Today's News: China's Concern for U.S. Treasuries

By Markos N. Kaminis - Economy & Markets:

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What's the worst possible thing that could happen? If asked that question, I probably would have answered, China stops loaning us money. If GOD FORBID that ever happened and demand was not replaced by some other sovereign lender, interest rates for the long-term securities would rise in order to attract borrowers. This would prove extremely costly to the nation and our citizenry. Mitt Romney describes that scenario, rather presciently, as likely to prove destructive to vast stores of wealth and decimating to the American middle class. However, China needs us as much as we need them. We are interlocked as supplier/consumer, lender/borrower, polar opposites that keep all order. Still, one must wonder what would happen if there were a catalyst that tested America's reliability as a credit worthy borrower. China is diversifying its assets just in case.

China's Premier Raises Doubt for Treasuries!

At the close of this year's session of the National People's Congress in China, Chinese Premier Wen Jiabao held the event's traditional closing press conference. He unexpectedly raised concern when he answered a question traditionally left alone.

Premier Jiabao expressed concern about the United States, its largest debtor, and wondered aloud about the security of its large loan portfolio extended to the us in the form of U.S. Treasury Instruments. The scenario of U.S. credibility coming under question and its greatest financier considering other options, is one regularly brushed aside by most strategists. It's such a nightmarish scenario, we would rather not consider it. Even today, one talking head (sorry I did not get the name) said Wen's comments were fine and dandy, but he noted that China didn't really have many other options. I have to disagree, and will try to focus a later article to this very important topic.

This news, raising alarm for the future of American capital acquisition, has effectively killed this week's nascent bear market rally.

Economic Data Analysis

International Trade Report

The International Trade Report for January showed the trade deficit narrowed to $36 billion, from a revised 39.9 billion in December. As you can see via the chart here, both imports and exports declined, but the pace of import demand drift was simply greater. The ratio of the different rates was 1.5:1. The U.S. is a consumption state, and the change in this data during a period of broad recession illustrates that clearly. You can see the full report by clicking through to either Wall Street Greek or Market Moving News (above).

Import & Export Prices

February's Import and Export Price data reached the wire this morning in the pre-market. Import prices fell less than was expected, moving lower by 0.2%, versus an expected 0.8% drop. The decline compared against January's 1.1% tumble. Prices have fallen every month since July 2008, and prices last month were down a full 12.8% from the prior year mark. That set a record for 12-month import price decline, but the index was only launched in 1982.

The price action of imported goods were greatly driven by a bump up in petroleum prices in February. If we exclude the petroleum component, prices fell 0.6%, which matches against a comparable reading of -0.8% in January. Petroleum import prices actually rose 3.9% last month.

The drivers of import price decline were natural gas (seems like this should be similarly broken out, but it's not), chemicals (petrol-related good), metals, foods and beverages. Clearly, there was a broad energy and petroleum based impact that stretches beyond just oil prices.

Export prices fell just 0.1% month-to-month and 4.5% year-over-year. Agricultural prices fell 1.7%, but were partly offset by a 0.1% increase in non-ag prices. Export prices had increased 0.5% in January, but were steadily lower over the five months before that. Higher export prices were driven by a capital goods increase, which in turn was impacted by higher semiconductor pricing. Agricultural price decline has been great, as farm goods had previously seen bubbly pricing on the recent global growth and ethanol stimulants. Ag export prices have corrected 15.2% over the past year.

Reuters/University of Michigan Consumer Sentiment

This regular consumer sentiment metric posted a surprising, but not eye catching, uptick. The mid-March reading at 56.6, compared against the prior look at 56.3 and consensus expectations for 55.0. On the face of it, there's nothing to get too excited about, but directional change is something to get excited about. I'm referring to the uptick in the "expectations index," the forward looking component of this tool. It stopped evaporating toward hopelessness, and actually rose to 53.0. While the index is still not far off its record low, this month's rise seems clearly tied to the pace and effort of the Obama Administration, something the President addressed yesterday. Seems America appreciates it, and gosh I hope I have time to write about this soon.

International, Commodity and Currency Market News

G-20 Kicks Off

Remember all the world unity we saw just a short time back? Remember how together everybody was with regard to how to approach the global crisis, with swift and decisive action. Well, it seems that global unity, like a marriage, is having trouble coping with hard financial times.

When the G-20 convenes on Friday evening and through Saturday, the United States will push for the other 19 nations to ante up. Let's face it, the world isn't keeping up with us, especially those folks across the pond. Furthermore, we can't use that fancy watch and sports car their trying to throw into the pot instead of cash!

