Government Actions
Research for Online Investors

by John Dalt

4/05/11

This morning, China’s Central bank bumped interest rates for the fourth time in the last six months.  U.S. House Budget Committee Chairman Rep. Paul Ryan unveiled his budget blueprint for 2012.  Senate Leader Harry Reid and House Speaker John Boehner went to the White House this morning to meet with the President on this year’s budget.  The U.S. faces a government shutdown on Saturday if an agreement is not reached.  Dueling press conferences afterwards tells us the probability of a shutdown increased.

China raised interest rates one-fourth of one percent to 3.25% on deposits and 6.31% on loans effective tomorrow.  Analysts believe rates were raised because inflation is heating up. This rate action follows an increase in bank reserves two weeks ago.  Chinese banks are now required to keep 20% of their capital in reserve. The government reports March consumer prices on April 15th.  Analysts expect prices rose 5.1% in March.  This rate matches last November's, which means past rate hikes have not slowed price escalation.  January and February came in at 4.9%.  The government has set a target of 4% for 2011.  Analyst Allan von Mehren at Danske Bank believes the government will increase rates at least another one-half of one percent in the next year.

Reuter’s reports that Proctor & Gamble (PG) and Unilever (UL) planned to raise Chinese prices 15% this month, but Unilever postponed their increases after being contacted by government authorities.  The Chinese Central Bank pulled $46 billion dollars out of the economy in March in open market operations.  The European Central Bank (ECB) is expected to raise their key interest rate to 1.25% on Thursday.

Rep. Ryan appeared on CNBC early this morning to talk about the GOP Budget proposal that was unveiled today.  He wrote an article in the Wall Street Journal, explaining the importance of cutting the Federal budget going forward.  The CNBC commentators asked him if he was giving fuel to democrats to use against him and the republicans.  He said in the past that was true but that he thought the citizens deserved an honest discussion and information on the budget priorities and the dangerous situation the country is in.  If democrats use it against him, he said “shame on them.”

He calls the budget proposal The Path to Prosperity, as it will cut $6.2 trillion from spending in the President’s budget over the next ten budget years.  Ryan criticized President Obama for not leading on the issue.  The President’s budget would triple the national debt by 2021, while imposing $1.5 trillion in new taxes.  Spending under the President’s budget would never fall below 23% of Gross Domestic Product (GDP).

The Heritage Center of Data Analysis projects that Ryan’s budget would result in one million new private-sector jobs in 2012, and bring unemployment down to 4% by 2015.  Reducing the size of government would also spur economic growth with a $1.5 trillion increase in GDP over the next ten years.  Heritage’s analysis of the budget shows $1.1 trillion in higher wages due to this economic expansion.  The budget also calls for lower income tax rates on individuals and business.

You can read the Wall Street Journal article, with some detail of the budget proposal by Rep. Ryan.  There is also a seven minute video embedded in the article with comments on the budget by Steve Moore.

The irony in today’s article is not lost on your editor.  While the U.S. government, and Federal Reserve, is pumping money into the economy trying to inflate it, the Chinese are raising interest rates to slow their economy down.  An earthquake on the east coast could be attributed to our founding fathers rolling over in their graves.

The mailbag:
When the cost of our covered call option has increased a great deal on a great position such as our MCP and the price of the stock has gone from $45 to $65, why don't we buy our 'in the money' call back and sell another call option covering the $65 value and let it keep running?-Buy, Sell, Hold subscriber G.C.

John’s reply:  We have a guaranteed lock 10% gain in a week and a half, if we buy back and rollup to a May $65 we have increased our net cost in the stock.  We could get a greater return, but certainly not a locked in profit when the stock is trading at 52-week highs.  I would rather take the “bird in hand rather than two in the bush.”  I love taking gains out of the market, and reinvesting in a new attractive position.  We don’t want to be ‘married’ to any stock.  We are just ‘courting’ them, so to speak!

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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