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Dallas, TX
January 13, 2010, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Watching The Fallout Of China's New Monetary Policy Trend
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What's Hot Today: |
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U.S. stock index futures are pointing to a higher opening
on Wednesday.
Today's Economic Calendar:
- MBA Purchase Applications 7:00 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- 10-Yr Note Auction 1:00 PM ET
- Beige Book 2:00 PM ET
- Treasury Budget 2:00 PM ET
News For Thought
China raises reserve requirements. China raised reserve requirements overnight,
its latest move within a week to cut back access to credit and to slow down its
growth rate and inflation. Global markets have yet to digest the news but Asian
markets fell.
Health care bill could have more hidden surprises. According to the New
York Times: "A group of House lawmakers and the head of the Federal Trade Commission
want Congress to include a provision in the health care legislation that they
say could save American consumers several billion dollars a year on prescription
drugs." And while it sounds good on the surface, there is more to it. The report
adds that "The group plans to ask Congress on Wednesday to block business deals
in which they say makers of name-brand drugs directly or indirectly pay generic
makers to delay competition from cheaper generic alternatives."
To be sure, this is a complex issue where cost is an important variable, but
so is the potential threat to innovation and new drug development as well as
job creation and job maintenance in the U.S. drug industry. According to the
report: "Generics account for only about 22 percent of prescription drug spending
in this country, although they represent nearly three-quarters of the prescriptions
written, according to the research firm IMS Health. That means 78 percent of
the nation’s drug bill goes toward the 25 percent of prescriptions written for
name-brand medicines."
Already within the last twelve months drug companies have laid off significant
numbers of sales representatives and other administrative personnel. This is
clearly a major new variable to keep an eye on in the health care bill, especially
from the point of view of those who work in the pharmaceuticals industry and
for investors.
One in eight Americans is on food stamps. According to Reuters: "Food
stamps are the primary federal anti-hunger program. It helps poor people buy
groceries. The economic stimulus package boosted benefits by $80 a month for
a family of four. Participation has surged since the financial-market turmoil
more than a year ago and has set a record each month since December 2008. The
Agriculture Department said enrollment reached 37.9 million in October, the latest
month for which figures are available, up 746,000 from the previous month."
The news is variable today, yet, the theme is visible. Many different things
are pulling people in different directions. That means that fragmentation and
self interest are likely to rise. In China, the markets, entrepeneurs and investors
are now starting to consider that maybe the party is over. That's new. That may
lead to significant amounts of volatility, even capital flight.
The health care bill continues to be a time bomb with its loopholes and hidden
agendas likely to provide surprises for a long time to come if it passes. And
in the U.S. the economic recovery remains patchy. In our opinion, trouble still
lies ahead.
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Watching The Fallout Of China's New Monetary Policy Trend
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How Long Before China's Changing Monetary Policy Has An Effect On The World?
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China, in a surprise move overnight, raised its bank reserve
requirements. The move effectively removes some $44 billion that would have been
available for lending. The sudden change in policy suggests that China's central
bank is trying to avoid an economic crash which could result from the increasingly
speculative frenzy in the country.
Contrary to the stimulus package in the U.S., China's foray into its economy
has actually led to growth. Growth that essentially put the previous boom into
overdrive. Now, the party days may be over, and what happens next is uncertain,
for China and for the global economy and the markets.
The move is seen as "symbolic," yet it is also being considered as a prelude
to higher interest rates in the country in the future. China has now joined Australia
as the second country to start tightening up after loosening policy in response
to the subprime mortgage crisis and the subsequent crash.
China's central bank did more than just raise reserve requirements, though. As
the Wall Street Journal points out: "Also on Tuesday, for the second time in
a week, the central bank raised the yield it pays on its short-term bills. That
makes the debt securities more attractive for banks to buy, a move designed to
siphon cash out of the financial system." That means that in the space of one
week, the central bank has made three tightening moves, which makes us wonder
is that's enough to consider this a triggering of the old "three steps and a
stumble" adage. Traditionally, Wall Street considers three tightening moves by
a central bank as a prelude to a stock market crash.
China is also facing other problems as its growth rates dwarfs most in the world.
According to The Journal: "While China's early recovery underpinned the global
economy, the country is facing the fallout from its success earlier than other
major economies. Recent news that China overtook Germany as the world's largest
exporter has sharpened calls for Beijing to lift the value of its currency, a
move that would make its exports more expensive. China also faces mounting protectionist
pressures."
Investors who want to consider making money if the Chinese stock market falters
could consider the Ultrashort FTSE/Xinhua China 25 Index (NYSE: FXP). This is
a leveraged ETF which moves at twice the underlying price change. That means
that it's not for everyone and that it may require frequent entry and exit in
order to minimize risk.
Chart Courtesy of StockCharts.com
Investors should also keep an eye on the currency markets. If China's monetary
policies lead to instability of the foreign currencies in the region, there could
be some significant consequences. In 1998, a run on the Thai Bhat led to a global
market meltdown.
Overnight, the dollar showed some weakness against the Euro and the British pound.
The Beige Book is out this afternoon and there is some housing data and the ten
year note auction today. There are also earnings out today, which could make
for another volatile day.
Conclusion
The times are changing. And what's most telling is that this time around, it's
not the U.S. that's leading the change, it's China.
That's not new. But it is more noticeable since we're talking about monetary
policy. The U.S. has been talking about changing monetary policy. But China has
made three moves in a week to actually change policy.
The world isn't exactly sure as to what to do. You can tell by the response overnight.
Asian markets took a dive, but U.S. futures and European markets were stable.
Bond markets rallied, and the dollar weakened. That's an interesting response,
given the fact that the U.S. dollar is often a safe haven. The moves weren't
that big in the currencies, though, which shows that there are still some traders
that are waiting to see what comes next.
There are several possibilities. The worse one, though, is that other countries
in Asia raise rates in order to defend their currencies. If that happens we could
have lots of volatility.
Otherwise, it looks as if it's a good idea to look at every position in our portfolios
and to consider whether they are working or not. What's not working should be
evaluated carefully.
What's the bottom line? As Sherlock Holmes would say: "the game's afoot."
Know when to sell and how to make money when the market falls. Get a detailed
trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Market Moves - Stock Of The Day
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Can The Currency Shares Euro Trust (NYSE: FXE) Be A Winner?
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The reversal
in China's monetary policy is having an unexpected effect
on the Currency Shares Euro Trust (NYSE: FXE)
Chart Courtesy of StockCharts.com
China has made three moves to reverse its aggressive monetary
policy within a week. Yet, instead of seeing money flow
into the U.S. dollar, the Euro is appreciating.
That suggests that China may be further diversifying its foreign currency reserves
away from the U.S. dollar, and it has some implications.
First, it suggests that China now has enough money and muscle to influence the
foreign exchange markets, both via policy and by trading.
Second, if the markets decide to go against the current trend, it could lead
to increasing market volatility.
In other words, we could be witnessing the beginning of a much bigger set of
circumstances here than meets the eye. What we're saying is that this is the
beginning of something that could both last a while and have some significant
repercussions.
Most alarming is that U.S. policy makers are too consumed with politics to see
that the rest of the world is starting to move away from the U.S. as the world's
economic and political leader and that it's because of the mismanagement of policy
from Washington that has taken place over the last several decades.
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