Archive for May, 2010

Rising Yen And Falling Currencies Causes Four ProFunds Bear Market Mutual Funds To Shine

May 31, 2010

Four ProFunds mutual funds, UKPSX, UXPSX, UFPSX, UVPSX,  rose on a higher yen and falling currencies during May 2010.

UKPSX, Short Japan up 25%

UXPSX, Short International up 23% 

UFPSX, Short Latin America up 19% 

UVPSX, Short Emerging Markets up 19%.

Google Finance Chart shows that a number of yen carry trades, FXA:FXY,  FXC:FXY,  BZF:FXY,  INR:FXY FXM:FXY and SZR:FXY began to unwind in early May, 2010 as the Yen rose on May 3, 2010 from 104.79 with the following changes: FXY, +3.5%, FXE, -7.8%, FXA, -8.5%, FXC, -3.5%, BZF, -5.8%, INR, -4.5%, FXM, -4.7%, SZR, -2.0%. 

A rise in the yen, FXY, simply has not been good for investment and exporters in Japan at large, EWJ, and Japanese Small Companies, JSC, fell 8% and 18% respectively. The country suffers from economic contraction: it continually sees a declining employment, month-after-month.

The unwinding of the yen carry trades globally and a flight of capital out of banking institutions on rising fears of sovereign debt default, caused international, latin america and emerging market bear-market investments to rise; docuemnts that we have entered in Kontratievv Winter.

Suggested Reading

The Coming Economic Collapse Of Japan

Emerging Market vs. G7 Public Debt Levels

Yen Carry Trades Began To Unwind May 4, 2010 … We Have Entered Into A Period Of Competitive Currency Devaluations

May 31, 2010

Google Finance Chart shows that the yen carry trades, FXE:FXY,  FXA:FXY,  FXC:FXY,  BZF:FXY,  INR:FXY FXM:FXY and SZR:FXY began to unwind in early May, 2010 as the Yen rose on May 3, 2010 from 104.79 with the following changes:

FXY, +3.5%

FXE, -7.8%

FXA, -8.5%

FXC, -3.5%

BZF, -5.8%

INR, -4.5%

FXM, -4.7%

SZR, -2.0%

We have exited a period of yen carry trade investing entered a period of global competitive currency devaluations; over the last year currency traders have had great run-ups on a number of the currencies; while according to Yahoo Finance, the yen FXY, has risen 5.0% and Euro, FXE, fallen to a +0.5% gain. Over the last year currencies have attained the following gains; but now, concerns over sovereign debt hav arisen, causing a collapse in currency values to begin. 

Brazilian Real, BZF +35%

New Zealand Dollar,  BNZ +32%

Australian Dollar, FXA, +30%

South African Rand, SZR, +22%

Canadian Dollar, FXC, +17%

Mexican Peso, FXM, +16%

Russian Ruble, XRU, +15%

Indian Rupe, INR, +15%

Swedish Krona, +11%

Swiss Franc, +6%

British Pound Sterling, FXB, +4%

The chart of the US Dollar, $USD, shows a close at $86.71; it may be reaching a top; all currencies may fall in a death spiral lower together at this time.

The Euro Yen carry trade began to unwind in December 2009; those “in the know”, those “with inside knowledge of just how serious the Greek debt situation was”, went “double short” the euro and “double long” the yen, as seen in the Yahoo Finance chart of EUO contrasted with YCL. It was at this time the Euro, FXE, really started to take a nose dive.  

Wikipedia’s 2010 European sovereign debt crisis web page gives insight as to the series of events that started the Euro’s down-slide: In October 2009, a new Greek government is formed after the election, led by PASOK, which received 43.92% of the popular vote, and 160 of 300 parliament seats. On November 5, 2009, a new budget draft reveals a deficit of 12.7% of GDP, more than twice the previously announced figure. On November 8, 2009, a final budget draft aims to cut deficit to 8.7% of GDP in 2010. The draft also projects total debt rising to 121% of GDP in 2010 from 113.4% in 2009. On December 8, 2009,  Fitch Ratings cuts Greece’s rating to BBB+ from A-, with a negative outlook. And on Deember 14, Greek PM Papandreou outlines first round of policies to cut deficit and regain investor trust.  

