Monday, February 28, 2011

'Global Credit Warfare': China Preparing for a Treasury Bond Sell-Off?

China may soon call time on Western quantitative easing. More worryingly, the language she is using is far from friendly.

In a report issued last month, the Dagong Global Credit Rating Company praises "emerging creditor countries" for preventing the collapse of "debtor economies" during the recent crisis, but stresses the "vulnerable position" of America, whose "excess issuance" of dollars has triggered a "global credit war" that "arouses all the countries in the world to take various credit resources as a financial weapon to safeguard the national interests."

Dagong blames QE for increasing exports of capital and raising international commodity prices, causing price and asset inflation in developing countries where, according to a cited World Bank estimate, net capital flows to stockmarkets soared by 42% and to bond markets by 30%.

Signalling that a US Treasury bond sell-off is a "financial weapon" that China may be prepared to use in its defense, Dagong notes that creditor nations stabilised the situation in 2010 not only by "continued buying" of treasury bonds but also because they "continued to hold" them.

China is by far the biggest holder of US Government debt - $891.6 billion at December 2010, according to the US Treasury. This is about the same as a year before, but ignores possible purchases via intermediary nations. In 2009, ex-Roubini associate and now NEC adviser Brad Setser plausibly argued that much of the British buying was on behalf of the Chinese.

This is all the more credible because of the UK government's own deep and long-standing financial troubles: Why would one near-bankrupt lend to another? In December 2010 the ostensible UK holding was $541.3 billion - triple the figure from 12 months earlier. Setser's January 2009 estimate was that taking US Treasuries and Agencies together, China controlled $1.425 trillion-worth.

The UK has since increased "its" stake in Treasuries by over $360 billion, though China appears to have been reducing its exposure to Agencies for some time, according to a July 2009 report from the Congressional Research Service:

Data from the Department of Treasury indicate that in recent months China has sought to reduce its holdings of LT U.S. agency debt, while increasing its holdings of short-term U.S. Treasury securities.

This shift from Agencies to Treasuries, and from long- to shorter-date debt, is itself a subtly troubling trend.

Total Chinese foreign exchange reserves - mostly denominated in dollars, one understands - were $2.45 trillion in June 2010 and the current figure may be over $2.8 trillion. The effect of currency depreciation on its foreign assets is massively expensive to the People's Republic, and it is little wonder that she should be reconsidering her investment - and musing on using her leverage to further other objectives.

Officially, China repudiates the notion of using its foreign exchange reserves as an "atomic weapon", but the use of an ostensibly unconnected agency to convey diplomatic messages would not be out of character. Founded in 1994, Dagong is based in Beijing, and in 2008 its chairman Guan Jianzhong received a "special government allowance" - not merely a monetary prize but a sign of governmental approval.

America still has the world's largest economy, but of developed nations it is also one of the most dependent on refinancing in 2011 - third in GDP terms (27.6%) after Japan and Iceland, and first in absolute terms.

As early as 2007, Brad Setser gave evidence about the US' economic vulnerability to foreign sovereign wealth funds, to the USCC. The US-China "Strategic Economic Dialogues" also began that year and one suspects that some home truths were being told even then. Now the noises are being made more publicly and discordantly, if still at one remove from official sources.

It is getting more serious, and Dagong is not hopeful:

The United States, as the biggest country involved in sovereign debt crisis around the world, will continue its quantitative easing policy when the country is in danger, and the world credit war will be escalated due to the overflow of US dollars.

Clearly we are still at the shot-across-the-bows stage, but we have come a long way from four years ago.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The Only Chart You Need To See To Understand Why The US Is Screwed

Here's the one chart you need to see to understand why the US is screwed.

This is the "income statement" of the United States in 2010. "Revenue" is on the left. "Expenses" are on the right.

Note a few things...

First, "Revenue" is tiny relative to "Expenses."

Second, most of the expense is entitlement programs, not defense, education, or any of the other line items that most budget crusaders normally howl about.

Third, as horrifying as these charts are, they don't even show the trends of these two pies: The "expense" pie is growing like gangbusters, driven by the explosive growth of the entitlement programs that no one in government even has the balls to talk about. "Revenue" is barely growing at all.

As we'll illustrate with more of Mary's charts next week, the US cannot grow its way out of this problem. It needs to cut spending, specifically entitlement spending. We hereby announce that we'll give a special gold star to the first "leader" with the guts to say that publicly.