China's Wen, responding to foreign pressure to increase IMF support, said he would like to see his nation gain more influence commensurate with such giving. Wen also pointed out the contrast between the big words and light contributions of many nations. Japan is speaking up as well.

So how is Europe responding then? Well, the Europeans are vocal on "protectionism" and "regulation," where they would like to see the America they once admired reform a bit. But, we fear there's a bigger problem developing. I notice and note for you that the G-20 build up and recent failings of the union have exposed some cracks in the EU. We can clearly distinguish that it is a group composed of too many chiefs with too many agendas.

Swiss Secret is Out

Call me crazy, but this looks like a mistake to me! The Swiss have decided to play by the rules, adopting OECD standards on tax evasion. They will offer specific information to tax authorities in cases where convincing evidence is available. Clearly though, that is going to be somebody's opinion to form. The Swiss believe that not sharing information in this limited manner would effectively blacklist them at the OECD and maybe more organizations, and they expect that would threaten their banking system and economy. A great portion of the world's capital is hidden away in Swiss accounts for a reason though, anonymity. I would trade blacklisting to keep that, as it is the elite and exclusive stigma that attracts large depositors, and in some (read many) cases dirty money. I think the Swiss will see a loss of funds now, though many other once discrete banking options are lining up to play by the rules as well. From an idealist's and also honest man's perspective, and not a businessman's, I like the Swiss decision. I just think it's bad business is all, however ironic that may be.

Oil, OPEC and Non-OPEC

I refuse to give the OPEC-lip-service too much attention. OPEC regularly feigns action to keep oil prices lofty, plain and simply put. Poor suppliers have begun complaining about production cuts, and will only break the rules more often the more OPEC kingpins decide to restrict flow. So, I believe there is less truth behind the noise on the wire than there is bluff.

Corporate News Drivers

Blown American Axle

American Axle and Manufacturing Holdings (NYSE: AXL) reported some lousy news today (blew the axle). AXL's auditors did something auditors didn't use to do, back in the good old Enron and Worldcom days; they performed an honest audit. AXL's auditor included a "going concern" notice in their note, a.k.a. the kiss of death. However, considering that AXL's condition has been well understood for some time now, due to its dependence on General Motors (NYSE: GM), the stock was actually up 6.6% as I tapped the keys here today. Hold on though, 6.6% in AXL terms, means $0.05. Click here to see our article published today on American Axle.

Hybrid War

The auto sector kept busy today, as Toyota Motors (NYSE: TM) announced it would produce a cheaper hybrid vehicle to compete against Honda Motors' (NYSE: HMC) Insight model. Toyota's new car will have a smaller engine than the 1.5 liter Prius, and it will be available first in Japan in 2011. The price tag will be approximately $20,500. Toyota also expects to trim costs of production on the Prius, and to offer it for less as well. This is the impetus most folks need to try a hybrid, but better aesthetics would go a long way toward market penetration as well.

EPS Schedule

The day's earnings schedule includes A. C. Moore Arts & Crafts (Nasdaq: ACMR), AEP Industries (Nasdaq: AEPI), Allianz SE (NYSE: AZ), American Shared Hospital (AMEX: AMS), Bovie Medical (AMEX: BVX), Compass Diversified Holdings (Nasdaq: CODI), Core-Mark Holding (Nasdaq: CORE), CytRX (Nasdaq: CYTR), Discovery Laboratories (Nasdaq: DSCO), Eni SpA (NYSE: E), EV Energy Partners (Nasdaq: EVEP), Furmanite Corp. (NYSE: FRM), GeoMet (Nasdaq: GMET), Halozyme (Nasdaq: HALO), Hooper Holmes (AMEX: HH), Inhibitex (Nasdaq: INHX), Keryx Biopharmaceuticals (Nasdaq: KERX), NACCO Industries (NYSE: NC), NPS Pharmaceuticals (Nasdaq: NPSP), Nymox Pharmaceuticals (Nasdaq: NYMX), Piedmont Natural Gas (NYSE: PNY), Progenics Pharmaceuticals (Nasdaq: PGNX), Protection One (Nasdaq: PONE), Reis Inc. (Nasdaq: REIS), Sun Communities (NYSE: SUI), U.S. Gold (AMEX: UXG), Universal Insurance Holdings (AMEX: UVE) and Volt Information Sciences (NYSE: VOL).


Please see our disclosures at the Wall Street Greek website and author bio pages found there. (Article interests: AMEX: DIA, AMEX: SPY, Nasdaq: QQQQ, NYSE: NYX, AMEX: DOG, AMEX: SDS, AMEX: QLD, AMEX: XLF, AMEX: IWM, AMEX: TWM, AMEX: IWD, AMEX: SDK).