But trust could not be found and the currency traders relentlessly sold the Euro against the Yen causing disinvestment out of Europe and European banks, as the chart of the European shares, FEZ, shows their dramatic tumble in early January, 2010.   It was on December 16, that S&P cut Greece’s rating to BBB+ from A-. and on December 22nd that Moody’s cuts Greece’s rating to A2 from A1. Analysis shows that the European shares, FEZ, began an Elliott Wave 3 o3 decline on October 22, 2010. 

Aaron Task, In TechTicher article Bailout Or Not, Greece “Looks Like a Train Wreck,” FT’s Martin Wolf Says, writes March 1, 2010 that global markets rallied overnight and U.S. stocks rose early Monday amid multiple reports that a bailout package for Greece a bailout package for Greece worth as much as $41 billion will be announced.

But German Chancellor Angela Merkel cast doubts on such speculation, telling German TV: “We have a treaty under which there is no possibility of paying to bail out states in difficulty.”

Presumably, French and German banks will provide some sort of financial guarantee program that will allow Greece to roll over its short-term debt, including about $30 billion of payments due in April and May, says Martin Wolf, chief economics commentator for The Financial Times. “But the precise details in all honesty I don’t know and I’m not sure anyone does.”

With much more confidence, Wolf says Greece “looks like a train wreck” because alleviating the immediate debt crisis will not solve the nation’s long-term problems.

Greece needs to massively cut its long-term deficits, which means slashing government spending, Wolf says; that, in turn, could tip Greece into a steep recession. The problem is Greece remains “hopelessly uncompetitive” as an exporter. It will struggle to rekindle the kind of private sector growth needed to supplant government stimulus, he says.

For now policymakers seem likely to “paper over” Greece’s problems and “kick the can down the road,” he laments. “I don’t see a proper resolution” for these long-term structural problems. Many observers believe “as Greece goes, so goes the EU,” so the resolution of Greece’s debt crisis – or lack thereof – could have profound implications for the global economy. 

But on March 15, 2010 European leaders,  led by Herman van Rompuy, agree on mechanism to help Greece, but reveal no details. And then on April 11, 2010, a seigniorage aid agreement was announced by European Leaders.

In summary, we have entered into a period of competitive currency devaluations; the US Dollar, $USD, may have topped out at $86.71.

World Collapse Explained in 3 Minutes

May 31, 2010

Video: World Collapse Explained in 3 Minutes by Alex Korbel

The Announcement By EU Leaders Of A Euro Stability Fund Supersedes EU Treaty Law

May 31, 2010

I … Ambrose Evans-Pritchard in article Spain Is Trapped In A Perverse Spiral As Wage Cuts Deepen The Crisis writes that Pierre Lellouche, France’s Europe minister, compares the  (EU’s €750bn “shield” for eurozone debtors) shield to NATO’s Article 4, the mutual defence clause that deems an attack on any one state to be an attack on all.

Whether intended or not, Mr Lellouche may have pulled the detonation plug on EMU by boasting that Europe’s politicians had created an EU debt union on the sly. “It is expressly forbidden in the treaties. De facto, we have changed the treaty,” he told the Financial Times. How will that go down at Germany’s constitutional court, already facing a growing in-tray of claims that these bail-outs breach the Maastricht Treaty?

For Spain it has been a horrible week. The central bank seized CajaSur and imposed draconian write-down rules on banks to restore confidence. The Spanish Socialist and Workers Party (PSOE) of Jose Luis Zapatero then rammed a 5pc cut in public wages through the Cortes by a single vote, shattering consensus. The government cannot hope to pass a budget. Its own trade union base is planning a general strike.

