Still mindful of losing about $6 billion of the $8 billion CIC invested in Morgan Stanley (MS) and Blackstone last year, chairman Lou Jiwei not only bluntly rejected the notion of putting the government’s money into banks outside of its homeland, but did so citing an overwhelming fear.

“I don’t dare to invest in financial institutions now,” Lou, said today (Wednesday) at a conference in Hong Kong, Bloomberg reported. “The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything.”

The timing of Lou’s remarks has to be intentional, as government officials are about to enter its fifth round of continuing economic-focused dialogue with U.S. Treasury Secretary Henry Paulson. And he wasn’t the only high-profile person in China who trashed the health of the U.S. economy, which officially entered a recession earlier this week.

“American consumption, to be quite blunt about it, is toast, and when the consumption bubble goes that’s a big problem for this region,” Stephen Roach, chairman of Morgan Stanley Asia Ltd., said at the same conference. “There is no country in this region that is not either slowing or in recession right now because the world’s biggest end market for its exports is in serious trouble.”

One can’t help think Roach is overlooking the facts that Morgan Stanley was one of CIC’s biggest losing investments, and that China followed the United States’ lead last month in announcing a $582 billion economic stimulus.

That stimulus money will largely go to infrastructure projects – low-income housing, water and energy projects, airports, disaster relief and new railroads. [Editor's note: Money Morning recently identified five way investors can profit from China's stimulus.]

Ironically, those projects will be the focus of the United States’ next stimulus plan when President-elect Barack Obama takes office in January.

With little exposure to the mortgage-backed assets responsible for the meltdown of the world’s financial system, and billions being poured into infrastructure, China could come out significantly ahead of the West when the global economy finally rebounds.

But even with  $1.6 trillion in foreign currency reserves, China still lacks the firepower to bail out the rest of the world.

“China can’t save the world,” Lou told Xinhu. “It can only save itself.”

Source: China Slams Western Financial Firms

Ever since the market bounced back from GE’s nasty earnings miss, there’s been a sense that the buyers have more mojo than the sellers. That bullish mojo seemed to dry up Wednesday, suggesting angst over the Fed’s next move. But then came Thursday, and the bulls went all out. Friday was so-so, but the optimism endures.

Trades that have been working for a long time — energy, metals and so on — have temporarily reversed. Stuff that was beaten down — tech, financials, home builders and so on — have caught a strong bid.

So does that mean it’s time to reverse last week’s call for more pain in the financials? Is it time to embrace new upside there and change the game plan around?

Nope. Not unless the key facts have changed. The bottom line is, there’s a new hope jag in town… but the question is how long it will stick around.

Of course, you can make some good coin being long selective names. My friend Cash’s Blackstone pick, for example, is up about 20% from his recommended entry point as of this writing. (See previous Taipan Daily episode, “Cash Makes a Controversial Call.”) But on the whole, I’d still rather be on the sidelines in financials (waiting for a reversal) than long them.

It’s also interesting to note that financial stocks, in rally mode, are approaching their 50-week moving average from below. Meanwhile gold and silver, in correction mode, are approaching their 50-week MA from above.

The 50-week MA could act like a ceiling in regard to the financials. For gold and silver, it could act like a floor. I suspect that, at some point soon, these markets will trade places and revert back to longer-term trend.

Why? Because underlying conditions haven’t changed all that much… and as Jesse Livermore once noted, the speculator’s greatest and truest allies are underlying conditions. Inflation is still a growing (and global) threat. Western banks are still coughing up hairballs. Consumer pain is still an early stage problem, in both the U.S. and Europe; the printing press still looms. Evidence on the ground hasn’t truly improved. The only thing that has, really, is Wall Street’s mood.

The Best Trading Book Ever Written

Speaking of Jesse Livermore there. Hopefully you’ve heard of him.

Livermore was a great trader in the early years of the 20th century. The book that tells his story, Reminiscences of a Stock Operator, is widely agreed to be the best trading book of all time. There are gems of insight on nearly every page. And though Reminiscences was first published in 1923, its wisdom applies today more than ever. (Technology has advanced since then, but human nature not a whit.)

If you haven’t read Reminiscences and have no interest in trading, then that’s fine. If you do have an interest in trading, however — or even just the least bit of curiosity — then by all means run, do not walk, to get your hands on a copy of this book.

The author of the book is a man named Edwin Lefevre. (Livermore told his story to Lefevre, a professional writer, who then turned it into a first-person narrative. The narrator in the book gives his name as “Larry Livingston.”) You can find a copy in your local bookstore, or on Amazon.com… or even free on the Internet. (The font isn’t all that appealing, but the book is available in PDF form here: http://www.scribd.com/doc/7923/Reminiscences-of-a-Stock-Operator)

For those not inclined to read the whole thing, I have a list of the top trading quotes and stories from the book. (I’ve read it multiple times, and compiled the list years ago.) It’s a pretty long list, but not as long as the 250 or so pages.

Since the text has passed into public domain, I imagine it would be okay to post that list on the Taipan Web site — but only if enough folks are interested. (If that sounds good to you, send an e-mail to (taipan@taipanpublishinggroup.com) with something like “Livermore quotes” in the subject line.)

This is the quote that came to mind most recently:

[The successful trader] must not only observe accurately but remember at all times what he has observed. He cannot bet on the unreasonable or the unexpected, however strong his personal convictions may be about man’s unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities — that is, try to anticipate them.

