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Farrell: China and Greece on My Mind

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Greece easily sold a bunch of short term bills Tuesday morning with demand far exceeding the supply. An originally planned sale of 1.2 billion Euros in 6 and 12 month bills was expanded to 1.56 billion Euros. The yields were so high, however, as to be painful.

The six month was priced to yield 4.55% (last January's auction was done at a 1.38% yield), and the one year bill was offered at 4.85% (2.2% last January). Demand was brisk with the bid to cover running over six times.

The issue isn't selling short term paper, though. Can they sell enough longer term bonds at anywhere near affordable interest rates to get through the year without turning to the bail-out fund is the far bigger issue. Pimco's Mohammed el-Arian said that knowing what they know now, Pimco would not be buying any Greek bonds on the upcoming offering.

Not having the biggest and arguably best bond manager on board will make the peddling a tough slog.

The U.S. trade deficit widened a bit more than expected to $39.7 billion from a revised $37 billion the month before. Exports did go up nicely but not as much as imports grew. Consumers bought more foreign made computers and TV sets and spent about $1 billion more on industrial supplies.

We are at the stage of recovery where both imports and exports should rise but our addiction to foreign made goods makes it very unlikely that President Obama's plan to double exports the next five years is doable. Prices of imports rose a modest 0.7% and ex-oil actually dropped 0.2%.

There is no sign of inflationary pressure coming from this sector.

China happened to report its first trade deficit in six years with a negative $7.24 billion for the month of March. Talk about timing! Just when the heat was being turned up about the renmimbi being overvalued, a deficit shows itself. It's good to be a Communist country I suppose.

China did run a surplus of almost $10 billion with the US so the pressure is not completely off. China's foreign reserves rose by $48 billion in the first quarter compared to an increase of $126 billion in the fourth quarter of last year. That brings its total reserve position to $2,477 billion. Their first quarter trade surplus dropped 77% and they would argue it is more than just exchange values that determine trade flows.

And to prove they don't take orders form anyone, the Chinese President, Hu Jintao, rebuffed US calls to re-value the yuan. He apparently told President Obama that China will adjust the currency only "in accord with domestic interests." President Hu defended the policy of pegging the yuan to the dollar and said changes to the exchange rate would not come from outside pressure. An official with the National Development and Reform Commission added that China would not be raising interest rates in the short term. Domestic currency traders were told last Friday not to speculate on rumors on currency reform and a foreign exchange regulator stressed the official policy of a stable exchange rate for the yuan. All of this is probably for public consumption and most expect some revaluation of the Chinese currency before too long.

The National Federation of Independent Businesses is, more or less, the proxy for small business in the US.

The NFIB survey showed small business optimism fell back to 86.8 in March from 88 the month before. My pal, Dave Rosenberg, of the Toronto firm, Gluskin Sheff, reminds us that in the 2001-02 recession the NFIB hit a low of 96.3; in 1990-91 it got as low as 91.4; and in 1981-82 the bottom was 94.4. So the current level is below the past three recessionary bottoms, even though we have come well off the economic bottom.

The NFIB stands in sharp contrast to the Institute of Supply Management (ISM) surveys I like to look at. It suggests smaller firms are still struggling most probably with the inability to access credit. Whatever the cause it is doubtful they will be aggressively hiring or expanding their businesses. Small business accounts for well more than half of job creation and the rate of unemployment is calculated off the "household survey" which is a small business/sole proprietor survey. The Bureau of Labor Statistics big job survey will likely show large job gains in the months ahead but the unemployment rate is likely to itself remain high.

That is one of the reasons I expect a moderate rate of GDP growth in the second half of the year.

Word around the office is that Mrs. Fong told little Harry when he was still in the cradle that if you could buy insurance stocks below book value you would probably make money. That could be why he has Allstate (ALL, buy rated, recent price $33 ) as his best idea for 2010. Book is about $34 now and should be close to $38 by year end. His estimates are $4.35 for this year and $4.60 for next so the stock is trading for a little more than 7 times next years earnings. About 2/3rd's of the business is auto insurance and their loss ratio is 94% with the industry closer to 104% (for 2009). That should provide an opportunity for market share gain. His target is $38 and the current yield is 2.3%.


Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC. 

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