Tuesday, November 12, 2013

Tuesday, November 12, 2013 Hitchhiker's VUE

General Information and Analysis

“You will never know how much it cost the present generation to preserve your freedom! I hope you will make a good use of it. If you do not, I shall repent in Heaven that I ever took half the pains to preserve it.” John Quincy Adams  
I hate to admit it, but my wonderful country is no longer a free country in anyway a free country could be said to exist.  We lost, and we are unlikely to ever retrieve what we lost.  

US

China:

I'm not putting this under China, as it does not directly apply to currency.  I'm putting under the US, as it affects investing here more so than in China directly.

The English Newspaper published by the Chinese Communist Party (Global Times) published a report on their heretofore denied existence of long-range nuclear submarines. 

"For the first time, Chinese state media outlets released a series of reports and photos about the development of the nation's first nuclear-powered submarine force on October 27. Until recently the North China Sea Fleet had been a military unit shrouded in mystery."

What does it mean to the Western World (not just the USA)?  One concern, which is not really the top concern, is that the USA (not Western World) is entering a "cold war" era with one of its major trading partners. 

Background:

The "Global Times" http://www.globaltimes.cn/index.html is a Communist Party newspaper printed in English.   The Communist Party (and the ensuing bureaucracy) watches what all reporters in China write and editors publish.  Not one thing controversial is published unless approved by the ruling party. 

Last week several large Chinese papers and the Global Times simultaneously published identical articles about the existence of a nuclear submarine fleet capable of striking any city on the USA Pacific Coast with nuclear missiles.  
Here is a "strike map" published by the Global Times.

(Can't put strike map here because Google won't let me insert graphics.   I'm still trying to find out why).
Black dots on the map identify potential nuclear targets, and the red and orange areas are fallout patterns that would make the land uninhabitable for many years.  The Chinese were very blunt: "Because the Midwest states of the U.S. are sparsely populated, in order to increase the lethality, [our] nuclear attacks should mainly target the key cities on the West Coast of the United States, such as Seattle, Los Angeles, San Francisco and San Diego".

However, if you look more closely, the target is Seattle and the Puget Sound.  This is likely because Boeing is centered in that area and there is major naval infrastructure at Joint Base Lews-McChord and several others.  This map would also indicate that the fallout would spread south, taking out San Francisco and San Diego (again Naval facilities).

Other than to show there is an approval by the government in China to show they have nuclear power that can strike the US, it is not China's strategic plan.  That plan will be drawn in secret. 

The point is we now have a coordinated Chinese media blast about nuking the USA mainland.  This is not some faraway science fiction end-of-the world movie.  This is a real world threat by the military of China. 

The Chinese Military is explicitly planning to blast US "key cities", and then watch as the nuclear fallout devastates the land.  We've learned from Chernobyl the natural resources often survive the fallout (not the immediate blast), and people can live on the land after a decade or so. 

At the root of this kind of planning is what military people call countervalue targeting.  This targeting makes no distinction between aiming at and hitting purely civilian activities vs. military related activities.  Counterforce is the term used for attacking military and military-industrial assets. 

This is planning for the most destruction that can possibly happen, without retaliation.  http://www.globaltimes.cn/content/820840.shtml  Of course, we can assume the USA also has nuclear submarines that could hit China's major cities, and so we end up an a "cold war" again.  (My nukes are equal to your nukes, and you do it we do it; end of world). 

 For investors then, the scenario that is likely to be played out is a nuclear and technology arms race.  The Chinese have already announced this through the new Prime minister.  They want to train thousands of engineers and scientists to create new kinds of weapons of mass destruction. 

Of course, that is really good news for commodity rich nations (like Australia and Canada).  Whatever the Chinese do, they must have raw materials, and much of those materials do not exist on the Chinese mainland in the quantities required.

Overall, we can expect that the USA leadership has to fund military systems to deter and counter that kind of unpleasantness. 

That must mean companies such as Boeing and Raytheon will benefit from the coming buildup.  Raytheon is arguably the biggest supplier of advanced armaments to the USA military. 

L-3 (LLL:NYSE) focuses on communications and signals equipment.  This will be a huge growth area, as the nuclear submarines China has built are stealth machines.  The Navy has made a decision to upgrade its airborn submarine tracking abilities.  L-3 and Boeing have teamed up to apply new technology with the P-8 aircraft from Boeing. 

