China, Cleverly Dumping US Dollars

FN: China is dumping dollars, but far more cleverly than you might think.

Immobilienblasen has noticed a rather curious tendency for China to overpay in "China Inc." Deal Premiums. What exactly is that all about?

Well, imagine you had a bunch of money... err... US dollars for example. You've also got a bunch more of these US dollars coming in daily. You don't believe they will hold their value. So you don't really want them. That is quite a problem.

The first trick is to get rid of them... without actually seeming to get rid of them. The second trick is to get rid of them in such as way as to not destroy their value.... yet.

The single best way to do this of course is to use your US dollars to buy hard assets. This looks "normal". It isn't nearly as obvious as "diversifying" your currency reserves. China is doing exactly that. The "China recovery" story is nothing of the sort. The Chinese demand for commodities is not a function of economic growth but rather a function of hoarding. There are Consequences to this Phantom Commodity Bull Market which will become apparent soon enough.

China has been buying into oil with size and at a premium. This has analysts puzzled:

"Sinopec’s offer is equivalent to $34 a barrel of proved reserves and $14 a barrel of proved and probable reserves. The African transaction average in 2007, when the average crude price is similar to current prices, was $14.40 a barrel for proved reserves and $9.90 for proved and probable reserves, respectively. On a proved basis, the 2007 average suggests $3.1 billion total value for the deal. Therefore, $7.2 billion implies a 135% premium."

But when it becomes obvious to investors the world over that a US dollar devaluation is the only possible way to manage the kind of debt burden the US has accumulated, those premiums will vanish instantly. Oil quoted in US dollars could easily make new highs beyond $147 in such a scenario. China will not only have safe guarded the wealth of its citizens by owning oil fields, but will also have increased the global political power of the country thru the acquisition these strategic assets.

While the US empire has stumbled and is desperately trying to avoid a faceplant, the Chinese have taken the opportunity to break out into a sprint. Even in a best case scenario where the US pulls off a miraculous recovery, valuable ground will have been lost and the global balance of power will never again be the same.

China Reiterates Call for New World Reserve Currency (Update4): "China’s central bank renewed its call for a new global currency and said the International Monetary Fund should manage more of members’ foreign-exchange reserves, triggering a decline in the U.S. dollar.

“To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” the People’s Bank of China said in its 2008 review released today. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said.

The restatement of Governor Zhou Xiaochuan’s proposal in March added to speculation that China will diversify its currency reserves, the world’s largest at more than $1.95 trillion. Chinese investors, the biggest foreign owners of U.S. Treasuries, reduced holdings by $4.4 billion in April to $763.5 billion after Premier Wen Jiabao expressed concern about the value of dollar assets. That reduction came a month after China boosted its holdings by $23.7 billion to a record.
“Zhou Xiaochuan sees the current international financial system is flawed, putting too much emphasis on the dollar as a reserve currency,” said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong.

President Barack Obama needs the support of China as the U.S. tries to spend its way out of recession. The Dollar Index that measures the currency’s performance against six trading partners fell as much as 0.8 percent to 79.779 at 1:11 p.m. in London. U.S. Treasuries were little changed with the 10-year yield at 3.53 percent."

World Trade, Baltic Dry and "Green Shoots"

FN: World trade has collapsed and shows little signs of recovery. Japan posted a 41% yoy drop in exports. The Baltic Dry Index (BDI) bounced quite a bit off the lows, but has now started to stall.

As more shipping capacity comes online (yeah they're still building like crazy) and demand continues to slide (yeah demand is still cliff diving) expect the BDI to curl over and plunge.

Box lines staring at $50bn revenue collapse: "TOP container lines could see $50bn or more wiped off their combined revenues this year as conditions continue to deteriorate, industry experts predict.

A new forecast from shipping analyst Alphaliner puts the anticipated drop in revenue from 2008 levels at $40bn-50bn.

This is broadly in line with Drewry Shipping’s projection of a $55bn collapse in revenue from last year’s income of $220bn, which will catapult the entire industry deep into the red.

Drewry said container lines would only be able to find savings of around $30bn, leaving a gap of $25bn, which will push the industry from a modest collective profit in 2008 to a massive deficit of around $20bn in 2009.

This is down from a very early projection Drewry prepared before first quarter results were published.

