Saturday, 19. July 2008, 19:53:32
Financial Market Report For The week Ending July 18, 2008IntroductionYen carry traders -- those invested with funding via 0.5% interest funding from the Bank of Japan sold out of their positions in oil. Light, sweet crude for August delivery fell 41 cents Friday to settle at $128.88 on the New York Mercantile Exchange — well below its trading record of more than $147 a week earlier. Te indexed oil ETF, USO, fell to 104, an 11% drop for the week; which saw the use of the yen carry loans take banks, KBE, 14.5% higher.
The carry traders sold off investments in the BRICS, EEB, energy producers, XLE, and energy service providers, OIH as well.
The EUR/JPY,
FXE:FXY, which is the barometer of the yen carry trade fell, documenting that the yen carry trade unwound, with the sell off in oil and energy stocks, but it then rose again, with the buying of the financial organizations such as Bank of America, BAC, and Citigroup, C, in the 'Freddie Mac and Fannie Mae Rescue Rally'.
EUR/JPY, closed at an all time high on Friday at 1.70, as investors closed out of trades, on options expiration; and those short, on this currency pair, covered their positions. In doing so, both the
daily FXE:FXY and
weekly FXE:FXY manifested a gravestone doji, suggesting a culmination of the yen carry trade for investing long stocks.
This week, the yen carry traders took profit on oil and bought debt laden stocksIt was options expiration on oil today, so this week, the yen carry traders, that is those who purchased with bank of Japan 0.5% interest loans sold their positions in oil futures and indexed oil funds to take profits.
The daily chart of the oil ETF, USO, shows three black crows with a closing price of 104, which goes back to strong support of May 19, 2008.
The weekly chart of the bank ETF,
KBE, shows banks have risen to strong resistance at 30.91. Note the strong and non stop sell off in the bank shares beginning on May 1, 2008; the institutional investors sold out of their dividend paying stocks to go long oil, commodities and gold, as can be seen in the chart of the gold ETF,
GLD.
The
ongoing Google Finance chart shows oil, uso, sold off 11%; and banks rallied 14.5% this week.
Yen carry traders bought the debt laden and consumer related stock sectors on Wednesday the 16th and Thursday the 17th Yen carry trade investors bought the following sectors:
Banks, KBE, 14%
Brokers Dealers, IAI, 11%
Investement Bankers, KCE, 10%
High Yield Dividend Payers, PEY, 10%
Financial, IYF, 10%
Homebuilders, ITB, 15%
Private Equity, PSP, 5%
REITS, RWR, 4%
Real Estate, IYR, 4%
Retail, XRT, 7%
India, INP, 6%
Transportation, IYT, (rose on lower oil) .... 5%
Consumer Discretionary, XLY 7%
Turkey, TUR, 12%
Small Cap Value, RZV 7%
Semiconductors, XSD, 4%
Industrial, XLI 3%
Global Wealth, ROB 6%
The capital status of the banks is very precarious, and the sustainability of the rally questionable for a number of reasons:
First, the chart of Banks, KBE, shows banks have risen to strong resistance at 31.90.
Secondly, the rally came through liquidity provided by the yen carry trade, as seen in its barometer, EUR/JPY, FXE:FXY, There was a tremendous gap up on Thursday July 17, 2008 from 1.67 to Friday's close at 1.70. Bank of Japan, 0.5% interest loans, were used to buy the bank stocks. The money that came in three days, could very quickly take flight and send the bank stocks reeling. The rise has come through lending, rather than committed investing by the investment community at large.
Thirdly, the type of rise is historic and unique, that is unusual.
Fourthly, today was options expiration on stocks.
Deflationary Hurricanes are just now making landfallActionForex in
Japanese Yen 2008 Q3 Outlook suggest a forthcoming higher yen, FXY, and thus an unwinding of the yen carry trade: Credit Default Swaps, the cost of protection against default in various debt instruments, fell consistently through mid-May after peaking in March. More recently, we see that the Dow Jones CDS Index has risen significantly from May lows, and the global investors are paying more and more to protect themselves against credit risk across a broad swath of corporate debt instruments. Given system-wide fears of credit default, it seems unlikely that risk appetite can make a significant comeback through the foreseeable future.
