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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Unwinding Yen Carry Trade Feeding Stocks Bear Market

Stock-Markets / Yen Carry Trade Jul 25, 2008 - 06:29 AM GMT

By: Richard_Gorton

Stock-Markets Best Financial Markets Analysis ArticleThe yen carry trade unwound as Martin Crutsinger Associated Press related the National Association of Realtor Report that sales of existing homes fell more sharply than expected in June. Sales dropped by 2.6 percent last month to a seasonally adjusted annual rate of 4.86 million units which left sales 15.5 percent below where they were a year ago. The drop in sales pushed inventories of unsold single-family homes and condominiums to 4.49 million units. That represented a 11.1 month supply at the June sales pace, the second highest level in the past 24 years.


The unwinding of the yen carry trade can be seen in the EUR/JPY, FXE:FXY , which is the barometer of the yen carry trade, falling to 1.690.

Yen carry traders disinvested from the The BRICS, EEB , which have been a long favored yen carry trade destination: it fell sharply, as did Steel, SLX, which is a major component of the growth in the BRICS.

The sell off in the steel sector caused a sell off in the metal manufacturing sector, XME, which caused a sell off in the gold shares, GDX.

An epic investment sea change occurred today: the leverage that gold mining shares have had over gold, broke down significantly: the gold mining shares disconnected severely from the price of gold, as can be seen in the chart of the HUI Indexed precious metal shares, GDX, relative to gold, GLD, GDX:GLD , collapsing.

In this blog and on FinancialSense.com, I have consistently encouraged investors to trade out of the gold mining stocks for the real thing.

Stocks falling significantly included
Fannie Mae, FNM -20%
Freddie Mac, FRE =19%
Ambac, ABK -11%
MBIA, MBI -16%
Lehman Brothers, LEH -11%
Merrill Lynch, MER -14%
AIG Insurance, AIG -9%
CIT Group, CIT -15%
Capitol One Finance, COF -8%
General Electric, GE -2%
Washington Mutual, -13%
Wachovia Bank, -11%

Sectors falling significantly included
Homebuilding, ITB -9%
Solar Energy, TAN -6%
Steel manufacturers, SLX -6%
Banks, KBE -7%
REITS, RWR -7%
Real Estate, IYR -6%
India, INP -6%
BRICS, EEB -5%
Financial, IYF, -6%
Stock brokers, IAI, -5%
Russia, RSX, -6%
Investment Bankers, KCE, -5%
Leisure and Entertainment, PEJ, -5%
Private Listed Equity, PSP, -5%
Mortgage REITS, REM -6%
Insurance, IAK, -4.5%
Global Build and Construct, PKB, -4.5%
Retail, XRT -4.5%
China, FXI -4%
Wind Energy, FAN, -4%
China Real Estate, TAO, -3.5%
Coal producers, KOL -3.5%
Global Luxury, ROB -3%
Semiconductors, XSD -3%
Brazil, EWZ, -3%
Russell 2000, IWM -2.5%
S&P, SPY -2.5%
Dow, DIA -2.5%

Commodities were volatile

Agricultural commodities, DBA, rose
Oil, USO, rose.
Natural Gas, GAZ, fell 4%. Its fall establishes speculation; industry reports have been published for weeks relating that sufficient supply exists to meet demand.
Industrial Metals, JJM, fell.

Ford Motor Co reported the worst quarterly performance in its history
Dee-Ann Durbin and Tom Krisher of the Associated Press reports that "Ford, F, lost $8.7 billion. The company also said it will retool two more North American truck and sport utility vehicle plants to build small, fuel-efficient vehicles, and it announced plans to bring six new small vehicles to North America from Europe by the end of 2012. The net loss includes $8.03 billion worth of write-offs because the sharp decline in U.S. truck and SUV sales has reduced the value of Ford's North American truck plants and Ford Motor Credit Co.'s lease portfolio. Ford has been successful selling cars in Europe, and the company is banking on the new European models to boost sales and revenue as it deals with a market shift from trucks to cars brought on by high gasoline prices.

The company said it has sufficient liquidity to weather the latest downturn in the U.S. auto market without additional borrowing. Ford borrowed $23.4 billion in 2006 to fund its North American turnaround. Cost cuts also will come from employee layoffs. Ford said 4,000 U.S. hourly workers took buyouts in the second quarter, and the company will continue offering buyouts at targeted U.S. plants. Ford also has announced plans to cut its salaried costs by Aug. 1, 2008 through voluntary and involuntary layoffs".

My commentary is that North American vehicle manufacturers Ford, F, -15%, and General Motors, GM, -11%, are being hit by multiple deflationary hurricanes and will not survive very much longer; it's as Greg Miles and Caroline Salas of Bloomberg report in GlobalResearch.ca article: GM, Ford `On the Verge of Bankruptcy,'

The stock market has failed at major resistance -- the bear market is fully underway again
Kevin's Market blog graphically shows that The Dow fails at major riesistance .

