Financial Market Report for September 16, 2010
I … Yentervention has restarted a sell off in currencies that will produce a sell off of stocks globally.
US Government Bonds, ZROZ, TLT, and IEF, traded down on a higher Euro, FXE. Junk Bonds, JNK, rose to a new high with a higher Euro; which also caused the distressed debt investment mutual fund Fidelity Capital and Income, FAGIX, to close higher. Trading in this mutual fund serves as a proxy for understanding the value of the investments taken in under TARP, which was headed up by Elizabeth Warren, the Harvard Law School professor, who first proposed the Consumer Financial Protection Bureau, and who has been named to a special position reporting to both President Obama and to the Treasury Secretary Geithner, and tasked with heading the effort to get the new federal agency standing. Ms Elizabeth Warren wrote Warren, Elizabeth. “Consumers Need a Credit Watchdog,” BusinessWeek, July 15, 2009. Those who shorted the 300% US Government Debt ETF, TMF, today, profited.
Base Metals, DBB, and Gold, GLD, traded up on today’s higher EUR/JPY; but stocks, ACWI, have recognized the higher euro yen carry trade as a false flag and have turned lower. The hot money flow into the base metals, caused a short sell covering in Tin, JJT, popping it higher. And the inflow caused Natural Gas, UNG, to rise to resistance. Being that there is a glut of oil at the terminals and through out the world wide system, oil, USO, fell lower again today; it manifesting three black crows as well, rewarding those short UCO.
The Bank of Japan in selling the Yen, FXY, on September 15, 2010, has created the consequence of restarting competitive currency devaluation that occurred on April 26, 2010, with the European Sovereign Debt Crisis coming to a head. This being evidenced by the small cap pure value, RZV, shares falling more than small cap growth, RZG, shares. Those shorting the 200% Russell 2000 Value ETF, UVT, profited.
On September 15, forex traders who were long the AUD/JPY, opened their portfolio to find that during the night, with the Bank of Japan’s currency operation, their position was massively larger as is seen in the chart of FXA:FXY; substantially larger than the EUR/JPY, FXE:FXY, portfolio.
Many of the beneficiaries of the BoJs selling operation have likely gone short, producing today’s Australian Dollars, FXA, bearish harami.
Other evidence for another bout of debt deflation, is the Mexico Peso, FXM, turning lower inducing Mexican Stocks, EWW, to fall 0.4% lower; and the Russian Ruble, XRU, to fall lower inducing Russian S&P, RBL, to fall 2.0% lower.
It is significant that the Japan shares, EWJ, are one of today’s loss leaders, despite the Nikkei 225, ^N225, trading unchanged overnight at 9500. This evidences that world stock traders believe the world is in a double dip recession that cannot produce and sustain growth. Those shorting the 200% Japan ETF, EZJ, profited.
Additional evidence for a double dip recession comes from Nuclear Energy Shares, NLR, falling 1.9% as well as the three black crows in the chart of Utilities, XLU; showing these to now longer be a safe haven investment.
The Yahoo Finance chart of Australia, EWA, Japan, EWJ, Asia, DNH, Frontier Emerging Markets, FRN, US Financials XLF, and Energy Service providers, OIH, …. EWA,.EWJ, DNH, FRN, XLF, OIH … shows what is likely, the restarted the April 26, 2010 bear market that commenced on April 26, 2010, when the value shares failed to outperform the growth shares.
Short sell covering caused a rise in semiconductors, XSD. And a rise in the Brazilian Real, caused a rise in the Brazil Small Caps, BRF.
The US Dollar Bull ETF, UUP, closed at 23.54 just above support at 23.50 going back in a broadening top pattern to October 2008. The US Dollar, $USD, closed at 81.25 at the edge of a broadening top pattern going back to early 2005. No wonder the gold ETF, GLD, closed up today to 124.6.
It was on April 26, 2010, the currency traders went long the yen and short the global currencies as is seen in the MSN Finance chart of FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, XRU, FXY causing the US Dollar to rise; as can be seen in this chart from April 26, 2010 to June 7, 2010. It was later, specifically on June 7, 2010, the US Dollar, $USD, turned down as the Euro, FXE, rallied on news of the call for the EFSF Monetary Authority to be established.
All stock markets now have been reset for their 3-of-3 downs. Get ready for investment, economic, and cultural “shock and awe”. Chaos and social hardships are coming.
The fall of the Yen, FXY, commenced competitive currency deflation that is part of global debt deflation.
The coming 3-of-3-of-3 downs in stock markets, will be intense debt deflation.
Debt deflation is the contraction and crisis that follows credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”
The fall of the Yen has turned off the only remaining spigot of investment liquidity; the other spigot of investment liquidity was the US Federal Reserve’s QE which ended for all practical purposes on March 31, 2010.
The Bank of Japan in selling Yen on September 15, 2010 was a pivotal day in investment history. Not only have the spigots of investment funding been turned off. But now, carry trade activity will now be operating in reverse to deleverage: the carry trades will be like black holes sucking in and destroying capital.
