Euro Yen Carry Trade Takes European And Asian Stocks Higher In Morning Trading But US Unemployment Report Weighs And Takes World Stocks Lower

I … Today’s financial market report 

The European shares, FEZ, rose strongly in early morning trading as currency traders took the Euro, FXE, up above its recent high to a little over 130. Austria, EWO, Spain, EWP, Italy, EWI, and France, EWQ, rose strongly. Chart of EWO, EWP, EWI, EWQ

The currency traders also took the Swiss Franc, FXF, the Australian Dollar, FXA, the South African Rand, SZR, the British Pound Sterling, FXB, and the Brazilian Real, BZF higher at opening. The Yen, FXY, rose strongly to 114, near its former high as stocks fell during the day. 

Today’s “euro and asian currency infusion” re-balanced the lucrative Swiss Franc Australian Dollar carry trade, FXF:FXA, to its 200 day moving average and re-established Asia, DNH, Russia, RSX, Sweden, EWD, Hong Kong, EWH, Australia, EWA, Singapore, EWS, United Kingdom, EWU, and South Africa, EZA, stocks to their former levels.  

The chart of dividend paying Exxon Mobil, XOM, shows that it has fallen out of favor with investors; it has been underperforming the stock market for the last year, in spite of the fact it pays a 2.9% dividend.  

Carry trade investment flowed into base metal, DBB, and oil, USO, causing a break-out or perhaps better said, a burst-out in base metals. The rise in base metals is led by copper, JJC, on reports of continuing decreases in copper stockpiles.   

The US Dollar, ETF, UUP, fell near its 200 day moving average.

The chart of the emerging market currencies relative to world currencies, CEW:DBV, indicates that six days of “credit deflation”, seen in the chart of AGG, is wearing on the competitive advantage once held by the emerging market currencies.  This profit taking on carry trade investing in the emerging market countries, is reflected in the chart of the emerging market stocks, relative to the world stocks, EEM:VT closing at 0.974. The rally in the emerging markets is clearly seen as topping out, in the chart of EEM which shows today’s lollipop hanging man candlestick. The emerging market superstar, Columbia, GXG, turned down now for the second day displaying a massive lollipop hanging man candlestick on an ascending wedge.

Despite today’s rise in the currencies mentioned above, debt deflation is working to take world currencies, DBV, lower, which topped out July 23, 2010 at 22.93.

One new effect of debt deflation: in addition to “stock deflation”, is that “credit deflation” has commenced, as aggregate bonds, AGG, topped out July 21, 2010 at 107.72; AGG closed today at 107.67. Confirmation that “credit deflation” commenced on July 21, 2010, comes from the 300% inverse of the 30 year US Treasury Bond, TMV, which has been rising since July 21, 2010 from 39.70 to close today at 43.57  

The US 20 to 30 Year Government bonds, TLT, topped out July 21, 2010 at 102.03. The US Ten Year Note, IEF, topped out July 26, 2010 at 95.86 and closed today at 95.73. Today the US Ten Year Note rose strongly on falling US Stocks, causing the yield curve, $TYX:$TNX to rise strongly; the yield curve has been RISING ever since the onset of the European sovereign debt crisis on April 26, 2010, and May 1, 2010, when the currency traders sold the worlds currencies, DBV, against the Yen, FXY as is seen in the chart of DBV:FXY. The same action of selling the world currencies against the yen is now in effect with the rise in the Yen, FXY, today to 114. 

Risk aversion to stocks took corporate bonds, CFT, above its July 25, 2010 high, and risk aversion took short-term US Government bonds, SHY, to close just below its July 21, 2010. I believe the lollipop hanging man candlestick in CFT, at 105.57 communicates an end to the rally in corporate bonds. 

