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Bret Rosenthal is Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds. Bret Rosenthal is responsible for the day to day management of the Fund’s investment and business activities. Rosenthal Capital Management, LLC, is an independent investment management company... More
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  • News That Moves Markets: Bank Of Japan Directly Manipulating Equity Market, MS Credit Downgrade Main Event Euro Woes Sideshow 2 comments
    May 9, 2012 1:54 PM | about stocks: MS

    BOJ Flaunts Unwritten Rule

    Filed under the category 'Things that make you go hummm' I would like to submit the following story regarding the actions of the Central Bank of Japan. Apparently we have entered a brave new world of centralized control. In rather Orwellian fashion, the BOJ has decided to directly support the Japanese equity market. Said support in and of itself is not that dramatic. We all know Central Banks have had an ever increasing heavy hand in direction of equities around the world since the 2008 crisis. However, other central banks have had the courtesy to attempt to hide the manipulation. There seems to be an unwritten rule among central bankers that manipulation is ok and encouraged as long as lying and misdirection are concurrently employed to dupe the sheepeople.

    Now, however, the BOJ has decided to flaunt the unwritten rules and manipulate openly in a desperate attempt to change market direction. Duping the Sheepeople is apparently now a mistake and instead leading by the nose to slaughter is preferable….

    Submitted by ZeroHedge:

    Bank Of Japan Goes Full Tilt, Buys Record Amount Of ETFs And REITs To Prevent Market Crash

    One can call the BOJ inefficient, slow and for the most part utterly worthless, but one can certainly not accuse them of lying, and beating around the bush. Because unlike all other central banks, with the BOJ at least it has been fully public knowledge that this particular central bank unlike all others (wink wink), is actively engaged in buying equity products, among them REITs and broad equity ETFs (which provide much explicit tail-wags-dog leverage and explains why the FRBNY's red phone hotline goes directly to Citadel's ETF trading desk). And buy stocks on full tilt and in record quantities is precisely what the BOJ just did, only as one can expect, with absolutely no impact on the broader stock market. Because once even the central bank is exposed as participating in the market, the element of surprise is gone, and the central bank becomes just one mark (if one with a largish balance sheet). As MarketWatch reports, "The Bank of Japan stepped back into the stock market Monday, making its largest single-day purchase of exchange-traded funds to date…The Japanese central bank said it spent 39.7 billion yen (about $500 million) buying up stock ETFs as part of its ongoing asset-purchase program, breaking a previous record of ¥28.5 billion, set on April 16. In addition to the ETF buys, the Bank of Japan also acquired ¥2.3 billion in real-estate investment trusts Monday." Too bad that this latest outright bull in a Japan store (sic) intervention had zero impact: "the move failed to prevent a sharp fall for the Tokyo equity market." But at least they are honest. Imagine the shock and horror (and complete lack of apologies to all those who have predicted just that) when the world finally gets a trade confirm-based proof that Brian Sack was indeed buying (never selling) SPYs and ES. Why everyone would be truly shocked, SHOCKED, that the Fed is nothing but another two-bit gambler in a rigged and broken casino.

    For those who are unaware of Japan's explicit but at least forthright approach to asset price manipulation, read on:

    Japan's monetary authority is almost unique among its peers in the major developed economies, in its high-profile purchases of ETFs, which it began in December 2010 as part of aggressive easing measures.

    Since then, the Bank of Japan has bought almost ¥1 trillion worth of ETFs - along with another ¥78.9 billion in REITs - and has an additional ¥642 billion to spend on the stock funds after raising the program's size at it last policy meeting in April.

    The central bank emphasizes that the program has only broad goals such as supporting interest rates and reducing risk premiums, rather than supporting financial markets.

    Jefferies Japan's head of Japanese strategy Naomi Fink says that while the ETF purchases are really part of the broad push to reflate asset prices in the deflation-plagued country, they do "provide a bit of a backstop, when they think they can curb the downside" for the market.

    "Still, it's a very small amount," Fink said of the ETF purchases. "It's more designed to bolster sentiment … [and] it works best when sentiment is fragile."

    As a tangent here, do these "strategists" even listen to what they sound like? "Very small amount"… "designed to bolster sentiment." Oh ok. That makes everything so much better. It is just too bad that a Martingale strategy where one has an infinite balance sheet is not all that available to everyone in the world, except to 5 or 6 market participants of course, all of whom are incentivized to destroy their currencies and ramp their "inflation-sensitive" assets ever higher. Surely that according to Jefferies is perfectly acceptable.

