Higher Yen As Well As Bank Of Japan And Federal Reserve QE Purchases Of Debt, Portends Unwinding Carry Trades, Falling Stock Prices, Rising 30 Year Interest Rate And Booming Agricultural And Food Commodity Prices

Financial market report for the week ending October 8, 2010.

Japan, EWJ, rose 3%; Turkey, TUR, 7%, Peru, EPU, 5%, Brazil Small Caps, BRF, 4%, Frontier Markets, FRN, 2%, Emerging Market Financial Institutions, EMFN, 3%, which is sharply contrasted with American Express, AXP, which fell 8%.  

Value and discretionary shares, as seen in the chart of RZV, BJK, FAA, PEJ, XLYS, IWM, RTH, PXN, rose 3%.  These have significant fall potential once the soon coming debt deflationary bear market gets underway.

The chart of the Russell 2000, IWM, relative to Banks, KBE … IWM:KBE, suggests that the US small caps have reached their full expansion value and will need rising prices in the banking shares, to rise further in value.

And the chart of the small cap pure value shares, RZV, relative to the small cap growth shares, RZG … RZV:RZG …  rising up into strong resistance at 0.813 suggests that rising major currencies, such as the Australian Dollar, FXA, the Brazilian Real, BZF, the Mexico Peso, FXM, the Canadian Dollar, FXC, the British Pound Sterling, FXB, the Indian Rupe, ICN, the Swedish Krona, FXS, the Russian Ruble, XRU, the New Zealand Dollar, BNZ, and the Euro, FXE, is nearly over now that someone or someones took the Yen, FXY, parabolically higher to close at 120.54. One can use this Finviz Screener of currencies to create a Finviz Portfolio and follow currencies.

Value, dividend, discretionary and small caps rose strongly this week:
Small Cap Pure Value, RZV, 4%
Gaming, BJK, 4%
Leisure and Entertainment, PEJ, 3%
Small Cap Consumer Discretionary, XLYS,  3%
Health Care REITS, NHI, 3%
Russell 2000, IWM, 2%
Airlines, FAA, 2%,  
Nanotechnology, PXN, 2%
Foreign Telecom, AMX, 2%
Retail, RTH, 1%; when I look at the rising price on falling volume in the chart of the Retail Holders, RTH, all I can say is “lookout below”.

Chart of RZV shows that the small cap pure value shares have risen to resistance.

Chart of IWM; the Russell 2000 shares have the greatest fall potential of ANY shares traded at the current time.

The strong rise in the Yen, FXY, to such a high level at 120.54, may very well mean an end to investing long in yen base carry trades, such as the Swiss Krona – Japanese Yen carry trade, FXS:FXY, the Canadian Dollar – Japanese Yen carry trade, FXC:FXY, the Australian Dollar – Japanese Yen carry trade, FXA:FXY, and the Euro – Japanese Yen carry trade, FXE:FXY, that is the EUR/JPY which closed at 114.60 seen in this ActionForex chart of EURJPY.  

ActionForex provides the chart of the USD/JPY closing at 81.81. I provide the chart of JYN closing at 72.18 and the US Dollar, $USD, at 77.18. I believe that now, the USD/JPY will be going up for a while, JYN going down, and the $USD, going up, as the full effect of QE2 has likely been priced in,  and the decision of the Bank of Japan to buy J-ETFs, Japanese Bonds, and lend at 0% interest is now in operation.

I believe that the US 30 Year Government Bond Interest rate, $TYX, will be going up from now on out. Thus I see world stocks, ACWI, the S&P, SPY, European Shares, VGK, and those stock ETFs and stocks listed above falling in price for a while, especially the small cap pure value, RZV, and the Russell 2000, IWM, and its leveraged ETFs, TNA, and URTY.    

The Euro, seen in ActionForex chart of EUR/USD at 139.21, and seen in chart of FXE, at 138.75, has been the driving force in global wealth expansion since the EFSF Monetary Authority was announced on June 7, 2010, at which time the Euro began to rise from 118.80. I believe that the rise of the Yen, FXY, to 120.54 on October 8, 2010, means an end to carry trade expansion of the Euro, FXE.

