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by John Dalt

4/20/11

The market is off to the races this morning.  The dollar is getting creamed. Crude oil is pushing higher, along with gold and silver.  All is well with the world.  Sleep tight, don’t worry.  INTC, YHOO and IBM all reported good earnings.  Just two days ago, you couldn’t find a buyer for stocks.  After S&P downgraded the outlook for U.S. debt, it was like ‘Can we leave on summer vacation early?”  Stocks fell across the board.

Today, everything is up.  Sure we had some good earnings reports, but this is schizophrenia writ large.  I am reminded of the comedy routine by Bird and Fortune a couple of years ago to explain the subprime mess.  We have a link to it under Diversions; Funny Pictures and Videos. at www.galtstock.com.  Taiwan’s China Post covered the S&P outlook downgrade by quoting Asian leaders affirming the ‘value’ of U.S. Treasuries.  Since most Asian countries run a surplus trade balance with the U.S., they hold large treasury positions.

China has been reducing U.S. treasuries for the last four months.  According to Reuters, net buys of long-term U.S. assets, excluding bills, fell to $26.9 billion in February, down from $51.1 billion in January.

Russia reduced their holdings of U.S. treasuries for the fourth month in a row.  Luckily, the Federal Reserve was present in the auctions to buy up the extra.  Alan Ruskin, global head of currency strategy at Deutsche Bank said, “None of the major components -- Treasuries, agencies, corporate and equities -- showed any inflow vigor, it does not paint a friendly picture for the dollar.”

While China is reducing their purchases, what do they do with the $1.1 trillion in U.S. debt they presently own?  Observers note China has been on a buying spree.  The Chinese government created the China Investment Corporation (CIC) to diversify away from just owning debt from countries.  This debt is a result of trade imbalances.  When China exports more to a country than they import, what do they do with the dollars?  Use them to buy assets, like U.S. Treasuries.  The Chinese Government along with the CIC has been busy buying hard assets in other countries.  How do they pay for their purchases?  U.S. dollars.

According to the Wall Street Journal, the CIC is looking for opportunities in Europe.  The Chinese are also active in S. America, Canada, Australia and other resource rich countries.  They are making “investments” in other countries with the dollars held from import/export imbalances to lock-up natural resources for the future.

According to Theodore Moran of the Peterson Institute for International Economics, “Chinese companies have been acquiring equity stakes in natural resource companies, extending loans to mining and petroleum investors, and writing long-term procurement contracts for oil and minerals. These activities have aroused concern that China might be "locking up" natural resource supplies, gaining "preferential access" to available output, and extending "control" over the world's extractive industries.”

President Obama should spend more time with our economy, and less time campaigning.  He is on a swing to California today for a Q & A on Facebook and a $35,800 per person fundraiser in Hollywood.  He will attend six fundraisers in California, and Nevada along with two townhall meetings.  After this, he will head back to Washington to meet with Republicans next week on the debt ceiling negotiations.

The market will be closed on Friday.  Tomorrow's volume will trail off as some traders will leave early for the long weekend.

The Mailbag:
Thanks for the promotion of Atlas Shrugged---paid up subscriber B.C.

John’s reply:  Elizabeth and I both enjoyed the movie.  I don't know if people that have not read the book will get the message as well as those that have.  I also don't know if it will make people that are liberal question some of their ideas about 'big government.'  I hope so.  Like Krugman; quoted below.

Quote:
Those tax cuts, rather than the spending binge, are the primary cause of the (federal) deficit. -Paul Krugman

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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