The sub-text of Fitch’s 32-page report shows Mr Zapatero’s self-immolation to be futile in any case. The agency has not downgraded Spain for lack of austerity. Its implicit conclusion is that the policy of 1930s wage cuts – or “internal devaluations” – being imposed on southern Europe’s humiliated states as a quid pro quo for the EU shield is itself part of the problem. Ultra-austerity will bleed the economy, shrivel tax revenues and fail to close deficit anyway. “Fitch believes the risk that economic growth will fall short of the government’s projections,” it said.

El Pais spoke of a “perverse spiral” in its editorial. “The Fitch note drives home the apparently unsolvable contradiction in which the Spanish economy finds itself. To maintain debt solvency Spain must squeeze public spending: yet this policy undermines the chances of recovery which itself causes further loss of confidence.”

Spain’s unemployment was already 20.5pc even before this latest dose of shock therapy. There are 4.6m people without work. Dole payments alone account for half the budget deficit. By comparison, the Anuario Estadístico shows that Spain’s unemployment never rose above 9.5pc during the Great Depression . The economy shrank by 3pc from peak to trough. The Zapatero slump is worse than anything inflicted by Gil Robles during the Bienio Negro.

It is no mystery why Spain is trapped in depression. The country joined the euro without grasping its Faustian implications, as did others. Germany was equally naive in thinking it could have a currency union entirely on its own terms.

EMU caused Spanish interest rates to halve overnight, with dire results as the Bank of Spain’s governor confessed in April 2007. “The single monetary policy has meant that excessively loose conditions for our economy have been almost continuous,” he said.

Real rates were -2pc as the bubble reached its crescendo. Nearly 800,000 homes were built in 2007, more than in Britain, Germany, and Italy combined. There is now an overhang of 1.6m unsold properties, six times the level per capita in the US. Total public/private debt has reached 270pc of GDP.

The boom was a debt illusion, just as it was in Britain but with the added twists of lower wealth to offset household debt and a global investment position that is underwater by 70pc of GDP. Britain still has the instruments to extricate itself. The Bank of England has engineered a devaluation of 20pc, restoring competitiveness at a stroke. Spain can try to claw back an even greater loss by cutting wages, but that risks a slow death by debt-deflation as compound interest tightens its vice.

This can end only in two ways. Either Germany tolerates massive monetary reflation by the ECB, or Spain will be forced out of EMU, setting off a catastrophic chain-reaction through north Europe’s banking system.

Your choice, Berlin.

II … In reply to the Pierre Lellouche quote: “It is expressly forbidden in the treaties. De facto, we have changed the treaty”, it is important to realize that a crisis arose from interest rates rising on Greece’s sovereign debt that threatened to the value of the Euro, FXE, and the stability of European Financial Institutions, EUFN, requiring the European leaders led by Herman van Rompuy and Angela Merkel, to meet in Summit in May, and announce an agreement to stabilize the Euro, by providing seigniorage aid to Greece.  The Leaders’ Announcement did not “change the treaty“, it superseded the treaty.

Glenn Beck in Video and Transcript Press Release relates that our leaders are laying the foundation for global governance and he documents this with the Stephen Harper quote “In a globalized economy, we are going to have to take global responsibilities.” The leaders are taking on responsibility for global governance, a case in point is the May 2010 Europe Summit of Finance and State Leaders who funded the Euro Stability Pact establishing European Economic Governance,  a common European Treasury to sell debt, to buy distressed sovereign debt and provide seigniorage aid for Greece, and to commission Herman van Rompuy to lead a task force to discuss and suggest policies and mechanisms to further stabilize the Euro.

The EU Finance Ministers’ Summit announced a sacrifice of national sovereignty to preserve the integrity of the Euro. The Leaders’ announcement established a unified economic, political, fiscal, monetary and seigniorage government for the entire eurozone. The age of sovereign nation states in Europe is history; global governance has commenced.