Commodities as seen in the chart of DBC, DBB, GLD, SLV, DBA, FUD, USO, rose 4% as a group for the week. I expect that food commodities, FUD, and gold, GLD, to continue to rise once the printing money printing presses at the Bank of Japan and the US Federal Reserve start up in their purchasing of government debt. Monetization of sovereign debt has proven time and time again to be commodity price inflationary.  
Commodities, DBC,  4%
Base Metals, DBB, 3%
Gold, GLD, 2%
Silver, SLV, 5%
Agricultural Commodities, RJA,  10%
Food Commodities, FUD, 0%
Oil, USO, 2%; UCO, 3%.

Both Natural Gas, UNG, and Lead, LD, fell 4% this week. Tin, JJT, rose parabolically 5% higher; I provide a chart of Tin, JJT, with an Elliot Wave 5 completion at 62.28.   

Basic material, mining, and energy stocks as seen in the chart of IYM CU, BHP, KOL, SIVR, GDX, GDXJ, rose 4%.  
Basic Material Stocks, IYM,  4%
Copper Mining, CU, 5%. The recent rise in copper mining prices is the very definition of investing long via euro yen carry trade investing; I believe that age is now over with the higher Yen, as well as with the currency printing presses reving up at  the Fed and the Bank of Japan; those in China will not be willing to pay in inflated dollars for copper.
Base Metal Mining Stocks, BHP, 5%. Chart shows that the price for BHP Billiton was achieved October 8, 2010.
Coal Mining Stocks, KOL, 4%
Silver Mining Stocks, SIVR, 5%
Gold Mining Stocks, GDX, 1%
Junior Gold Mining Stocks, GDXJ, 3%. Chart shows the top is likely in on these speculative investments; the Yahoo Finance chart of GDXJ, together with Silver Standard Resources Inc, SSRI, its speculative twin, GDXJ and SSRI, shows the investment power of yen carry trade investing.  
Energy Production Companies, XLE, such as Exxon Mobil, XOM, 3%. The chart of Exxon Mobil illustrates the power that is the draw up in value/dividend paying stocks that has come via the widely anticipated Federal Reserve QE 2 at its November 3, 2010 FOMC meeting.    

Wisconsin Energy, WEC, and other diversified utilities finished the week strongly; while Solar Energy, TAN, finished the week lower.  

The Dow, DIA, closed at 11,006, this week, up 1.7% and the S&P, SPY, closed at 1,165, up 1.7%

The close in Volatility, VXX, on 10/8/2010 at 15.40, may be a spike down low. And Inverse Volatility, XXV, may have peaked, if QE 2 is fully priced in to market thinking.

Bonds, BND, roe 0.6% to close at a new high of 82.83.  
Junk Bonds, JNK, 1.0%
Very Short Term Government Notes, SHY, 0.2%
Short Term Government Notes,  IEF, 1.1%
Mortgage Bonds, MBB, 0.6%; The 3 day parabolic rise is proof positive that the market anticipates  strong action from the US Federal Reserve.
Long Term Goverment Bonds, TLT, -0.4%
Zeroes, ZROZ, -2.5%; notice how the longer out debt fell in value, while the short term government notes rose in anticipation of QE 2 purchases by the Fed.

Of significant note the interest rate on the $30 Year US Government Bond, $TYX, rose to 37.45, causing bonds in the futures market place, $USB, to fall lower.

I believe that the anticipation effect of QE 2 is now priced in, and accordingly the world passed through peak investment liquidity, that is peak credit, that is peak debt, on Friday, October 8, 2010, as is suggested by the 30:10 US Sovereign Debt Yield Curve, $TYX:$TNX, steepening to 1.573.  I expect that the yield curve will flatten from here on out, aggressively destroying bond wealth in the longer out corporate debt, BLV, and US Government Debt, TLT and ZROZ resulting in a decrease in value of the new Treasury Flattner ETF, FLAT.  Those short the leveraged government debt ETFs TMF and UBT will profit.

Peak Credit means that a high has likely been achieved in Junk Bonds, JNK, and in distressed securities, like those in Fidelity Capitol and Income, FAGIX.   

