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July 21, 2005

Chinese Food

China roiled up markets today with their announcement that their currency would no longer be pegged solely to the dollar, but to a basket of currencies. The move has been anticipated by many top minds, including Marc Faber and Bill Fleckenstein. As part of the restructuring of its currency, China said that it would revalue the Yuan from 8.28 to the dollar to 8.11 to the dollar.

The timing of this announcement is chilling; the tensions between the U.S. and China, palpable. In short, the shift away from the dollar is a clear message to the U.S. that China is not happy we are preventing them from purchasing real assets with their dollars (two U.S. companies recently outbid China for Unocal and Maytag, presumably for “national security” reasons). The U.S. was sending the message that China should just stick with purchasing Treasuries, and China’s response is “up yours.”

The revaluation of the Yuan against the dollar is insignificant. It was included in order to throw U.S. politicians a bone. They can jump on this aspect of the news and say, “See! We got them to do what we wanted!” The ever-optimistic media naturally picked the bone and cheered the revaluation as good for our trade deficit (it will make no difference to the trade deficit).

Traders, on the other hand, are smarter than journalists. They understand that the shift away from dollar baking of the Yuan implies that China will purchase less Treasuries. The 10-year Treasury sold off nearly ½ point, adding a whopping 11 basis points to the yield. Housing stocks, the most sensitive sector to the 10-year notes, sold off precipitously… to the tune of 4%. Looking back at my comments from ages ago (err… yesterday), the charts of the homey looks spookily like Nasdaq 2000, and today’s drop could prove to be the beginning of the end. The action in the homeys over the next several days is mightily important.

F5 Networks spilled blood after their earnings announcement (down 18%). The carnage was worse than indicated by yesterday’s after-hours trading when the company lowered its fourth quarter guidance. If anything, INTC and FFIV have re-affirmed that guidance is more important than current numbers. I covered half of my FFIV short today. Though I may come to regret that move, it’s usually not a bad idea to take some money off the table after a big move.

Due to today’s market action, INTC was not able to recover from yesterday’s hit, and fell another 2%. Other big movers in my radar include Research in Motion (down 3.1%), Yahoo (down 2.8%), eBay (up 19%… no I didn’t leave out the decimal. that’s nineteen percent), Texas Instruments (down 2.4%), and Dell (down 0.7%). A word on Dell… it has come to my attention that many insiders at Dell have been dumping shares. They may prove to be a victim of any housing market deflation. I purchased some long-term puts on the stock today.

Despite the big hits in individual stocks, the Big Three indices were down less than 1%. There is plenty of room for more carnage. It will be interesting to see if the China news turns out to be a catalyst for a downturn.

Disclosure: Short INTC, FFIV, RIMM. Long INTC, TXN, YHOO, DELL Puts


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