Japan issued a stunner this morning with a GDP report of -3% after being expected to grow 0.1%, that’s a pretty big miss! Negative is, of course, not good and the Nikkei dropped 357 points (2.22%), recovering 100 points off the low on a weak finish.
Now this is, of course, a good thing for us because our markets compete for global dollars with the Japanese economy AND global investors use cheaply borrowed Yen to invest in U.S. stocks, bonds and notes in what is called "the carry trade". This carry trade has been unwinding of late as the falling dollar was beginning to pressure investors to get out of their dollar denominated assets before the decline in the value of the dollar offset the spread they were making between the interest they paid and the interest on U.S. equities.
We were on top of this issue last Wednesday when I pointed out the turmoil in Japan and the only thing that’s really shocking about today’s news is why am I the only person who doesn’t need a GDP report to see a problem? We’ve been tracking the weakness of the Nikkei since it first fell into the danger zone on the Big Chart back on July 27th, when it gapped down to close below our "Must Hold" level of 17,400.
Still, the fact that we are the least objectionable investment vehicle as the entire global financial market begins to unravel on us is NOT a good basis for long-term investing over here so we will continue to take any gains with a huge grain of salt as we wait for word from the Fed. There are many Fed speakers scheduled early this week as they get their last licks in ahead of the next meeting on the 18th with plenty of data to mull over between now and Friday. So we have that to look forward to! We also can look forward to China redeploying some of their $1.4 trillion of foreign currency holdings where it will do them the most good. The country (and keep that fact in mind) invested $3B in BX back in May, buying about 10% of that company and losing over $1B in value for their troubles so far.
That didn’t go so well so they are starting their own "China Investment Company" that will be staked with $200B, which is being set up in a kind of Fund of Funds format that is certain to have every investment bank and hedge fund on the planet foaming at the mouth for a piece of that pie.
After the Blackstone debacle (which was a shame because their broker told them that the IPO was going to the moon), they have retasked a good portion of the fund to invest back (ie. take more control) in their own banking sector as well as other state-run or JV operations. Is $200B, or whatever part trickles over here, enough fuel to get our markets going again? They are already heavily invested in China and, despite BX’s performance, prudent diversification would indicate 10 times that $3B investment at minimum should be placed over here.
This runaway growth of our money flowing into China is one of the reasons I am not looking for a doomsday scenario in the world economy. China knows they have to reign in their own growth and they are pragmatic enough to realize that they will get further in the race with 4 well-inflated tires (China, US, EU, Japan) than they will with one over-inflated tire and 2 flats.
Other than the Nikkei, which had a blow-out, the rest of Asia was pretty flat despite the very poor showing in the US on Friday. The Hang-Seng, of course, went up but a gain of 17 for them is like a non-gain of 250 points, which is their average gain for the past 16 sessions! While investors in Hong Kong try to recover from a day without making triple digits by lunch, we’ll have to ponder how great of a barrier 24,000 is going to be (they closed at 23,999.70).
Europe is an island of stability as economic fortunes are clearly tilting from West to East on this planet. The markets over there are flat ahead of our open and EU bank members have said they will be patient and hold off on rate decisions while they see which way the wind blows. Irish CB President John Hurley said: "the forecasts show that the outlook is good, but there is a good deal of uncertainty." While the EU remains on inflation watch, they do not wish to exert undue pressure on our markets by raising rates, which would pull even more money out of US equities.
The most interesting news of the day to me is that privately held Hunt Oil of Dallas has made a deal with the regional government of Kurdistan to explore Iraq for oil. Effectively this is a simultaneous vote of no-confidence in both the Iraqi and US governments, both of whom should be furious about Hunt going around them and cutting deals with a split-off faction in Iraq. While this deal may be great for Bush’s pals at Hunt, it is a disastrous precedent for Iraq and effectively says whoever takes control of a region can cut oil deals with our blessing. Will there be outrage or are we just too sick and tired to care at this point?
Earlier this morning I said, "How amazingly perfect was the timing of a drastically downward revision to Japan’s GDP just hours away before a runaway Yen was about to push the dollar well below the 80 level? Sure I believe in coincidence, it’s just uncanny coincidences with perfect market timing that concern me…:" and now, almost as amazing in its timing, just as oil fell $1 on international exchanges, Mexico’s Pemex pipelines were hit by a terrorist attack, coincidentally rescuing oil from slipping back below $75. Remember, I’ve warned you already, the oil roaches are getting very desperate and ANYTHING can happen this month!
Speaking of our great oil strategists, the U.S. announced today plans to build a
HUGE TARGET military base right at the Iran-Iraq border. Maj. Toby Logsdon, the U.S. officer overseeing the project, says that the new base will have living quarters for at least 200 happy, happy soldiers. He hopes U.S. forces will begin living at the new outpost in November. "Iran will know this is here — they will have to rethink how they do things, and the smugglers will have to rethink how they do things," he says, gesturing to the sandy field where the new base will be bombed built. We will be hearing more about Iraq all this week as the generals go before Congress to give their unbiased opinions of the war effort.
Expect interest rates to go up this week as $120B worth of commercial paper needs to be rolled over, including $56.5B worth of asset-backed paper which MUST find a home at perhaps the worst possible time for such a large sale. Because of limited investor demand, the U.S. and euro commercial-paper markets have been shrinking in terms of outstanding debt. The asset-backed commercial-paper market shrank by $195 billion from July to $980 billion at the end of August, according to Federal Reserve data. That means less money is available to get things done, plain and simple!
So, as I said in the Weekly Wrap-Up: "Now we are right back at the bottom (13,100) where Homer and I predicted this market action on the 28th (13,040) and I am LESS confident today that we will make another rough climb to the top than I was then. This may be a week for bottom testing, but a little too early for bottom fishing!
Expect at least a 50-point bounce but a failure to break 13,200 will be a total failure… I see they have released Cramer and put him in a suit on CNBC this morning, something they tend to do when they need to rally the troops.
Let’s be very careful out there!