Alphaliner’s latest forecasts are also based on the performance of top lines in the first three months of the year, when income of those monitored plunged 35% as volumes collapsed by 20% and average freight rates declined 15%.

A survey of 11 of the top 20 lines that report a breakdown of their liner shipping results found that revenue in the January-March period shrank to $14.5bn from $22.4bn a year earlier.

The 11 lines surveyed account for 45% of total fleet capacity.

Of those 11, the two big Chinese lines, China Shipping and CoscoContainer Lines saw the biggest percentage decline, each suffering a drop in revenue of more than 50%.

World number one Maersk Line posted a 28% drop, the smallest reported. Other global carriers saw their revenue contract by about 33%-40%. Figures for Mediterranean Shipping Co, Evergreen and CMA CGM were not included.

Alphaliner noted that no region had been spared in the latest slump. Volumes were down in all parts of the world, leaving carriers unable to shift capacity from a weak trade lane to one faring better.

Furthermore, NOL’s latest results “suggest that there is still some way to go before any recovery is seen,” Alphaliner said.

Trade conditions continue to deteriorate. Drewry reported that average spot rates from Hong Kong to Los Angeles slid over the past week to $914 per loaded 40 ft container from $921 a week earlier and $2,043 in June 2008."

Value of Japan exports falls 41% year on year: "Japan's tentative export rebound faltered in May as shipments fell 41 per cent by value year on year amid a rising yen and continuing weakness in sales in key markets for the nation's electronics and cars.

While most economists believe the world's second largest economy is bottoming out after suffering its sharpest postwar slump, yesterday's trade statistics highlight the shallow roots of a recovery likely to remain highly reliant on external demand and debt-funded fiscal stimulus.

May's year-on-year decline outpaced the 39 per cent drop recorded in April. On a seasonally adjusted month-on-month basis, exports slid 0.3 per cent in May, after having risen in both March and April."

Don't Forget About GE

FN: General Electric (GE) is a name that hasn't come up much lately. But it should... and will.

Gone are the panic days when GE was hurtling towards zero. However, nothing much has changed. GE is still sitting on a credit bomb leveraged at least 30:1.

GE failed to reach the 200 day EMA (green line) on this short covering bounce, a definite sign of weakness. GE is now in the most bearish orientation possible, below the 20, 50 and 200 day EMA (blue, red and green lines). GE barely outperformed the broader markets on the bounce and has now reverted back to underperforming.

In a real "Green Shoots" scenario, GE with its gigantic global presence would surely be a bit more perky. Watch GE. They have a truly ridiculous exposure to both consumer and corporate credit.

In related news yesterday, credit card delinquencies blasted to a new record high of 10%. GE Money is the worlds largest store branded credit card issuer. Ouch.

US credit card chargeoffs break new record - Moody's: "The U.S. monthly credit card chargeoff rate surpassed 10 percent and hit a sixth straight record high in May, Moody's Investors Services said on Wednesday, as unemployment grew to a 26-year high.

The chargeoff rate index -- which measures credit card loans the banks do not expect to be repaid -- rose to 10.62 percent in May from 9.97 percent in April.

"We expect the chargeoff rate index to continue to rise in the coming months but at a slower pace, as it peaks at around 12 percent in the second quarter of 2010," Moody's senior vice president William Black said in a statement.

The Moody's index also showed delinquencies -- monthly payments more than 30 days late -- fell to 5.97 percent in May from 6.34 percent in April.

However, the agency said it was due to a seasonal trend, as consumers used tax refunds to pay back debts, and estimated delinquencies will resume their upward trend.

Credit card losses usually follow the trend of unemployment, which rose in May to 9.4 percent and is expected to peak over 10 percent by the end of 2009.

With credit card losses across the industry surpassing the 10 percent this year, loan losses in the industry could top $70 billion, according to analysts' estimates.

According to data released by credit card companies earlier this month, based on on the performance of loans that were securitized, defaults rose across the board in May, with a steep deterioration of Bank of America Corp's (BAC.N) lending portfolio.

American Express Co (AXP.N) -- the largest U.S. credit card company by sales volume -- and Citigroup Inc (C.N) -- the largest issuer of MasterCard branded credit cards -- also showed big credit card losses.

