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Six ETFs To Go Long For A Debt Deflationary Bear Market

I … Financial market report for August 9, 2010

A. Highlights of several ETFs and stocks.

The lollipop hanging man candlestick in solar stocks, TAN, today August 9, 2010 serves as a dark cloud covering in the solar stocks.

The bearish engulfing candlestick in AMJ illustrates the vulnerability of this ETN to sell off

The chart of the Russell 2000, IWM, shows a rise to resistance; that which was formerly support at 66 now serves as resistance. Note how the Russell has risen since early July 2010, but is below the apex of a “broadening top pattern” at 66. 

B … The overall  rise in stocks, VT, to 43.57, today August 9, 2010 makes for an excellent short selling entry point. Stocks, VT

C … Bonds, BND fell slightly

The 200% inverse of the Euro, EUO, turned up.

II … I believe the euro yen carry trade, the EUR/JPY, that is FXE:FXY, will unwind after the Fed meeting on Tuesday, causing BOTH stocks and bonds to fall.

III … Here are six ETFs for investing long in a debt deflationary bear market

Six ETFs for investing long in a debt deflationary bear market…….. DGP ….. TMV ….. BZQ …..  SJH …..  EUO ….. VXX. One can see these in this Finviz Screener. These are 200% of Gold, 300% inverse of the 30 Year interest rate, 200% inverse of Brazil, 200% inverse of the Russell 2000, 200% inverse of the Euro, and a purchase of Volatility.  Chart of SJH:

The chart of the FTSE 100, compared with the European Financials, and major world ETFs, shows that all stocks hinge on the value of the European Financials, EUFN, which in reality depends on continuing support of the EUR/JPY  moving above today’s close at 113.57  …. ^FTSE, EWU, FEZ, EEM, DNH, VTI, EUFN   Chart of the European Financials, EUFN.

The US Stocks that are at the greatest risk for “stock deflation” coming from a turn lower in the euro yen are the credit services like Nicholas Financial, NICK, and financial services such as Fiserv, FISV.     

The chart of the EUR/JPY together with gold Bull, DGP, and Treasury Bears, TMV and TYO,  shows that an unwinding euro yen carry trade has caused gold to break out. The interest rate bears were defeated on Friday August 6, 2010, and are ready to come back with a vengeance  …  Chart of EUR/JPY, TMV, TYO, and DGP 

Chart of the EURJPY, that is FXE:FXY, shows worn and frail and suggests that the EUR/JPY will unwind after the Fed meeting. Should this happen, I believe interest rate will rise higher, gold will soar, and bonds will fall lower.

IV … Gold broke out August 4, 2010.

A steepening yield curve, $TYX:$TNX, ever since April 26, 2010, when the currency traders sold the world currencies against the yen on concerns over the European Sovereign debt crisis, has been creating an investment demand for gold, GLD, which broke out again on August 4, 2010 rising to 116.72 and which closed at 117.40 today. 

USD/JPY rising from 85.0350 to close at 85.89, up 1.0% today, will be providing underlying support for a rising price of gold.

One can follow gold rising in the chart of USD/JPY and GLD.  I personally am invested in gold coins; it was a buy and hold decision made long ago.

Will the run in the base metals, DBB, specifically JJT, JJN, JJC, SLV, and PALL fail, when the eur-jpy stimulus comes to an end? Or is there a shortage of these metals in the warehouses justifying such elevated levels? Only time will tell.

Carry trade investment came out of Sugar, SSG, and Natural Gas, Chart of Sugar and Natural Gas shows a 4% loss to each of these today. 

V … Bonds fall lower in advance of the US Federal Reserve Meeting to be held August 10, 2010.

Will the currency traders pull the plug on the euro yen carry trade and thus turn off the spigot of investment liquidity?

The chart of debt, that is the US Ten Year Note, IEF, Corporate Bonds, LQD, Emerging Market Bonds, EMB, Build America Bonds, BAB, Municipal Bonds, MUB, and Junk Bonds, JNK … IEF, LQD, EMB, BAB, MUB, and JNK … shows a rise in IEF on August 6, 2010 took bonds higher; now bonds, even IEF, are falling.

The Ten Year Note, IEF, took off like a rocket from a launch pad on August 6, 2010, to close at 96.88. It fell lower today.


