May 11, 2007 by Addison Wiggin & Ian Mathias

• Dow takes a triple-digit hit
• Chinese volume spikes up 1,000% in less than a year…
• Forced marches, forced “buying missions,” what’s the difference?
• Dollar rallies… apparently, currency traders can’t read
• Our Maniac Trader eyes a silver play
• Chavez rhymes with Castro: Deja vu all over again?

Specul… ahem… Investors are taking U.S. profits off the table. Yesterday, the Dow posted its first triple-digit loss since March. As we suspected, weak retail sales pushed stocks lower all day.

In China, the bubble market is one day closer to popping, too. Yesterday, almost $50 billion was exchanged on the Chinese market… more trading volume than all the rest of Asia combined. Perhaps even more shocking, just six months ago, trading volume on China’s two exchanges was somewhere around $5 billion per day.

If you’re doing the math at home, that’s 1,000% growth in half a year… incredible.
“Wait a minute. Aren’t these the same people who believed Mao’s silly guff?” asked our own Bill Bonner in yesterday’s Daily Reckoning. “Aren’t they the same dumbbells who took the Long March... who starved each other... who tried to make steel in their kitchen stoves... who wore ugly gray suits, held up copies of Mao’s pathetic Little Red Book and put dunce caps on anyone with wit enough to object?”

“They’ve been victims of collectivism,” said Bonner. “Now they seem to want to be victims of the market system too. And when the end comes -- there has never been a bubble without a pop -- many of them are going to feel like jumping out of windows.”

Some 300,000 Chinese trading accounts will be opened today alone.

The U.S. trade deficit with China has become worrisome… so worrisome, the Chinese government is forcing businesses to come to the U.S. on “buying missions.”

In preparation for upcoming trade talks, China is on a mission to spend money in the U.S. on… well… anything expensive. Think they bought Mustangs or the Trump Tower? Not likely. The Chinese kicked off the campaign on Wednesday by buying $4.3 billion in U.S. technology… which they will take back to China to build stuff with.

The Commerce Department reports that the trade gap has widened by another 10% in March, to $63.9 billion -- about $4 billion over what noodlers at the Commerce Dept. had estimated. Wait a second. Shouldn’t we be sending our boys over there on SELLING missions? Oh, yeah… we don’t make anything they want to buy. Hmm…

Despite all the recent bad news for the U.S. dollar, it “has come out of the woods smelling like a rose…” writes Chuck Butler.

You’d think a 10% U.S. trade deficit increase, the interest rate hikes from the Bank of England, more on the way from the European Central Bank and god-awful retail numbers would take the dollar for a ride. But as Keynes said, the market can remain irrational longer than you can remain solvent.

“I have no idea what these traders are doing,” Chuck reported from the EverBank world currency trading desk. “All I know is traders are setting up the dollar for a big fall. The longer the dollar remains just ‘weak,’ and doesn't get weaker with all this bad data flying around it, the harder the fall is going to be!”

“Silver, like many precious metals, is set to go much, much higher,” our Kevin Kerr responds to a reader inquiry. How do you play it? “My first choice for taking advantage of silver’s coming rise is options on futures. However, owning key mining stocks, like Coeur d’Alene Mines, is excellent, too.

“A stock like CDE is not silver -- silver is silver,” says Kevin. “It has no board of directors, scandal, threats of strikes, flooded mines, etc. But CDE just bought one of my favorite Australian gold miners, Bolnisi Gold, to get control of that firm’s Palmarejo silver and gold project.

“However, CDE recently reported earnings news that disappointed the market. First-quarter net income dipped to $14 million, or 5 cents per share, from $14.3 million, or 5 cents per share, in the prior year. Income from continuing operations before taxes grew 32%, to $17.7 million, or 5 cents per share, from $13.4 million, or 5 cents per share a year ago.

“The dip in CDE is a buying opportunity, but I'm not sure where the bottom is. Once it bottoms, I'm a buyer.”

 “If I were a Venezuelan citizen, I would have to agree with Chavez,” one reader wrote in response to our kind view of the Venezuelan president’s nationalization program. “Supplying the domestic market first before exporting steel and creating a shortage at home is the right approach. Kind of like Bush supplying Iraq with all our capital, and then having to print phony money for our consumption.”

Yeah… except Bush is a nut job too.

“Maybe I'm just ignorant, but can't remember anyone drawing a parallel between Castro and Chavez. Not even the fact that their names both begin with ‘C’...” another reader opined.
 
“Chavez is a relatively young man and a fanatically radical socialist, and has been ‘legally’ endowed with the capacity to be dictator for life; he is also nationalizing industries almost monthly, or at least effectively controlling them, which amounts to the same thing. Very bad for international companies, initially the oils. Some had the wisdom to get out of Dodge, others wishing now they had cut their losses, evacuated their people and told him to run the blamed tar oil business himself. The world, being as it is, Chavez will find techs and support facilities to service his wells -- at least for a while, and as long as they get paid, but the country will suffer, and the price of petrol may be affected…

“Castro took a long time to take the country, and the signals were there; some sold and left whole, others paid a price. ‘Deja vu all over again?’ Close enough for this investor.”

“Chavez is not a nut job,” another responded with a near-1,000 word opus. “He is doing his best to protect his country's interests against all the subtle and not-subtle U.S. economic aggressions in the past. Obviously, he is far from perfect from any perspective… but he too has his country trying to go in the right direction, trying to help the general citizenry.

“I suggest that a more credible argument can be made that it is OUR policies that should be described as those of a ‘nut job’ [done], for not creating an environment which enhances its citizen's long-term well-being. And when all is said and done, that seems pretty much in agreement with the material that you [Agora Financial] regularly send out. I value your collective comments, and in fact, I am a Financial Reserve member… 'nuf said…”

'Nuf said is right… around here, Reserve members can always count on getting the last word.

(BTW, if you are a Reserve member yourself, you can attend all our events free -- including our famous Investment Symposium in Vancouver July 24-27th... this year's going to be the best yet. If you're not a Reserve member, the early-bird discount is still available...click here to learn more. )

Warm regards,
Addison Wiggin,
The 5 Min. Forecast

P.S. “Our recommendation on the Dow industrials (the DIA July 130 put),” wrote Steve Sarnoff earlier this week, keeping his eye on the froth in the market, “was triggered on May 7 at $175 and traded up May 8 at $190. That’s a 9% gain in one day.”

As we pointed out yesterday, Steve uses these trades to hedge against unexpected moves in the market. For example, you may be long some big blue chips in the Dow, but worried the market is getting overvalued. A put -- or bet that the market will pull back -- can hedge against your long position. That 9% gain, if you’ve taken profits at the right time, can help defray any losses you may have taken while following your overall investment strategy.

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