Dandelionsalad posts the Mike Whitney article
Swan Song for Fannie - Eulogy For The “Ownership Society” which relates: "Whatever happens to Fannie, the loss of investor confidence will send long term interest higher as investors demand bigger returns for the risk they’re taking on GSE bonds. That’ll put a straitjacket on home sales which are already flagging from soaring inventory and falling prices. Higher rates could bring the whole housing market to a standstill.
The Fed’s cheap credit policy under Greenspan created an artificial demand for housing which ballooned into the biggest equity bubble in history. Low interest rates are a subsidy which naturally lead to speculation and asset-inflation. At a certain point, however, the endless debt-pyramiding reaches its apex and the whole mechanism switches into reverse. Now the economy has entered deleveraging-hell where everything is primal blackness and the gnashing of teeth, the flip-side of speculative rapture.
By some estimates, Freddie Mac has a negative net-worth of $17 billion. It’s basically insolvent, although Paulson would like to see the charade go on a while longer. Investors purchased another $3 billion of the two GSEs last Monday, but the appetite for failing bonds is diminishing? What’s certain is that the collapse of Fannie and Freddie would be a watershed event and a mortal blow to the US financial system. $5 trillion in shaky mortgage-debt can’t be easily swept under the rug and ignored. Interest rates on everything would quickly rise; credit would become scarcer, economic growth would shrivel, unemployment would soar, and the dollar will plummet.
What Paulson is really wants is for congress to allow the Fed to regulate the financial system without congressional oversight. Paulson’s so-called blueprint for financial regulation is a blatant power-grab meant to expand the authority of the banking oligarchy giving them unlimited power over the markets. Journalist Barry Grey sums it up like this in his article on
US Bailout of Mortgage Giants: The politics of plutocracy.
“The plan outlined by Treasury Secretary Henry Paulson would give him virtually unlimited and unilateral authority to pump tens of billions of dollars of public funds into the mortgage finance companies. At the same time, the Federal Reserve Board announced that it would allow the companies to directly borrow Fed funds”.
Even if Paulson’s plan worked in the short term, the damage would be enormous. It would place the country’s regulatory powers and purse-strings in the hands of the same amoral banksters who created this mess to begin with. It is the fast-track to corporate feudalism on a nationwide scale.
If foreign banks and investors ditch their GSE debt; it will send shockwaves through the global economy. But if the Treasury provides unlimited funding for a sinking operation, it’s likely to trigger a sell-off of the dollar. It’s a lose-lose situation. For now, bond holders are sitting-tight even though the stock is tanking, but for how long? They’ve already been taken to the cleaners on hundreds of billions of dollars of mortgage-backed garbage; now there are rumors that the US government won’t back agency debt. What kind of shabby shell-game is the US playing anyway?
Charles Duhigg of the New York Times relates in
Loan-Agency Woes Swell From a Trickle to a Torrent that: “If people lose faith in Fannie and Freddie, then the whole system freezes up, and nobody can buy a house, and the entire housing market can crash,” said Paul Miller of the Friedman, Billings, Ramsey Group in Arlington, Va. “There’s a fine line between having faith and losing it, and sometimes it’s unclear when it has disappeared. But when investors cross that line, bad things happen very quickly.
Fannie’s demise comes at a particularly difficult time for the banking system. According to a report by Paul Kasriel, Chief Economist at Northern Trust writing in
Option Armageddon, Understanding Bernanke relates that the credit crisis has morphed into a credit gridlock where corporations are unable to obtain operating funds as debt comes due resulting in bankruptcy.
“The sharpest 13-week contraction in bank credit” since data were first available in 1973. Banks simply don’t have the capital on hand to avail “themselves of the cheap credit the Fed is offering to fund them at” ... This is what it means to be in a “credit crunch.” Banks have suffered hundreds of billions in losses, forcing them to pull credit out of the economy. Every time you read an article about banks cutting credit lines, exiting lending businesses, or eliminating mortgage products it represents more bank credit drying up.”
