Mandarin Monday: China Takes Over Second Place

China became the world’s 2nd largest economy this weekend.

Or rather, Japan became number three because it’s not so much what China did as what Japan did not do, which was (or was not, in this case) grow. Japan’s GDP came in at a pathetic 0.4% annualized pace in Q2, about 1/6 of the 2.3% pace expected and 90% slower than the 4.4% pace of Q1. At least we can’t call Japan a "double dip" - they haven’t been out of a recession since the ’80s…

This post will be mercifully short as I’m in Washington, DC this morning, hoping to avoid having China pass us by next by pushing my "New, New Deal" (and don’t even bother reading this if you are a Conservative as it will just upset you or, even worse, make you think) and generally making a nuisance of myself as I try to get a handle on what is real in this town (quite a trick, actually).

One surreal thing I noticed is that the Washington Post does not have a full Business Section. That’s right - our capital’s largest newspaper and one of the oldest in the nation, has NO full business section - today it’s just 2 pages on A9 and A10 (at least it’s in Section A!). It is the fifth largest paper in the nation but, more importantly than that, it is read by 582,000 people a day, which is about 1/2 of all of the people in this town, and DOES NOT HAVE A PROPER BUSINESS SECTION. They do have a Style section and Classifieds and Sports but, on Monday at least, no Business Section. Don’t you think that may somehow color the way Washingtonians view the World, when their own paper de-emphasized Business to the point where I would comparatively call the USA Today in-depth?

What makes this even stranger is that the paper’s editor, Marcus Brauchli, was previously the editor of The Wall Street Journal! I knew the Post has gone conservative over the years but I never realized why conservatives in DC seem so clueless as to how the real economy works. Now I see that it is truly a case of "hear no evil, see no evil" when reading the Post - a paper that once won Pulitzers for uncovering Watergate and now allows their reporting to be dictated by Republicans. In "Buying the War" on PBS, Bill Moyers noted 27 editorials supporting Bush’s ambitions to invade Iraq. National security correspondent Walter Pincus reported that he had been ordered to cease his reports that were critical of Republican administrations. Glenn Greenwald has called its Op-Ed page the "leading outlet for neoconservative and related right-wing advocacy".

I always tell our Members to be aware of the spin (and its origins) they are getting from the media, but what does it say about our Capital when the Post is STILL considered the liberal alternative to the dreaded Washington Times?

Anyway, back to China. So China’s GDP is trending just shy of $6Tn, still a bit behind our $14Tn and, of course, if you look at the EU as a bloc, they are up around $16Tn so let’s not call it game over just yet. We can still get our GDP back on the growth path if we invest in infrastructure, like China, or promote education, like China, or manage commodity prices, like China, or rein in Corporate greed, like China, or provide health care, like China, or create a VAT, like China (17%, which raises 1/2 of all Government revenues) - to make sure our corporations don’t avoid paying their fair shares of taxes (currently they pay just 6.4% of all taxes - see New Deal article).

Unfortunately, the chances of the US adopting a Chinese-style Capitalism and walking away from our current Corporate Kleptocracy are pretty slim, so we’ll just have to grin and bear it as China is forecast to continue to grow around 8% annually through 2025, at which point they are likely to pass both the US and Europe - especially if the obstructionists in Government continue to have their way and prevent the Administration from taking action to stimulate the economy before it slips back into a prolonged state of malaise.

So happy Monday to you! Our main concern going into the weekend was that oil was going to take us down this week and it looks like energy companies will be leading us lower but the banks are not far behind. Our own growth prospects are not looking too bright after last week’s data and the Japan news will certainly spook investors and we may be testing our bottoms all week.

I do think we hold up. The news flow could hardly be more negative but until we see hard evidence, like Q3 earnings turning south, it’s going to be hard to drive the market back to the flash-crash lows. Of course, it’s options expiration week so ANYTHING is possible, and we’ll be sticking to our very simple 3 of 5 broken levels rule to flip more bearish at: Dow 10,200, S&P 1,070, Nas 2,200, NYSE 6,800, and Russell 635.

Last week, I put up a DXD hedge for members that we felt so strongly about that we also posted it on our Instablog on Seeking Alpha to help protect as many people as possible. That 566% hedge is currently 300% in the money and if we hold up today it might be a good idea to cash out. If we do break lower, we can use the 10,200 line as our next on/off point for a new hedge and I’m looking at the DXD Sept $26/28 bull call spread at .60, selling the $25 puts for .40 for net .20 on the $2 spread, which offers $1.80 of upside (900%) and is already $1.28 in the money so the Dow will have to rise 5% - back to 10,700 before you are likely to lose more than .20 on the play.

As we drop to test our levels, you may want to (also on the InstaBlog) check out my "Buying Premise," as that’s why we’re still bullish until proven otherwise. Like that old Chinese curse goes: "May you live in interesting times!"