Goldman Sachs Group Inc. GS Stock Analysis 2/26/11

The following is technical analysis on Goldman Sachs Group Inc (GS) stock for February 28, 2011

Goldman Sachs Group Inc GS Resistance, pivot & Support Levels - 02/28/2011

Resistance levels: $168.24, $167.20, $166.16

Pivot point: $164.84

Support levels:$163.80, $162.48, $161.44

Shares of Goldman Sachs Group are trading back over $165. Goldman Sachs does not have any major resistance until $175.50 area need to watch now. Goldman Sachs remains a strong buy below $162.Goldman Sachs is now a strong buy below $150.

FDIC Bank Closings

Rate Of Spread Between GBP And JPY Spec Bets Cut In Half, And Other Commitment Of Trader Observations

A week ago we highlighted the major inversion in the non-commercial spec bets between the GBP and the JPY, after the two had been trending with very close correlation for almost a year. This week, after GBP spec bets had hit the highest in over a year, on expectations that the BOE would commence a tightening regime (which we believe are unfounded and largely premature considering the worsening stagflation the UK finds itself in), GBP bets dropped by a the second largest amount in over a year, or by 16,563 contracts (only the 18,788 decline in February of 2010 was greater), to 36,009. And as we suggested last week, when we told readers to "note the surge in GBP bullish bets, and the plunge in JPY. Those willing to bet that the spec crowd is always one step behind the curve may be well advised to take the other side of the trade" this is indeed what is starting to happen: the drop in Yen specs was roughly half the GBP decline, at 9,198 to a total of -27,746. In other words the GBP-JPY convergence is starting to play out. Nonetheless with Yen specs at the lowest they have been since May of 2010, this is a level of concern.

GBP-JPY net non-commercial specs and trendlines:

All FX. Note the continuing destruction of the USD. The EUR and the USD continued to trade with a -1.000 correlation.

Next: grains and softs. Slight reduction in spec bets except in Cocoa, which have surged since the Ivory Coast violence.

And last, the distribution of spec bets along the Treasury curve. Most bullishness is in the belly, while the outlook for the 10 Year continues getting worse, and is now at the lowest since August 2010.

Top 12 Countries Most Likely To Go Belly Up

By Dian L. ChuRisk analysis firm Maplecroft just released its new fiscal risk index ranking of 163 countries. Europe trumps all other regions with 11 out of twelve courtiers rated as "extreme risk." However, quite surprisingly, only one PIIGS country--Italy which takes the top spot--is in the top 12.

The others include many big economies in Europe - Belgium (2), France (3), Sweden (4), Germany (5), Hungary (6), Denmark (7), Austria (8), United Kingdom (10), Finland (11) and Greece (12). Japan at No. 9 is the only other country not in Europe within the highest risk category (See map below).

Aging Demographics

While high national debt and public spending are two common denominators, the study finds it is the aging demographic that puts these countries at extreme fiscal risk. An aging population will place increasing pressure on public expenditure such as pension and health care, while a shrinking working-age population means less productivity and less tax revenues to support public spending and debt payments.

High Dependency Ratio

Aging population also means high dependency ratio, or the number of people 65 and older to every 100 people of traditional working ages. For example, according to Maplecroft, the dependency ratio in France is 1 to 47 (i.e. 47%), Germany at 59%, Italy with 62%, and Japan at the very top with 74%, while the ratio in UK is currently 25%, and is forecast to rise to 38% by 2050.

Low Senior Labor Participation Rate

Another problem within Europe is that it has the low labor participation rate in the 65+ age bracket. In fact, the labor market participation of age 65+ amongst the ‘extreme risk’ nations range from 1.4% in France, 7.71% in UK, to 11.7% in Sweden, vs. a 28% average across all countries ranked in the index.

Maplecroft cited pensions and discrimination as two examples that would push people away from the work force.

U.S. – High Fiscal Risk

Although the United States is not ranked among the "extreme fiscal risk," the nation is nevertheless classified as "high risk", along with Spain, another PIIGS country, Australia, Canada and Russia.

Let's take a look at the two metrics mentioned here.

The dependency ratio in the U.S. is 22 in 2010, but is projected to climb rapidly to 35 in 2030, according to the U.S. Census Bureau, mainly due to baby boomers moving up into the 65+ age bracket. The ratio then will rise more slowly to 37 in 2050.

The labor participation for age 65 and over in the U.S. is at 17.5 according to data at Bureau of Labor Statistics (BLS). This is better than most of the European countries, but below the overall average of 28%.

U.S. in Wave 2

Most people typically associate a country’s fiscal risk to its government’s monetary and fiscal policies, and Lehman Brothers has taught us that banking and housing crisis could push the entire world into the Great Recession.