However, JPMorgan Chase and Co (JPM.N) -- the largest issuer of Visa branded credit cards --, Discover Financial Services (DFS.N), and Capital One Financial Corp (COF.N), showed better than expected default rates."

Selling Tails

FN: A negative close today would put the price below the 50 day EMA (red line). With NYA below the 20, 50 and 200 day EMAs, the markets would be vulnerable to follow thru to the downside next week.

Notice that as the sell off picked up steam, volume increased but volume actually decreased on any rally attempts. This suggests distribution, rather than accumulation.

Thursday's candle is also indicates selling pressure. The long wick is called a "selling tail". Supply came in an overwhelmed the bids, resulting in a close well off the highs.

If you look closely at the chart you can spot "selling tails" just before a trend change from up to down or actually marking the trend change.

Transports Diverge Update1

FN: Compare the two charts. The first is from 06/15/09 and the second from 06/22/09.

From the original post Transports Diverge:

"TRAN was down on Friday when the broader markets "broke out higher" intraday.

TRAN didn't even bother to try. This kind of divergence should not be ignored."

It wasn't just the transports... there were many other warning signs as well. The financials for example had already rolled over and the Charts Say "Decision Time" Update2.

Second Major Distribution Day, Support Smashed

Prices couldn't stay above the 200 day EMA (green line) for long... and broke through the 20 day EMA (blue line) that acted as support off the March lows. On Friday, NYA failed at the 20 day EMA pounded straight thru the rising 50 day EMA (red line) today. This is not good for the "Green Shoots" crowd.

June 15th and June 22nd mark the first cluster of "Major Distribution Days" in a while.

The trend has definitely changed from 'bounce' to down.

Russia: The First Bear of 2009

FN: The first "Bear Markets" for 2009... oh what fun this will be as one after another the squeeze runs out of steam and the gravity of reality re-asserts itself.

Russia Stocks Fall 20% in World’s First Bear Market Since March: "Russia’s Micex Index tumbled more than 20 percent from its 2009 peak, becoming the world’s first benchmark equity index to enter a bear market since global stocks began rallying in March.

The index of ruble-denominated shares slid 7.8 percent to 937.98 as of 6:46 p.m. in Moscow, bringing its decline since June 1 to 22 percent. The 30-company gauge led a worldwide retreat in stocks this month on concern the global recession will persist for longer than investors anticipated."

FN: Just how ridiculous was the rally? Well, ridiculous enough to rally back to January 2007 VALUATION levels. Talk about discounting a "V" shaped recovery! How does taking Russian equities to pre-crisis, credit bubble valuation levels during these uncertain, volatile times make any sense at all?

"The Micex, which rallied as much as 135 percent since October, is tumbling this month after reaching the most expensive level relative to profit estimates since January 2007, according to data compiled by Bloomberg. Russia’s economy may shrink 7.5 percent this year as industrial production collapses, unemployment rises and investors pull capital from the world’s largest energy exporter, the World Bank said today. That compares with the Washington-based lender’s forecast for a 2.9 percent contraction in the global economy."

FN: The RTSI dropped below all moving averages, 20, 50 and 200 day and there is no real support until about 800.

Bear Market Rally Over

FN: This Bear Market Rally is definitely over, 67.8% of stocks are trading above their 50 day simple moving averages... after staying above 80% for an almost ridiculous amount of time.

The NYA50R could easily drop down to as low as 15% before becoming oversold. That could put equities pretty close to the previous S&P 500 (SPX) low of 666.

When there is a large gap between NYSE Issues Advancing (NYADV) and NYSE Up Volume (NYUPV), especially after a rally, look out below. This is a breadth indicator and the gap reveals that even as prices rose (advancing issue) it was on less and less volume (volume advancing).

In Running out of Volume I wrote: "Primary Market Total Volume (NYTV) is generally declining, even as the market rallies. The volume decline has now really started to accelerate. It would appear that the market is now rising on fumes... an example of which would be yesterday's late day jam job. These are done on low volume and are all about fixing a closing price."

As the market rolled over, backing away from the 950 area high prints on the S&P 500 (SPX) volume has spiked, increasing the odds that this is more than just a 'consolidation' or 'pause' before another leg higher. Declining volume on the way up and increasing volume on the way down is the very definition of distribution.