China Criticizes Dollar Carry Trade

Richard Suttmeier is the Chief Market Strategist at www.ValuEngine.com. ValuEngine is a fundamentally-based quant research firm in Princeton, NJ. ValuEngine covers over 5,000 stocks every day. A variety of newsletters and portfolios containing Suttmeier's detailed research, stock picks, and commentary can be found HERE. Suttmeier's Four in Four video can be watched on the web HERE.

November 16, 2009 – China Criticizes Dollar Carry Trade Bank Failure Friday, China criticizes dollar carry trade, and Copper and Crude Oil hold their 200-week simple moving averages Bank Failure Friday – Three more dominos fall. Two private banks in Florida and a publicly-traded bank in California failed on Friday bringing the total to 123 for 2009, and to 148 since “The Great Credit Crunch” began at the end of 2007. All three banks had extreme overexposures to C&D and CRE loans, and Pacific Coast National Bank (PCST) was on The ValuEngine List of Problem Banks. The cost to the Deposit Insurance Fund was $986 million, which by my calculation puts the fund $10.4 billion in the hole. The FDIC has thus pre-spent 23% of the $45 billion in prepaid fees being collected by the FDIC for 2010 to 2012. These funds must be paid in by member banks by year end. The FDIC says that most banks are well capitalized. Sure 63% of banks are not overexposed to C&D and or CRE loans, but 37% or 2,985 banks are. These are the candidates for future failures. This figure was above 3,000 banks in the second quarter, but 50 banks failed in the third quarter. Of the 1367 publicly traded banks 760 or 55.6% are overexposed to C&D and CRE loans. By number of failures, the banking system is deteriorating. In the first quarter there were 21 failures. In the second quarter there were 24. Failures more than doubled in the third quarter, and another 28 failures have occurred since the end of September. Most bank failures have been private banks. The ValuEngine List of Problem banks contains only publicly-traded banks and 28 failures were on this list by name with C&D and CRE exposures. China says Fed Policy threatens the global growth story. The top Chinese bank regulator agrees with me that the weak US dollar and low federal funds rate are causing speculation in commodities and stocks. Distorted global asset prices threaten the global growth story because of the Dollar Carry Trade.

Record-low interest rates are supposed to encourage lending to businesses, but instead is fueling speculation, as Wall Street takes cheap dollars and using leverage buys stocks, commodities and emerging-market currencies. China is worried that its markets, where stocks have surged by more than 70% this year, and higher property values are creating asset bubbles in China that might later implode. If China becomes more concerned they may decide to sell or reduce their purchase of US Treasuries, and they are the largest buyer of our country’s debt. The Dollar Index remains extremely oversold on its weekly chart with up trend support at 74.48 this week. Charts courtesy of Thomson / Reuters.

Watch the 200-week simple moving averages for copper and crude oil: The weekly chart for Comex copper shows a negative divergence in MOJO with a reading just below 8.0 at 7.9. A close this week below the 200-week simple moving average at 294.50 shifts the weekly chart to negative, which questions the global growth story regardless of the dollar.

The weekly chart for Nymex crude oil shows a negative divergence in MOJO with a reading below 8.0 at 7.5. A close this week below the 200-week simple moving average at 75.50 shifts the weekly chart to negative, which also questions the global growth story regardless of the dollar.

Send me your comments and questions to [email protected]. For more information on our products and services visit www.ValuEngine.com That’s today’s Four in Four. Have a great day.

Richard Suttmeier Chief Market Strategist www.ValuEngine.com (800) 381-5576 As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as well as my most up-to-date analysis of world markets. My newest products include a weekly ETF newsletter as well as the ValuTrader Model Portfolio newsletter. I hope that you will go to www.ValuEngine.com and review some of the sample issues of my research.

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