Now with the fall of the Yen, the Global Elliott Wave 3-of-3 Down Wave can get underway to destroy wealth world wide: serious downdrafts will be coming to all financial and bond markets globally. The chart of ACWI shows a close at 42.40. The chart of the S&P, SPY, shows a close at 113.05
Chart of ACWI
Chart of SPY
Thomas Jefferson said: “If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”
I personally am invested in gold bullion, $GOLD. But, I do provide a listing of ETFs and Stocks to sell short for a debt deflationary bear market for those interested in short selling. At the top of my list of stocks to sell short is Apple, AAPL and Tata Motors, TTM
Chart of Apple
Chart of Tata Motors
II … I believe that soon, out of a liquidity evaporation and a liquidity crisis, stemming from a fast fall in bond and/or stock values, that here in the US, a Financial Regulator will be announced who will oversee lending and credit, as well as money market and brokerage accounts.
This person will be what I call a credit boss or credit seignior who funds economic operations with an emphasis on seeing that the strategic needs of the country are met and that monies for food stamps keeps flowing. I believe the government will become the first, last and only provider of liquidity and money.
I believe that here in the US, the Financial Regulator will exercise Discretionary Governance, and announce a Home Leasing/Renting Program administered by the banks on their REO properties and those of Freddie Mac, Fannie Mae and the US Federal Reserve. Mortgage lending and securitization of loans will cease, and leasing of homes will be a public private partnership cooperative endeavor. Companies that have created and serviced mortgage-backed securities, such as Anworth Mortgage Asset Corporation, ANH, and Annaly Capital Management, NLY, will quickly disappear from the economic landscape, as mortgage bond funds such as Goldman Sachs Mortgage Bonds, GSUAX, tumble in value.
And I envision that in Europe, a continuing fall in the EUR/JPY from 112, will result in further stock deflation, seen in the ETF, FEZ, falling below 36 and EUFN falling from 22. Then a liquidity crisis will emerge, where there will not be enough buyers for sellers of stocks as well as bonds, causing small business failures, and banks to become sorely decapitalized, resulting in the president of the ECB arising to be an “Eurozone Credit Seignior” and provider of liquidity to Europe.
While many write that Ms Warren has been appointed as lapdog, I believe that Ms. Warren, is more likely to turn out to be the top dog, that is the Seignior, meaning top dog who takes a cut, and be called upon in time of crisis, to assume the role of Financial Regulator overseeing investment, banking, lending, credit, seigniorage and house leasing as her many articles would uniquely qualify her for such a role:
Warren, Elizabeth & Jay Lawrence Westbrook. The Law of Debtors and Creditors: Text, Cases, and Problems (Aspen Publishers 6th ed. 2008).
Warren, Elizabeth. “Congress and the Credit Industry: More Bad News for Families” in Law and Class in America: Trends Since the Cold War 279 (New York University Press, 2006).
Warren, Elizabeth et al. “Mortgage Debt, Bankruptcy and the Sustainability of Homeownership” in Credit Markets for the Poor (Howard Rosenthal ed., Russell Sage, 2003).
Warren, Elizabeth et al. “Who Uses Chapter 13?” in Consumer Bankruptcy in Global Perspective 269 (Ian Ramsay ed., Oxford: Hart Publishing, 2003).
Warren, Elizabeth. “Evaluate the Present and Shape the Future” in The Development of Bankruptcy & Reorganization Law in the Courts of the Second Circuit of the United States (Mathew Bender, 1995).
Warren, Elizabeth. “Natural Disasters and Bankruptcy,” 3 Federal Reserve Bank: Communities & Banking (2005).
Warren, Elizabeth & Jay Lawrence Westbrook. “Class Actions for Post-Petition Wrongs: National Relief against National Creditors,” American Bankruptcy Institute Journal, March 2003,
Warren, Elizabeth. “Why Have a Federal Bankruptcy System?” 77 Cornell Law Review 2401 (1992).
Warren, Elizabeth. “Foreclosure Crisis: Working Toward a Solution: March Oversight Report” (2009).
III … In the news
OpenEurope reported September 15, 2010:
1) European Commission unveils proposals for regulation of derivatives and short-selling
EU Commissioner for Internal Market Michel Barnier will today present his proposals for regulation of derivatives and short-selling. EurActiv reports that under the proposed measures, so-called “over-the-counter” (OTC) derivatives would have to be traded via stock exchanges and processed by clearing houses or central counterparties, with a key role in the supervision of contracts for the new European Securities and Markets Authority.
As regards short-selling, the WSJ reports that the new rules would – if adopted – force investors to disclose “short” positions to regulators. Il Sole 24 Ore notes that bans on short-selling imposed by national regulators would be coordinated by the European Securities and Markets Authority, which will also have the power to limit or ban short-selling on its own initiative in “emergency situations”.
Barnier’s proposals will now have to be endorsed by the Council of Ministers and the European Parliament. If the timetable is respected, the new rules on short-selling and Credit Default Swaps (CDS) will enter into force in July 2012, followed by the new rules on derivatives six months later.