General Dynamics (GD:NYSE) will likely build the new type submarines at their boat division in Connecticut (Ingalls Shipbuilding). 

The investing opportunities will be in large military suppliers that pay excellent dividends.

Friday's Labor Report

In one word: Confusing... 

On one hand, the report looked very good.  However, the BLS assumes 3% growth (and you know we are not getting that), and so they arbitrarily add employment numbers to support the assumption.  That number was 126,000 jobs added out of thin air based on an erroneous assumption.

Then when you read beyond the headline number, we observe that the number of people not in the labor force (but want jobs) exploded by nearly 1 million in October!  That my friends is the 3rd largest increase in the history of the US labor statistics. 

The participation rate fell to a 1978 low.  Think about that: 62% are participating in the job market; well who knows about the rest.  However, that number is likely lower than that, because Food stamps applications exploded last month.

Very confusing...

The markets went nuts selling foreign currencies like mad, driving the US dollar up, and the stock market threatened to make an all time high in the S&P 500. 

Today, sanity is coming back in.  Price is neither good nor bad - it just is.  The only thing price is telling us at this point in the S&P 500 is that investors and traders are unsure where the market should be.  In auction market theory, the market has reached an equilibrium where price is fair on the S&P 500 between 1650 and 1770.  (For technical analysis, 1700 is a support area on an even number - a physiological number.) 

Today?

The market is in a downward move. 

The US Treasury starts off this week by selling $30 billion in 3 year T-Notes.  On Wed. they will sell $24 billion in 10 year T-notes, and finish with $16 billion 30 year bonds on Thursday. 

The currency markets overnight were mixed.  The dollar index is up, but the major currencies are mixed (some up some down).

The bullish factor for stocks is China.
  

Canada

Eurozone

The Euro suffered mightily last week. It began with the lower inflation reports (from the previous week), suffered through a rate cut, and then extreme dovish talk from the ECB (European Central Bank). 

There is more trouble coming for the Euro.  ECB will very likely opt for another round of LTRO (Long-Term Recovery Organization) bond buys.  The ECB with support from Germany, will likely announce negative deposit rates. 

When this is done (probably through December 2013), the Euro will rebound more than likely.  At the moment, if one invested short term in currencies, the Euro is taking a shellacking.

Why would they rebound?  Because the US political and financial situation is worse than Europe's and the USA faces the debt ceiling again first of next year.


Australia:

Australia is not feeling the love at the moment (they experienced some last week).  This is very likely because there is no GOOD news coming from China's Third Plenum meetings where it was expected President Xi would announce liberalization of the Chinese Economy.  

China

End of 3RD Plenum

This just in:

"A few hours ago, the "historic" and "most important ever" (just like ever payrolls report) Chinese plenum concluded. And like everything out of China, it was big on promises and scant on details. Among the numerous assurances of reform, the plenum promised: to deepen reform of the medical system and in the education sector, to speed up free trade zone development, to clear barrier in markets, to deepen national defense and military reform, to reform the income distribution system, reiterated the main role of public ownership and said there would be reform of government-market relations. And all of this would yield results by 2020. Essentially, words so hollow one can't help but doubt this was merely the latest smokescreen to justify the perpetuation of the status quo, investment-based economy which as the BBG Brief chart below shows, instead of becoming more consumption driven which is what China has been feverishly attempting to achieve, has instead become ever more reliant on consumption." Zero Hedge
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The most notable thing is the shift in language, because this has all been said before.  They use "Decisive" role instead of "Basic" role for the economy.  

China’s October industrial Production unexpectedly took a huge jump to +10.3% year on year.  It was expected that industrial production would decline.  Retail Sales were weaker than expected. 

Wholesale delivery of Cars and Sport utility vehicles rose 24%.  This was much higher than expected, and would indicate the wholesalers believe there will be strong retail demand. 

New Yuan loans were 506.1 billion Yuan; well below estimates of 580 Billion Yuan.  China’s curtailment of loans internally seems to be working.

China’s CPI roase +3.2% y/y.  This is a continual improvement (if inflations is improvement), and continues to climb as China focuses on building the middle class of consumers.   However, unexpectedly PPI fell -1.5% y/y.  

Overall, these numbers (along with iron ore shipments last week) seem to indicate that the global economy driven by China’s consumption is on track even with the USA problems.


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