Yes, European Economic Governance has commenced. A region of global government has coalesced as envisioned by the Club of Rome in 1974.  Wikipedia relates that The Club Of Rome developed a plan to divide the world into ten regions:  In 1972 The Club of Rome raised considerable public attention with its report Limits to Growth, which has sold 12 million copies in more than 30 translations, making it the best-selling environmental book in world history. Before Limits to Growth was published, Eduard Pestel and Mihajlo Mesarovic of Case Western Reserve University had begun work on a far more elaborate model (it distinguished ten world regions and involved 200,000 equations compared with 1000 in the Meadows model). The research had the full support of the Club and the final publication, Mankind at the Turning Point was accepted as the official Second Report to the Club of Rome in 1974. In addition to providing a more refined regional breakdown, Pestel and Mesarovic had succeeded in integrating social as well as technical data. The Second Report revised the predictions of the original Limits to Growth and gave a more optimistic prognosis for the future of the environment, noting that many of the factors were within human control and therefore that environmental and economic catastrophe were preventable or avoidable, hence the title.

Earth Times reports that the European Commissioner For Economic Affairs, Olli Rehn, warned Tuesday May 25, 2010 at the Brussels Economic Forum, that the European Union risks economic stagnation and mass unemployment unless its member states pursue “ambitious structural reforms in the coming five years.” Mr. Rehn stressed those plans could be enacted without time-consuming amendments of EU treaties, “which is important because we have a sense of urgency and we do not have the luxury of time.”

Herman van Rompuy believes a Crisis Cabinet is the Missing Link in the Eurozone Crisis debate.

The President of the European Council Herman van Rompuy proposed a “crisis cabinet” reports Honor Mahony of the EUObserver on May 25, 2010 in article Van Rompuy Wants Clearer Hierarchy To Deal With Future Crises.  He said that “there is not much hierarchy or organic links between the main players and the main institutions”

European Commission President Jose Manuel Barroso, the head of the European Central Bank Jean-Claude Trichet and Mr Van Rompuy himself would be the Triumvirate in this “crisis cabinet”.  

And Honor Mahony again reports that at the same time the President of the European Commission, Barroso, called Germany’s plans on improving economic governance in the eurozone as “naïve”. He believes that any treaty reform is not feasible in the moment.

Mr. Evans-Pritchard in writing  “This can end only in two ways. Either Germany tolerates massive monetary reflation by the ECB, or Spain will be forced out of EMU, setting off a catastrophic chain-reaction through north Europe’s banking system” gives the clarion call for investing in the safe haven of gold; while one could invest in the gold ETF, GLD, I personally am invested in gold coins.

Glenn Beck Reveals The Push For Global Governance

May 31, 2010

Glenn Beck in Video and Transcript Press Release relates that our leaders are laying the foundation for global governance and he documents this with several quotes: 

Barack Obama … The international order we seek is one that can resolve the challenges of our times.

Stephen Harper … In a globalized economy, we are going to have to take global responsibilities.  (Yes the leaders are taking on responsibility for global governance, a case in point is the May 2010 Europe Summit of Finance and State Leaders who funded the Euro Stability Pact establishing European Economic Governance,  a common European Treasury to sell debt, to buy distressed sovereign debt and provide seigniorage aid for Greece, and to commission Herman van Rompuy to lead a task force to discuss and suggest policies and mechanisms to further stabilize the Euro).

Olli Rehn Calls For Structural Eurozone Reforms Without Time Consuming Treaty Ammendments, Earth Times Reports

May 31, 2010

The European Union risks economic stagnation and mass unemployment unless its member states pursue “ambitious structural reforms in the coming five years,” the European commissioner for economic affairs, Olli Rehn, warned Tuesday May 25, 2010 at the Brussels Economic Forum, Earth Times reports 

Rehn said commission proposals to let eurozone states peer into each other’s spending plans and to create a permanent rescue fund for countries in crisis received “broad and strong support” at a meeting last week of a special task force of euro area finance ministers.

Germany is pushing for more ambitious changes that would require treaty changes, including the suspension of voting powers on EU decisions for countries that repeatedly breach eurozone rules.  “It is a matter for member states to judge” whether to go down the German route, Rehn said.

