Dragon Whisper

In the past few weeks the US congress has expressed its anger towards China’s currency manipulation. Since then, the voices in the US congress are growing louder and louder. Of course this could also be the pre-election rhetoric for the 2012 campaign, one might say, but the situation appears to be a little bit different this time.

The US congress is threatening to impose tariffs on imported Chinese goods, the bill was already passed by the Senate and it is pending to get approved by the Congress. Different than other times, the Senate actually approved the bill and is taking actions–not just blowing hot air–of course China is not pleased and is warning the US with a trade war. The Chinese warning has gone so far that the Chinese authorities have closed 12 Walmart stores in Chongqing due to selling regular pork for organic pork. I will not defend Walmart here, but I will say this, it is hard for me to believe that the Chinese government is doing this solely to protect its citizen. It wants to send a clear message to the US Senate that the trade war can begin.

A trade war, would be devastating for Hong Kong–a city that thrives on trade and where the economy is completely dependent on trade between China and the rest of the world. Hong Kong is like a double broker, it makes money both ways of the trade and this has made Hong Kong one of the richest cities in the world. But with the slow down in Europe and the protectionism in the US, as well as the slow down in China; Hong Kong will soon feel the flip side of the coin: you live and die by trade. Hong Kong is like a gambler that places all its money on one horse, it is a city that lives and dies on the mercy of international trade.

All these years Hong Kong profited from labour arbitrage, which is the difference between labour wages in different countries. The wage difference between American workers and Chinese workers, made it possible for trading companies to report huge profits through their participation in international trading business; taking advantage of the lower Chinese wages. Now with Chinese workers demanding more money and the US workers making less and also being unemployed for years, the American consumers buying power for Chinese goods that are not as cheap anymore as they used to is diminishing fast and if you also add higher fuel costs, the slow down in the western economies and competition from other South East Asian countries who have much lower wages than China such as Bangladesh and Vietnam.

The China-America trade is losing its sparkle and the profits are not as lucrative anymore as they used to be, this trade war is only a reflection of the fundamental problems that exist between the two nations, a relationship that’s crumbling and is no longer profitable.

During trade wars there are always the losers and winners. In this case, the loser will be Hong Kong. The Hang Seng is the most beaten financial market in the world, as a matter of fact it has lost more points and percentage than the Italian financial market, which is stricken with debt problems.

The winner of this debacle will be Singapore, a city that is less dependent on one country only. Singapore is a hub that’s taking advantage of new rising manufacturing countries like Cambodia, Bangladesh, Sri Lanka and seasoned countries such as Indonesia and Malaysia. The difference between Hong Kong and Singapore is that Hong Kong has placed its bet on one horse only, while Singapore has diversified its bets and has emerged as the true international champion of Asia.

No wonder why Li Ka-shing sold his stakes in Deep Water Port Holdings in Hong Kong and China, he was always ahead of the curve.

This is the link to the Li Ka Shing story, just as a reminder.

http://www.bloomberg.com/news/2011-01-18/hutchison-whampoa-applies-to-form-singapore-listed-port-trust.html

Every major city throughout the globe was experiencing major rallies and demonstrations this weekend, some violent, peaceful and some joyful and fun. These demonstrations have all one thing in common: everyone is demanding the punishment of bankers and the abolishment of the current banking system. But how serious are these demonstrations?

The characteristics of these rallies are typical to all demonstrations and movements of the past, they all have demanded equality in some shape or form and these demands are usually expressed as rights. Women rally because they want to have equal rights to men, Afro Americans want the right to be equal to the white Americans, then you have religious rights and so forth.  From all the rallies and demands that have occurred from mass protests in the past, the only ones that have achieved their goals have been movements that have had a leader.

Martin Luther King was a leader, he was a man with a vision  and a clear goal. He was eloquent, educated and willing to die for his vision, which in turn, inspired most Afro Americans to support him—and  he got what he wanted—he died for his vision and  obtained rights for his fellow Afro Americans. Similarly, Susan B. Anthony of the woman suffrage movement. An active leader able to grant rights to women for their children and property.

On the other hand, you had the movements of the hippies in the 60s, which accomplished absolutely nothing because they had no leaders.

