Wednesday, November 7, 2007

China wants to "diversify"

Their foreign reserves, that is. Cheng Siwei said that China wants to diversify it's foreign currency reserves. And we look to open down 200 points on this news with a dip of 25 points on the Naz.

So China, wants to have some real assets. Is that a surprise? Put a 500 euro note in your hand, and ask yourself if this is money. China wants more of them, and it's in their national interest. Now today, the entire foreign currency market is spooked. They are worried about the flow of funds away from the dollar with this move by China. And the deepest, most liquid, and largest market in the world, can't absorb this news, and the dollar gets hit again.

Now ask yourself one more question. If China can move the foreign currency markets, what happens to the stock prices when they decide to diversify their assets here? I keep talking about the NASDAQ 100. It's a non-financial index. But there is a component of the Naz that will be dramatically repriced upwards because of the trends facing the world's economy.

Our Federal Reserve is completely behind the eight ball. They said they wanted to get ahead of the curve. Let's see if they are right. The two year note yields 3.63%, while the Fed funds rate is at 4.5%. The Fed should of cut 50 basis points, but by cutting 25 basis points, it will extend their interest rate cuts to deeper levels. They should of used the elevator down instead of the stairs. The Forex markets see this. Housing needed more, and that's the weakness in our economy. So Bernanke & Co. by their blustering bluffing, intended to protect the dollar, paradoxically will hurt it. And the banks will have larger writeoffs because there still is price discovery problems because everyone is still afraid to trade any of this sub-prime paper, because the underlying collateral, housing continues to go down. Would they trade this paper if home prices were going up?

And I have to rant when financial commentators state that consumers have absorbed the higher oil prices. Since when? The refiners absorbed the prices! Now those days are over, and the monthly saving on the HELOC will be taken away at the pump.

So what do you do? You buy the opening gap down!

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