While these are all definite risk factors, a highly productive labor force and relatively young population makeup tend to ensure more sustainable prosperity and better odds at climbing out of a hole.

The Maplecroft study concludes:

" high risk countries, it is increasingly likely that the private sector will be called upon to contribute in the form of pensions and private health care.... Without significant adjustments, such as raising taxes or reducing spending, countries risk going bankrupt."

So, while Europe is being forced to do all that amid sovereign debt crisis in the middle of widespread protests over raised pension age and austerity measures, the U.S. and other "high fiscal risk” countries seem be set up as the wave 2 of this global fiscal chain of events.

Leading Indicators of Revolt in the Middle East and Northern Africa: Corruption, Unemployment and Percentage of Household Money Spent on Food

What determines which Middle Eastern or North African (MENA) countries will face revolt?

On February 3rd, the Economist came up with a list of "vulnerable" countries based upon the amount of democracy, corruption and press freedom:


But the Economist index doesn't take unemployment into account unemployment.

As Alternet notes:
Arab Labour Organisation (ALO) figures show that Arab countries have among the highest unemployment rates in the world -- an average of 14.5 percent in fiscal year 2007/08 compared with the international average of 5.7 percent. The rates may even be higher if one accepts unofficial estimates.
Global risk specialist Mi2g notes:
There are a lot of “orphans” and most are young – 65 percent of the population of the Arab League is under the age of 30. Youth unemployment rates are exorbitantly high – as high as 75 percent in some countries like Algeria. While the informal economy provides partial compensation, this does not provide security; the Jasmine Revolution was triggered by the self-immolation of a young man, Mohamed Bouazizi, unemployed after police confiscated his wheelbarrow, used to make ends meet by selling fruits and vegetables.
On February 2nd, Nomura published a report written by Steven Cook of the Council on Foreign Relations, arguing that youth unemployment and underemployment - along with a large proportion of youth - are primary factors driving revolt in the Middle East:
In both Tunisia and Egypt factors were at play which are also to be found in other economies in the region, notably:–An autocratic and corrupt regime [and] A significant―youth bulge and related unemployment and under-employment....
In other words, when there alot of young, unemployed (or under-employed) people, they might revolt.

Here are statistics from Nomura showing the percentage of youth under 15 years old and median age in years in the Middle East and Northern Africa:

CountryPopulation Aged <15>
Median Age (2010)
Algeria 27.0% 26.2%
Egypt 32.1% 23.9%
Iran 23.8% 26.8%
Iraq 40.7% 19.3%
Jordan 34.0% 22.8%
Libya 30.1%26.2 %
Saudi Arabia32.0 %24.6%

On February 9th, the Economist came up with a revised index, which they call the "shoe thrower's index" (throwing one's shoes at someone is the ultimate sign of disrespect in the Arab world).

The index gives a 35% weighting for the share of the population that is under 25; 15% for the number of years the government has been in power; 15% for both corruption and lack of democracy as measured by existing indices; 10% for GDP per person; 5% for an index of censorship and 5% for the absolute number of people younger than 25: (more)

8 Stocks George Soros Is Buying

NEW YORK (Stockpickr) -- At Stockpickr, we track the 30 of the top holdings of a variety of high-profile investors, such as Warren Buffett and Carl Icahn. On the heels of the most-recent quarterly 13F filings with the SEC, we're drilling down into these portfolios to offer you the stock picks of some of the world's most famous and followed investors.

One of our most popular professional portfolios is that of George Soros' Soros Fund Management. Keeping in mind that Soros Fund Management conducts hundreds of transactions every quarter -- in the fourth quarter, for example, just positions initiated by Soros clocked in at more than 250 -- we thought we'd single out some of its recent top buys.

What follows is a closer look at eight of the 30 holdings that Stockpickr tracks in its George Soros portfolio. These stocks, including one brand-new buy, saw position increases in the most-recent quarter of 100% or more. They are organized here by increasing position size.

Related: 7 Stocks Leading the Market in 2011


Ford(F) comprises 0.6% of Soros' portfolio. The 2.6 million-share position is a 7,070.5% increase over the previous quarter.

Ford also shows up in the portfolios of Leon Cooperman's Omega Advisors, which maintained a 6 million-share position at 2.5% of the total portfolio, and Ken Heebner's Capital Growth Management, in a 41.6 million-share position that, at 10.3% of the total portfolio, is its largest holding.

Stock Overview: Ford Motor is a producer of cars and trucks. Its business is divided into two sectors: automotive and financial services. It has a market cap of $53.6 billion, a 1.9 short interest ratio and a P/E of 8.8.