Now this current movement against the banking system against inequality and austerity is also about rights—the right to be financially equal—but these demonstrations lack one thing: a leader, someone with a vision. Usually when a huge number of people express their frustrations and wish for change, the opposition parties tend to support these people. I have not noticed any opposition party supporting any of the rallies or participating in them. This lack of participation from the opposition ultimately shows that both the ruling party and the opposition party share the same political visions.

There has been one very unconventional leader  and that has been the World Wide Web. The rallies in Egypt, New York, London, have all been organized through Twitter and Facebook, reflecting the power of globalization and instant communication. Social websites make it easy for everyone to get connected and share their frustrations. It is to be seen if movements still require a leader to achieve goals and change, or, if the world wide demonstrations are capable of achieving all of their demands through Twitter and Facebook.

Movements without a leader can quickly turn to uncontrolled movements, leading to anarchy and chaos. The law of nature says that uncontrolled forces always turn into chaos. The flash anarchy ion London two months ago might have been a preview of whats next to come.

This entire situation in Europe is ludicrous, investors and markets are waiting how the Slovaks will vote on Europe’s bailout program. 5 years ago people didn’t know what Slovakia was, now the entire worlds faith depends on how a country like Slovakia is going to vote. A country that GDPs is smaller than that of the city of Boston. This just shows me how pathetic the situation in Europe  is and how noone has any idea how to solve this. The only thing this politicians know, its how to run their PR machine and keep people focused on something insignificant like Slovakia.

Europe’s socialism is under threat, for years people in Europe have been able to enjoy free Healthcare fat welfare cheques for the unemployed and other social benefits. On the other hand Europe’s economies couldn’t be more of a mess. The practice of protectionism, the failure of integrating its immigrants to their societies (remember Paris burning 2 years ago), discrimination and state taxes of 50% in some countries are few of the factors why Europe is suffering.

All of a sudden the life of Europe’s citizens who are known for sitting in coffee stores and Bistros is under threat, no more can the state finance this laissez faire lifestyle. The countries that are experiencing economical hardship like Ireland and Greece will never recover from its current dire situations the force of deleveraging is hitting this countries really hard and if that wasn’t enough, countries like Greece are coming under threat of losing its population. The Greeks especially the young people are fleeing Greece for a better future which is worsening the current economical situation and speeding the deleveraging problem.

What Europe needs is a change in reforms to spur growth, change from the old ways of socialism of reforming their immigration policies, lowering their taxes, loosen the bureaucracy that makes it so hard to even start a business in Europe, change the labour laws that makes it hard for everyone to hire anyone but knowing Europe none of this will happen. Instead what we will see in Europe will be a repeat of 1930, the economies will get worse the debt crisis will become worse and everyone will blame the immigrants, nationalism and fascism is around the corner you just need to look at the statistics of rising rightwing extreme parties all over Europe. Norway was just the beginning.

Lets hope Slovakia makes the right decision and we can postpone Europe’s dark days that are about to come. I think Slovaks should postpone the decision for the ESFS program for another week to capitalize on this great PR stunt for tourism purpose.

The Hang Seng is surely making a nice come back from the very oversold levels that it was trading at. The Hang Seng has gained more than 12% in 3-4 trading days and it is approaching its 1st Resistance levels at 18300 points, for the ones that bought stocks when the Hang Seng was trading 16000s this bounce should be welcomed as an opportunity to sell 35% of their long positions and to perhaps lock up some gains. The 2nd and major resistance in the Hang Seng is 19600 points. At this level people should completely sell their long position and should look to short the Hang Seng market. 19600 points will be the ceiling of this technical bounce on the Hang Seng

Dragon whisper made a prediction 10 days ago that the Hang Seng will head to 15400 points, well the level was not hit and the Hang Seng bounced off the 16200 level. Of course our prediction was a conservative one and we believe to make conservative predictions is the right move when it comes to capitalize on a bounce in a downtrending market. Catching falling knifes can be very hurtful sometimes.