The US Dollar, $USD, continued its strong slide, to close with a hammer candlestick at 77.18.

When a rising dollar comes, and US Treasuries, $USB, fall lower, with higher interest on the 30 Year US Government bond, $TYX, then the junior gold mining shares, GDXJ, and HUI Precious metal mining shares, $HUI, traded by GDX, will fall lower. The ^HUI precious metal stocks saw a high on October 6, 2010 at 530.84, and closed on October 8, 2010 at 521.26; these gold miing stocks have been one of the investment success stories of our age with precious metal mining mutual funds, such as Tocqueville Gold, TGLDX, leading the way up. Another investment success story has been the consistent rise in mortgage mutual funds, such as Goldman Sachs US Mortgages A, GSUAX, with the investments being securitized by firms such as Annaly Capital Management, NLY; those who stayed invested in Annaly Capital Management over the years have seen excellent returns as is shown in its monthly chart.

II … In today’s news

The Rochelle Group reports that lenders Starwood Capital and TPG have restructured their $300-million loan on 582-room Terranea Resort, located in Rancho Palo Verdes, on the 102-acre Marineland of the Pacific theme park near Los Angeles. Travel The World relates: One of LA’s best kept secret is the Terranea Resort in Rancho Palos Verdes, about 30 miles from downtown Los Angeles. This tranquil, secluded and private piece of heaven embodies the classic California lifestyle. Terranea Resort celebrated its grand opening on June 12 in Rancho Palos Verdes, California. The 102-acre, $580 million, bluff-top property, owned by Lowe Enterprises and operated by Destination Hotels & Resorts, features a Mediterranean-style design and architecture. Luxury Travel Magazine relates: The property offers a 360-room hotel, 20 bungalows, 50 oceanfront casitas and 32 oceanview villas. Amenities include The Links at Terranea, a nine-hole golf course; The Spa at Terranea with 25 treatment rooms; three oceanview pools; a secluded beach cove; eight restaurants, bars and lounges; a children’s center with interactive nature programs; and several miles of scenic, bluff-top trails that connect to miles of off-property coastal trails. CurbedLA relates:  Given that ST Residential, that Starwood-led entity, holds the loan on the $475 million Terranea Resort, the future of the swanky Rancho Palos Verdes development has been a little murky. Terranea can now start closing on about two dozen contracts on the villas and homes. Residences at the resort start at $1.3 million. Check out ST Residential’s new web site, which shows all the properties they both own and hold construction loans on.

Yahoo News and Alan Zibel of the Associated Press report: BofA halts foreclosure sales in 50 states.

The Economist reports: French President Sarkozy hopes to use France’s presidency of the G20, which starts in mid-November and is followed by the G8 presidency in 2011, as a means to reassert his voice abroad and to boost his standing at home. When France held the rotating European Union presidency in the second half of 2008, Mr Sarkozy’s popularity rating climbed from 38% to 46%, according to OpinionWay, another pollster. Never short on ambition, Mr Sarkozy wants the G20 to become the forum for talks about global economic stability and governance, including exchange-rate volatility. “Monetary imbalances threaten all our economies,” he declared in Brussels this week. There are plans for the two G20 summits in France next year to be preceded by thematic seminars steered by various world leaders, the better to squeeze meaningful decisions out of the summit meetings themselves. (Hat Tip to Global Europe Morning Briefing which reports frequently on news of global governance and European economic governance specifically).

