Trade!

buy 5% position NG @ $4.10.

NG is now a 20% holding.

Strike Two!

I'm seriously debating getting out of DUG, FXP, and half of EUO.

DUG and FXP are killing me. DUG went nowhere as oil fell from $70 to $63, and it's absolutely plunged as oil's run back up to $66. Gold's the only thing working for me right now.

Same thing with FXP. It's like pulling teeth when it goes up. And it falls like a lead balloon on a down day.

As for EUO, it's done nothing for months. I need the space.

Chinese Lending Out of Control

Great summary from Market Skeptics. Bloomberg is reporting that China's central bankers are starting to worry that lending is out of control.

The evidence leaves no doubt. Through June, Chinese banks have increased credit by an amount equal to 1/4 of last year's GDP.

Now this is what already happened. There is no doubt in my mind that this extraorinary expansion of credit is partially responsible for the run-up in the prices of oil, copper, and global equities.

It could also explain the strength in bonds recently if the smart money in China was cashing out in anticipation of Chinese credit tightening.

Now, the question I have is, "how much gold did the Chinese buy in the last six months?" I don't know the answer, but the question makes me nervous. If tightening prompts a real estate and stock bubble collapse in China, gold may do very well. Hard, to tell, but gold's been weak lately, so maybe I should sell GLD just to be safe.

Theory

After the US economy collapsed, China needed a way to keep their economy growing. They could no longer print yuan to buy dollar reserves, because exports dropped so much (they're still buying Treasuries, but it isn't enough to maintain growth). So, they decided to relax lending standards and told banks to lend more money. This has caused one of the great credit expansions in history. However, this money is not causing growth. Instead, it is causing asset bubbles to get out of control. Central banks fight this.

The question for me is what happens next? What are the ramifications and likely consequences?

Trade Deficit

The May trade deficit dropped 10% from April, surprising "economists" according to Yahoo! This shows that the US consumer is still extremely weak. So is business spending. Unfortunately, this data is two months old, but it confirms what Japan's export data told us last month. Exporting countries cannot look to the US to pull them out of recession as happened in the late nineties with the Asian crash.

In other news, China has accused Rio Tinto employees of stealing state secrets. This is probably a tit for tat measure because RTP blocked Chinese investment in the company.

BEIJING (AP) -- Four detained Rio Tinto Ltd. employees are accused of paying bribes for secret information about China's stance in iron ore price talks, state media said Friday in a case that highlights the volatile Chinese mix of business and politics.

This is also a trade war measure. That China is willing to engage in a trade war when it's an exporting country that needs free trade tells me that they are desperate about the state of their economy.

China looks more and more to me to be an over-inflated bubble ripe for collapse. Small cap stocks have PE's over 100. Here's some telling info from SeekingAlpha:

At the end of June, a parcel of land in Beijing was auctioned for the single highest price ever, and China Daily reports that the same parcel had been pulled 15 months ago “due to a lack of bidders.” That article cites a property broker, Homelink, which claimed that residential property in Beijing’s Central Business District appreciated 6.5 percent in the last week of June. A Homelink broker went on to say, “We used to talk about monthly price growth, but recently, it’s more about daily change.” To further quote the article, jam-packed as it is with great anecdotes: “‘Unlike the previous growth, mainly driven by first-time homebuyers, the recent transaction growth is largely buoyed by rising investment sentiment,’ said Chen Weiye, a researcher at Shanghai Centaline Property Consultants.”

Translation: China's inflationary credit policy is pumping up asset prices. Weekly growth in property prices is unsustainable and will collapse, taking lenders with it. Particulary clear is the admission that this is not driven by first-time homebuyers, but

by "investment sentiment." This really means that there is no fundamental demand. Instead, prices are being bid up by easy borrowing, herd behavior, greed, and speculation that prices will continue up. In fact, credit restrictions have been placed on first time buyers.

And a last word about unemployment. Mish digs through BLS data to find out that unemployment claims are understated by 2.5 million. The BS numbers don't include anyone on extended unemployment. The numbers are a blatant lie, a sham. No one is paying attention to this, so it's got to be an opportunity. People are now dropping off extended unemployment without finding jobs.

I need to do an allocation analysis and buy something according to this data. It all points in one direction.

New Data

It seems that Chinese cities are concerned with runaway lending and have tightened mortgage standards. I expect more of this.

Apartment vacancies are at a 22 year high. This is very deflationary, and is extremely bearish for commercial real estate and bank loans.

If adjusted for the drop in hours worked per week, the economy lost the equivalent of 800,000 jobs in June, which would have been a record.

According to the BLS, the economy produced a record low number of new jobs last month.

Almost 650,000 people have used up their 6 months of unemployment benefits without finding work. This is a nightmare for consumer spending.

Looks to me like the market is going to have a tough time with these fundamentals. Let's see if it comes through in earnings season.

Shipping and Navios Maritime

Navios Maritime (NM) bought 4 capesize drybulk ships for half price last week. Looks like they might be worth watching. They have an almost 6% dividend, and they financed half the purchase with bonds convertible at $14/share. Here are the details from Yahoo! Financial.

We will probably see a lot more deals like this one. It seems that banks' reluctance to foreclose is wearing thin. Also, things are so bad that smaller creditors will soon be able to place liens or seize boats themselves. The banks are now being forced to move. Even with the recent market recovery to average levels, there are many companies in trouble. That number will increase dramatically if the market should weaken.

Trades

Sold 5% DIG @ $24.89, -7%

Time to run from oil. I'm actually going short. See below.

Buy 5% FXP @ $12.80.

The global economy is still sick as a dog. The market is starting to get fearful again. Deflation is rearing its ugly head. And with China's exports down 25% from last year, they have their own troubles. Also, the domestic economy is not growing enough to cover export losses, as shown by Australian coal exports.

Buy 5% DUG @ $19.90.

Today's drop on the unemployment report may signal the return of fear in the markets. If it does, I ride the bad news. If it doesn't, I'll have to dance.

Deflation

More deflationary signs. I just remembered reading that Australia's exports of coal to China had dropped precipitously. So much so that trade went into a deficit last month. This makes me think about shorting some FXI or buying FXP. Lending in China is unsustainable, not being used for anything economically productive, and ridiculous.

The question is, when does this roll over? I'm starting to get a gut feeling that deflation has overcome central bank printing and will start carrying the field in the near term.

Frustration

I'm frustrated. The market is dropping today, but so is gold and oil. Why tons of deflationary news. First is job losses of 473K vs fairy-tale economist predictions of 363K. Off by a mile. Oh green shoots, where art thou?

Agricultural commodities were down limit earlier this week. Hotels are defaulting by the hundreds. 25% of homeowners are now underwater. Wages are stagnant. Car sales were down in June. Oh green shoots, where art thou?

Treasuries are the only thing up today. Oh green shoots, where art thou?

I might have to dump oil fast here. I think I will if it breaks below $24. I'm looking for TBT to go below $50, and will jump on it if it drops to $48.

Jobs

No wonder consumer confidence fell. The ADP job report showed a loss of 473K. This is a slight improvement from 485K in May. But far short of green shoots expectations of only 393K lost.

So far the news is playing out as I expected. Green shoots data has disappointed. The dollar is weak as Bernanke says "no inflation." Treasuries have run back up, as people realize the economy is not recovering. They're back to falling today, as they may have hit their high for the next few months. Mortgage applications have fallen to a 7 month low, as higher rates discourage refinancing.

The stock market is up, but so is oil. Gold has fallen a little, but should jump as soon as Bernanke starts printing again.

I need to do an allocation assessment, and then I may buy TBT today.