China won't be manipulated in euro chaos

Reports about the possibility of China dumping European bonds in response to debt crisis are absurd.

By Jim Cramer May 27, 2010 10:46AM
TheStreet's Jim Cramer

OK, let's figure out some other way to take the euro down.

I am talking about what now looks to be the totally specious report by the Financial Times that the Chinese were going to dump their holdings in European bonds, something I dismissed last night as highly unlikely, because unlike the US, the tariff-happy Europeans would have quickly put import duties on the 25% of Chinese exports that head to Europe.

The story seemed too perfectly timed. Lots of hedge funds --which are known for betting on falling stocks -- have had a great May and it would have been horrible to ruin that performance with a couple of good days inspired by American fundamentals and a better Chinese market.

So, I think, we had a whole new factor at work Wednesday, something I will call the "markdown" factor.

As you recall, we were having a slam-bang session with the Dow ($INDU) up 133 points, when the Financial Times "broke" the story about the potential Chinese bond dumping. I thought the story was pretty absurd if not "evergreen" as this is what the bears used to say the Chinese would do about what must be the greatest investment in the history of communism: long-term US government bonds.

But other outlets seized on it when the euro fell and that was all she wrote, and a drop of 200 points enveloped us.

It hit me this morning: Hedge funds at the margin are the only games in town, meaning they are the ones who are controlling prices. Equity inflows have stopped since the "flash crash." The equity inflows were never that substantive anyway and the individual investor is closing accounts and fleeing to anything, including housing, as Bob Toll, the CEO of Toll Brothers (TOL) said last night. So hedge funds, like the mutual funds of olden yore, have to protect their gains.

Who isn't fretting about bonds worldwide? The fact that the story hit at a maximum impact moment felt as if it were planted by people desperate to preserve their lead.

Today we see how hard it is to manipulate the Chinese. That country knows where its dumplings are buttered --- do they butter dumplings? -- and quickly dismissed the story lest the retaliation begin today. Smart guys.

It’s crummy timing for the bears, but great timing for the bulls, with only one day left in the month. Do they have the firepower to keep it up? I doubt it.

But they have the Chinese on their side and a globe-trotting Tim Geithner and no quitting on "top kill" yet, so after a 12% decline in May, the return to where we were before the story floated looks to be in the cards.

Jim Cramer is co-founder and chairman of TheStreet. He contributes daily market commentary for TheStreet's sites and serves as an adviser to the company's CEO.

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