Open Europe reports: The Irish Independent reports that former Irish EU Commissioner Peter Sutherland last night said that Ireland must go well beyond the €3 billion deficit reduction previously set for the 2011 budget to prevent the EU or IMF taking control of the economy. “Economic and fiscal conditions mean tightening in the range of €4 billion to €5 billion should be implemented”, he said. The governing and opposition parties met last night to discuss further budget measures. Open Europe blog Irish Independent  Irish Independent 2  Irish Independent 3 Irish Times  Express: Forsyth   Le Figaro  Les Echos  DPA  Handelsblatt …. I provide the chart of Ireland … EIRL … In another article I wrote something that few of those living in Ireland understand: “Banking, Mortgage and Sovereign Debt can be neither expunged nor repudiated. It must be, and will be applied to a nation’s and even a region’s people, through austerity measures announced by Government officials. The debt will be applied to every man, woman, and child living in Ireland; and in as much as Ireland is part of the Eurozone, and shares a common economic governance, and a common currency, its fellows in that greater union, will eventually share currency debasement and the austerity that comes through that as well. Both Ireland and those in the Eurozone share a common destiny–debt servitude.”  EuroIntelligence has it right as they report: No bond holder participation in Ireland: “It sounded like an exciting piece of news, when Ireland’s regulator pronounced that Ireland may after all participate the senior bondholders in the rescue costs. Ireland’s finance minister Brian Lenihan yesterday not only contradicted this. He also outlines the rules for the subordinate bondholders, which suggests that even those will not really be participating. It would only apply to institutions which are not listed on a recognised stock exchange, are in 100 percent state control and could not survive in the absence of total state support. That exempts pretty much anybody.  So the Irish bank bailout is de facto finance to 100% by the tax payer.”

Scott Hamilton of Bloomberg reports: public debt on explosive path under current fiscal policies: Public debt is on an “explosive path” in some of the world’s largest economies as aging populations. This as the cost of fighting the financial crisis erodes government finances. Quoting a report from Standard & Poor’s, based on current fiscal policies, median net debt as a percentage of GDP in 49 economies will rise to 245% by 2050, compared with 148% forecasted in 2007. With rising costs for pensions and other social services, higher debt will likely lead to sovereign-rating downgrades from 2015 onwards, unless governments change their fiscal policies, the report says. Spending pressure may push debt as high as 590%of GDP in the Netherlands and 510% in Greece.

Manuel Balce Ceneta, of the Associated Press, provides a photo of French Finance Minister Christine Lagarde, right, and Chilean Finance Minister Felipe Larrain, left, talking during the International Monetary and Financial Committee, IMFC, meeting at the IMF World Bank 2010 Annual Meetings in Washington, Saturday, October 9, 2010, standing at left is Bank of Algeria Governor Mohammed Laksaci.  Martin Crutsinger, of the Associated Press reports that the world’s finance leaders failed to resolve deep differences that threaten the outbreak of a full-blown global currency war.

III … A council of Financial Regulators met to establish economic, credit and Investment policy
in both Japan and In the United States.

A … I wrote in October 5, 2010 article Stocks Rise As Japan Lowers Interest Rate To Zero: “The HELOC Syndrome is the phenomena where those taking out mortgages leverage their indebtedness to obtain mortgage equity withdrawals, MEW, which finally results in borrower bankruptcy.

The Yen Carry Trade Syndrome is the phenomena where the ruling class in Japan encourages continual leveraging of borrowed funds to make global investments which finally has resulted in a Zero Interest Rate Policy causing currency debasement and soaring commodity prices and will cause eventually, worldwide debt servitude.

On, October 5, 2010, Japan took the ultimate action. In a unilateral decisiion, it went nuclear in the currency war that started September 15, 2010, when it intervened in the currency markets and sold Yen. In a unanimous vote, the Bank of Japan’s nine-member policy setting board set its interest rate at zero, that is, it established a Zero Interest Rate Policy, ZIRP,  in an attempt to stop the rise in its currency and to appease political dissent that has risen over Japan’s ongoing deflation.

EconomicPolicy Journal relates that the Bank of Japan announced that it may buy J-Reits and J-ETFs as well, in an attempt to appease Japanese politicians who relate they have had enough of deflation.

Shaun Richards relates: “In addition it stated that it would look at establishing a temporary 5-trillion-yen ($60 billion) fund to purchase various financial assets such as government securities, commercial paper and corporate bonds in an attempt to stimulate the economy by lowering longer-term interest rates or what are more commonly called asset purchases or Quantitative Easing. The central bank will offer another 30 trillion yen ($359 billion) through its loan program.”

It is quite a stunning thing when a central bank goes to zero; Japan has simply decided to print money at will. Furthermore, the central bank of Japan, has in effect become the unitary, and sole provider of capital and money in Japan crowding out all bank lending. It has  integrated banking and government into a state corporate combine; and it has effected a bloodless coup, establishing state corporatism, that is state corporate rule over the people of Japan.