Bank credit is drying up because the capital is being destroyed (from foreclosures and downgraded assets) faster than anytime in history. We are just now feeling the first stiff breezes from a Force-5 deflationary hurricane set to touch down in 2009. Fannie and Freddie are teetering towards insolvency while the country is entering the most vicious downward cycle since the Great Depression. Higher interest rates, negative home equity, mounting credit card debt, auto loan debt, commercial real estate debt and tightening lending standards will only curtail consumer spending more putting greater pressure on the dollar.
It was a scam of Biblical proportions and now it is all starting to unravel. Bush’s “ownership society” was a cheap parlor trick engineered by the Fed’s low interest rates to trigger massive speculation and shift wealth from one class to another. Now, the housing bubble has crashed and the excruciating reality of insolvency is beginning to sink in.
Michael Hudson writing in
Why the Bail Out of Fannie Mae and Freddie Mac is Bad Economic Policy, relates that the housing boom never had anything to do with Bush’s Utopian-sounding “ownership society”. It was always just a swindle to enrich the banking establishment and divert middle class wealth to ruling class elites.
Elaine Mein Supkis writing in
Banking Collapse Is Not Over Yet At All relates that the bank insolvent credit crisis presents many systemic risks: "The present banking crisis began in ernest last summer right about now. So I have been including older articles I wrote because they show clearly how important it is to understand INTERNATIONAL finance when talking about money in all ways. 99% of American commentary either never mentions international finance or they look only at China or OPEC and ignore Japan and Europe. We also look yet again at the Federal Reserve's own graphs and charts and analyze what is going on here. 'Liquidity' is pure red ink and it is drying up across the planet even as international bankers struggle to keep it flowing. Bankruptcies are spreading in even the strongest economies. This is classic and has happened repeatedly in history. Oil is down so the DOW is happy. But the mess isn't finished, it has barely begun.
In the last 40 years, the CD rates have fluctuated wildly and I would suggest, carelessly. Ever since the Federal Reserve decided its main function is to control inflation, the rates have whipsawed wildly because the real function of the Fed is to feed inflation as much as possible without it showing up in the consumer price data. Since the financial games of Wall Street are bottomless and since the entire function of Wall Street is to make as much money as fast as possible and since our Treasury and the Federal Reserve is often full of people who come from Wall Street or whose social circle is heavily invested in Wall Street, we see these endless bubbles.
When the bubbles cause inflation at large, this has to be controlled. It is simple: if one is making a 8% profit and inflation is 2%, all is well. 8% profit while inflation is running at 18% is pure hell. Low interest rates makes Wall Street happy because they can use cheap loans to invest in stocks and then 'make a killing.' Cheap loans are happy days for everyone except people trying to save money. If the money is hammered by inflation and cheap interest rates, you get a total economic collapse.
Rates rose now for two years and then a panicked Bernanke and the Fed officials all dropped the rates like crazy. It is now at 2%, a very dangerous number. They are sorely tempted to drop it even further. Back when they dropped it to only 1%, it was obvious that this was far below the fake rate of inflation, and even further below the actual rate of inflation. Yet they did it to 'save' the economy after Bin Laden's tiny group successfully attacked thanks to Bush maliciously ignoring the 9/11 conspirators or even perhaps actively enabling the attacks. After all, the bin Laden family is very close to the Bush clan.
We developed a new, upside-down banking system during the last 35 Floating Currency years. The banks only want to lend. They don't want reserves at all. Debtors want sub-inflation level debts because of two things, they get to pay the debts back with increasingly worthless dollars and they get the money cheap so the payments are lower than they should be if inflation were accurately accounted for.
Like all nifty schemes that can't work, this system is now collapsing because inflation is a very dire Goddess and can outrun all schemes to make wealth while cheating on the currency being used to determine wealth. Seriously, we should change the 'In God We Trust' to 'In The Inflation Goddess, We Fear' on our bills. When we notice She is stirring, we know that we have made too much 'liquidity' and the red ink will now destroy the wealth as it has to be sopped up somehow."