I call this “playing the odds game.” It means being aware of reward to risk, being aware of the chances (or “odds”) of an event happening, and combining those two things in an effort to make good trading decisions.

Oftentimes, playing the odds game means passing up a trading opportunity — even if it looks tempting in the short term. A healthy respect for probability means thinking about risk as much as reward; that in turn means thinking how a trade might play out if it were reenacted not just once or twice, but a hundred or even a thousand times.

However, to take one example, big oil still looks cheap. I’m not convinced that oil prices above $100 a barrel will be sustainable for the rest of this year and next, as economic conditions worsen across the globe (though in the long term, peak oil and rising demand may well mean that we one day look back on $100 a barrel as a bargain).

But the truth is that the oil majors’ shares haven’t really risen with the oil price in the past year or so, as they’ve had their own worries. So at these levels, regardless of what happens to the oil price (within reason), both Shell and BP look cheap. The Chinese certainly think so – The Telegraph reports that Beijing has built up a near-1% stake in BP through a sovereign wealth fund.

While the Chinese haven’t exactly shown stupendous judgement (buying Blackstone just as the private equity bubble burst, for example), I wouldn’t want to bet against them on this one.

Turning to the wider markets…

On Friday, the FTSE 100 closed down 63 points at 5,831. Insurer Friends Provident was the main faller after US group JC Flowers said it will pull its proposed offer unless the group enters talks by the end of this week. For a full market report, see: London market report (http://www.moneyweek.com/file/45345/london-close-small-retreat-on-broad-front.html).

Across the Channel, the Paris CAC-40 lost 31 points to end the day at 4,766. And in Frankfurt, the DAX-30 fell 49 points to 6,554.

On Wall Street, US stocks edged lower as the country’s fourth-largest bank Wachovia said it would raise $7bn in capital and cut its dividend sharply, after losing $350m in its first quarter. The Dow Jones slipped 23 points to end at 12,302. The broader S&P 500 fell 4 points, to 1,328, while the tech-heavy Nasdaq slid 14 points to close at 2,275.

In Asia, Japanese stocks headed higher, with the Nikkei 225 closing 73 points higher at 12,990. Trading houses, which generate a large chunk of their profits from commodities trading, headed higher as oil hit a fresh record.

Crude oil was trading at around $112.04 this morning, after hitting a record of $112.48, while Brent spot was trading at $110.06.
Spot gold was trading at around $934 an ounce this morning. Platinum was also higher, at around $2,012, while silver was trading at $17.98.

Turning to forex, sterling was trading at 1.9711 against the dollar, and at 1.2430 against the euro. The dollar was last trading at 0.6308 against the euro and 100.93 against the Japanese yen.

And this morning, Tesco’s full-year results met City forecasts, with an 11% rise in annual profit for the 52 weeks to February 23rd. Like-for-like sales (excluding petrol) were up 3.5%, and up more than 4% in the first five weeks of the new financial year. Chief executive Terry Leahy acknowledged that the tough economy would have an impact on consumer habits, but told Reuters that Tesco tends to “grow market share in this kind of environment”.

Source: http://www.moneyweek.com/file/45379/the-outlook-for-house-prices-is-the-worst-in-30-years.html

It’s a stupid question.

1. China already owns a huge chunk of our national debt. It has accumulated $1.5 trillion in its foreign exchange reserves. At one point last year, it was adding $1 million a minute to its vaults. The U.S. already depends on China using that money to buy our bonds. It keeps our interest rates down. This by itself is more than enough power over our economy.

2. So far, the China Investment Corporation (CIC) – the name of its sovereign fund – has made investments totaling $200 billion. That’s a pretty big number. But only $60 billion of it is earmarked for foreign investment. And the U.S. will only get a small part of that. In other words, the numbers aren’t scary.

3. It’s invested $5 billion in Morgan Stanley. Oops. And $3 billion in Blackstone. Double oops. Maybe it’s not Americans that should be asking whether the Chinese should be investing billions into our companies, but the Chinese who should be asking whether they should be investing so much into assets falling in price.

Besides Chinese money, there are petrodollars, drug money, money from terrorist states and other suspect sources making their way into the global and U.S. economy. This is nothing new.

In a worst case scenario, can Chinese money exit all at once from U.S. companies – creating economic chaos? Can these small shares in very big companies lead U.S. companies into nefarious anti-U.S. activities?

No and no.

It reminds me of the paranoia surrounding Japan in the early 1980’s when they were buying some of our most cherished real estate. It’s true that Japan was (and is) an ally and China is a country where in some areas we cooperate and in some we compete. And in other areas we manage to cooperate and compete with them at the same time. In other words, it’s complicated.

U.S. companies have invested a great deal of money and technology into China. By the way, wouldn’t it be easier for the Chinese government to sabotage those investments on their own turf rather than pulling off something in the U.S.? And now, China is returning the favor – more with its money than technology.

I’m all for it. Anything that gives China more of a stake in our economy and our biggest companies doing well is fine by me.

What’s worrying me isn’t what they do with the $60 billion. It’s how they grew their foreign exchange reserve so fast. Our appetite for imports has made China a ton of money and has saddled the U.S with a huge debt.

A South Korean pension fund – the fifth largest in the world – just said it will stop buying Treasuries. Not being able to finance our huge debt is going to get us in the end, not China’s U.S. investments.