The effect of debt deflation is stock deflation as world stocks, VT,  topped out July 26, 2010 from 42.48; today world stocks rose back up to 42.31. Chart of world shares, VT, compared to European Shares, FEZ, and emerging market shares, EEM, and the Russell 2000, IWM,  shows the topping out of world stocks … Chart of VT, FEZ, EEM, IWM

Volatility has been rising from a bottom of 22.64 on Jul 27, 2010, indicating that the bear market that commenced April 26, 2010 has returned; Volatility closed today at 22.83. Confirmation of recommencement of a bear market comes from the rise in the ProShares bear market ETFs, SJH, and SDP, coupled with inability of the financials, XLF, to rise above resistance, as well as the spectacular pop in the European Financials, EUFN,  on July 27, 2010 to 22.34; EUFN closed today at 22.33.

Financials, IYF, topped out July 27, 2010, at 53.34; they closed today at 52.91. 

US Shares, VTI, fell, more than world shares, VT, as the US small caps, that is the Russell 2000, IWM, shares fell 0.26% as Stephen Bernard of the Associated Press reported that the investors took a dim view of the latest report on unemployment and warily waited for the government’s reading on second-quarter gross domestic product. Semiconductors, SMH, fell 1.57% to lead the technology, MTK, shares lower. 

This author sees an “order of future falling”: First the Russell 2000, IWM, critically dependent upon low-cost and highly available credit, will lead the way down, now that “credit deflation” has commenced, in addition to the recommencement of “stock deflation” that started on April 26, 2010. Secondly, the European shares, FEZ, will fall lower being crippled by debt issues surrounding the European Financials, EUFN. 

EuroIntelligence in its news summary of 29.07.2010 reports that Wolfgang Munchau in FT  Deutschland says the German banks are over reliant on hybrid capital, as boosting capital in banks is likely to emerge as the most important economic policy challenge of the decade. And in news detail reports that the German banks, the Landesbanken in particular, would have failed the stress tests, if the benchmark had been equity tier 1 – just equity capital and retained earnings. Munchau argues that the real weakness of the German banking sector is thus not fully captured by the stress tests. Worse still, unlike in Spain, there is no political priority to resolve the issue, as the German government is not going to meddle with the Landesbanken. A weak banking sector is thus likely to persist. 

HousingStory.Net reports that the aftermath of the global housing bubble chokes the world banking system.

Ambrose Evans-Pritchard of the Telegraph reports in article Europe’s €30 trillion headache that European banks have amassed €30 trillion in liabilities and face a serious funding threat over the next two years as authorities withdraw emergency support, according to a new report by Standard & Poor’s.

All percentages and figures in today’s report have come from Yahoo Finance.

II …. Tyler Durden shares a rumor.

Tyler Durden is the Jeff Rense of the financial world. Being today’s alarmist he writes: The GSEs and the FHA may be preparing to imminently launch an instant auto-refi program which would take millions of borrowers to current market rates overnight.

In the process $45 billion of consumer savings would be created. Welcome QE 1.999.

There are millions of American’s with rates much higher than market rates who can’t refi due to lack of equity or income needed to qualify for a new vintage loan.  Or, because after all of the new vintage loan level adjustments to the rate and fee structure for being less than perfect it makes the current 4.5% rate into a 6% rate taking away any benefit. We have discussed all of this ad nauseum over the past couple of years.
Their solution is to quickly identify all of the borrowers who are making payments on time and send them a one page refi form, which instantly takes their rate to current market. There would be a few other borrower hurdles but not many. The savings to the home owning consumer would be about $45bb per year, more than the cost of the recent extension to unemployment benefits.

III … Toxic assets from AIG gaining value, Fed says

Daniel Wagner of the Associated Press writes that the New York Fed says toxic assets it bought in bailouts of AIG, Bear Stearns are gaining value. The assets are now worth $69.1 billion — about $2 billion more than they were during the previous quarter.

I say they should have sold them, as there are a number of buyers in the market place. One includes the Fidelity Capital & Income mutual fund FAGIX.

