Thursday, July 21, 2005

China Sets the Stage

The market had a bit of a shock this morning as China announced it was finally revaluing its currency the yuan, or renminbi. The market initially thought this was a great thing until the announcement of another London bombing. Then the media picked that up as we watched the futures drop. The news out of China is something we have mentioned several times because of the hard shot it is against the US Dollar, implying all sorts of things.

Generally these things take quite a while to filter through the financial system, although not always because currency revaluations by the market can be swift; but, we think this is significant news and plays into our continuing belief that the stock market is going to be a casualty of the inevitable unwinding of the huge credit expansion.

The first thing that came to my mind on the subject when hearing the news was that we buy a lot of goods from China and, guess what, the price just went up. That is called inflation. And, the bond market kind of "got it" today as it traded down rather hard, meaning interest rates moved up. We have "pegged" (I had to) our turning point in the credit expansion to the June jobs report day when the bond market had its big reversal and tonight that date is looking better and better.

The second thing is "What does that imply for the economy?" We come back to the almighty ATM that many people live in--oh, yes, their houses--which have allowed them to spend more than they earn to buy those goods from China. You never know what is going to push the housing market over, but whenever it rolls over, the economy will follow suit.

I know you've probably heard about this news since it was out all day long today but it is something to take seriously. Even though it may not bring immediate reactions either in the stock market or the economy, this news has the potential to affect many areas of the global economy.

The Chinese have just given a little shove to push the dollar aside and give more credibility to other currencies when valuing their own. The Asians are the ones who have been supporting the US Debt binge, both private and public debt. Again I can't stress enough the importance of this news today. We'll continue to watch the bond market to see what it thinks of this development in the near term. Today, it viewed it as negative.

The other news is earnings news and the big one tonight was GOOG, one of the stocks on our watch list for shorting opportunities. GOOG has pushed above the $300 mark and the new targets have been raised to $350. Well, tonight it disappointed the market with its earnings news, which really wasn't too bad, and dropped about 6% after hours. This could have an influence on the market on Friday so that is also something to watch.

The stock market looks very tired of rallying. Be careful here.

Meanwhile, the precious metals are again mounting an unnoticed rally since we mentioned them as buying opportunities over the past week. They were some of the beneficiaries of the yuan revalution news due to the implications on the dollar. The last two days have been pretty good but there needs to be a strong up move fairly soon to confirm our bullishness in this sector. Friday we get another installment of the commitment of traders and those numbers have recently improved so we will see if they can improve again this week. Unfortunately, they are measured on Tuesday evening which was before the move of the last two days.

Have a good weekend and we'll see you back here late Sunday evening.

Dow Industrials: 10,627.77 -61.38
BGEIX: 11.15

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