Nonetheless, the Hang Seng has bounced the situation looks a lot calmer than it did 3-4days ago. The Europeans saved Dexia Bank and that is a relief for the market even though in our opinion nothing has really changed, nationalizing a Bank reflects upon the disaster situation that Europe is in and it should not be taken as a sign that better days are coming. This situation also reminds us of how interconnected Asia and Hong Kong with the European Banks is, and how dire the situation for China has become.

Many investors believe that China can not withstand a second financial shock coming from Europe and losing its other big export market after the US. The situation in Europe is exposing Chinas dependence on the US and European markets.

We at Dragonwhisper also believe that China will be less willing to issue a 2nd stimulus of 600 billion US$ like it did in 2008 during the US crisis since China has to deal with its 6% inflation. This is why we do not believe in this rally, since nothing has changed and the dire conditions of the global economy are still as negative as they were last week, the situation is still too fishy to trust the market with any  money.

I really have a hard time putting any money in the market when I found out that DEXIA Bank could have gone bankrupt if it didn’t receive any help, I wonder how many other banks like DEXIA are still outthere?

I am not trusting this and investing is about trust.

In a recent interview between a Bloomberg reporter and an Analyst the question was raised, what is the remedy to all difficulties that the world economy is going through right now? The analyst said, we all know the answer it is growth.

Of course growth, we all know it. The analyst didn’t really give any clues to how to achieve growth, either because he was clueless or because most people don’t really have an idea of what the pillars of growth actually are, therefor can not give a solution to the problem.

These are the 3 fundamental pillars to growth,

1.CAPITAL = money, financing.

2.LABOUR = all type of workers, skilled ones and general labour

3.TERRITORY = Land to produce, to built and harvest the resources of the land

This is all it takes, Capital, Labour  and Territory. This are the pillars that spur growth and always have since the dawn of civilization, for instance Spain quickly became the most influential country in Europe during the 16th century after adding Territory and Capital(gold stolen from the indigenous tribes) to its kingdom.

So did England, Portugal and Rome. The formula is simple, acquire Territory and Capital add Labour and you will grow.  By looking at this formula it is very easy to identify where the problem is rooted with the low growth and the economy of today. At this very moment we only have one of the 3 pillars and thats Labour there is an abundance of Labour but there is little new Territory left and Capital is being preserved. The solution to this of course is more Territory so we can expand and grow, one of the greatest finds of new territory was the Virtual Territory. The Internet has been the biggest contributor to the growth of the past 20 years, it has created jobs and Capital but even the Internet is getting crowded almost everyone has a website or is part of a website (Facebook) hence a slow down in expansion and growth.

So what would be the solution, the solution is pretty easy. We need more territory to expand and grow again but thats not happening any time soon since this planet is limited and humanity has reached the limit of its borders, growth has been dull. The next best solution is to become more efficient with what we have and this is exactly what is going to happen until we can colonize an unknown planet in the universe.

Any company involved in preservation and efficiency is the company that will create the next boom in jobs and capital, anyone that would like to invest in the future and make money of the next coming era should take a look at companies operating in this field. The industry that will take charge in innovation due to the dire situation that we are in today, will be the industry of preserving energy, recycling and technology that enables us to be more efficient.

This are the 3 booming industries of the next 30 years. There is many companies that focus on this and are  trading for very cheap in the market, do your research and you will find plenty. There is plenty of hidden gems.

A week ago HSBC reported a gloomy outlook of Chinese factory activity  the HSBC PMI was reading 49.8 points, which is clearly indicating a slow down in factory outputs. Few paid attention to this report except few analysts and DragonWhisper that started reporting about Chinas tight credit situation and Chinas upcoming crisis.

A month ago Dragonwhisper was able to recognize that there was danger brewing with the Casino stocks and this danger was coming from their operations in Macau. That report seemed a bit childish a month ago and was dismissed by many readers as unserious but a month later we find the Casino stocks in the middle of a crash due to reports and rumors from Macau.

The Casino stocks in Macau are exposing the credit danger that is starting to hurt China, many Junkets operations are finding it very difficult as of late  to collect their credit given to the VIP gamblers in Macau. Usually this VIP gamblers are factory owners, real estate tycoons and business men from Mainland China.

