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Thank you China!

I had put out a post last night detailing how we ended up short at yesterday’s close and at 3:21, when I published it as I was checking the Asian markets (don’t ask, I keep strange hours) it looked like I had called it wrong as the Hang Seng went into lunch up over half a point and commodities were still hanging tough after yesterday’s ridiculous run up. In fact, at 12:07, in Member Chat, I just so happened to say: "Copper $3.13 - ridiculous… Very annoying movement, not very playable like this as it can all crash back down again very fast."

Fortunately, we let our levels be our guide and cashed out our long DIA day trades in my 1:41 Alert to Members as we hit our Dow 10,165 target from the morning post. We flipped bearish to the DIA $100 puts at .62, which should have a nice open this morning. We had a Freeport-McMoRan (FCX) short play with the $70 puts that I couldn’t bring myself to let go of, even after they broke over our $72.50 stop line, and my 1:50 comment on that position was: "I’m in a 4x position at avg. $1.16, now .71 so not good but I think copper run was BS so I’m willing to stick it out but very happy just to get even now. I think a big squeeze was put on commodity bears today with no energy reports to point out the demand destruction. Copper up from $2.93 yesterday to $3.13 today after taking two weeks to fall that far on the way down - that is nonsense! If I were not full I would roll up or DD but, as I said, I’ll just be happy to get back out and, if not by tomorrow, I’ll sell some other sucker my puts and roll to March."

Needless to say, despite having a rolling plan to turn the trade into a spread, I was not a happy camper as things held up into the close and then, through lunch in Asia and into Europe’s open. My closing comment to Members at 3:44 had been: "I’m still generally suspicious that we’ve had such a strong day on very low volume (Dow 136M at 3:40) when there was a storm. An amazing coincidence if nothing else…. The fact that it was led by BS commodity sector making a radical move up on NO news at all (in fact, when data was postponed) makes the coincidence even more amazingly amazing to the point of being kind of impossible to believe…"

Imagine my surprise when I woke up this morning to find that it was China saved us! We had actually been debating the logic of China’s position on commodities in last night’s chat and I feel good about my premise now (that it makes no sense for China to allow commodities to rise again) as China joined my bubble brigade and raised their reserve requirements on banks for the second time this month! The reserve requirement will increase 50 basis points, or 0.5 percentage point, effective Feb. 25, the People’s Bank of China said on its Web site today. The current level is 16 percent for big banks and 14 percent for smaller ones.

Stocks reversed gains in Europe after the announcement on concern that tighter lending in China will dampen the global economic recovery. Policymakers aim to avert asset bubbles and restrain inflation after banks extended 19 percent of this year’s 7.5 trillion yuan ($1.1 trillion) lending target in January and property prices climbed the most in 21 months. “This is all about controlling the boom, so that we don’t have a bust in the second half,” said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.

The central bank will keep raising the ratio frequently until the middle of the year,” said Lu Zhengwei, a Shanghai- based economist at Industrial Bank Co., who predicted today’s increase. “The central bank wants to stay ahead of the curve by tightening before inflation starts to gain pace.” He forecast an increase in the benchmark lending rate from 5.31 percent as early as April. Timing, on this move, is everything, as the Chinese markets had no time to react and now go into New Year’s week when they will be closed, making any gut reaction to the rate hike the rest of the world’s problem. “Raising the reserve ratio on the eve of the Chinese New Year holiday really makes a lot of sense as it will give markets time to react,” said Mark Williams, an economist at Capital Economics Ltd. in London.

The Nikkei was already closed when the China news came out and they finished the day up 128 points at 10,092 - back to moving pretty much in lock-step with the Dow. The Shanghai closed at the same time, up a strong 1% and just back over the 3,000 mark at 3,018 but the Hang Seng was open for that last hour and they gave back 100 points in those last 60 minutes but held the 20,200 mark at 20,268, so well done China with some very excellent timing on your rate call! India had some great Industrial Output numbers but Vietnam is still having serious problems with its Dong and may soon need to take some financial medicine before things get worse over there.

Europe was not so lucky with China’s timing, which was a real shame as the FTSE was gapping right up to our old 5,250 breakout level but got smacked down hard as China’s news spread. 5,750 is our DAX line and we’re about 5% away from that at 5,517 and were already rejected there on our earlier attempt to recover this month. German Chancellor Angela Merkel and her counterparts yesterday pledged “determined and coordinated action” to support Greece’s efforts to regain control of its finances. They stopped short of providing taxpayers’ money or diluting their own demands for the country to cut the European Union’s biggest budget deficit. While bonds gained, the Euro slipped for a third day today and pressure is now on the governments to show how they would back up their words with action. Investors’ attention now turns to a meeting of finance ministers in Brussels on Feb 15th.

Europe’s recovery almost stalled in the fourth quarter as waning spending and investment in Germany unexpectedly brought growth in the region’s largest economy to a halt. Gross domestic product in the 16-nation euro region rose 0.1 percent from the third quarter, when it gained 0.4 percent, the European Union’s statistics office in Luxembourg said today. Economists forecast expansion of 0.3 percent, the median of 34 estimates in a Bloomberg survey showed. The recession in Greece deepened, with GDP falling 0.8 percent in the fourth quarter after a 0.5 percent slump in the previous three months.

It’s “another piece of bad news for policymakers as they struggle to come up with a plan that soothes worries about the credit worthiness of the eurozone’s peripheral economies,” said Nick Kounis, chief European economist at Fortis Bank Nederland in Amsterdam. The recovery is “continuing, but at a snail’s pace.”

Wow, China fighting inflation with predictions of 50% commercial vacancy rates in Beijing, Japan is Japan, Vietnam is worried about their Dong, and Europe and South America are a mess - it looks like it’s up to America to save us because, as I said earlier in the week - do you really have anywhere better to put your money? Fortunately we did have a nice Retail Sales Report this morning with a 0.5% increase blowing away economists’ forecasts of 0.3%, which was whispered as low as -0.1%. Ex-Autos we held up well too, at a 0.6% increase and the numbers looked good across the board so all is not lost - we just need to be patient and wait for a proper global recovery and not get too far ahead of ourselves.

We’re going to be thrilled with today’s drop and get back to cash (on our unhedged positions) over the weekend - there’s no need to risk it after such a fantastic week! Next week is options expiration week and we love to have cash for day trades, especially as we’re still in earnings season and can make tons of fun short-term trades!

Have a great weekend,

- Phil

Source: Friday Preview: China Puts First Pin in the Bubble