The bank of Japan became Financial Regulator and Seignior, that is Credit Boss, overseeing money, lending, credit, banking and, investment in Japan.

The currency traders and the central Bank of Japan, have “scorched the investment skies” and have taken the “global currency war”, to an all new level, with the result being the US Dollar, $USD, went down in flames. The Yen Dollar ETF, JYN, like the Yen, FXY, rose.  

And gold, $GOLD, became ever more, the sovereign currency and storehouse of investment wealth.

On October 5, 2010 a whole new chapter in investment history was written; we are living in an age like no other.”

B … On October 8, 2010, Robert Wenzel in EconomicPolicy Journal article Secret SEC Meeting with Goldman Sachs and JP Morgan:  “A secret meeting apparently took place on Wednesday at the Willard Hotel, between the SEC and top elite banking insiders. Here’s what Politico reports: Top Wall Street CEOs were in D.C. yesterday to meet privately with top regulators at the Willard hotel. Much of the discussion centered on Dodd-Frank implementation. The meeting was closed to press, but our spies say chief executives including Jamie Dimon of JPMorgan Chase and Lloyd Blankfein of Goldman Sachs expressed relief that they at least now know what the new rules of the road are going to be (even if they don’t always agree with them).

So in a secret meeting, Blankfein and Dimon get briefed on the new “rules of the road.”

What about the rest of the business and financial world? J.P. Freire at the Washington Examiner tried to learn about the meeting from the SEC:

Yesterday, the Securities and Exchange Commission (SEC) met with top brass at Goldman Sachs at the Willard Hotel to discuss implementation of the Dodd-Frank financial reform. So what happened? We wish we could tell you. When The Examiner called the SEC to ask for comment or for any notes from the meeting, they said that they would not comment and could neither confirm nor deny a meeting with Goldman. “But we know it happened,” I told the press officer. “No comment.”

This secret meeting by the SEC with Blankfein and Dimon, one block from the Treasury and the White House, has to be one of the most outrageous examples of elite plotting to be disclosed since Jekyll Island meetings. The SEC, Goldman and JP Morgan need to immediately disclose who was at the meeting and what was discussed. (ht Janet Tavakoli)”

C … In retrospect, it was the Dodd Frank legislation that established a Financial Regulator, that being the Treasury Secretary, and granted him wide discretionary power of the economy.

From the Robert Wenzel article, I conclude that in the US, through an October 6, 2010, meeting of bankers, investment bankers and SEC officials, an elite group of stakeholders has arisen to serve as a “banking, lending, credit, and investment Regulatory Council”, supporting the Financial Regulator in overseeing the US economy.

Tyler Durden writes that Karl Denninger, was on the Dylan Ratigan show, and not only provided one of the most comprehensive explanations of where we are in the mortgage foreclosure imbroglio, how we got here, and where we are going to date; but said in his concluding remarks: “What if we find that of these $6 trillion in securities that are out there, outstanding right now, half or more of them are defective. You put them back on the banks and they all blow up. You know what – we have a resolution authority under Frank-Dodd, how about if we use it?”

In the near future, in recognition of currency and financial crisis, other nations, and regions, where economic governance has been established, such as the Eurozone, and the ASEAN trading region, will do likewise and announce publicaly, or decide in closed door meetings, to establish a Financial Regulator, that is a Seignior, to oversee money, lending, credit, banking and, investment.

It is reasonable to believe that in the future, a global Sovereign, and a global Seignior, will arise to govern the world and manage credit worldwide; this to fulfill the call of Timothy Geither for unified regulation of banking globally, as related in James Politi and Gillian Tett Financial Times article NY Fed Chief In Push For Global Bank Framework

Keywords: financial regulator, global sovereign, global seignior, currency war, global currency war, EFSF, QE 2, QE2, EUR/JPY, yen carry trade, carry trade investing, peak liquidity, peak credit, monetization of debt, debt monetization, yield curve, volatility, global governance, peak liquidity, globalsoveriegn, globalseignior,  

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