Now you get a report like this from the junkets in Macau, a report from HSBC that factory activities in Mainland China are slowing down plus another report that 20% of Real Estate sold in Hong Kong this year was owned by mainland Chinese and a 12% increase on Chinas CDS this Monday (3rd October). It doesn’t take a genius to figure out that the rich in China are getting hurt by the slow down in Europe and US and that credit is getting tight in China.

At dragonwhisper we have been warning about the slowdown in China and have pointed at this signals. One of the signals that people should have paid more attention to was when HSBC announced to eliminate up 3000 employees(30.000 worldwide) in Hong Kong as part of their saving cost strategy . Why would you fire people in a country that apparently has the fastest growth in the world and will continue to grow, this raises questions of course. During the time that HSBC made this announcement the Hang Seng was trading at 22000 points and it should have served as a warning call to investors. This reminded me on February 2008 when HSBC announced that it will reduce the exposure on US mortgage market at that time the DOW was trading at 14000 pts and it served many investors as a wake up call.

We believe that the Hang Seng has few more points to go down until it finds major support and that support is at 15400 pts. Until than enjoy the ride and read through the lines. We will notify our readers which stocks to purchase once the Hang Seng hits 15400 pts.

For many months now we are having people wonder who might be involved in the Greek crisis, who are the bondholders that will have to take a 50% haircut on their holdings of Greek debt but one of the big question also is, who was issuing insurance on Greek debt?

The US firms are trying their best to place themselves as far away as possible from this Greek crisis, they are portraying this image that this crisis is solely a European bank thing. Sure it is true the European banks have been the biggest lenders to Greece but and there is always a but US firms have been very active insuring Greek debt and this is exactly what the market is telling us.

The market is punishing US investment banks heavily especially Bank of American (BAC) and Morgan Stanley(MS) both firms shares are down over 50%, it is hard convince anyone that both firms are not involved in the Greece crisis and that both firms will not be directly hit when Greece defaults when your stock is down over 50% and when the CDS are pricing BAC and MS to the same category as Italian debt by the way Italian market is down only 38% in comparison to this 2 firms.

Of course the ones that remember the 2008 crisis knew that Merrill Lynch was next after Lehman and Morgan Stanley after that (GS ,and JPM were next in line) and it so happens that  BAC is suffering heavily from Merril Lynch portfolio in Europe but not many speak of this it seems like a distant time 2008 and Merrill Lynch overall numbers are not revealing the whole picture, BAC is blaming it on Countrywide and trying very hard to portray Merrill as the best of the best even though they are firing this allegedly great people like David Bianco, it is getting tough to swallow this PR stunts from BAC.

To help getting my point across and make people see this in a chart, I have compared the performance of US Bancorp (USB) a traditional regional bank with absolute no ties to Europe and credit default swaps with the performance of 4 candidates that are heavily involved in Europe and this 4 firms are BAC, MS, GS and JPM. This chart clearly shows what the market thinks of this 4 candidates and the European crisis and it is exposing them by punishing their stock price.

I have been following this company (LULU) for quite some time perhaps for more than 2 years, I obviously missed out on purchasing this stock at 20$ (pre split) in 2009 because I believed investing in DOW chemicals and other industrial companies was a better trade off. Of course it was I was able to pick industrial for very cheap and it was a lovely trade but nothing compared to what I missed out with LULU.

One of the reason why I didn’t purchased LULU was that I don’t go long on companies that rely on trends, I rather short this companies by purchasing puts when I realize that the trend is over. I know the story of LULU very well, it is a Canadian company thats was created a former bum yes a bum the creator was poor and broke and one day decided to create light clothes that you can wear casually and for sports, realizing that Vancouver was going through the trend of yoga he capitalized on that trend and soon enough he was able to sell his clothes all over Canada and US. This story is inspiring indeed it shows you what a human is capable of doing if he sets his mind to it. On an interview the founder of LULU was asked if he ever thought the company would reach the size that it is now and of course he never ever dreamed anything like it, an 8billion$ company that produces over expensive yoga clothes. LULU is probably one of those companies that blows out of proportion and a trader like me waits like a Lion to grab this obese Gazelle and eat it alive, I am very passionate about this because I have waited to short this pig for 2 years.

