Michael Michaud's  Instablog

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From Wall Street to Guangdong Road, one hot-button issue is taking the financial airwaves by storm: The bull in China's economic "shop." And, according to the mainstream majority, the recent slew of positive data suggests this horned beast is here to stay. Off the top are these third-quarter 2009 stats: A 16.1% leap in China's industrial production, a 16.2% increase in retail sales, and a strong rise in GDP to 8.9%. In the words of one November 11 CNBC report:

"The underlying growth story is a real one. China is now experiencing what the United States did during the Industrial Revolution. It's like the only successful story in the global economy. It's like the locomotive pulling the globe..."

Does that sound familiar? It should.

Two years ago, in the third quarter of 2007, China's industrial production also stood high: at 18%. During the same period, China saw a powerful 16.4% rise in retail sales (a five-year high), and 11.5% GDP (a 13-year high).

Then, as now, the usual experts hitched their bull market bandwagon to the positive "stars" in China's economic galaxy. Here is a statement from a major Chinese official published in an October 25, 2007 New York Times: "The macroeconomic controls this time around have not only effectively prevented the economy from transitioning from speedy growth to overheating... but at the same time have not resulted in a sharp downturn."

Yet -- do you remember what happened to the Shanghai Composite Index then? The chart below vividly illustrates what started that very month. In short: "a sharp downturn" (higlighted in red).


The market plunged 70% into the two-year low in November 2008.

A First-Hand Look at China's Bull Market: The latest Asian-Pacific Financial Forecast includes a special, in-depth 4-page essay on China's long-term growth prospects.

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Clearly, China's robust "fundamentals" did not save Chinese stocks two years ago. So what? Who cares? -- say many officials today. This isn't 2007. Things in China are different. Well, they're absolutely right. This isn't 2007. It is different. Two years ago, the main fear of China's monetary officials was that the easy lending environment would cause an unsustainable asset bubble. Their concern was justified, as new loans in China stood near their highest level in four years.

Flash ahead to 2009: New loans in China exploded off the charts to their highest level ever. See for yourself, as the November 2009 Asian Pacific Financial Forecast captures the credit-crazed scenario with this compelling picture (Elliott wave labels erased for this article):




And, as the November Asian-Pacific Financial Forecast reveals: In the first five months of 2009, one-fifth of the new loans issued in China went to stock market investment.

Now that's something to think about.

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Is Your Bank Safe? Click Here for This Free Complimentary 10-Page Report

Is Your Bank Safe?

More than 130 banks will have failed by the end of 2009. What if your bank fails? Did you know you could be left in the lurch for days, weeks, even months before you get your money back from the FDIC? What happens if the FDIC can't cover your funds? How do you find a safe bank to protect your deposits right now? Find answers to these questions and more in the original "Safe Banks" report from Elliott Wave International. Learn more and download your free report now..

Please read the following Bloomberg news item carefully. It has a direct impact on the safety of your money.

Sept. 24 (Bloomberg) -- In May, the FDIC said it was projecting $70 billion of losses during the next five years due to bank failures. The agency said it expects most of those collapses to occur in 2009 and 2010.

The FDIC’s problem is that it didn’t collect enough revenue over the years to cover today’s losses. The blame lies partly with Congress. Until the law was changed in 2006, the FDIC was barred from charging premiums to banks that it classified as well-capitalized and well-managed. Consequently, the vast majority of banks weren’t paying anything for deposit insurance.

Of course, we now know it means nothing when the FDIC or any other regulator labels a bank “well-capitalized.” Most banks that failed during this crisis were considered well-capitalized just before their failure.

By the end of 2009, more than 130 banks will have failed. Most depositors will have little clue their bank was even at risk. Worse yet, the string-pullers in Washington are doing everything in their power to hide information about the safety of your bank from you.

So far, the FDIC has had enough money to cover insured depositors. But that money is quickly running out.

Just last week, the FDIC voted to mandate early payment of insurance premiums to help cover at-risk banks. Here's what the Associated Press reported on Thursday, Nov. 12:

WASHINGTON (AP) -- U.S. banks will prepay about $45 billion in premiums to replenish a federal deposit insurance fund now in the red, under a plan adopted Thursday by federal regulators.

The Federal Deposit Insurance Corp. board voted to mandate the early payments of premiums for 2010 through 2012. Amid the struggling economy and rising loan defaults, 120 banks have failed so far this year, costing the insurance fund more than $28 billion.

Worse yet, three more banks failed the very next day, Friday, Nov. 13.

This is a very real problem and a direct threat to your money. It's more important now than ever to personally ensure the safety of your bank. The free 10-page "Safe Banks" report from our friends at Elliott Wave International can help.

Inside EWI's revealing free report, you'll discover:

* The 100 Safest U.S. Banks (2 for each state)

* Where your money goes after you make a deposit

* How your fractional-reserve bank works

* What risks you might be taking by relying on the FDIC's guarantee

Please protect your money. Download the free 10-page "Safe Banks" report now.

Learn more and click here to download the "Safe Banks" report.

The Market Week Ahead

Options expiration is coming up next week, and still many of not most traders are short the Dollar currently. If those Dollar shorts start to cover and or reverse for whatever reason, there should be more volatility coming into all the markets.

Most Important Economic Data Reports this Week

Monday: USA Advance Retail Sales

Wednesday: Bank of England Meeting Minutes, USA Consumer Price Index

Friday: Bank of Japan Interest Rate Decision

My Stock Pick This Week

Is a buy long position in the biggest producer of agriculture products in the world. Agriculture is one of my favorite sectors long term. I’m torn right now on making this buy long call on this stock, as I think that stocks and commodities are headed lower near term before going much higher long term. Nonetheless, this company has a lot of positives going for it fundamentally that I think might propel it higher at least long term, and hopefully near term. In case not, stick to stop-loss, and buy back in it later at lower prices.

Buy Long Potash – Ticker POT

Buy Entry: On Breakout of 104.85 to 107.67

Stop-Loss: 102.30

Take Profit Areas: 118.04 to 121.22, Hold Longer Term with Trailing Take Profit Stop-Loss

Potash Company Profile

Potash Corporation of Saskatchewan Inc. engages in the production and sale of fertilizers, and related industrial and feed products in North America. The company manufactures and sells solid and liquid phosphate fertilizers; animal feed supplements; and industrial acid, which is used in food products and industrial processes. It also produces nitrogen fertilizers, as well as nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate, and nitric acid. Potash Corporation’s primary customers for fertilizer products include retailers, dealers, cooperatives, distributors, and other fertilizer producers. In addition, the company produces potash from six mines in Saskatchewan and one mine in New Brunswick. It sells purified phosphoric acid directly to consumers of the product. The company was founded in 1953 and is based in Saskatoon, Canada.

Click here to review and trial the Trading Software we used in determining our buy long position on POT.

Click the Potash Stock Chart for a larger view.

Hyperinflation Worries Laid to Rest, Part I

Many pundits have attributed equity rallies off the March lows to global "fiscal stimulus" packages and “massive, swift action” on the part of central banks, the Federal Reserve first and foremost. Taking it a step further, many people who correctly forecasted the real estate and credit bust say that deficit spending, the Fed’s money printing and U.S. dollar weakness will create hyperinflation in the U.S.

Elliott Wave International's president Robert Prechter carefully laid out his case for deflation as a threat that would likely come before inflation as early as 2002 in his prescient Conquer the Crash (now in second edition). Still, the inflation/deflation argument rages on, and a reader asked recently me to discuss why we aren't worried about hyperinflation.

Let's go back to the June issue of EWI’s Global Market Perspective, where we showed how the situation in the U.S. situation is different from bouts with hyperinflation in Argentina, Mexico and Brazil. Although we continue to look for another deflationary collapse, it also seems reasonable to examine hyperinflation in another nation -- Zimbabwe -- in order to answer a few questions:

1. What really caused the hyperinflationary currency crisis in Zimbabwe?
2. What are the differences between Zimbabwe and the U.S.?
3. Can it happen in the U.S., and if so, what are the signs of its onset?

Zimbabwe’s involvement in the Second Congo War, which began in 1998 and killed 5.4 million people, caused its government to spend billions. Its problems began to spiral out of control shortly thereafter. Following the confiscation and redistribution of land, agricultural output declined by 51% from 2000-2007, which contributed to a rise in unemployment (recently at an unbelievably high 94%).

To undermine the internationally unpopular President, Robert Mugabe, the U.S. passed the "Zimbabwe Democracy and Economic Recovery Act of 2001." This law imposed sanctions and eventually led the International Monetary Fund and financial institutions to abandon Zimbabwe. That loss of the ability to borrow money was the main catalyst of the out-of-control money printing in Zimbabwe. After its 2001 default on IMF loans and suspension of IMF voting rights, the government printed money in an attempt to repay these loans and regain its access to credit. This action failed to turn the tide.

In order to keep the military loyal, Mugabe raised their salaries -- and again, the only way to pay for it was via the printing press. Certainly, Mugabe’s government could have slowed government expenditures after the loss of external creditors, but he would have lost control of the government due to political unrest.

What conditions did Zimbabwe citizens have to deal with? In mid-November 2008, Zimbabwe’s inflation rate hit 79,600,000,000%, which is the equivalent of prices doubling every 24 hours (see the chart below for year-by-year currency values).


To help alleviate this unprecedented hyperinflationary problem, in January 2009, the government legalized commercial foreign currency transactions, formerly a black-market practice. This official “dollarization” of Zimbabwe's economy occurred as conditions improved. Oddly, though, many items are still ridiculously expensive -- for example, a three-bedroom house in Harare goes for $450,000 USD, or baked beans at 50% over the UK price. This situation, however, is due to a supply shortage created by price controls and employment rules that make it difficult to hire or fire workers.

Click here for more information on Currency and Interest Rates Specialty Services

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How to Prepare Yourself for the 'Serious Event' Ahead

Critical junctures come in many forms, yet opportunity comes in only one: It allows you to anticipate and prepare for what's to come.

A timing strategy that dials in a precise turning point can earn you the greatest-possible gains (not to mention the respect of your peers). But pinning an otherwise winning strategy on the hopes of precise timing risks more than personal glory; it risks your entire opportunity.

[The week of Oct. 12, 2009], the Dow touched 10,000 and the S&P hit 1095, reaching the upper end of our range for a normal rally and fulfilling our original expectations from last March-April. With respect to targeting waves 1 and 2, the Wave Principle has been a consistent guide. An outsized rally, as EWT said in August, could run as high as Dow _____, which would mean about _____ in the S&P. … [Specific prices redacted for this publication.]

"Prediction is one thing, and taking prudent action is another. Trading strategy entails figuring out the best way to take advantage of the market’s probabilities." ~ Robert Prechter, October 2009 Theorist

The October 2009 Elliott Wave Theorist dives into the current juncture head first. It fully spells out our analysis of the critical juncture. It also delivers our recommendations for how to prepare your portfolio for what's to occur (before it happens).

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* 14 eye-opening charts across 10 analysis-packed pages for today's most critical markets: U.S. stocks, gold and the U.S. dollar.

* One chart you will NOT see elsewhere: It depicts a beautiful -- and telling -- fractal form in the past two years of market action.

* Mounting evidence from trusted technical indicators: sentiment, advance/decline ratio and volume.

* A decennial pattern in U.S. stocks that's held true for 10 of the past 11 decades.

* An informative and useful section titled "Devising Trading Strategies."

* Two and a half pages of gold analysis -- why lessons from the past likely provide ironies for the future.

* Poignant analysis for the U.S. dollar.

* And much more, including a rare opportunity for a good cause: You can dine with Robert Prechter.

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