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Selloff Unrelated to China Tightening


How are incremental efforts by the Chinese to curb excessive lending bearish?

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

China is on track to grow at a pace well in excess of 10% in 2010. The danger of a general overheating and the exacerbation of speculative bubbles in stocks, real estate, and commodities is clear. So how is it that incremental efforts by the Chinese to curb excessive lending is bearish? Since when is GDP growth of 8% bad for commodities?

Let's add one more wrinkle: In a consumption-based economy, there are few indicators more important than retail sales. And the US retail sales number today blew out consensus estimates. January growth was 0.5% versus consensus of 0.3%, and December was revised to -0.1% from -0.3%. It would be difficult to find a more bullish sign of gathering economic momentum and of the sustainability of the current economic recovery.

I can only conclude that this move -- and most of the down move since the S&P 1150 peak -- has relatively little to do with incremental fundamental news/events. The only incremental bad news of any consequence has been the developments in Greece. The correction thus far seems more related to a shift in the sentiment cycle and the technical cycle (the two are linked).

So the question arises: What happens if we ever get some real bad fundamental news out of the US? Remember, in the early stages of a recovery, the fundamental signals will tend to be mixed. (See Bi-Polar Economic Data?)

At some point, it's likely that some actual bad news will hit the wires. And in the current sentiment and technical context, the impact on markets could be rather intense.

I remain 100% cash.
No positions in stocks mentioned.
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