Analyst Ratings: Of 14 analysts covering the stock, seven rate it a buy, six rate it a hold, and one rates it a sell. TheStreet Ratings has a C hold rating on the stock, earning it a spot on the top-rated automobile stocks list.

More on Ford: Ford is one of Goldman's 11 best consumer stocks for 2011, and according to Dirk van Dijk, chief equity strategist at Zacks, it's one of several stocks to ride an economic recovery. Comcast

Comcast(CMCSA) comprises 0.6% of Soros' portfolio. Soros Fund Management increased its position by 112.2% in the most-recent quarter to about 2 million shares.

Comcast also shows up in the portfolios of John Paulson's Paulson & Co., at 3% of the total, and Steven Cohen's SAC Capital, at 0.6% of the total.

Stock Overview: Comcast is a provider of cable services, offering a variety of entertainment, information and communications services to residential and commercial customers. It has a market of $53.1 billion and a 3.4 short interest ratio, it yields 1.8, and it trades at a P/E of 19.9.

Analyst Ratings: Of 25 analysts covering the stock, 15 rate it a buy, and 10 rate it a hold. TheStreet Ratings has an A- buy rating on the stock.


Citigroup(C) comprises 0.7% of Soros' portfolio. Soros Fund Management increased its position in the stock by 49.4% to 1.1 million shares in the most-recent quarter.

At 5.7% of the total portfolio, Citigroup is the top holding of Steve Mandel's Lone Pine Capital. The 145.1 million-share position is new as of the most-recent quarter. The stock also comprises 7.1% of Bruce Berkowitz's Fairholme Capital Management portfolio.

Stock Overview: Citigroup is engaged as a financial services holding company, whose businesses provide consumers, corporations, governments and institutions with a broad range of financial products and services. It has a market of $142.6 billion and a 0.7 short interest ratio, and it trades at a P/E of 14.

Analyst Ratings: Of 20 analysts covering the stock, 10 rate it a buy, eight rate it a hold, and two rate it a sell. TheStreet Ratings has a C- hold rating on the stock.

More on Citigroup: Citigroup showed up on a recent list of the 10 cheapest big U.S. bank stocks, and according to Lauren Tara LaCapra, it's one of 18 big banks that could see dividend increases. Goldman included the stocks as one of its seven best financial stocks for 2011. Wal-Mart Wal-Mart(WMT) comprises 0.7 of Soros' portfolio. The 938,400-share position is a 6,595.7% increase over the previous quarter.

Wal-Mart is also a top holding of Stockpickr's most popular portfolio, that of Warren Buffett, who owns 39 million shares. The stock comprises 4% of the total Berkshire Hathaway portfolio. The Bill and Melinda Gates Foundation Trust also likes Wal-Mart. It owns 9.8 million shares, for 3.5% of the total portfolio.

Stock Overview: Wal-Mart Stores operates Walmart discount stores, supercenters, Neighborhood Markets and Sam's Club locations in the U.S. It has a market of $197.3 billion and a 2.5 short interest ratio, it yields 2.2%, and it trades at a P/E of 13.8.

Analyst Ratings: Of 28 analysts covering the stock, 17 rate it a buy, and 11 rate it a hold. TheStreet Ratings has a B buy rating on the stock.

More on Wal-Mart: Wal-Mart showed up on a recent list of 16 Dow stocks selling at five-year discounts and according to Jake Lynch is one of the 10 cheapest Dow dividend stocks for 2011. Frank Byrt included it as one of four stocks that could get a boost from inflation.

Coca-Cola Enterprises

Coca-Cola Enterprises(CCE) comprises 0.8% of Soros' portfolio. He increased his position by 1,276.3% in the most-recent quarter, to 2.4 million shares.

Coca-Cola Enterprises also shows up as a holding of Michael Price at MFP Investors, at 1.5% of the total portfolio.

Stock Overview: Coca-Cola Enterprises markets, produces and distributes soft drinks to customers through license territories in 46 states in the U.S, the District of Columbia, the U.S. Virgin Islands and certain Caribbean islands and the 10 provinces of Canada. It has a market of about $9 billion and a 2.3 short interest ratio, it yields 1.8, and it trades at a P/E of 14.8.

Analyst Ratings: Of 13 analysts covering the stock, seven rate it a buy, and six rate it a hold. TheStreet Ratings has a B- buy rating on the stock, earning it a spot on the top-rated beverage stocks list. Best Buy

Best Buy(BBY) comprises 0.9% of Soros' portfolio. The 2.1 million-share position is a new one for the most-recent quarter.

