Wednesday's Worries: Wall Street, Greece and China

Includes: DIA, FXE, QQQ, SPY
by: Philip Davis

Click to enlargeCan Super Market ignore 3 major issues in a single day?

Issue #1 (this is my audition to take over the McLaughlin Group, by the way): Americans are disgusted with Wall Street and give both Wall Street Executives and Corporate CEOs ratings as low as Congress (66% disapproval). In a Bloomberg survey conducted over the weekend, by a 2-to-1 margin Americans believe the economy has worsened over the past year and only 3 out of 10 people benefited from the rise in the markets over the past 12 months, missing the rally as their wiped-out life savings went to pay for mundane things like food and fuel.

A sense of despair pervades perceptions of the economy and nation. Barely one in three Americans says the country is on the right track. Fewer than one in 10 say they believe the economy will be strong again within a year. Just 4 percent of Americans who cut back on spending during the recession now say they are confident enough to open their wallets, according to the poll, which has a margin of error of plus or minus 3.1 percentage points. Clearly these are not the same people Jim Cramer knows. In general, the public wants Wall Street regulated - AND punished!

Issue #2: Greece is still uncertain and the Dollar moves to a 10-month high against the Euro, which touched $1.33 this morning with the Pound dropping to $1.494 and, even against the Yen we gained ground, rising to 91.35 Yen to the dollar as investors fly to the relative safety of the dollar. French and German leaders said any aid package for Greece would require help from the International Monetary Fund, denting confidence in the European Union. The 16-nation currency also fell against the yen and the pound as Fitch Ratings cut Portugal’s credit grade. “If Greece goes with the IMF, that says something terrible about the political process within Europe,” said Stuart Bennett, a senior foreign-exchange strategist at Credit Agricole Corporate and Investment Bank in London. “This undermines any confidence in the currency.”

Issue #3: Are the Bulls in a China Shop? Vitaliy Katsenelson compares China’s economy to the bus in Speed, that would explode if its speed dropped below 50 m.p.h. "Well," he says: "China is like that bus with 1.3 billion people aboard. If the Communist Party can’t keep the economy growing at a fast clip, the result will be catastrophic."

To achieve high growth, China kept its currency, the renminbi, at artificially low levels against the dollar. This helped already cheap Chinese-made goods become even cheaper. China turned into a significant exporter to the developed economies. Normally, if free-market economic forces were at work, the renminbi would have appreciated and the US dollar would have declined. However, had China let this occur, demand for its products would have declined, and its economy wouldn’t have grown at roughly 10 percent a year, which it did during the past decade.

Of course the US is now under tremendous pressure to do something about China’s currency manipulation - which was cute for a while but now we kind of need some of those 30M jobs we shipped overseas to come back. Time Magazine asks whether Google (NASDAQ:GOOG) is an early indicator of a brewing US-China trade war as the drumbeat of protectionism grows louder each time a Senator filibusters another extension of unemployment benefits. Meanwhile, S&P warns that as much as 10% of the $1.4Tn lent out by Chinese banks last year may end up as "non-performing." I don’t know about China but that would be considered a problem for US banks…

Doesn’t it bother you that the primary bullish premise is the strength of an economy on the other side of the world? It bothers me. We hear so much conflicting information and we know our own government’s data is total BS - why on earth would we believe China’s? I know from having conversations with many Capitalists that it doesn’t bother anybody that the average Chinese worker makes $2,500 a year and the average US worker’s compensation has been moving downward to meet it. Even though there are 1.3Bn Chinese and just 300M Americans - is it really good to throw the dice on their consumer purchases (on the other side of the world) making up for US losses?

Asia had a slightly up session this morning, gaining about 0.25% across the board, but that doesn’t really tell the story as the Hang Seng once again DROPPED 200 points off a 220 point gap-up open (all futures) and finished right back at the 21,000 line. If I didn’t know any better, I’d say that the Chinese market is looking almost as manipulated as the US market but that would be crazy - Chinese regulators can’t possibly be that lax, can they? So there’s your up 20 day in China…

Europe is also surprisingly blase about our move to within just over 100 points away from Dow 11,000 yesterday. EU Markets are flat but the CAC is down half a point as the strike in France marches on. Germany got good news on exports and Business Confidence as the global top 10% continue to buy their Mercedes and Brauns. In fact, US Durable Goods orders were up 0.5% in February after being up 3.9% in March but we were up 0.9% ex-transportation, so better than expected for sure.

Oil is coming down nicely ahead of inventories at 10:30 and we won’t need to be risking them as $80.50 is going to be a great place to cash out our short positions from yesterday, when oil was way up at $82. We are very much in hit and run mode with our trading, still staying in mainly cash and watching the market nonsense from the sidelines. MBA mortgage applications fell 4.2% this week after falling 1.9% last week and that’s a lot of falling when they are already 80% off the highs! You have to sell A LOT of washing machines to make up for not selling 1.5M homes…

Obama’s $50B effort to stem foreclosures has been a disappointment, says TARP’s inspector general. The program may be delaying foreclosures rather than preventing them, and has so far provided long-term payment relief to 169K households vs. the 3-4M the White House says the program will help. Now Bank of America (BAC) will start forgiving up to 30% of mortgage principal for homeowners who owe more than 120% of their homes' value or who are struggling with ever-expanding "negative amortization" loans - hopefully that will help.

Continue to be careful out there - it’s a crazy time in the markets and cash is definitely King!