    Sentiment was certainly fragile Monday, as investors returned from a four-day holiday weekend to find the yen considerably stronger - a negative factor for Japan's export-focused corporations - U.S. employment growth weaker than expected, and European election results raising more uncertainty for the euro zone.

    And while investors don't find out about the Bank of Japan's market operations until after the close of trading, "there's a market assumption that when the Topix falls more than 1%, that triggers ETFs," according to Fink.

    Still, Fink advised against trying to front-run the central bank by jumping into the market whenever the Topix - Japan's key broad-market index - drops 1%.

    And whatever you do kids, remember: frontrunning central banks is not to be tried at home…

    "I wouldn't exactly call that my favorite strategy," she said, adding that since the ETF-buying program isn't meant to be a "price-keeping operation," it offers little in the way of trading opportunities.

    … After all that's what Primary Dealers are for: and since they make sure that no bond auctions can ever fail (courtesy of the $30 trillion custodial asset cloud, which desperate economists have pegged fancy post-modernist theories to explain how infinite supply can generate infinite+1 demand without having the faintest clue of how the shadow banking system works) there naturally has to be some kickback in it for them. Because otherwise one of them might even speak up and tell the rest of the world just how much of a fraud the system truly is.

    And yes, the BOJ IS completely open about what they buy and how much: Click Here for Chart Details

    Credit Update: As always I adhere to the belief that 'Credit Leads Equity'. So in the midst of equity market mayhem over the last two weeks a review of credit volatility is in order. A conversation with the oft accurate always eloquent MJ reveals some telling insights. To date, credit market volatility appears normal and not a repeat of MF Global 2012 action. Credit, as judged by the CDX IG18 index, remains in a trading range between roughly 101 and 89. A move dramatically above 101 would be cause for concern as of now no sirens are blaring.

    MJ Credit Guru: Morgan Stanley Not MF Global

    The potential rekindling of the European sovereign crisis has generated numerous bearish headlines and strategy reports over the past month. This weekend's elections and the outright stupid comments by some of Greece's politicians were interpreted as "events" that meant last year's successful trades (short banks and sovereign risks) are being given a second chance to prosper. Given the performance of last year's short sellers, even as the US economy grew and credit expansion broadened, this trading reaction is to be expected.

    However, in order for this year's sovereign crisis to become a short seller's dream it needs to find a way to destabilize the global financial system. This will be much more difficult this year due to the launch of the LTRO and the likelihood that another LTRO will be launched if bank funding concerns begin to mount.

    Nevertheless, we believe the real reason for US equity market weakness is not Europe…but fears that Morgan Stanley might suffer the same fate as MF Global. MS' potential counterparty collateral increase associated with credit downgrades is causing many investors to remember the AIG's 2008 demise as well as last year's MF Global implosion.

    The number of people asking if firms are cutting their trading exposure to MS spread like wildfire yesterday and it seems likely to accelerate today. However, investors need to remember that MS is not MF Global and the economy is much stronger today than it was in 2008.

    Additionally, banks that fall under the supervision of the FED are not going to cut their credit lines to MS. Why? Cause the FED will fire and replace their boards almost instantaneously. When BAC's board was rumored to be considering cutting MER and CFC loose at the height of the credit crisis BAC was publicly warned that such actions would hurt the US and global financial system. Some FED members went so far as to say that such actions would decrease the safety and soundness of Bank of America. Code words for "No!" you cannot do that and, by the way, you are fired!" Next sentence.."Now that your calendar has been freed up; Congress would like you to answer some questions in front of 400 cameras." There is no reason to believe anything has changed.

    MS also has strong client driven franchises with built in profitability and do not appear to have a huge concentration of risk. MS also has a huge amount of liquidity and can borrow from the FED. The Volcker rule has also materially decreased the amount of credit market liquidity, almost forcing many clients who need to trade credit to trade with MS

    A major difference between the MF Global situation and MS is that MF Global was never a systematically important firm. MF Global was also highly leveraged to one basic trade based on a traders EGO, MS is a systematically important firm with a global business.

    MS will not fail, but its negative credit migration and a drop in its equity price could cause a surge in systematic risk that causes the VIX to rise.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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  • untrusting investor
    , contributor
    Comments (9923) | Send Message
     
    Amazing the BofJ would actually admit to equity market purchases and plan to continue with even more of the same. No doubt other central banks are doing the same. But whatever happened to "free markets" and real price discovery?
    10 May 2012, 03:20 AM Reply Like
  • Bret Rosenthal
    , contributor
    Comments (67) | Send Message
     
    Author’s reply » "free markets" and real price discovery

     

    Remember when. All of a sudden I'm misty eyed with nostalgia.
    10 May 2012, 09:40 AM Reply Like
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