Whitney Tilson at T2 Partners also initiated a new position in Best Buy in the most-recent quarter, which now comprises 0.4% of the total portfolio.

Stock Overview: Best Buy is a multinational retailer of consumer electronics, home office products, entertainment software, appliances and related services. It has a market of $13 billion and a 2.2 short interest ratio, it yields 1.8%, and it trades at a P/E of 9.9.

Analyst Ratings: Of 25 analysts covering the stock, 11 rate it a buy, and 14 rate it a hold. TheStreet Ratings has a B- buy rating on the stock.

More on Best Buy: Forester Value Fund manager Tom Forester selected Best Buy as one of his five best value stocks for 2011.


Dendreon(DNDN) comprises 1.9% of Soros' portfolio. The 4.2 million-share position is a 131.2% increase over the previous quarter. SAC Capital also boosted its position in Dendreon in the most-recent quarter, by 16.6% to 7.1 million shares.

Stock Overview: Dendreon is a biotechnology company focused on the discovery, development and commercialization of novel therapeutics that improve cancer treatment options for patients. It has a market cap of $4.9 billion and a 4.7 short interest ratio.

Analyst Ratings: Of 18 analysts covering the stock, 12 rate it a buy, five rate it a hold, and one rates it a sell. TheStreet Ratings has a D- sell rating on the stock. Delta Air Lines

Delta Air Lines(DAL) comprises 2.4% of Soros' portfolio. Soros Fund Management increased its position by 299.1% in the most-recent quarter, to 14.7 million shares.

Delta also shows up in the portfolio of Ronald Muhlenkamp at Muhlenkamp Fund in a new 1.7 million-share new position, comprising about 3% of the total portfolio.

Stock Overview: Delta Air Lines operates as an airline, providing scheduled air transportation for passengers and cargo throughout the United States and around the world. It has a market of $9.6 billion and a 0.9 short interest ratio, and it trades at a P/E of 16.4.

Analyst Ratings: Of 13 analysts covering the stock, 11 rate it a buy, and two rate it a hold. TheStreet Ratings has a C hold rating on the stock, earning it a spot on the top-rated airline industry stocks

To see these stocks in action, check out the 8 Top George Soros Buys portfolio. For Soros' top 30 holdings, visit the George Soros portfolio at Stockpickr.

US Economic Calendar for the Week

DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From
Feb 288:30 AMPersonal IncomeJan-0.3%0.3%0.4%-
Feb 288:30 AMPersonal SpendingJan-0.1%0.4%0.7%-
Feb 288:30 AMPCE Prices - CoreJan-0.1%0.1%0.0%-
Feb 289:45 AMChicago PMIFeb-62.067.568.8-
Feb 2810:00 AMPending Home SalesDec--1.5%-3.2%2.0%-
Mar 110:00 AMConstruction SpendingJan--1.0%-0.6%-2.5%-
Mar 110:00 AMISM IndexFeb-61.560.560.8-
Mar 13:00 PMAuto SalesMar-NANA3.95M-
Mar 13:00 PMTruck SalesMar-NANA5.64M-
Mar 27:00 AMMBA Mortgage Index02/25-NANA+13.2%-
Mar 27:30 AMChallenger Job CutsFeb-NANA-46.1%-
Mar 28:15 AMADP Employment ChangeFeb-160K163K187K-
Mar 210:30 AMCrude Inventories02/26-NANA0.822M-
Mar 22:00 PMFed's Beige BookMar-----
Mar 38:30 AMInitial Claims02/26-400K400K391K-
Mar 38:30 AMContinuing Claims02/19-3800K3800K3790K-
Mar 38:30 AMProductivity-Rev.Q4-2.4%2.3%2.6%-
Mar 38:30 AMUnit Labor Costs - RevisedQ4--0.6%-0.3%-0.6%-
Mar 310:00 AMISM ServicesFeb-
Mar 48:30 AMNonfarm PayrollsFeb-200K180K36K-
Mar 48:30 AMNofarm Private PayrollsFeb-NA185K50K-
Mar 48:30 AMNonfarm Private PayrollsFeb-220K193K50K-
Mar 48:30 AMUnemployment RateFeb-9.2%9.1%9.0%-
Mar 48:30 AMAverage WorkweekFeb-34.3%34.334.2-
Mar 48:30 AMHourly EarningsFeb-0.2%0.2%0.4%-
Mar 410:00 AMFactory OrdersJan-3.2%2.1%0.2%-