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Taking Protection From Protectionism


Some US equity market investors were equally astute yesterday, by "taking protection, against protectionism."


I'll start with a spotlight on comments made today by US President Bush on China, during his Rose Garden press conference:

"They need to eat US beef. It's good for them. They'll like it."

They'll like it???

Does Bush think he is talking to children?

US pompousness has hit a new record high.

So too has the buffoonery. It has almost reached a point of… embarrassment.

Indeed, sitting here in my office I did a major 'double-take' when I heard this comment on the television. President Bush comes off less 'Presidential' in making such comments. He looks more like the old lady in the Wendy's commercials of the 1980's, where the woman asks the clerk at the generic fast-food burger place, "Hey, where's the beef?" as she opens a burger containing a TINY beef patty.

Earlier this week there was commentary from US Democratic Senator Charles Schumer, Senate Banking Committee Chairman Chris Dodd, and ranking Republic Senator Richard Shelby, along with USTR Special Envoy Alan Holmer, all sounding very… 'protectionist.' Indeed, Schumer talked of "strong WTO legislation," while Shelby and Dodd spoke of "legislative options." Today I note comments made yesterday by Senate Majority Leader Harry Reid following his one-on-one meeting with Chinese Vice Premier Wu Yi:

If China and the Bush Administration won't take action to bring about more balance, there is growing sentiment in Congress to act. US politicians are prepared, if not eager, to act, in a 'protectionist' way."

From Chinese Vice Premier Wu Yi:

"China's exchange rate reform will be advanced in an orderly way, based on the principles of self-initiative, controllability and gradualism. I urge Washington to contain protectionism that is increasing day by day."

Following my Macro-China-US 'presentation' at the New York Mercantile Exchange on Wednesday, a 'delegate' from SINOPEC, the Chinese energybehemoth, approached me and asked:

"What do you feel is a reasonable rate for dollar-yuan?"

Indeed, great question, and one with no answer forthcoming. For me, it is not the 'level' of the USD-CNY, but rather the pace of dollar depreciation, and how the CNY is trading relative to the rest of Asia, Malaysia, the Philippines, and Korea in particular.

My firm's presentation focused on this exact point, with several 'rates-of-change' utilized. The two-Year rate of USD depreciation (Chinese Yuan appreciation) is (-)7.5%, a 'level' of change in line with mid-points used in the widest of ERM bands.

Even more 'telling' is the fact that the 200-Day rate has just exceeded (-)4% for the first time since the 'yuan-peg' was abandoned, surpassing the (-)3.5% rate seen immediately after the spring-2006 'de-pegging.'

The point: the Chinese currency is appreciating, and at a reasonable rate.

Subsequently, in reply to the question, the Chinese are being reasonable, against a stance in the US that unconsciously results from the Yuan's (-)200% decline in value that caused the 'peg' to be established in the first place. Of course, US policy makers are not 'thinking' this, but at the end of the day, the reality seems reasonable and thus a gradualist approach from China obtains.

Moreover, China's imports are soaring too. It is not 'just' exports that are 'hot' (nearing $100 per month), but so too are imports, and particularly those of raw-resource commodities. The Chinese are very astutely allocating reserve dollars towards 'strategically securing' resources and resource producing properties.

Evidence my firm's data dissection as applies to China's April IMPORT figures and the four-month YTD rate of change versus the same Jan-April 2006 period:

  • Coal: up +50.4% yr-yr
  • Copper: up +141.7% yr-yr
  • Gasoline: up +61.0% yr-yr
  • Silver: up +110.9% yr-yr
  • Platinum: up +43.1% yr-yr
  • Palladium: up +101.5% yr-yr
  • Nickel: up +21.9% yr-yr
  • Nickel Ore: up +1,040.8% yr-yr (yes, correct)
  • Zinc Ore: up +137.9%
  • Lead Ore: up +21.5% yr-yr

This is just amazing micro-data, particularly the huge gain in ore imports, which also helps explain record highs in platinum prices, the steep rally in copper and nickel, and record highs in Dry Bulk Freight Rates.

Looking at the charts I note the rate of depreciation in the US Dollar over the last two years, and, more importantly, the most recent downside acceleration.

The 'elongated' perspective offered by the daily chart below reveals the med-term rate exceeding (-)4% while the One-Month rate of dollar depreciation reaches levels that in the past marked sharp acceleration.

Seems 'reasonable.'

In terms of the potential impact in the US, of action from the US government as it relates to "protectionism," some US equity market investors were equally astute yesterday, by "taking protection, against protectionism."

More 'telling' technically is the potential for a 'Double-Doji' pattern, including a 'Gravestone Doji,' as evidenced within the chart below, and the daily candlestick plot for the 'cash' S&P 500. I also spotlight the negative momentum divergence generated while the double-doji was being formed.

Of specific interest as relates to the med-term view is the upside pop in Volatility, as evidenced in the chart below. I also note the downside probe of the 21-Day EXP-MA, suggesting that the short-term uptrend is exhausted.

My firm is not 'bearish' on stocks, but we are definitely cautious and no longer bullish in general. I note that Gold got whacked yesterday, helping confirm my firm's overall macro-theme of taking protection, against protectionism, in all asset markets.

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