Friday, July 10, 2009

China Exports, Fed Investigation Fuel US Stock Sell-Off

News from the People's Republic of China (the most Westernized Communist nation ever) that imports rose 13.2% while exports fell 21.4% in June underscored the sheer depth of worldwide trade contraction (a better word than depression, but along the same meaning). In the prior month, China's trade balance fell to a paltry $8.25 billion, a far cry from the enormous trade surplus during the mid-2000s.

Since the US economy has contracted at an alarming rate over the past year, China has suffered the consequences of being too-highly dependent upon one major trading partner. For its part, the Chinese will likely devote heavy sums of its manpower and money to infrastructure development and strengthening the domestic economy over the next two to three years, areas ripe for growth.

Compared to the US, China can outspend America for years on building new bridges, buildings, rail and highways, and not bat an economic eyelash, most of its development financed by domestic banks. To the contrary, the US has to borrow its way back to "prosperity" and doesn't have nearly the real need for new infrastructure the Chinese do, though repairing much of the existing stock is a tall order.

In the end, somewhere around 2013, China will rival the United States as the dominant economic power in the world, and they'll have done so without firing a shot - although waging a military war with the Chinese is surely a last-gasp scenario in secret DC boardrooms.

There's little doubt that China is the ascendant power of the 21st century, just as America was the powerhouse in the century prior. Now that we have shipped our manufacturing over to mainland China, there's no chance of retaining our dominant position. It will not happen overnight, or suddenly, but slowly and less painfully for US interests, but betting on America's future is a fool's gambit. Our economy is shrinking while our debt enlarges. It is a recipe for catastrophe and the winner will be China.

Also of note on the final day of the week is the call by 3 Democrat and 14 Republican House members for the Obama administration to investigate the Federal Reserve over its role in the Bank of America/Merrill Lynch merger. While the House members' move sounds interesting and potentially a blockbuster, it's more than likely nothing more than bluster and grandstanding. The Administration is not going to peer too deeply or with any grand degree of rigor into the activities of its own operatives. While there's little doubt Henry Paulson and Ben Bernanke pressured BofA to do the deal and save Merrill from bankruptcy - which would have triggered more financial fallout and stock losses - nobody in the world is going to get anyone from Treasury or the Fed to 'fess up to that dirty deed.

The news did send some shockwaves across the market, however, as stocks continued to reel for a fourth straight week. On the Dow, the 8146 finish was the lowest since April 28 and a loss of 134 points on the week. All of the major indices except the NASDAQ opened on the negative side of the ledger and stayed there throughout the session. While NASDAQ finally finished in the green, damage was limited by a late-day short-covering rally on extremely low volume.

Nine of 12 sectors were lower, with Transportation, Consumer Cyclicals and Technology the only winners.

Dow 8,146.52, -36.65 (0.45%)
Nasdaq 1,756.03, +3.48 (0.20%)
S&P 500 879.13, -3.55 (0.40%)
NYSE Composite 5,627.52, -39.85 (0.70%)

Declining issues outweighed gainers, 3227-3021, but new lows continued to dominate new highs, 99-23, on the day. Volume again was anemic, appearing to be the lowest single-day number of shares traded since the first trading day of the year, January 2.

NYSE Volume 922,061,000
NASDAQ Volume 1,673,932,000

Crude oil for August delivery closed down 52 cents, passing the psychological $60 mark, at $59.89. Gold dipped $3.70, to $912.50, with silver down 29 cents to $12.65. If one is seeking a gauge for deflation, there's likely no better place to look than to commodities, a leading indicator. They have taken some time to fully commit, but there are indications aplenty that raw material prices have fallen and are staying down. Lack of demand will continue to erode raw material prices now that China has eased up on some of its buying. If there was a time to sell commodities - especially metals and energy - it was over the last two weeks. The stampede for the exits may only be beginning.

Looking ahead to next week, which will be chock-full of earnings reports, the banking sector may predominate, as Goldman Sachs (GS), JP Morgan Chase (JPM), Citigroup (C), and Bank of America (BAC) will all issue 2nd quarter results.

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