Chart of IEF Weekly shows a peak last week, which began when the Euro started to rise May 10, 2010, when the EFSF monetary authority was announced and the Euro rose in value. The rise in the US Government Note, IEF, like all debt was simply a flight to safety, underwritten by yen carry trade investing.  As the Euro, FXE, fell, more than the yen today, carry trades unwound, and bonds traded lower.   


The US Government Bonds, TLT, rose hitting resistance and has turned lower.

Corporate bonds, LQD, rocketed higher and today closed even higher at 110.75. The monthly chart of LQD suggests that business credit could instantaneously be cut off as happened in mid 2008, with a fast and substantial loss of value to bond holders. 

The strong rise in emerging market bonds, EMB, was accentuated by a jump higher on August 9, 2010 to 109.79,  which came as emerging currencies, CEW, rose to 22.22  The monthly chart of emerging market bonds, EMB, suggests that these could fall quickly.

Aggregate bonds, AGG, rose to a new high at 107.63 on August 6, 2010 and closed today unchanged at that value. 

Peak bonds, that is peak credit, AGG, peak debt, my may have arrived today August 9, 2010 at 107.63, and BND as well, on August 6, 2010 at 82.03. 


The Chart of emerging market currencies, CEW, together with other currencies, FXE, XRU, BNZ, BZF, SCR, FXA, and Aggregate Bonds, AGG, shows that bonds have been underwritten by a tide of carry trade investing. 


The fall of major currencies, DBV, lower confirms an August 4, 2010 high of  23.37 as pivot point and rally high: currency deflation in the major currencies commenced August 4, 2010.     

The rise in aggregate bonds, AGG, came from demand for shorter duration US Treasuries, IEF, and corporate bonds, LQD, and emerging market bonds, EMB.

Many think that the Federal Reserves’ terms of “unusual uncertainty” means low rates for a longer extended period, which fuels speculation and the carry trade investing in bonds. But I think that “unusual uncertainty” means  that “debt deflation” will come to the minds of the currency traders and that they will call emerging currencies, CEW, major currencies, DBV, such as the Euro, FXE, lower, resulting in profit taking in bonds, BND, and AGG. I believe “currency deflation”, will induce “bond deflation”, resulting in higher interest rates, as well as continued “stock deflation”; and a steepening yield curve resulting in “gold inflation”.   

VI … US Treasuries had been moving higher, and interest rates have been moving lower in advance of Tuesday August 10, 2010, US Federal Reserve Meeting  …. Daniel Kruger of Bloomberg reports:

Treasuries rallied on Aug. 6, pushing two-year note yields below 0.50 percent for the first time, after the government’s payrolls report showed the U.S. lost 131,000 jobs in July, more than economists forecast. The unemployment rate held at 9.5 percent, the Labor Department said.

Yields on 10-year notes, which serve as a benchmark for everything from mortgages to corporate bonds, fell to the lowest since April 2009 and closed last week down 0.09 percentage point at 2.82 percent, according to BGCantor Market Data

The savings rate for American households increased to 6.4 percent, the highest level since June 2009, the Commerce Department said Aug. 3. At the same time, personal consumption and incomes were unchanged. The savings rate has averaged 5.9 percent since November 2008, the most for a 20-month period since 1992 through 1994. It fell as low as 0.8 percent in April 2005, and averaged 2.2 percent from 2005 through 2007. (Comment: people are putting money away for emergencies).

Investors in the U.S. have added to their Treasury positions at a faster pace than overseas holders this year through May. Holdings in the U.S. are up 12 percent to $3.99 trillion, while Treasuries held overseas have risen 7.4 percent to $3.69 trillion. The biggest jump in demand this year among domestic buyers of Treasuries has been commercial lenders. Bank holdings of Treasury and agency securities increased 5 percent to $1.57 trillion last month, according to the latest data available from the Fed. That compares with a 3 percent gain in the first half of the year. (Comment: Banks are effectively monetizing US Debt; when the euro yen carry trade rally fails, interest rates will explode higher).

Risk appetite has diminished among both borrowers and lenders,” said Andrew Harding, who helps manage $22 billion as chief investment officer for fixed income at PNC Capital Advisors in Cleveland. “It’s some skepticism on the economy, and also risk aversion. Unemployment is still above 9 percent and doesn’t show signs of coming down below 9 percent.”

