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Trades: Retreat

I've been forced to retreat from two of my short equity trades with hefty losses.

Sell 10% position in EDZ @ $28.22, -25.52%.
Buy to cover 10% short position in SPY @ $114.70, -11.04%.


Two things prompted these trades. First was the technical situation, as the S&P 500 (NYSEARCA:SPY) confirmed its breakout above resistance of 1,130 today with a huge 2% gain. EEM (MSCI emerging market index etf), the underlying index for EDZ (ultrashort EEM), hit new yearly highs today. Although these indexes look overbought, I just don't feel like taking any more losses on them.

The news today, however, is what really prompted these trades. Although Yahoo! Finance made the early claim that the durable goods report was responsible for the jump in equity prices, I don't believe that at all. the real news today came out of Congress as China Bill Heads for House Vote With Panel Approval. This bill would let companies petition the Commerce Department for import duties on Chinese products. Although the bill took some slight watering down to gain Republican backing, it could go for a vote before the house as early as next week. An "I got tough on China" vote is just what congressmen up for re-election need for their campaign speeches. This bill is clearly the work of Treasury Secretary Tim Geithner, and was set up nicely by President Obama yesterday at a U.N. meeting with the Chinese premier.  

This news shows that the U.S. government has reached the limit of its patience with China regarding trade. Geithner has sold his dollar devaluation scheme to lower unemployment to Congress on the basis of the latter benefit. But the unmistakable consequence of trade tariffs cannot be other than a devaluation of the U.S. dollar. Combined with the possibility of lower foreign competition, it is no surprise that equities are in rally mode. Unfortunately, I feel like I should have been able to anticipate the effect of this, at least on equities.

Long-term Treasuries also sold off today, as a devaluation of the dollar is not good for them either. I will most likely sell my Treasuries on Monday.

Disclosure: long 30-yr Treasuries