Today's Coffee - China's Shady Tactics

China trade talks are the most important topic again today, despite the market's hope to find another driver. It appears the only tangible result of the meeting between the delegations will be the opening of Chinese destinations to American airlines and the sharing of environmental technology. America benefits from both of these initiatives, as does the world, from a reduced pollutant contribution emanating from China's coal-fueled plants.

It looks as if the Democratically controlled Congress will not be satisfied by these minor achievements and recent Chinese fiscal policy decisions. I expect Congress will move to penalize China for copyright infringement and its impeding of a free trading currency. While China's yuan has appreciated against the dollar, most experts agree it remains significantly artificially restrained, leading to an unnatural contribution to trade imbalance.

Wall Street Greek agrees that China needs to play by the rules, but I would avoid a trade war. I think a better solution might be providing further incentive for American firms to do business in India and Eastern Europe, rather than China, to force China to play fairly. Nobody likes a cheater. Actually, Chinese investors do, as the CSI 300 Index climbed another 1.77% today. I do not see a catalyst strong enough to impact the heavy flow of capital from domestic sources in China, until Iran. I'm talking about the kind of catalyst that is capable of doing the damage Alan Greenspan spoke of today regarding Chinese equities.

Gunslinger
Somebody gave Jeffrey Lacker a microphone yesterday, and that's a sign that the guy has finally been recategorized from the insane inflation hawk box, to the concerned economic maven file. Lacker is the lone wolf from the Richmond Fed who has been aggressively pushing for interest rate hikes, while his colleagues have argued otherwise. The tone in which the mainstream media use to refer to him made him seem like gunslinging idiot out to make a name for himself. In the interview on CNBC yesterday, he didn't look so tough. He also spoke yesterday to a group at New York University and said he is comfortable for now with interest rate levels, but sees opportunity for Fed action in the not too distant future. At least that's how I interpretted it. Read for yourself.

Thanks for nothing nuclear man...
The International Atomic Energy Agency reported to the U.N. Security Council today that Iran has stepped up nuclear enrichment efforts and that it had blocked IAEA access to secret facilities. It's clear that the longer the world pursues a diplomatic solution, the closer Iran gets to making nuclear weapons. ElBaradei said that Iran already had the knowledge of enrichment, and the world should now focus on preventing Iran from moving to industrial scale production. It's anticipated that Iran could have 3,000 centrifuges in operation by June's end.

Meanwhile, the U.S. Navy sent nine vessels, which we believe include two carriers westward through the Strait of Hormuz and deeper into the Persian Gulf. The vessels are set to run exercises, but it seems the U.S. is making a show of force, and possibly even trying to entice Iran into a mistake. No advanced notice was issued to the Iranians of the activities, so some itchy trigger fingers are likely shaking. Brent crude broke $70 today, while WTI crude is up a half of a percentage point, to just above $65.

Today's Petroleum Status Report showed a 2 million barrel build of inventory stocks, while gasoline built by 1.5 million barrels. RBOB gas futures are down fractionally today as a result. Capacity utilization at refineries, the bottleneck that has driven gasoline prices so high, improved to 91.1%, up 1.6% percentage points. This should allow gas prices to moderate some, in my view, despite capacity utilization still slightly below normal for the season. However, I can't retain my short-term bearish view on oil with a face-off apparently in store now with Iran. I am neutral near term and still bullish long term, as I continue to expect war to occur sometime later this year or early next year. Please review my recent weekly article, in which I discuss in detail the catalysts I view capable of collapsing Chinese and global equities. My discussion includes the catalyst of war with Iran.

Below, please find all the articles from our "Key Headlines" sidebar:

Key Headlines:

CNN: China Seeks Patience in Trade Talks
CNBC: Day 1 for Chest Beating, Day 2 Deal?
Bloomberg: Yuan Flexibility, Catalyst for Collapse?
Bloomberg: Fed's Lacker Says Slowing Economy Not Enough to Stem Inflation
DOE: Petroleum Status Report
BBC: Security Council Gets Its IAEA Report on Iran
CNN: Carriers Exercising in Persian Gulf
Yahoo! Earnings Calendar
CNN Money: The Speed of Subprime Bust Shocks
CNBC: Weekly Mortgage Applications Rise
Bloomberg: Bank of England Raises Rates
Forbes: Alcan Had Other Plans
CNN Money: Target Bettering WalMart
CNBC: Iran, Inventory in Oil's Focus
CNN: Turks Attribute Ankara Bomb to Kurds
Yahoo!: White House Declassifies 2005 Bin Laden Order to Attack
Iran Daily: Tales from the Dark Side

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