The investment strategy of short selling proved profitable today
Yesterday, in my article, Peak Dollar, I suggested that one go long these Proshares 200% inverse ETFs; here are their returns for today:

SKF Financial +12%
SRS Real Estate +14%
SJF Russell 1000 Value +6%
FXP China +9%
SCC Consumer Services +4%

And I suggested that one go long these too; here are their returns for today:
DXD Dow 30 +5%
TLL Telecommunications +5%
RXD Health Care +0.5%
SSG Semiconductors +6%

I also recommended yesterday that one wait for a good drop in the bond bear market ETF; today was a good drop, as government bonds, TLT , rose; thus providing a safe and profitable entry point .
TBT US Treasuries -2%

The investment demand for gold remains resilient
Gold usually trades inversely of the US Dollar; but today both were up slightly as interest rate differential traders suffered loss.

Not only was there an extinguishment of stock wealth today, there was an extinguishment of currency wealth: interest rate differential traders suffered a set back, as stocks globally fell, and as the metal and manufacturing, XME, fell 4%, and gold mining shares, GDX, fell 1%.

Yes, the major currencies of the world fell lower as seen in the fall of the currency harvest ETF DBV .

The British Pound, FXB , fell lower: it will not be going higher.

The Australian Dollar, FXA , fell; it will not be achieving parity.

The Euro, FXE , remained unchanged; traders please take note -- it will not be moving higher.

The Canadian Dollar, FXC , is in a bearish pattern -- it will not be moving higher.

The last three currencies above have traditionally been the gold and natural resource currencies, that have been used to take gold higher; now that risk aversion to natural resource investing is rising; lending liquidity from the Bank of Japan at 0.5% interest is not flowing into these currencies.

We are seeing disinvestment from traditional long the Aussie and short the Yen; likewise we are seeing disinvestment from long the Loonie and short the Yen.

The Yen, FXY , will be rising for a period of time before it begins to fall lower as well.

There is a reversal now of interest rate differential currency investing.

The USD/JPY fell; Yahoo Finance is quoting a price of 107.79; but the chart reads 107.29 ; I'll go by the chart and not the quote.

The US Dollar, $USD , rose 0.1% today; however in the future it will be going lower -- taking all currencies lower in a death embrace lower together.

Not only will regional trading alliances become evident, they will grow strong; these include a Taiwan and China alliance. And regional unions and currencies will arise in Africa and South America.

Gold, $GOLD , rose 0.6%; for the common investor and all investors for that matter, gold is the now sole means of maintaining wealth ; even if it, for a time falls lower now that the gold currencies are failing.

Gold is likely to jump higher from time to time, as investors leap out of stocks and into gold, in a "desperation jump" to preserve wealth.

My heart really goes out to the retired fixed income investors living off of Treasuries, TLT +1%, zero coupon bond funds, BTTRX +1.4%, and utility stocks and ETFs, such as VPU -1%; these will see not only their capital rapidly depleted but their income as well as interest rates, such as that on the 30 year US Treasury Bond, $TYX , and inflation move higher.

The yen carry traders are definitely in a pickle; their traditional strategies failed today.

The neoliberal Milton Friedman floating currency regime and its policies has met its Waterloo suffering defeat at the hands of gold investors as is seen in the currency harvest, DBV , falling 1% and gold, GLD, rising 0.8%; here is DBV weekly for reference.

The world currencies tanked and sank today; gold rose supreme over stocks, bonds and all currencies.

Speculators may be borrowing from the Bank of Japan to go long gold in the futures market, or invest in gold ETFs such as GLD and IAU.

Those with access to the 0.5% Bank of Japan lending window will now be going short the markets to garner wealth; which will only increase the Deflationary Hurricanes that Mike Mish Sheldon references.

The investment demand for gold remained resilient today as disinvestment from stocks rapidly got underway, as can be seen in the ratio of gold relative to stocks, GLD:VTI , rising; and the ratio of gold relative to oil, GLD:USO, remaining basically unchanged.

The Great Unwinding Of Investments Commences
The springs of liquidity and spigots of liquidity for stock investing have run dry and have been turned off

Jesse in report Bank Credit and Money Supply Growth shows a downturn in the "growth" of Bank Credit, MZM, M2 and M3. This documents the twin spigots used to generate fiat wealth in stocks and bonds have been turned off; these being the easy credit of the US Central Bank in TAF, TSFL and PDCF facilities, as well as the Bank of Japan, 0.5% interest loans.

The turning off of liquidity is seen in the daily chart of the barometer of the yen carry trade, that is EUR/JPY, FXE:FXY, where this metric recently turned down to 1.670, then bounced back up to an all time high in short sell covering, and has now fallen lower to 1.690.

This turning off of liquidity is seen particularly well in the fall in margin credit and yen carry trade favored stocks, particularly the BRICS, EEB, on May 19, 2008; and then again in June, as the May 2008, Bank of Japan minutes were released indicating that inflation is an increased investment risk factor, and now today, with a significant 5% fall lower to 44.7.

Inflation is a major factor in demand destruction at work in turning down stock such as Dow Chemical, DOW .

The ability of corporations to continually being able to wring out profits is done and over; its like a towel being wrong out; their is a maximum to what can be achieved; and that maximum has been achieved.