Richard, the Resourceful Bear, interjects here that the liquidity stored up in level two assets and level three assets, and kept off the books in qualifying special purporse entities, SPEs, as well as SIVs, cannot be sopped up. Bradley Keoun of Bloombreg relates the extext of the SPEs at Citicorp which is representative on many banks globally: “At an investor presentation in May, Citigroup Inc. Chief Executive Officer Vikram Pandit said shrinking the bank’s $2.2 trillion balance sheet, the biggest in the U.S., was a cornerstone of his turnaround plan. Nowhere mentioned in the accompanying 66-page handout were the additional $1.1 trillion of assets that ... Citigroup keeps off its books: trusts to sell mortgage-backed securities, financing vehicles to issue short-term debt and collateralized debt obligations, or CDOs, to repackage bonds ... ‘If you start adding up all the potential exposures, it’s a huge number,’ said Sam Golden, a former ombudsman for the U.S. Office of the Comptroller of the Currency ... ‘The banks will say that it was disclosed. Investors are saying, `Yeah, but it was cryptic. We really didn’t know what you were telling us.’” And the liquidity, in the forth coming federal defecit spending cannot be sopped up. Not only are there many deflationary hurricanes, but a systemic risk event or events are at hand, and the
Liquidation Thesis is going to be applied: government services and payments, service sector jobs, public and private debt of all types, and unfunded retiree benefits are going to be liquidated, that is done away with.
Ms. Supkis continues: " From 2002-2007, (govrenment) debt reached yearly new records. The top line shows the total debt apex to be in the third quarter of 2007.
This is when we had simultaneously a record stock market right smack dab in the middle of an obvious banking collapse! The rate of debt creation has slowed down since then. In 4 areas, the debt apex is the first quarter of 2008 during which the government struggled to prop up the entire system and the Federal Reserve opened their miracle windows that accepted wretched previous loan instruments in exchange for Treasuries which are based on a vast, growing Federal debt.
Interestingly, the farm lending sector took off this year due to inflation fueling huge jumps in farm prices. Global debt ballooned greatly this recent quarter, too. Due entirely to trying to cope with this sudden inflation in all commodity markets. By far and away, dwarfing international debts is the US government debt growth: It shot up $277 billion! This was the bank rescues, I might suggest. Interestingly, broker and dealer debts rose to their apex in 2008. These are the same guys who were madly bidding up commodities. This is yet another facet of the Goddess of Inflation and how She operates. These gnomes were using massive debts almost equal to the rest of the world's debt growth to bid up the value of commodities!
The market indices rose Wednesday the 16th, and Thursday the 17th, with most of the gain coming on Wednesday, and barely "hung on" Friday.
The
Indices:
Russell 2000, IWM, rose 2% this week. I expect the $RUT to fall lower, as its small US based companies, are highly dependent upon a functional credit system which is going to turn lower this next week.
Dow, DIA, rose 3% this week. I believe further demand destruction of the industrial shares is going to take the $INDU lower; its rise this week is nothing more than a rise in a strong down drating bear market. The Freddie and Fannie Rescue Rally has given short sellers the rise they need to go short or increase their shorts: it's time to 'lock and load' with the Proshares 200% inveserse of the Dow 30, DXD.
S&P, SPY, rose 2% this week. I see great risk to be invested in the S&P because of the greatly overdone and rather suspect Freddie and Fannie Rescue Rally. I expect the $SPX to tank this next week as the yen carry traders exit their postitions in their recently purchased financial shares.
Nasdaq, QQQQ, rose 0% this week. The Nasdaq, failed this week. The weekly charts shows a dark doji; and the daily chart shows a sell off,
as Google, GOOG, and Microsoft, MSFT, both disappointed investors with weaker than expected earnings. The daily chart shows yen carry trade sell offs on June 6, and June 23 as the Bank Of Japan May Meetings Announcements were released. Folks, today's sell off is the nail in the coffin for the Nasdaq.
TraderZ writing in
$NDX Update for 07.19.2008 said of
the Nasdaq chart: the price action of the last three day's of trading created a similar pattern to the abandoned baby candle pattern. While it is not a true abandoned baby candle pattern by the strict definition, the sentiment is the same. This pattern suggests further weakness.
The Dow, the S&P, and the Russell 2000 rose; but they did not rally; there is no outbreak that justifies going long.
Jesse's Charts shows that the Dow, and the S&P, rose to the edge of their downward channels; although the Russell 2000,
seen it its chart, rose, it manifested a lollipop hanging man candlestick at resistance: I see nothing in the charts of the major indices that suggests a breakout justifying going long.
I remember how it was before October 8, 2007, when Google, GOOG, kept rising, and rising; and then rose again last November and December; and also how investment flowed into the mid-caps as they rose and fell like waves in the sea that surf riding stock jockeys would ride up and down,
as seen in this ongoing Google Finance chart. I thought this is truly dramatic to see the amount of capital flowing! Well now, I know the source: it was the 0.5% lending window for institutional investors and hedge funds at the Bank of Japan. But ever since the May minutes of meeting were released and published, by news-services such as 'CEP News', in places such as ActionForex.com, risk aversion to investing in stocks has risen, and disinvestment from stocks took place between June 6th and June 23, 2008.
Deflation in stocks and bonds is now underway, due to risk aversion coming from a price-inflationary demand destruction world environment, where level two assets, level three assets, and mortgage backed securities are seen as toxic.
The spigots of liquidity have been turned off: the Alan Greenspan-Ben Bernanke Federal Reserve spigot of TAF, TSLF and PDCF liquidity failed May 19, 2008, and the the Bank of Japan 0.5% spigot of liquidity abandoned in the aformentioned June 6 to June 23, 2008 period.
The world should be thankful to the yen carry traders, because this week, their investment in the banks and debt laden investment sectors, saved us, albeit temporarily, from a global stock market meltdown.
The lollipop hanging man candlestick in the overall stock market, VTI, suggests that the gains will not be maintainedThe daily chart of
VTI.
The investment application is to go short stocks or long goldMy investment maxim is: "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".
The investment application today is to go short or to go long gold, I recommend the latter.
The investment strategy of short selling via stocks and ETFsThe best sectors to go short are the ones that have risen the most lately in the Wednesday July 16th and Thursday July 17th, rally.
Unusually spectacular short selling opportunities exist in the following; I strongly suggest that one look at the charts of the following; these represent short selling opportunities of a lifetime.
APH shows a definite selling pop.
AZZ shows rising price on falling volume and a lollipop hanging man candlestick.
XBI is demonstrating investment mania at the end of fiat wealth; the three white soldiers and the bearish harami relates that the bull run is all over; it is now safe to sell XBI short; these biotechnology stocks seen in the
Google Finance comparative chart of SVNT, ONXX, ALXN, OSIP, MYGN are clearly excellent short selling opportunities.
Education providers seen in the
Google Finance comparative chart of EDU, GPX, COCO, ESI are now prime for short selling.
Financial stocks having lots of subprime and option ARMs are great choices for short selling; the percentages are their rally this week:
Bank United, BKUNA, 160%
First Horizon National Corp, FHN, 26%
Huntington Bancshares Inc, HBAN, 24%
Washington Mutual, WM, 20%
Regions Financial, RF, 18%
KeyCorp, KEY, 15%
Sovereign Bancorp Inc, SOV, 14%
Wachovia Corporation, WB, 12%
Corus Bank, CORS, 12%
AIG Insurance, AIG, 9%
Capitol One Finance, COF, 11%
CIT Group, CIT, 23%
Miscellaneous ralliers are good candidates for short selling as well
Hovnanian,
HOV, 37%; the lollipop hanging man candlestick in HOV says "sell me".
Expedia, EXPE, 7%
Valmont Industries, VMI, 15%
Mattell,
MAT, 13% The chart of this consumer discretionary leader shows a strong pop to resistance; and it like HOV says "sell me".
Strong short selling opportunities exist the 'Bank of America Rally' and 'Freddie Mac and Fannie Mae Rally' these also are short selling opportunities of a lifetime.
Banks, KBE,
Brokers Dealers, IAI,
Investement Bankers, KCE,
Homebuilders, ITB,
Moderate short selling opportunities exist in
Private Equity, PSP,
REITS, RWR,
Real Estate, IYR,
Retail, XRT,
India, INP,
Consumer Discretionary, XLY
Turkey, TUR,
Semiconductors, XSD,
Small Cap Value, RZV
China, FXI,
Industrial, XLI
Russell 2000, IWM
Moderate short selling opportunities exist in the inflation related utilities as well on their next rise in value.
Utilities, VPU
A strong short selling opportunity exists in US Government Debt; and can be acted upon their next rise as well.
Treasuries, TLT
Short selling via Proshares bear market ETFsDomestic stocksSKK Russell 2000 Growth
SRS Real Estate
SSG Semiconductors
TLL Telecommunications
SKF Finance
More Domestic stocksSCC Consumer Services
DXD Industrials Here is the daily chart of DXD daily as of July 18, 2008 showing a safe entry point at 62 after a recent high of 69.
Foreign and basic material stocksEEV Emerging markets
FXP China
Health care stocksRXD Health Care ... The long legged doji in the weekly chart of this bear market ETF suggests a safe short selling entry point.
DebtTBT ... One should invest in the future when it falls in value some; as
the current chart shows it has risen too strongly now to 71.23. The daily chart of TBT shows that on Wednesday July 16, 2008, the bond market place called interest rates higher in response to the Wednesday economic report that inflation is rising as well as the Federal Reserve's proposed guaranteeing and/or recapitalizing of Freddie Mac and Fannie Mae. Note the breakout of RSI over 50; the MACD bullish crossover, and the rise above 50 day moving average: this ETF is now in breakout witnessing that a run on US Treasury Bonds is now underway. Wealth can no longer be garnered and accumulated by investing in government bonds. A deflationary hurricane has come to government bonds. The rise in the Proshares 200% inverse of the US Treasury Bonds, TBT, confirms the
Liquidation Thesis is now underway: government services and payments, service sector jobs, public and private debt of all types, and unfunded retiree benefits are going to be liquidated, that is done away with. It was Bernake's statement last weekend of extending liquidity and possible investing in Freddie Mac and Fannie Mae, and in so doing guaranteeing and/or recapitalizing these two corporations, that drove market place interest rates on government bonds higher this week, just like when Bernanke announced the provisions of TAF, TSFL, and PDCF on March 18, 2008; and thus the strong three day rise in TBT.
ActionForex
provides the details of Wednesday's inflationary report, which spoke strongly of stagflation: "On the data front, it was an extremely busy week in the US. Inflation data released reaffirmed Bernanke's comment that inflation risks has 'intensified'. Headline CPI surged by 1.1% mom in Jun, stronger rise since 1982, pushing yoy rate sharply higher from 4.2% to 5%, highest since 1991 and way above expectation of 4.5%. Core CPI was also up from 2.3% yoy to 2.4% yoy. Real earnings, on the other hand, dropped -0.9% in Jun, the biggest monthly decline since 1984. Headline PPI surged much more than expected from 7.2% yoy to 9.2% yoy versus consensus of 8.5% while core PPI was unchanged at 3.0% versus expectation of 3.2%.
From Eurozone, German ZEW economic sentiments deteriorated much more than expected from -52.4 to lowest readings in 16 years at -63.9 in Jul versus expectation of a modest fall to -55. Current situation gauge also dropped sharply by -20.6 points from 37.6 to 17. Eurozone ZEW economic sentiment also dropped sharply from -52.7 to -63.7 with current situation indicator turned negative from 7.9 to -3.3. Surging energy and food driven inflation and high interests rates are dragging down the Eurozone economy. ZEW respondents expect inflation to persist, and that short-term and long-term interest rates will rise.
Eurozone HICP in Jun confirmed to be 0.4% mom, 4.0% yoy. German PPI climbed to 26 year high of 6.7% yoy in Jun. Eurozone industrial production dropped -1.9% mom, -0.6% yoy. Eurozone trade balance showed wider than expected deficit of -4.6b in Jun.
UK headline CPI surged from 3.3% yoy to 3.8% yoy in Jun, even stronger than expectation of 3.6%, far above BoE's target of 2-3%. Core CPI was up from 1.5% yoy to 1.6%. RPI was also uncomfortably high at 4.6% yoy with RPI-X at 4.8% yoy. PPI beat expectation again. Jun output prices accelerated to 10.0% yoy, highest reading in 22 years. Input price surged to 30.3% yoy. Core PPI accelerated to 6.4% yoy but was below expectation of 6.5%.
BRC retail sales dropped -0.4% in Jun. RICS house price balance showed 88% of respondents saw housing market declined in June. Claimant count in Jun jumped 15.5k, above expectation of 10k. Unemployment rate was mildly down from 5.3% to 5.2% in May.
BoJ left rates unchanged at 0.5% as widely expected on unanimous 7-0 vote. In an unexpected move, BoJ released the monthly statement together with the announcement. BoJ acknowledged that economic growth is slowing, trimming GDP forecasts from 1.5% to 1.2% yoy. Domestic CGPI forecasts was up sharply from 2.5% yoy to 4.8% yoy while CPI excluding food was also up from 1.1% yoy to 1.8% yoy. The Bank of Japan also noted global financial markets remain unstable and downside risks to the U.S. economy and the world economy remain."
The investment strategy of investing long goldIt's truly an opportune time to go long gold as the chart of gold,
$GOLD, shows a price decline to $950, in its immediate chart objective of $1,000 -- its previous high.
Reports of inflation, interest rates rising, and stagflation all favor an investmet in gold.
The investment demand is easily seen in the following; these ratios show that wealth is garnered and maintained by investing in gold;
gold relative to emerging markets stocks
GLD:EEBgold relative to world stocks: GLD:VEU
gold relative to US Stocks:
GLD:VTIgold relative to bonds: GLD:TLT
gold relative to oil: GLD:USO
gold relative to commodities: GLD:RJI
The
ongoing MSN Finance chart and the
ongoing Google Finance chart shows that gold outperforms stocks, bonds, oil and commodities; these show that in the last month gold is up 7%, bonds up 2%, oil down 4%, commodities down 5%, and world stocks down 7%.
While one could short sell, I see two major disadvantages of doing so. First is the ongoing depreciation of the dollar relative to gold; therefore, I do not want a dollar denominated anything. And the second, is systemic risk events, events plural, where one may not have immediate and full access to one's wealth in the brokerage based and money market based financial system. Take for example, the Mike Mish Sheldon report
Palm Beach County Foreclosure Report where he relates that losses on foreclosures are typically 50%. There is no way that the current investment system can take these kinds of hits: a global systemic failure of banks is coming soon.
Therefore, I encourage an investment in gold with diversification of location: BullionVault.com; GoldMoney.com, and in a gold ETF, in a trust account, not a brokerage account, in Switzerland.
Concluding remarks: yen carry traders are now underwriting the investment demand for gold.
The yen carry trade has been the great unseen hand moving stock and commodity investing; its use, has traditionally generated tremendous flows in and now out of the BRICS, EEB.
Disinvestment from stocks and thus an unwinding of the yen carry trade began May 19, 2008 with the failure of the TAF, TSLF, and PDCF rally as can be seen in this Yahoo Finance chart of the BRICS,
EEB.
The MSN Finance chart of the BRICS, EEB, relative to gold, GLD, oil, USO, and Cabot Oil and Gas, COG,
for the period May 1, 2008 to July 18, 2008, and presented
here, shows that between June 6 and June 23, there was an winding of traditional yen carry trades, and a use of the loan facility to go long oil, the US based natural gas and oil producers, and gold.
The chart of the gold ETF,
GLD, shows the yen carry trade investors underwriting the investment demand for gold.
Said another way, a rising yen, FXY, since June 23, 2008 when yen carry traders disinvested from stocks world wide due to risk aversion to inflation, level two assets and level three assets at banks, as well as the loss of confidence in the US Dollar, seen in the fall of USD/JPY, as investment risk of the failure of Freddie and Fannie is transferred to the Federal Reserve by loans from Bernanke,
is stimulating an investment demand for gold.
