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Random Thoughts: China Syndrome


Is the Middle Kingdom raising a red flag?

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

Throughout the latest stages of the European crisis, while everyone was obsessed about whether the force-fed policy measures would pass the collective muster, we asked the question in Minyanville: What if it does?

The uniformity of opinions that the EU, ECB, IMF, LTRO, EFSF, ESM, EIB and other alphabet-soup solutions would somehow solve a debt crisis that took decades to build -- and in some cases, was a cumulative by-product of disparate cultures -- was worthy of a nose-scrunch. What if it in fact worked? The resulting outcome would be strictly enforced austerity measures and higher taxation, neither of which is pro-growth.

That outcome has been absent from the ongoing conversation, in large part because the liquidity-fueled stateside rally cast a shadow of doubt on the bears rather than the bulls. Remember in December 2011, the smartest guys in the room screamed to get out of the market, yet here we are, a few months later and 25% higher, and the chorus is singing a much different tune. We were lucky enough to identify the technical pattern that worked to S&P 1360 at the time and now that we're there and then some, China, of all places, has planted that very seed.

Slowing global growth; we postured that position, ironically enough, in May 2008 when crude was bubbling north of $130/barrel and we offered the variant view that $50 crude would be entirely more problematic than $150 crude (we re-hashed a theme offered a few years prior that caused some to think we had fallen out of our tree). I suppose it isn't as "sexy" as a massive catalyst but sometimes a slow, methodical burn can be equally debilitating.

I don't profess to know if China announcing its lowest economic growth target since 2004 -- and European services and manufacturing output being revised lower -- is in and of itself enough to reverse engineer numerous years of financial engineering. But it does plant a seed, one that has been abandoned for the euphoria of higher prices and averted crises.

And lest you think that latter matter is a done deal, I will remind you that Greek private creditors will decide this week whether or not to (cough) voluntarily accept the biggest sovereign-debt restructuring in history.

Enter the PSI and the CAC; man, you need a PhD to figure out all these acronyms!

Random Thoughts:
  • Watch gold following last week's Thumper. The ability to stem the supply will help shape psychology; should it continue to smelt, the above thesis will gain traction in the marketplace.
  • I swapped my placeholder long in Research in Motion (RIMM) -- with a stop below $12.50, which is the December low -- for a handful of out-month upside call options, which is defined risk through a different lens. I've been patient; it remains to be seen if I'll be rewarded.
  • The most bullish action on my eight screens of late has been the banks, which are currently trading above the all-important BKX 45 level. Bank of America (BAC), Goldman Sachs (GS) and Deutsche Bank (DB) are my proxies in that regard.
  • The Big East Championship starts tomorrow (I'm gonna miss MSG when my Orange migrate to the ACC). I'm less concerned about this tournament -- the big dance starts soon, and Syracuse is vying for the No. 1 overall seed (or at least, the No. 1 seed in the east) -- as my sights are set on March Madness. Yes, it's the little things in life that make the journey of life what it is. So good luck to you and yours as we kick off the Tourney!

Twitter: @todd_harrison

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