The Fed’s decision to hold its target for the overnight lending rate at a record low has made it possible for banks to borrow at near-zero interest rates to finance purchases of longer-term and higher-yielding Treasuries while lending less. Commercial and industrial lending by banks has fallen 20 percent since the end of 2008 to $1.2 trillion, as of March 31, the latest data available, according to the Federal Deposit Insurance Corp. (Comment: There has been an abatement to lending because it is easier to speculate in rising bonds).

Fed policy makers signaled they will probably pass on providing more stimulus at their Aug. 10 meeting and wait to see if signs of weaker economic growth persist. Bernanke told lawmakers in South Carolina Aug. 2 that consumer spending is “likely to pick up” amid a “moderate” expansion. (Comment: There will be no QE 2 and the euro yen carry trade rally that started June 10, 2010 with the announcement of EFSF facility will fail. The rally end’s will fall hardest on the European Financials, EUFN, the Financials, XLF, the Banks, KBE, and the Russell 2000, IWM).

Demand for Treasuries is heating up at the same time sales of the securities are slowing. The Treasury lowered its estimate for government borrowing from July through September, reflecting a reduction in federal spending, during an Aug. 2 press conference in Washington.

Borrowing will total a net $350 billion in the current quarter, compared with an estimate three months ago of $376 billion. The Treasury also projected borrowing of $380 billion in the three months to Dec. 31.

The proportion of U.S. holdings of Treasuries reached 50.2 percent in May, up from as low as 44.3 percent in April 2008, when foreign demand surged as investors sought a refuge in U.S. government bonds following the collapse of Bear Stearns Cos. (Comment: the proportion of US holdings of Treasuries may have come from proxy banks acting on behalf of the US Fed as well as a “euro yen” carry trade stimulated by a rise in the Euro as part of demand for Euros associated with the settlement of Libor contracts; in other words, the only thing keeping Libor low has been an increase in the value of the Euro).

China has added $35.8 billion to its holdings of Treasury notes and bonds, a 4.3 percent increase to $860.1 billion. At the same time, it has slashed its holdings of short-term bills to $6.8 billion from $69.7 billion at the start of the year.  (Comment: there has been a net decline in China’s holdings). Japan, the second-largest holder, has added $21 billion of the debt, raising its position 2.7 percent to $786.7 billion. (Comment: the increase in Japan holdings likely came from “bond yen” carry trade investing; when the Euro falls, there will be an unwinding of yen carry trade investing in bonds of all types).

Treasury debt rose 25 percent to $7.27 trillion last year, while foreign holdings increased 20 percent to $3.69 trillion. The last time domestic investors held the majority of outstanding Treasuries, in August 2007, outstanding public debt totaled $4.45 trillion with foreigners owning $2.22 trillion, or 49.8 percent. U.S. government borrowing has increased 9.4 percent, a faster pace than foreign purchases, up 7.4 percent (Comment: The extent of the monetization of US debt is truly astounding).

VII … Deflation is ongoing worldwide

Ambrose Evans Pritchard relates: “In Japan itself core CPI deflation has reached -1.5pc, the lowest since the great fiasco began 20 years ago. 10-year yields fell briefly below 1pc last week. Premier Naoto Kan has begun to talk of yet another stimulus package. “The time has come to examine whether it is necessary for us take some kind of action,” he said. (Comment The Japanese shares, EWJ, have the same wave structure as the Russell 2000, IWM, shares: both are deflationary)

In a normal recovery, the US labour market would be firing on all cylinders at this stage. Yet the latest household jobs survey showed a net loss of 35,000 jobs in May, 301,000 in June, 159,000 in July. The ratio of the working age population with jobs has fallen to 58.4, back where it was in the depths of recession. Over 1.2m people have dropped out the work force over the last three months, which is the only reason why the unemployment rate has not vaulted back into double digits. A record 41m Americans are on food stamps. This is unlike anything since the Second World War. It screams Japan, our L-shaped destiny.

“Unprecedented monetary and fiscal stimulus has produced unprecedentedly weak recovery”, said Albert Edwards from Societe Generale in his latest “Ice Age” missive. That stimulus is now fading fast before the private economy has clasped the baton.

Disclosure: I am invested in gold coins