The European Union risks economic stagnation and mass unemployment unless its member states pursue “ambitious structural reforms in the coming five years,” the European commissioner for economic affairs, Olli Rehn, warned.  He stressed those plans could be enacted without time-consuming amendments of EU treaties, “which is important because we have a sense of urgency and we do not have the luxury of time.”

Euro Crisis Has Led To Recognition Of The Importance Of Emerging Markets And Need For Their Integration Into Global Governance, Trichet Says

May 31, 2010

Gabi Thesing of Bloomberg repors that European Central Bank President Jean- Claude Trichet said emerging nations have weathered the global recession better than advanced countries. Federal Reserve Chairman Ben S. Bernanke also said in prepared remarks to a Bank of Korea conference in Seoul today that “as emerging market economies become increasingly important in the global trading and financial systems, the world economy will depend even more on them to maintain strong domestic growth and economic and financial stability.”

 The International Monetary Fund said last month that emerging economies, including Brazil and Russia, will expand 6.3 percent this year, nearly triple the pace of growth in advanced nations.

Europe this month had to save its single currency with a $1 trillion rescue package after Greece’s sovereign debt crisis threatened to spread. “Emerging countries have also been severely affected, but as a group remained a source of strength for the world economy,” Trichet said via video link to the Bank of Korea conference, according to the text of his speech published by the Frankfurt-based ECB. “It is therefore not surprising that the crisis has led to even better recognition of their increased economic importance and need for full integration into global governance.”

Trichet also said that “the international community has identified the G-20 as the premier forum for international economic cooperation.” The Group of 20 accounts for about 85 percent of global gross domestic product. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union. Korea holds the presidency this year.

Buckle in for Hurricane Season 2010

May 31, 2010
By Michael D. Lemonick Wednesday, May. 26, 2010 in Time magazine relates if a growing number of forecasts are correct, the hurricane season of 2010 could be a monster — one that will have the Eastern states from the Gulf of Mexico to New England fearfully watching the sea all summer.

Debt Crisis Drying Up European Lending, Bloomberg Reports

May 31, 2010

Fabiola Moura of Bloombeg reports in article Debt Crisis Drying Up European Lending that Europe’s sovereign debt crisis is making financial institutions reluctant to lend, threatening to choke off credit to the region’s banks and consumers, said a senior executive of Banco Espirito Santo SA.

“There is a problem with the real economy, because now credit is shortening completely,” said Jose Maria Espirito Santo Ricciardi, head of the investment banking unit of Portugal’s largest traded bank. “I will not say capital markets are completely closed, but it has been difficult, more for the banks than for sovereigns. Namely, the medium and small banks are having problems.”

Lending growth in Portugal will slow to about 2 percent this year from 9 percent in 2009, Ricciardi said in an interview May 27 at Bloomberg’s headquarters in New York. Espirito Santo “will lend much less” and “many, many banks” in the region are in the same situation, he said.

The fiscal crisis in Europe that prompted credit rating downgrades for Greece, Spain and Portugal pushed the three-month London interbank offered rate to 0.5384 percent on May 27, the highest in 10 months. Overnight deposits with the European Central Bank also reached a 10-month high of 315 billion euros ($387 billion) on May 10, signaling banks are wary of lending to each other on concern about exposure to high-deficit countries.

Commercial Paper

There are signs that U.S. banks are growing more concerned about lending to their European counterparts. U.S. commercial paper outstanding sold by foreign financial companies and their domestic units fell the most in 10 months as fund managers trimmed holdings of the short-term debt issued by European banks, the Federal Reserve said on May 27.

The ECB should act faster to free up funds in the market as the Federal Reserve did in 2008, to avoid the situation getting worse, Ricciardi said.

Fed Chairman Ben S. Bernanke had already cut interest rates and led the $85 billion bailout of insurer American International Group Inc. by the time Lehman Brothers Holdings Inc.’s bankruptcy in September 2008. The Lehman collapse sent shock waves through financial markets, leading Bernanke to carry out unprecedented moves to shore up U.S. banks and keep credit flowing.

