Wall Street Greek: Morning Report: Burning Dollar

(Stocks in this article: NYSE: GM, NYSE: SDS, NYSE: MAN, NYSE: TWX, NYSE: TM, Nasdaq: CSCO, Nasdaq: MSFT, NYSE: MTG, NYSE: RDN, NYSE: PMI, NYSE: TOT, NYSE: DVN, Amsterdam: TOM2.AS, NYSE: FLR, Nasdaq: GRMN)

Stock index futures are at unsettling levels this morning, indicating significant decline on concern for the U.S. dollar. Today in China, a high ranking and respected official declared that China would diversify its reserves out of weak currencies and into stronger ones, clearly a threat against its dollar holdings.

The Dollar Drop - Cheng Siwei, Vice Chairman of the National People's Congress stated that China would look to diversify its $1.5 trillion in reserves out of "weak currencies" and into stronger ones. This was appropriately inferred to mean the Chinese could be about to follow through on long rumored U.S. treasury security sales. Hank Paulson is going to have to get on the horn quickly on this one, and work to preserve the dollar. Sales of greenback could spur U.S. interest rates higher on inflation. The reason for this is because if China wants to unload a ton of U.S. debt and stop buying, yields on these securities will have to rise in order to compensate for the loss of demand. U.S. equities are thus reacting appropriately to this news. Now, Boris Schlossberg of DailyFX wisely notes that Mr. Siwei is not responsible for policy, however, we doubt he would speak off the cuff on such an important topic; he is very likely in the know.

Paulson is going to have to flex some muscle, or else, the Democrats in Congress will likely gain enough support to take action against China on its dangerous threat. A serious trade war is brewing, and considering the needs of the two countries, we think the topic is dangerous enough to inspire real war eventually. We understand the responsibility we bear in making a statement like that, but we speak our mind here. This news means our favorite long remains favored, the UltraShort S&P500 ProShares (NYSE: SDS), which seeks to counter the performance of the S&P 500 Index. It's a clear bear buy. I previously suggested investors look to Manpower (NYSE: MAN) for short short-term gain. I was wrong here, and suggest taking the loss if you own the stock. The outlook for equities is weak, and this economically sensitive stock is at risk despite the recently strong jobs report, and temporary employment data.

The dollar could get a bounce tomorrow, when the Bank of England and the European Central Bank both decide on rates and make statements. The economic outlook is weakening in Europe, as indicated by a cut to Germany's '08 growth forecast today. Both banks are widely expected to hold rates steady, supporting the dollar.

Petroleum's March to $100 - Today's inventory data could provide a frenzied crescendo buying spree in oil futures, taking the commodity to $100. If not for geopolitical stresses, I would say the petroleum market would top today, and advise selling your oil long positions today. However, this dip I anticipate in days to come may be short-lived also, as I expect Turkey to make a face saving military incursion into Iraq (see recent articles). That threatens to support oil in the near-term, but it should also be short-lived. Pakistan bears watching. Bhutto is aggressively stepping up the heat on Musharraf, and we expect she will be arrested soon. This could spur complete chaos in Pakistan, and President Musharraf has likely never had a less stable hold of his country. For this reason, I have to back off my general oil short recommendation for now. Best to be nimble in this volatile environment. My longer term feel is bearish based on fundamental reasons (see yesterday's article), but there's no reason to bear losses in the meantime.

General Motors Large Charge - GM took a non-cash charge and posted a $39 billion loss today. Its shares are down 5.5% in the pre-market. GM otherwise narrowed its losses, and should still benefit from its recent agreement with the UAW. While this charge was not previously discounted by the stock, it likely offers opportunity to enter GM sometime in the near term. GM executives claim these tax writeoff opportunities remain available in an economic sense, so today's discounting by the market looks to prove in error. Now, the important question remains, can GM's tough operating environment offset its operational improvement, thus impeding performance. I would nonetheless recommend buying GM today for long-term portfolios.