There was a market place action today, not only to the NAR report, but also to the vote in the US House of Representatives today to give Ben Bernanke more authority over the GSEs as well as to provide credit liquidity and capital infusion ; neither of which will help Fannie Mae, FNM, or Freddie Mac, FRE; these organizations are "goners".

And the authority is coupled with the Dodd Frank housing bill, which is really Bank of America, BAC, rescue legislation; the forthcoming action of Congress and the President effectively nationalizes the US mortgage backed security debts onto the backs of the US taxpayers; it privatizes gains to investment bankers and banks and socializes losses losses to the people of not only America but the world as well. The legislation establishes significantly greater authority in the US Central Bank chief Ben Bernanke; and solidifies an interwoven plutocracy of legislative and business leaders in state corporate rule in America.

The level two assets, level three assets (which are marked-to-fantasy), at banks, KBE, and investment bankers, KCE, as well as the assets kept off balance sheet in qualifying special purpose entities, SPEs, and SIVs, are factors which are going to quickly pull the financial sector, real estate, and stocks and bonds globally, sharply lower.

Going back to the liquidity information: the dwindling of liquidity is stock and bond deflationary: just as increasing liquidity bubbled wealth up, decreasing liquidity will ratchet wealth down.

Multiple systemic risk events are at hand: one being the credit gridlock causing a commericial lending freeze-up causing a massive increase in bankruptcies.

Misery increases
Patrick McGee of CEP news reports that unemployment came in higher that the 380K expected: U.S. Jobless Claims Soar to 406K in Week Ending July 19, 2008

We have passed from one age into another -- gold is the means of preserving wealth
The age of 'investment prosperity is over' and the age of 'financial disinvestment and instability', and the age of 'state corporate rule' are rising.

One might ask, "How is state corporate rule rising"?

The leaders have announced two 'framework agreements': the Security and Prosperity Partnership of North America, the SPP, and the Declaration of EU US 2008. These give them authority to address events that threaten economic stability, and which provide for economic competitiveness. The leaders have appointed councils, working groups and stakeholders, who work in global government principles and policies of security and prosperity.

Kondratieff Winter came to the people of the world today.

Corey Rosenbloom in article Gold Takes An Unexpected Swing provides the chart of gold, $GOLD, showing its outbreak from former consolidation; with $890 forming a strong base of support.

My investment recommendation remains unchanged: I recommend that one dollar cost average a buy in gold within the next ten days with a diversified investment in gold at BullionVault.com, GoldMoney, and in a gold ETF, in a trust account, in Switzerland.

Congress may outlaw elements of oil futures trading
Daniel Whitten of Bloomberg reports that Congress may outlaw elements of oil futures trading that lawmakers found distorted demand and contributed to the 69 percent surge in prices in the past year.

Analysts believe such intervention would drive oil, $WTIC, down to $80/barrel.

U.S. legislators are considering limits on the number of oil contracts an investor can hold and may increase disclosure requirements. Speculators such as Goldman Sachs Group Inc. use the practices to bet on price swings, which may drive up prices, though they have no intention of taking delivery of underlying goods, lawmakers say.

China star rises as US goes supernova
Elaine Meinel Supkis writes "The US still likes to pretend the 21st century will be the Unipolar world dominated by the US. Instead, we will be the frozen North Pole and China will be the red hot momma economy".

"Note how the Chinese took inflation far more seriously than the US this last year. Relentlessly, the government has raised banking reserve requirements and strangled the inflow of foreign funds. This is why they increased their FOREX reserves to now almost $2 trillion. This is over their target. But they are flexible. They can see the US and Japan are set to ignore inflation at home and are bent on exporting inflation to China. So China is no longer 'growing' its trade surplus with the US and Japan. The recent earthquakes in China has also given it more impetus to invest internally, anyhow".

"Japan and China's interrelationships are growing rapidly. Japan can't afford to pretend there is no inflation and hire workers in high-value factories so they are replacing workers with robots at home and moving factories to China and Southeast Asia. The Chinese and Indians are both now developing rapidly their own auto industries. They have to interact with the Japanese for use of the high technologies developed by Japan. Ditto, with Germany. Both Japan and Germany funded state enterprises and systems with high fuel taxes. The US did the exact opposite. So Ford today announces an $8 billion loss this quarter and is rapidly going bankrupt. Like all British auto enterprises, it will soon be owned by either the Indians or Chinese".

"I was wrong about China no longer pouring more money into their FOREX reserves. They paused briefly but by January, 2008, decided to continue the torrid pace of increasing the FOREX reserves so it has doubled in size. Japan, which stopped doing this, joined the Chinese and increased their own reserves by over $200 billion".

Related Reading

My investment article from yesterday: Peak Dollar

By Richard Gorton

Richard Gorton
409 York St #908
Bellingham, WA 98225

http://my.opera.com/richardinbellingham/blog/

Im an investor; and my investment statement is simple: in a bull market be a bull; in a bear market be a bear. In a bull market, one buys on dips; in a bear market, one sells into strength. Research indicates that the stock market has transitioned from bull to bear; and that one's wealth is now best garnered and protected by investing in gold.

© 2008 Copyright Richard Gorton - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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