EurActiv WSJ BBC Il Sole 24 Ore La Repubblica
2) German government losing patience with Van Rompuy’s lack of progress with economic governance; Commission to propose fines for member states which fail to boost their competiveness
EUobserver notes that the German government has spoken out at the lack of progress by Council President Herman Van Rompuy’s taskforce on economic government. Deputy German Foreign Minister Werner Hoyer is quoted saying, “This dossier is too important to be treated on the basis of nebulous texts.” Germany backs the idea of a suspension of voting rights in the Council for states that break budget rules, which is likely to require treaty change.
In an interview with the FT, French Finance Minister Christine Lagarde has said that the eurozone’s drive for new fiscal rules and sanctions has run into “very difficult” legal obstacles and political objections from non-eurozone members in Eastern Europe. She said that, although there is scope under existing treaty provisions for the 16 eurozone members to draw up their own procedures, “We have the other 10 members saying: ‘Why should you exclude me? Why am I not part of the club?’”. She added, “The whole question of sanctions, the timing and pattern of sanctions, is at stake here.”
Meanwhile, Handelsblatt reports that the European Commission will separately table a proposal on 29 September, which would see fines imposed on member states which fail to pursue reforms to boost their economic competitiveness. Such reforms could include measures to counter balance of payments deficits or excessive wage costs. Italy, France and Poland also have reservations about stronger sanctions.
OpenEurope reported September 16, 2010 :
1) Euro “A Bad Thing”, For The Economy Say Majority Of French, Germans and Spaniards
EUobserver reports that a fresh survey, conducted by the German Marshall Fund of the United States, has shown that 60 percent of the French, and more than half of German, Spanish and Portuguese respondents said that the euro was “a bad thing for their economy”. Outside the eurozone, 83 percent of the British, 53 percent of Poles and 42 percent of Bulgarians thought that using the euro would be bad for the domestic economy. The only exception was Romania, where 54 percent of respondents are in favour of the common currency.
Only in Germany did the majority of respondents (54 percent) agree that the European Union should have the primary responsibility for economic decision-making in tackling the economic crisis. This option was the least popular in the United Kingdom (25 percent) and in new member states Bulgaria (24 percent), Slovakia (22 percent), and Romania (15 percent). The French were divided on the issue. The article notes that the results sharply contradict a recent European Commission survey that Brussels interpreted as saying that European citizens are in favour of “European economic governance”.
Meanwhile, the poll found that 20% of Turks believed their primary partners should be Middle East countries, while 13% favoured the EU. Compared with last year, that almost halved support for the EU while doubling the figure for engagement with the Middle East.
2) Germany Wants Complete European Economic Governance
The FT reports that the European Central Bank Executive Board Member Lorenzo Bini Smaghi said some of the Commission’s powers over competition policy should “also be applied” to police member states’ economic and financial policies.
EurActiv reports that Germany is still pushing for a possible treaty change to strengthen the Stability and Growth Pact, calling for the suspension of member states’ voting rights if they break the rules. “Germany thinks that it is important to make progress on extending the scope of possible sanctions within the Stability and Growth Pact,” a diplomat added. “In our view, this is something that is still on the agenda and should be elaborated.”
Belgian Radio 1 quotes European Council President Herman Van Rompuy saying, “If the euro had failed, there wouldn’t be an EU any more.”
3) Barnier: New rules on derivatives and short-selling will put an end to “Wild West” speculation … Lord Turner: It is “vitally important” that new EU watchdogs do not get involved in day-to-day supervision
It is widely reported that EU Commissioner for Internal Market Michel Barnier yesterday unveiled new proposals for regulation of over-the-counter (OTC) derivatives and short-selling, due to enter into force by the end of 2012, with a key role for the European Securities and Markets Authority (ESMA) in directly banning certain activity if it is perceived to threaten the financial system. “No financial market can afford to remain a Wild West territory. The absence of any regulatory framework for OTC derivatives contributed to the financial crisis and the tremendous consequences”, Barnier said yesterday during a press conference.
The proposals have already attracted criticism, especially with regard to temporary bans on Credit Default Swaps (CDS) and naked short-selling. Andrew Baker of the Alternative Investment Management Association (AIMA) is quoted in the Telegraph saying: “We do hope however that new powers to ban short selling are never used. Such bans have never worked, and indeed all the evidence is that the shorting bans during the crisis made the situation even worse”.
Meanwhile, Reuters reports that yesterday FSA Chairman Lord Adair Turner said that it is “vitally important” that the three new EU financial watchdogs do not get involved in day-to-day supervision of financial institutions, adding: “We are clear that the fundamental process of supervision has to occur where expertise is, with the national authorities”. However, the Commission’s proposal on derivatives appears to be giving ESMA day-to-day supervisory powers over clearing and trade repositories.
WSJ IHT Guardian FT FT 2 Telegraph Mail City AM City AM: Sidwell Handelsblatt RTBF El Pais Irish Independent Irish Times BBC EUobserver European Voice Reuters Open Europe research Open Europe press release
Disclosure: I am invested in gold bullion