"China Rising"

by Larry Levin


Last week I wrote "I have noticed a disturbing trend. Citigroup's stock had to be (temporarily) rescued by Saudi money. UBS needed a huge cash infusion from the government of Singapore and unnamed "middle East money." The FOMC was able to cajole the BOE, BOC, Swiss Bank and European Union to "inject liquidity" into the system for the benefit US banks. And now the Bank of America has warned of larger fourth-quarter losses than previously projected. Who will come to its rescue? Communist China ? Unfortunately, it seems like investment banks (especially in the US ) and the Federal Reserve, are going out with their hat in hand asking, 'Brother, can you spare a dime?'" What a prescient statement indeed! The communists have "come to the rescue" of a major US investment bank, but it wasn't Bank of America that needed the money, it was Morgan Stanley.

In the latest sign that the credit crunch is getting worse, Morgan Stanley admitted to an additional $5.7 billion of CDO-related assets, taking its total fourth-quarter loss to nearly $10 billion. I believe this will be the first quarter in Morgan Stanley's history that it will have a quarterly loss. WHAT? I thought this was an investment bank, ferchissakes, not a bond investor!

Morgan's CEO made the following statement this morning, "The results we announced today are embarrassing. This loss was the result of an error in judgment that occurred on one desk, in our Fixed Income area and also a failure to manage that risk appropriately." He also said he was turning down a bonus for 2007. How nice of him. After all, the entire CDO debacle, including the enormous risk undertaken, came straight from the CEO himself. The mere fact that he was even offered a bonus is offensive to shareholders.

What might also be offensive to current shareholders is the new investor mentioned earlier: the communist government of China . Today's $5-billion bail out, I'm sorry - investment, puts the communist control of Morgan Stanley at nearly 10.0%, which is the #2 investment bank in this country. The Chinese government will be paid a fixed annual rate of 9% and convert into Morgan Stanley common shares in 2010. The current shareholders, however, are only being paid 2%.

When I scanned the financial press after the pit closed, I couldn't find a single negative comment about the financial-love-coupling between the commies and Morgan Stanley. In fact, it was quite the opposite: most approve of the new arrangement. What do you think about this? Before you answer, think of it carefully.

My thoughts come down to this: How would these same supporters of this financial duo have reacted to the US government owning 10% of Morgan Stanley? The outcry from Wall Street would be deafening! So if you answered that it is "ok" like the so-called experts did, but US government ownership would be bad - why? Is it because the US government can't run much properly or profitably (think of the Post Office, IRS, FEMA, etc)? If that's true and you're for the CIC investment, then you must believe the Chinese government does things right. I suppose we shouldn't talk about Chinese communist sponsored slave labor or murder-for-medical-body-parts at its prison camps. Yeah, let's save that for a bed time story.

Apparently Warren Buffet was correct when he recently said in an interview, "Over time, if you keep shipping $2 billion a day out of the country, as we do, of assets, you put pressure on the dollar, and that's what's happening." He went on to say (loosely quoted), " America is for sale all across the globe."

We can hear it now, from the US to Europe to Japan, "Attention K-Mart shoppers, excuse me, foreign shoppers; we have a red tag sale on all mortgage insurance companies and a blue light special on all investment banks!" Boy, that mega-phone must be as big as the grand-canyon!

Real Time Trading Signals*for

Trade Date: 12/19/07

E-Mini S&P Trades*
(before fees and commissions):


8:47 VA Sell 69.00 = -1.50 all

8:59 VA Buy 69.25 = +.75 all

9:15 FT Buy 71.50 = +.25, +.25, -.50

10:08 ENG Sell 73.50 = +.75, +2.25, +2.75

10:37 FT Sell 63.00 = -.50 all

11:14 OTF Sell 3.50 = +.75, +.50, +.50

12:51 ID VA Sell 58.00 = +.75, +1.00, +1.25

1:02 OTF Sell 60.75 = -1.50 all

1:31 VA Sell 68.75 = +.75, +1.25, +1.00

1:54 VA Buy 68.50 = -1.25 all

2:01 VA Sell 8.75 = b/e all

2:12 FT Sell 66.75 = -1.50 all

2:21 VA buy 68.50 = -1.50 all

E-Mini Russell Trades*
(before fees and commissions):

1) Sell @ 8:45am at 756.6 = -1.4 & -1.4

2) Buy @ 9:13am at 759.2 = +.5 & b/e

3) Buy @ 9:41am at 759.6 = +.5 & +.7

4) Buy @ 10:15am at 758.7 = +.5 & b/e

5) Sell @ 10:40am at 757.6 = +.5 & +1.6

6) Sell @ 11:01am at 755.8 = -.9 & -.9

7) Sell @ 11:10am at 757.9 = b/e (1 lot)

8) Buy @ 11:31am at 756.2 = +.5 & b/e

9) Sell @ 12:55pm at 754.4 = +.5 & -.9

10) Sell @ 1:01pm at 755.8 = +.3 & b/e

11) Buy @ 1:17pm at 758.2 = b/e & +.5

12) Buy @ 2:04pm at 761.5 = -.2 (1 lot)

13) Buy @ 2:23pm at 760.9 = +.5, +.7, b/e

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