Another Correction? Come On!

• ByRon Insana, Portfolio Manager
• On 10:12 am EDT, Tuesday July 28, 2009

It's amazing how quickly market pundits get unnerved by a 7-point drop in S&P 500 futures, pre-open. After a succession of new highs, the market is entitled to work off an overbought condition.

In fact, I hope it does. My favorite banks and homebuilders, Citigroup notwithstanding, have been on a tear. But the news has been supportive.

Once again this morning, good news for the builders -- the Case-Shiller 20-City Home Price Index showed a slowing rate of descent in May, a sign of further stabilization in housing. Recent data on new and existing home sales have buttressed that argument.

As for the market selloff, Bank of America just denied a Wall Street Journal report claiming it plans to shutter 6,100 branches, or 10% of the total number of outlets.

Banks were expected to be weaker today, as Deutsche Bank said it would take larger-than-expected reserves against risky loans. The news hit banks in the premarket this morning but have since reversed course. European banks are largely behind the curve, much more so than U.S. banks, in setting aside funds for future losses.

(Yes, I am talking my book, but European banks have spent the last 18 months pretending that problem loans are an American-made problem when they, in fact, were more highly levered -- and consequently more exposed -- to loan losses than their American counterparts!)

As I told subscribers of my "Market Movers" newsletter yesterday, I bought 1,150 more shares of Citigroup at $2.64 a share. That has worked out well, as Citigroup has rebounded by almost 2% as I write.

As for the overall market, a minor rotational correction is still my base case, before another attempt to rally. I would like to see the VIX fall to 20 before I get all worked up about a larger, more meaningful correction, which, as I stated, will prompt me to hedge my exposure to stocks.

The Red Menace

It appears that our former foes (now touchy allies) can dish it out, but they can't take it. As The Associated Press reported yesterday, China's assistant finance minister lectured his U.S. counterparts about fiscal responsibility.

"We sincerely hope the U.S. fiscal deficit will be reduced, year after year," Assistant Finance Minister Zhu Guangyao told reporters after the Monday talks had ended.

"The Chinese government is a responsible government and first and foremost our responsibility is the Chinese people, so of course we are concerned about the security of the Chinese assets," Zhu said, speaking through an interpreter.

The Chinese government is so responsible, in fact, that it murders political dissenters in Xinjiang-Uighur province, where at least 156 people have been killed in the worst riots since the Cultural Revolution. Chinese businesses sell melamine-tainted baby formula to their own children and lead-tainted toys to ours.

But at least they are pillars of fiscal probity, unlike the U.S., which is using record large deficits to counteract the biggest recession in 80 years and keep alive the very consumer market that profits China quite handsomely.

If it weren't for the health of my fellow Americans, I'd be willing to cut the U.S. deficit to zero, overnight. I'd let the economy fail to see which the Chinese value more -- the largest market in the world in which to sell their cheap goods, or a rising dollar that protects the value of their recycled trade surpluses generated by a strong U.S. economy.

The circular flow of trade demands that the current account be balanced. China is running huge trade surpluses, generating more than $2 trillion in foreign exchange reserves, resulting in China buying more than $800 billion of U.S. Treasury securities.

If it weren't so, China would not be the world's second or third largest economy and would not be enjoying the newfound political and geopolitical influence associated with its export-oriented trade machine.

I am no protectionist and I am a supporter of globalization, but if I were President Barack Obama, Secretary of State Hillary Clinton or Treasury Secretary Tim Geithner, I would forcefully tell the Chinese to quit carping; stop talking about a new reserve currency to supplant the dollar, which weakens the very currency they would like to see hold its value; and dump their low-quality products in other markets. Oh yes, and when we bring up human-rights violations, tainted goods, intellectual property rights protection and North Korea, we don't expect to be lectured again for meddling in China's internal affairs.

If Beijing were as responsible, and responsive, to its people as its assistant finance minister claims, these issues would have been solved decades ago. Having just passed the 20th anniversary of Tiananmen Square massacre, it's amazing how quickly the world forgets that for all our issues, there are still regimes that fail to respect rule of law and basic human protections.

From Russia ... Lacking Love

Meanwhile, Muscovites are up in arms about the following comments from Vice President Joe Biden, who -- although he seems to have a congenital condition of foot-in-mouth disease -- made some very accurate statements in a weekend interview with The Wall Street Journal about the reality Russia faces today:

"They have a shrinking population base, they have a withering economy, they have a banking sector and structure that is not likely to be able to withstand the next 15 years, they're in a situation where the world is changing before them and they're clinging to something in the past that is not sustainable."

While clearly at odds with the relationship the Obama administration is trying to "reset," Biden is right and is at the very core of why I want to avoid investing in Russia, performance notwithstanding. To paraphrase a line from a Woody Allen story, they have the type of stability that would make Caligula appear normal. Russia remains a Stalinist dictatorship dressed in capitalist clothing. I don't expect it to change anytime soon.

Biden's comments have caused outrage in Russia's newspapers. Yet they are accurate. Russia is a powerful country, most notably because of its massive nuclear arsenal. Without that, the failed communist state would be nothing more than a resource-dependent nation whose fortunes rose and fell with the prices of oil, diamonds and uranium, the last of which put Russia on equal footing with the likes of economic powerhouse Pakistan.

---

Know what you own: Insana mentions homebuilders. Companies in the industry include Lennar , Pulte , KB Home and Centex .

Buzz up!