LULU trades at a PE of 50 but thats not the only problem, LULU warned in their last quarter statement about the next quarter and LULU still went up now thats when I knew this bubble is about to burst. See,overblown stocks have the tendency to make one last push before they start speeding down and LULU did just that, I was waiting for LULU to break out of its final uptrend and confirm what I am waiting for the beginning of the down trend.

I recommend shorting LULU between 52-54$. I also recommend puts on this pig at 50$ striking price, the ones that are interested in purchasing puts should wait for it till Monday the volatility premium is a bit too high for now, if this stock manages to stick around 52-54 for another 2-3 trading days which would make the put cheaper than grab it. None the less this stock will trade at 44$ on October 21st expiration day.

The S&P500 has gained over 4% in the past 3days in response to good news out of Europe apparently, the news out of Europe is actually not good nor is it bad as a matter of fact it is old which in reality is bad. We also had some news coming out on Tuesday that Warren B.(B for bonehead) was purchasing shares of his own company and this was hailed by the Fund Managers as a move to purchase some shares before the quarter ends. This move from Buffet was translated as the S&P 500 being too cheap and people should follow his move, well the S&P trades at 1.9 book value and Berkshire trades at 1.1 book value hence it is Berkshire thats cheap and not the S&P 500 and thats all it is. Berkshire is cheap for a reasons and I am not recommending it, Buffet is a old boring men and people should stop listening to him. Anyways be it as it may Fund managers did buy into it and I can not blame them, if Buffet does it and you lose you can always justified nicely to your clients, but but “Buffet did it“.

The S&P is heading lower and it will reach the 980 very soon, 1180 is the top on the S&P 500 and this goes down 200 pts from here. Yes it sounds crazy but the the liquidity is drying up and the charts are speaking for themselves, the S&P is creating lower lows for the past 3 weeks and the bulls are out of gunpowder.
On the news front, the good news or the so called good news are also coming to an end we will see negative news from now on. Copper and Hang Seng are signalling a slowdown in Asia and that news will start hitting the wire next week.
The market is ripe for the capitulation ride, see you at S&P 980 pts.

While the world is busy reporting about Greece and the US, China is silently worrying about its own bubble. The real estate bubble is becoming more of the threat to the status quo than any other event in history it is such a big threat to the Chinese economy that the numbers are being manipulated left and right.
If 1000 sqft. apartment was selling for 4 million RMB in Shanghai in 2010, the same apartment in 2011 with a markdown on the sqft. will sell for 4million RMB. Huh? Exactly thats what I thought during my last trip to Shanghai, huh? what is going on here. Well I will explain the manipulation right now. 20-30% of real estate in China is empty but the price of real estate in China keep on rising, the way the realtors are posting higher real estate appreciation is by simply marking down the square footage. A 1000 sqft apartment becomes an 800 sqft. apartment, the realtors for instance will not measure the balcony in the measurements so what u get now is 800 sqft apartment(including balcony but not measured) for 4million RMB which shows as an increase in real estate prices if you calculate by square foot. This tactic is widely practiced in China, the realtors and developers use this tactic in order to show potential clients that the value is on a steady rise and to encourage them in buying of course they need to do this because real estate purchase has been down in China since 2010.
This crisis that will reveal itself in the near future will not play out as it did in the US since most people in China tend to make a minimum down payment of 50% and higher but this will hit the cement makers, the steel factories the developers. This are also the guys that have borrowed heavily from the banks the past 5 years in order to capitalize on the real estate boom and with the Chinese government finding itself increasingly under inflationary pressure they will maintain the high interest to tackle the runaway food prices to avoid mass rallies and demonstrations from the poor, which makes up for 80% of the Chinese population.

On top we have a dramatic slowdown in Europe and a European banking crisis, if that wasn’t enough European banks are the biggest lenders to developing countries(3 Trillion$) around the world and southeast Asian countries and this countries in turn are big importers of Chinese products.
The numbers are already speaking for itself we had a slowdown again in the manufacturing sector around the Shenzhen area which in turn has created better Hong Kong air quality, good for me.
The crisis will become louder and obvious after Chinese new year 2012, the charts are already speaking for itself is just as I said people are too busy focusing on Greece and the Chinese don’t mind it at all.