisis, the dollar and Dow have moved in opposition… namely, stocks fall, dollar soars.

On Thursday, however, the dollar rallied big right along with stocks. Today, the Dow opened down 100 points… and the dollar index dropped nearly a point. It’s a curious trend developing with this “sucker’s rally." When it sputters… and the dollar plays along… look out below.

  Helping to confuse your post-holiday 5 this morning, U.S. trade deficit contracted again in February, this time by 28%, to $26 billion, its lowest level in nine years. Exports managed to find a temporary bottom, even perking up a bit, but the decline was mostly led by crashing imports.

“Falling oil prices are part of the import reduction,” writes Rob Parenteau, “but with consumption cratering, imports are off nearly 30% versus a year ago. The turn in trade is clearly more than just price effects. In fact, U.S. export price deflation is running close to a 7% year-over-year pace as producers struggle with a collapse in global trade.

“From a financial balance point of view, the more dramatic the turn in the U.S. trade balance, the easier it will be for the U.S. private sector to return to a net saving position. However, that poses serious challenges to production in the export-dependent economies abroad, and we continue to see harsh production cuts coming out of Asia.

“We would much rather see the U.S. trade balance turning with export growth remaining robust — instead, we have global trade collapsing because so many countries geared their growth strategies to an ever-indebted Western consumer.

“While many institutional equity investors have piled back into emerging equity markets over the past month because they are perceived to be the highest beta play, we remain concerned that excess capacity will prove to be a serious challenge for these nations as the globalized economy adjusts to a less-leveraged Western consumer.”

Editor’s Note: Last week, we announced open enrollment in the newly minted Richebacher Society. In short, had more policymakers, investment bankers, wonks, politicians and homeowners paid attention to Dr. Richebacher’s warnings and advice prior to his death in 2007, much of the carnage of the past two years would have been averted. Kurt often lamented the loss of “macroeconomic” thought in the American school. In founding the society, we’re aiming to keep up his good works. For details, please read the following.

  In markets today, it looks as though the wave of optimism over the last few weeks has crested. The real business of first-quarter earnings begins this week, and with announcements from the likes of Citi, J.P. Morgan, GE, Goldman Sachs and Google… oy, it’s hard to be a fearless buyer of stocks.

  “The single most important factor in short-term stock market movements,” says Dan Amoss, “is investors’ perception of risk; it’s not the tone of the daily economic news, as so many believe. The market usually has its sharpest rallies — the past five weeks being a perfect example — when the news is still bad, but the perception of risk goes from terrified to merely bearish.

“The sharpest, most notable rally has been in the financial stocks. Investors in financial stocks are donning rose-colored glasses and assuming that the worst of the credit losses have passed. I strongly doubt this has happened, since most of the write-downs have been concentrated in securities — MBSs, CDOs, and other contraptions of bundled cash flows. Credit losses on whole loans — mortgages, commercial loans, credit cards, etc. — will eat into bank balance sheets over the course of 2009 and 2010.

“To offset these losses, banks will have to generate as much capital as possible from both internal and external sources. Internally generated capital comes from the cash flows of legacy loans (as long as these cash flows are retained once dividends are cut or eliminated). External capital can come from new, dilutive offerings of preferred and common stock.”

  Right on cue, Goldman Sachs is rumored to be raising capital. According to The Wall Street Journal, the investment bank is looking to dilute shareholders by as much as $10 billion — all with the intent of repaying TARP funds from the government.

“Apparently, Goldman doesn’t like Barney Frank telling it where it can hold investment conferences or how to pay employees,” continues Dan. “I think Goldman is getting off easy, with just a little harassment from Congress. If Goldman is so concerned about the conditions attached to a capital infusion from taxpayers, its executives should never have allowed its balance sheet to grow like it was on steroids.

“Goldman has proven masterful at manipulating the Fed and Treasury into bailing it out without imposing much of a penalty on Goldman shareholders. The substitution of private for public capital is a good thing, as long as these new capital providers are willing to suffer any losses that may come (and not go hat in hand to the government once again).”

Interesting too, that Goldman assumes paying back TARP funds will loosen Uncle Sam’s icy grip.

  Oil is down today, too, offering further proof that the trends in place since the credit crisis began in earnest are changing. Crude is off about three bucks to $49 a barrel, even though the dollar is weaker. Some of the selling momentum today can also be attributed to another demand reduction forecast from the International Energy Agency.

  While oil, stocks, the dollar, housing and imports are falling today, gold is holding up just fine. The spot price hit a short-term bottom of $868 last week, and this morning it’s up to just below $900 an ounce.

  “I think Japanese real estate also looks attractive longer term,” writes Chris Mayer, with one new theme to begin looking at. “Only a year ago, it looked as if Japan’s real estate sector was going to enjoy some time in the sun. There were new luxury hotels, high-end condos and posh boutiques opening all over Tokyo. The Shangri-La opened its first hotel in Japan, near Tokyo Stadium. And in the business district of Marunouchi, a huge new landmark building is set to open this spring.

“Yet that picture changed very quickly as the global financial crisis rippled across the globe. Suddenly, you have big sellers of property that has not changed hands in decades. For example, AIG — the big, villainous insurer — is selling a bunch of properties. One of them is a historic building near the inner moat of the Imperial Palace. AIG has owned the property since 1974.

“General Electric, likewise facing its own capital problems back home, looks ready to sell a bevy of Japanese property, after being a net buyer for years. Even Japanese companies, particularly the hard-hit exporters, will look to their real estate holdings as a source of cash. Insiders in Tokyo expect to see a lot more property coming on the market in the coming months.

“All this distressed selling is bound to open up unprecedented opportunities to pick up valuable properties at super-cheap prices. In some places, the property declines have been around 50%.

“My guess is that Japan’s real estate market doesn’t get up on its feet for another two years — just based on guesses on what’s available and the market’s ability to absorb square footage. But behind the scenes, smart real estate investors are setting the stage for a big rally when things return.”

If you’re not already plugged in, Chris identifies his favorite Japanese real estate plays, here.

  Another Monday, yet another bank failure notice from the FDIC. Cape Fear Bank of North Carolina and New Frontier Bank of Colorado both bit the dust Friday, bringing the 2009 tally to 23 failed banks.

All we need is two more and we’ll have beaten last year’s total of bank failures. At the current rate, that oughta happen before the end of the month. The two failures this weekend cost the FDIC another $801 million.

  The data cupboard is empty today. But if it’s economic data you seek, you’ve got quite a week ahead. We’ll see the latest PPI, CPI, retail sales, industrial production, jobless claims, housing starts and consumer sentiment reports all by the end of Friday. Not to mention a slew of earnings reports. Ought to be one helluva good time. Stay tuned.

  So, too, is our mailbox empty — a first in our two-year run here at The 5. It must have been the Christian holiday over the weekend, yeah? So good of you to take it easy on us, thank you.

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S. We’ve been saying for some time, once a clear trend develops in the stock market, you can bet the bubble in Treasuries will begin losing some of its air. The developments with the Chinese central bank make that even more likely now.

President Obama gave a Good Friday sermon extolling the “glimmers of hope” in the economy on Friday, but we suggest you beware. The story is now more complex than ever… but never fear, we’ve already unpacked it all for you, right here.

 

rspertzel

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