Fed Moves

In December 2008 the Fed slashed its key interest rate to almost zero, where it has remained. In the following months, the Fed launched programs to pump money into the economy through purchases of mortgage-backed debt and U.S. Treasuries and loans against securities backed by auto loans, credit cards and commercial-property mortgages. Bernanke also backed the Treasury’s $700 billion Troubled Asset Relief Program that was eventually used to purchase equity stakes in the lenders themselves.

“The Federal Reserve opened completely its criteria for giving liquidity to the banking system and buying all types of assets that were not allowed until that moment with the condition that the banking system would continue to give credit to the real economy,” Ricciardi said. “The European Central Bank must change their monetary policy, because if you have a problem in a bank like you had here, in certain countries like Spain, for example, it is going to be a worldwide problem again.”

ECB Emergency Measures

The ECB in Frankfurt has also adopted emergency measures to try to stimulate credit flow in the 16-nation economy, including lending banks as much money as they want in regular refinancing operations at its record-low benchmark rate of 1 percent. It has also extended the duration of the loans and urged banks to resume lending to companies and households. Lending has nevertheless declined for seventh straight months.

While the ECB started to withdraw its so-called non-standard measures earlier this year, the sovereign debt crisis prompted it to restore some of them and also to start buying corporate and government bonds on the secondary market in an attempt to lower bond yields in Portugal, Spain and Greece.

Stocks and bonds in Portugal, with a budget deficit of 9.4 percent of gross domestic product, more than three times the European Union limit, are falling on concern that the government will struggle to reduce its debt. The cost of protecting the government’s debt against non-payment over five years with credit-default swaps has about doubled to 309 basis points last week from 155 on April 13, according to data compiled by CMA DataVision.

Portugal remains Espirito Santo’s biggest market and the bank’s shares have lost 31 percent this year, compared with the almost 17 percent slide in the country’s benchmark PSI20 Index.

Foreign Markets

Espirito Santo, based in Lisbon, is relying on business in markets outside Portugal, such as the U.S., Brazil and Africa, to keep up its profit growth, Ricciardi said. The bank said May 3 first-quarter net income rose 18 percent, driven by equity trading.

“Almost 40 percent of our overall bank is already business that is coming from outside Portugal and we are still growing in many parts of the world,” Ricciardi said. “Until May it was very good, but I won’t say I am not concerned. This is becoming again a worldwide problem if in Europe people can’t have a strong and fast answer. The problem with Europeans is that they always come late and not with enough strong measures.”

Commentary

A liquidity crisis is emerging in Europe, that is a liquidity evaporation is developing, which is leading to a freeze in lending, and a redirection of funds from banks to the ECB and BIS,  causing capital depletion of banks, and stimulating a short selling spree of European Financial Institutions, EUFN, as their debt is down graded and credit default swaps rise on all types of debt in Europe. The issue is exasperated as currency traders go long the Yen, FXY, and short the Euro, FXE.

Utility Investors Have Lost Seven Percent On Their Investment This Year

May 31, 2010

Fixed income investors have been badly beaten down this year: those invested in utility stocks and ETFs such as VPU have lost quite a bit: VPU is down 6.4% so far this year.

American Electric Power, AEP, is down 8.1% this year.

The US has entered into a “deflationary spiral” that is part of the Elliott wave 3 of 3 down; which is also Kondratievv Winter  Citing reduced electrical demand American Electric Power will keep 10 units off line most of the year.

American Electric Power Inc., one of the nation’s biggest power generators, says 10 of its smaller, coal-fired generating units will remain off line for much of the year because of lower demand for electricity.

The company said the units will be kept in “extended startup status,” during off-peak months beginning Tuesday. The plan will allow the company to redeploy workers at several coal-fired units projected to run less frequently over the next few years.

During peak months of July, August and January, these units will be available as they have been in the past.

The recession has dampened demand for electricity, especially from industrial customers. Electricity demand fell for the past two years, the first time that has happened since 1949.