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Navarro's Broad Market Outlook: The Bamboozled Curtain
The Chinese have made three changes to their yuan policy. First, they have raised the value of the yuan by 2% vis-à-vis the U.S. dollar from its previous peg of 8.28 yuan to 8.11 yuan. Second, the yuan's value going forward will be managed against a basket of currencies. The Chinese have not stipulated what currencies are in the basket or their weights. Third, the yuan's value will be set each evening after the close in trading in reference to the dollar. During the next trading day, the yuan's value will be permitted to fluctuate within 0.3% of where it was set the night before.
In principle, the yuan could appreciate by 6% per month if it were permitted to rise each day by the 0.3% limit. In practice, it will appreciate by only as much as allowed by Chinese authorities through their foreign exchange interventions.
Economy.com
The American media pretty much got bamboozled by the China yuan story. Strip away the rhetoric, and the proposed phased-in revaluation will move at the pace of a glacier and likely take years for the yuan to actually catch up to where it should be – a proverbial moving target. And if the Chinese DO allow a faster float to full value, it will only be so they will have a stronger currency to buy up U.S. assets. In the meantime, the U.S. will continue to suffer from a severe cost disadvantage, forcing more offshoring of American production.
Meanwhile, the summer rally continues amid very good earnings reports and a pattern of economic data that remains encouraging. Enjoy it while it lasts and trade (carefully) with the trend.
Lots of reports this week, including a first look at 2nd quarter GDP, which could rock the markets one way or the other. But earnings will continue to be the big story until further notice.
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Portfolio Musings: Penny Ante Stuff
I begrudgingly closed my positions in GERN and ASTM with a nice in the green result. Will keep an eye on both but each seemed to be weakening a bit and I hate to give money back to the house.
ARTX, NTOP, PDYN, TRPH, TMTA all have maintained decent technicals, with only TRPH showing a little waffle while VION continues to gather steam. Added a small stake in VWPT on a technical trade and promptly dropped a couple of dimes on this penny stock. Will bail if it doesn't right itself this week.
CHIR is my summer pox. More bad news last week in what has been a steady stream. Stuck in an option position where bailing makes no sense – particularly since I've got until 2007 to recover.
I've doubled down on my two losers ARDI and ZILA and both now are very solid technical longs. The key litmus test for both will be earnings but the risk reward at the current price is very good. Either or both could be piggie time, with good upward moves with any good news at all.
Hedging Your Bets With Matt Davio: S&P History Lesson
"May you live in interesting times . . . "
A Chinese Curse
Yesterday's announcement of the de-pegging of the Yuan to the US dollar had an immediate impact: Bonds across the yield curve all rose about 10 basis points. This led Barry Ritholz to quip:
"The Real Estate Complex has been the most robust segment of the U.S. economy. If the Chinese can succeed (where the Fed failed) in raising U.S. long rates, the strongest part of the US economy is at risk. While we know real estate had to slow eventually, the question is how fast will it occur, and how dramatically."
That's my key takeaway from this entire yuan issue. Why? Because I doubt it will impact exports much -- given that the massive wage disparities and cost structure differentials are so significant, a 2% (or even a 12%) currency change won't amount to a whole lot, relative to imports.
The position I've staked out (vis-a-vis Real Estate and the Economy) is decidedly in the minority. It is simply that:
1) Real Estate is a very different type of asset than stocks
2) Housing is not a bubble -- rather, it is an extended asset class -- and therefore is vulnerable to a 25-35% retracement, as opposed to a Nasdaq like 80% crash; (which would seem like a crash to anyone who bought at the top)
3) The rest of the economy is mediocre; Back out Housing Related activity, and there's not a whole lot of
there, there.
So the currency shift, and its resultant impact on driving up long bond rates plays very much into this theme of "trouble in housing city." Just consider the Yuan depegging in light of the increasing number of "exotic" mortgages: 30-Year Fixed mortgages are down to just over 40% from ~70% of all mortgages; Adjustable mortgages, up from under 10% to over 40%; Interest only mortgages, up to 20% -- from 0 in 2001.
By the way, it's just plain stupid to take an adjustable rate mortgage when rates are at half century lows. As for interest only mortgage holders, they don't really own their homes -- they are more like renters with an option to buy. Hey, that's the free market -- people are free to be as dumb or as speculative as they want to be.
Where it becomes a macro-concern is that all these loans get sold, securitized and packaged, courtesy of Fannie Mae and Freddie Mac. If we see a big wave of defaults from the adjustable and interest only crowd, that could have deep and far reaching ramifications on the country's capital markets.
Last take: Did anyone see Cramer on MadMoney Wednesday night with Attorney General Spitzer and a frothy live audience? It truly felt like Cramer was the son of Tony Robbins and Jerry Springer on Market Crack. Truly scary.
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