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The Cheap Shot vs China: De Riskifying The Banks

The market dished up a nasty correction last week as the global powers at be moved to "De riskify" the banking system on both sides of Planet Earth. It started in China with a sensible approach, and ended in the US with a political cheap shot.

Very prudently, the Chinese government made a move early in the week to stem the flow of liquidity to the economy in response to statistics that suggested a moderate inflationary trend.

China’s inflation accelerated to 1.9 percent in December, form 0.6 percent the previous month, and GDP climbed 10.7 percent in the fourth quarter. In fiscal policy, interest rates are the primary tool used to curb inflationary forces.

For the first time since 2008 China's central bank raised rates by a 1/2 percentage point, and implemented lending curbs for the remainder of January. 9.5 trillion RMB was loaned last year in China by commercial banks. Chinese banking officials expect to loan about 7.5 trillion RMB in 2010, thereby ringing a few excesses out of the market.

To me, the market's reaction to China's move is pretty entertaining. I've been reading all these articles crafted by the know it all geniuses who claim China is overheating and becoming bubbleicious. 

Now, the government has moved in a moderate fashion to insure inflation doesn't run rampant, and the market hates it- but just for a few days. As compared to the rest of the world, it seems to me the Chinese are doing one heck of a good job managing the growth of their economy. As you can see from this table- which is the latest GDP forecast for the world's 4 largest economies, China is where the growth will be in 2010, with about 12% GDP growth. Japan is next at about 2%. China is #3 globally behind the US and Japan GDP wise, and is expected to become #2 later this year.

From a corporate finance point of view, they're doing a great job getting our capital into their companies. I've personally invested in 5 China companies directly since last June- you know about two of them- NFEC and CREG. The other three will be covered when the time is right.

China is making the right move to deriskify its bank- now, on to the cheap shot of last week:
 

Obama's Cheap Shot At the Banks

The market has been looking for a reason to correct as we have climbed the always present "Wall Of Worry" since mid October with little respite. China's move with the banks got the week off on a sour note, but it was nothing compared to Obama's move a couple days later.

Last week, President Obama took a really cheap shot at the US banking industry in my view. I don't normally comment on political issues except when they effect the market, and this one was a real doozy. Love him or hate him (and there seems to be little in between), Obama seems to have earned the faith of the American people as a well intentioned leader.

However, last week was a political low point in my view. Let's face it- our government is run by highly skilled and highly evolved political animals. The Bush and the Clinton families were both ultimate political animals, and Obama is no different.

Last week's proposals targeting the banking industry was nothing if not a transparent political shot to regain popularity. Let's think this through. A Republican just won Teddy Kennedy's seat. The democrats suspect their popularity is waning.

There's been a lot of publicity lately about bank profits and bonuses. The American people leveraged their future and paid in substantial sums to bail out the entire banking industry just 15 months ago. Now, banks are making billions and issuing huge bonuses.

This leaves a bad taste in our mouths, and makes the industry an easy target for an ambitious politician. Last week President Obama announced some new measures to limit the size of banks, control their proprietary trading, and implement special taxes on profits.

Wall Street hated it.

I don't believe it's a bad idea because Wall Street hated it. However, it's a cheap shot at a defenseless opponent, and a political deflection from the real issues- jobs and healthcare.

Mr. President- if you want to take a shot at the banks, work on making more capital available to small businesses in the US- there is still little capital flowing to Main Street- after all, businesses with less than 100 employees represent about 70% of the US economy. Don't over tax their profits and over regulate.

While the banks were given very favorable treatment in the melt down, it's worth noting the majority have repaid their TARP money, and the US taxpayer, as the investor of last resort, made a handsome profit on many of them.

I believe there will be a modification of this stance as we move down the road, and the markets will remain a bit choppy for a few weeks before the bull wrestles control back.

It might get a bit negative, but it ain't late '08 all over again. Mr. President- please focus on job creation and healthcare. You already fixed the banks. Help them function better, don't kill them.
 

China Recycling Energy (OTC BB: CREG) Update

#2 pick CREG has held up nicely in last week's pullback. Here's a research update from Garwood- the one institutional research boutique firm following the stock so far. They updated their price target to $6.
 

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