IV.  Investment Application.

I am not a licensed investment professional. I am a blogger who perceives an investment demand for gold coming from a steepening yield curve, $TYX:$TNX, and debt deflation, and therefore I am invested in gold coins. Institutional accounts should consider trading the bear market ProShares 200% inverse ETFs seen here in this Finviz Screener of  SRS,  SJH, SSG, EEV, SMN, BZQ, SIJ, EPV, FXP, SCO,  JPX,  BOM, EWV, INDZ, BRIS, BIS, SDP, RXD … Chart of SJH rising from a head and shoulders pattern. Debt destruction is most likely going to fall fastest and hardest on the Russell 2000 companies so dependent upon properly functioning credit markets which they use to pay accounts payable, buy inventory and pay employees. Yes, small business America is going to be literally decimated very, very soon. Click on chart to enlarge.

And Institutional investors should consider the Morningstar report that The Profunds UKPSX, 200% short Japan, and the Direxion DXRSX, 200% Small Caps  have been a consistently good performing bear mutual funds. And the investment prospects look good for TMV, 300% inverse of the 30 Year US Government Bond as well. Those who have invested since its rise should consider taking profit soon. 

V … Conclusion

I … A debt deflationary vortex has formed creating the start of a bear market characterized not only by “stock deflation”, but also “competitive currency deflation” and now “credit deflation”, that is “bond market deflation”.

II … Five black swans are seen:

1) The plunging liabilities in the shadow banking system, primarily the Landesbanken, that is the German state-owned wholesale banking system, responsible for securitization of debt, and accounting for mortgage-backed securities, much like America’s Fannie Mae and Freddie Mac.

2)   Europe Financial Institutions, €30 trillion in liabilities, of which much needs to be refinanced in the next few years.

3)   The great reliance of America’s small capitalized companies, the Russell 2000, on easy access to low-cost loans.  

4)  A downgrade of America’s Aaa rating as Reuter reports that Moody’s says the US needs a debt plan to keep its rating.

5) The beginning of Discretionary Governance with steps towards imposition of the Dodd-Frank Financial Regulation, that is the  Wall Street Reform and Consumer Protection Act.

6) Exploding higher municipal bond interest rates. Currently the interest rates on municipal bonds have been decreasing, driving up the value of municipal bonds as investors have sought a safe haven investment from falling stock prices. For example the weekly chart of HYD, shows a rise from four, count them, four cup-and-handle breakouts, rising from 24 to 31 in only sixteen months which is about a 30% gain. The weekly chart of the National Municipal Bond Fund, MUB, shows strong gains as well rising from 95 to 105 in the same time frame. 

Soon investors will shy away from municipal bonds, and the interest rates will soar, causing HYD and other municipal bond investments to fall. At that time even with a budget in place, municipalities and states will not be able to attract investors, so in a desperate move these governments will have to yet further cut employees, expenses and possibly go bankrupt. The states where Alt-A and Option-Arms lending plus Illinois are for all practical purposes insolvent; these include California, Nevada, Arizona, Florida, and like I mention Illinois.  

Robert Wenzel of EconomicPolicy Journal reports California Declares State Of Emergency Over Finances. California Governor Arnold Schwarzenegger declared a state of emergency over the state’s finances on Wednesday, raising pressure on lawmakers to negotiate a state budget that is more than a month overdue and will need to close a $19 billion shortfall, reports Reuters.

The deficit is 22 percent of the $85 billion general fund budget the governor signed last July for the fiscal year that ended in June.

In the declaration, Schwarzenegger ordered three days off without pay per month beginning in August for tens of thousands of state employees to preserve the state’s cash to pay its debt, and for essential services.

“Without a budget in place that addresses our $19 billion budget deficit, every day of delay brings California closer to a fiscal meltdown,” Schwarzenegger said in a statement.

Schwarzenegger’s declaration noted State Controller John Chiang has said he could be forced to issue IOUs as early as next month because of the budget impasse.

Keep in mind that they are pretty much just playing here. That’s the way it will be until muni-bond markets weaken and it becomes impossible to finance state debt even with a budget in place.

IV … Symbols used in this report AGG, FEZ, GXG, EEM, VT, CEW, DBV, FXE, FXF, FXA, SZR, FXB, SZR, FXY, DBB, USO, SMH, EWO, UUP, TLT, IEF, IWM, DNH, CFT, SHY, HYD, MUB.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: