Wednesday, 16. July 2008, 04:45:34
Yen carry traders sold oil to take profitToday, the yen carry trade unwound, much like a year ago, in fact almost to the very day, on growing concern over the financial sector, and in particular concern over mortgage backed securities, as yen carry traders took profits on oil, USO, which fell 4.3%. Kevin's Market Blog reports that
it was the largest drop since the gulf war.
It's risk aversion to the level two assets and level three assets at the banks, KBE, and investment bankers, KCE, as well as confidence over the Federal Reserve's effect and also authority to effectively capitalize and guarantee the two mortgage GSEs, Freddie Mac, FRE, and Fannie Mae, FNM, which each fell 26% today, that was the impetus for today's stock market sell off.
The barometer of the yen carry trade, EUR/JPY,
FXE:FXY, gapped 1.2% lower on opening to close at 1.673. The chart of
FXE:FXY weekly shows the current exhaustion of the yen carry trade.
The yen, FXY, rose 1.2%, the Euro, FXE, fell 0.1%, and the Aussie, FXA, rose 0.7%.
Gold, GLD, rose 0.3%, even though oil, USO, sold off 4.3%, indicating that an investment demand for gold is underway.
The
ongoing chart of the USD/JPY fell hard:
USD/JPY fell from yesterday's 106 to 104.7.
The US Dollar, $USD, was off sharply in early morning trading; but recovered on oil's fall to close 0.2% lower at $71.79. It is now trading below 72 -- that which was once support will serve as resistance.
Biotechnology,
XBI, rose 2.8% based largely upon the rise in
SVNT, ONXX, ALXN, OSIP, MYGN; given a market downturn is at hand, these are an excellent short selling opportunity.
The HUI indexed precious metal mining shares, GDX, struggled to rise with gold, GLD: the gold shares fell 2.4%, compared to gold's 0.3% rise.
Gold stocks,
GDX, manifested a hammer in the weekly chart at the 49.60 which is the middle of a 'broadening top pattern' going back to October 2007.
Gold stocks, GDX, are once again disconnecting once from the price of gold, GLD; this is seen in the chart of gold stocks relative to gold,
GDX:GLD. This disconnection comes from the yen carry traders selling the metal manufacturing stocks, XME, to take profits and repay their 0.5% Bank of Japan loans: XME fell 4.1% today.
Those invested in the gold mining shares are wise to trade out of the gold stocks for the real thing, as the stocks are likely to fall lower with the rest of the stock market as interest rate differential investors take profits.
Yen carry traders continued to disinvest from the BRICSYen carry trade disinvestment not only came out of oil, USO, energy shares, XLE and OIH, and metal mining shares, XME; but out of Asia, the BRICs and related yen carry trade favorites in the emerging markets which included the steel manufacturing stocks:
Taiwan, EWT, 4.0%
South Korea, EWY, 2.9%
China, FXI, 3.1%
China Real Estate, TAO, 2.5%
India, INP, 2.7%
BRICS, EEB, 2.7%
Steel, SLX, 2.8%
Coal, KOL, 4.2%
Agriculture, MOO, 2.1%
Alternative Energy, GEX, 2.1%
The chart of the BRICs,
EEB, clearly shows risk aversion and destruction to traditional yen carry trade investing in the emerging markets: the termination of the TAF, TSLF rally on May 19, 2008 and then the announcement of the Bank of Japan minutes of May meeting on June 6th and June 23, 2008 and then today's 2.7% sell off.
The chart of Cabot Oil and Gas,
COG, a "come lately" yen carry trade investment that accompanied the rise of natural gas, GAZ, shows, early June, late June, and today's yen carry trade disinvestments.
Other dynamics of today's stock market sell offDemand destruction is continued to cause a sell off in the industrial shares:
Industrials, XLI, 2.0%
Financial and mortgage shares fell on Freddie's and Fannie's 26% fall:
Financial, IYF, 2.8%
Mortgage REITS, REM, 3.2%
Insurance, IAK, 3.2%
Insurance, AIG, 8.5%
Preferred, PFF, 5.1% these fell sharply on
Moody's Cut GSE Preferred Stock Rating (courtesy of CreditWritedowns)
Office REITS, FIO, 4.9%
Wall Street Bearish Diva Meredith Whitney targeted, Wachovia, WB, which holds a substantial $170 billion residential mortgage portfolio; a whopping $121 billion of that total was in the form of option ARMs at the end of Q1: its shares saw investment shock-and-awe today.
Energy shares fell on oil's, USO, 4.3% fall:
Energy Services, OIH, 4.1%
Oil Producers, XLE, 4.2%
Volatility,
$VIX, has been on the rise since May 19, 2008, when the TAF, TSLF, and PDCF rally ended.
The
daily and
weekly chart of SKF suggest it is wise to start to start taking profits as this has gone parabolically up.
Another reason for taking profits on SKF, is that CreditWritedowns is reporting in
Welcome to The United Socialist States of America that The Wall Street Journal reports the following regarding short-selling:
"The Securities and Exchange Commission announced an emergency action aimed at reducing short-selling aimed at Wall Street brokerage firms, Fannie Mae and Freddie Mac, and will immediately begin considering new rules to extend new requirements to the rest of the market.
SEC Chairman Christopher Cox said the SEC would institute an emergency order requiring any traders to pre-borrow stock before shorting Fannie Mae and Freddie Mac, the embattled government-sponsored entities that own more than half the nation's mortgages. It would also apply to the stocks of Lehman Brothers, Goldman Sachs, Merrill Lynch and Morgan Stanley. The order is a near-term fix and will expire in 30 days.
Mr. Cox said the SEC "will undertake a rulemaking to address the same issues" across the market.
The move will likely limit short-selling for the two mortgage entities, which have seen their stock prices fall sharply in recent weeks. Wall Street has been calling for the SEC to address short-selling, which some believe is contributing to market volatility and could be used to manipulate shares of financial stocks."
The weekly chart of the overall stock market, VTI, relative to the financial shares, IYF,
VTI:IYF, suggests that either the overall stock market is going to correct lower or the financial shares are going to correct higher: I expect a systemic risk event failure of the stock market is at hand; and that stocks are going to fall sharply lower.
Aversion to US Treasuries continues from last week when concern grew over Freddie's and Fannie's capital lossesUS Government treasuries, as traded by the government bond ETF, TLT, fell 0.1% to 92.94 which is down from Wednesday July 9, 2008 recent high of 93.50.
Treasury Bonds weekly,
TLT Weekly shows a gravestone doji at the edge of a massive head and shoulders pattern: all I can say is "look-out below".
The interest rate on the 30 Year US Government Bond,
$TYX, is up from July 8, 2008, as the bond market place sees the Federal Reserves guarantee and capitalization of the GSEs not as a strong dollar policy, but rather as a weak dollar policy.
The zero coupon mutual bond fund
BTTRX, manifested what is likely to turn out to be a shooting star.
The yield curve,
$TYX:$UST2Y, has been increasing since mid June 2008, when the Yen Carry Trade began to unwind as the minutes of the May Bank of Japan meeting were released which noted that rising global inflation is an investment risk factor.
A rising yield curve relates investor concern over inflation; and the Resource Bear says: "Interest rate inflation is a gold thriller and a bond killer".
The bond market place independent of Federal Reserve action is in the process of calling interest rates higher and the value of government bonds lower.
Gold remains in its channel in its growth to chart objective of $1,000 while commodities fall lowerThe chart of the gold ETF, GLD, shows a rise of 0.3% to 96.17
Oil, USO, fell 4.3%.
Timber and wood, CUT, 2.0%.
Natural gas, GAZ, fell 4.3%.
Base Metals, JJM, fell 2.7%.
Agricultural Commodities, DBA, fell 0.9%
Grains, JJG, fell 2.1%
$CRB commodities, RJI, fell 2.6%.
The fact that gold is rising relative to oil, GLD:USO, stocks, GLD:VTI, and commodities, GLD:RJI, indicates that an investment demand for gold is underway.
The President announced that the troubled financial system is 'basically sound'Terrence Hunt of the Associated Press reports that
President Bush Says The Troubled Financial System is 'Basically Sound" and urged lawmakers to quickly enact legislation to prop up mortgage giants Fannie Mae and Freddie Mac. He also called on the Democratic-run Congress to follow his example and lift a ban on offshore drilling to help increase domestic oil production.
Bush said the two troubled mortgage companies play a central role in the nation's housing-finance system and that government action to help them were not bailouts because the two would remain shareholder-owned companies.
Bush went on to say that: "I don't think the government ought to be involved in bailing out companies," Bush said.
(Yet, the Bernanke Rescue Plan where the Federal Reserve provides capital for a special class of shares is a bailout, and is doomed from the start, as those shares, if they become publically traded, will surely be sold short, just like the existing shares.)
(The investment and economic truth is that Freddie Mac, FRE, and Fannie Mae, FNM, are toxic zombie corporations, financial Chernobyles; they are so capital depleted that they cannot continue in their securitization and financialization role.)
Bush also said: "It's been a difficult time for many American families." But he also said that the nation's economy continues to grow, if slowly.
(This latter clearly is not the case, economic reports show basically no growth.)
Bush said that despite the woes of Fannie Mae and Freddie Mac and the recent government takeover of California bank IndyMac, U.S. depositors should not worry because their deposits are insured by the government up to $100,000. "If you're a depositor, you're protected by the federal government," Bush said.
(Well, that again is not true, because there were many depositors who were over the $100,000 limit
and will loose up to probably $1 Billion.)
More on the Freddie and Fannie Rescue PlanThe administration and the Federal Reserve announced an emergency rescue plan Sunday to bolster Fannie Mae and Freddie Mac, which hold or guarantee more than $5 trillion in mortgages — almost half of the nation's total.
The plan would temporarily increase a long-standing Treasury line of credit that could be provided to either company. Treasury also said it would, if necessary, buy stock in the companies to make sure they have enough money to operate.
The Fed also announced that it would allow Fannie and Freddie to get loans directly from the Fed — a privilege previously granted only to commercial banks until this March, when the Fed extended the borrowing to investment banks to deal with the collapse of Bear Stearns.
(The provision of a line of credit and loans is clearly without legal authority. If carried out it would simply be an announcement and execution of a framework agreement -- an application of global governance where a leader declares oversight and regulation for economic stability or political security.)
(And if the Treasury owns shares, it really isn't a shareholder owned corporation in the traditional sense of the word. Such ownership would constitute outright transfer of ownership of debt to the tax paying public; it would be a new kind of state corporatism).
At the same time, a housing package was heading toward final congressional passage. It would modernize the Federal Housing Administration and create a new regulator and tighter controls for Fannie Mae and Freddie Mac.
(I'm in favor of holding the current regulators accountable; and having the current controls promptly and effectively enforced).
Congress could move as early as this week on the housing legislation to send it to Bush. First, though, House and Senate leaders must strike a deal in consultation with Treasury Secretary Henry Paulson to resolve key differences so Bush, who has threatened to veto the measure, will sign it.
(While the legislation is a housing package, it is in reality a Bank of America, BAC, rescue bill and not genuine mortgage assistance and not real estate market stabilization. It is terrifically expensive at $300 Billion, which is the cost of two years of war in Iraq. The truth is that the Dodd Frank housing bill nationalizes real estate debt, where mortgage backed security losses are socialized onto the taxpaying public, and gains accrue to investment bankers who get financial relief they otherwise would not.)
Bush defended his insistence that the U.S. economy was not in a recession, even though many economists believe it is.
(The President is living in a bubble; and is totally disconnected from economic reality)
On Capitol Hill, Fed Chairman Ben Bernanke warned that inflation seemed likely to move even higher and economic growth would be "appreciably below its trend rate,"
"In general, healthy economic growth depends on well-functioning financial markets," Bernanke said. "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority," he said.
(The financial markets can not return to normal until there is genuine financial statement transparency, that is until
FAS 157 is reworked and/or reapplied; and level two assets and level three assets at Banks, KBE and IAT, and Investment Bankers, KCE, are stated at their true market value, rather than as they are now marked to fantasy. And financial markets cannot return to normal until qualifying special purpose entities, SPEs, that is SIVs, are brought back fully back onto lending institutions books at their true market value. Application of the principles of mirage accounting must cease, interest rates must rise, and central bank facilities end, for stability to return to the stock, bond and currency markets.)
Congressional Democrats are considering a second round of rebates to taxpayers, saying the benefits of the first checks sent to more than 100 million households this year are being eroded by rising energy prices, Bloomberg's Laura Litvan reports.
``
We will be proceeding with another stimulus package, and we once again hope we will work in a bipartisan way,'' House Speaker Nancy Pelosi said after House Democratic leaders met with a group of economists to discuss the spreading housing crisis and rising gas prices.
Pelosi and other House Democrats said that in addition to more rebates a second stimulus package would probably include additional spending for roads and other infrastructure, expanded unemployment benefits, home-heating assistance for low-income families and aid for states struggling with budget deficits.
Elaine Meinel Supkis relates:
this alarming news is total insanity:
Across the nation, every politician is lining up to demand gas taxes be terminated as if dropping a 20¢ tax per gallon is going to do much of anything. The idea that we can have endless tax 'rebates' is pure insanity. Our budget, dear people, is IN THE RED. Terribly in the red! All our systems are in the red! And instead of offering higher interest rates so people save, the government is setting up these perpetual money making machines in every town square and like in Weimar Germany or Stalinist Russia, the money will be printed up and then we can rush off and use it to buy a loaf of bread. But first, we need to buy wheelbarrows to cart this new money around. Wheelbarrow makers will become rich, I tell you! Rich!.
Interesting readsRUT Levels The RUT (IWM) Daily Chart shows the high wave doji candlestick that formed today as first the stocks gapped lower on opening and then rallied for the Bernanke and then settled; it was a real battle between the bulls and the bears
SPX Close Below 1220 Not Good The SPX (SPY) Weekly Chart has broken support.
Investment applicationBecause of many investment market dislocations, weaknesses, and multiple systemic risk potentialities, one may not have immediate and full access to one's wealth in brokerage accounts and in money market funds in the near future, that is at the time of a systemic risk event: I recommend that one invest in the gold ETF, in a trust account (not a brokerage account) this next week, as well purchase gold at both BullionVault.com and GoldIsMoney.com.
WIDGETIZE