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Bonds Bounce Up As The Yen Soars Causing Instability In Stocks


Financial Market Report for October 28, 2010
… Bonds, BND, are trading up in early morning trading as the Yen, FXY, is trading up and overtaking the Euro, FXE, as is seen in the chart of the euro yen carry trade, FXE:FXY, trading lower which is destabilizing yen based carry trades in stocks, as is seen in World Stocks, ACWI, manifesting a bearish lollipop hanging man candlestick.  

Yahoo Finance reports the EUR/JPY is trading at 112.42 which is lower than its open at 112.5250 and lower than yesterday’s close at 112.4750.

The chart of the Euro, FXE, shows trading at 138.35 which is right in the middle of a broadening top pattern, of which Street Authority communicates when you see the broadening top, the market will eventually drop

And I believe the Euro will drop very soon as EuroIntelligence reports today that the Greek fiscal adjustment plan on the verge of collapse: “2009 Greek deficit revised upwards from 13.6% of GDP to 15.5%; revenues are coming in lower than projected, risking a severe undershoot of the 2011 deficit target; the fiscal slippage is making it more likely that Greece will end restructuring its debt; the budget talks in Portugal have broken down, as the opposition is taking the dispute to the brink.” And Shaun Richards provides the downbeat fiscal news from the Bank of Greece and the Irish Government and also relates additional insights on the Peripheral Euro Zone countries. And Ambrose Evans Pritchard of The Telegraph writes: Hopes of a budget deal in Portugal collapsed after marathon talks between the minority government of socialist premier Jose Socrates and conservative leaders ended in acrimony. Finance minister Fernando Texeira dos Santos said failure to agree on budget cuts will “plunge the country into a very deep financial crisis” …. Meanwhile, Ireland has announced fiscal retrenchment of €15bn over the next four years, twice the original plan. It is already cutting public wages by 13pc. John Fitzgerald from Ireland’s Economic and Social Research Institute said there is a risk that austerity tips the economy into a downward spiral, comparing it to an overdose of “chemotherapy” that does more harm than good. Finance minister Brian Lenihan said the country had no choice. “The cost of borrowing is high and rising, and if we do not act soon to live within our means, people may stop lending to us. We will not fool the markets for an instant if we seek to defer any longer what evidently needs to be done now. The Irish people will have to accept cuts in public expenditures and higher taxes,” he said. … In Greece, yields on 10-year bonds surged 67 points to 10.26pc, the biggest jump since the turmoil in June. The sell-off came after permier George Papandreou warned that the country was still in danger, and threatened to call early elections. Finance minister George Papaconstaninou refused to rule out a request for an extension of the repayment period for the EU rescue package and confirmed that tax revenues are falling short. “We are deluding ourselves as a country in thinking we have a tax system. We don’t,” he said.  It unclear whether Portugal can salvage anything over coming days in what amounts to a game of brinkmanship, with the socialists demanding VAT tax rises and the conservatives demanding spending cuts. He confirmed leaks that the budget deficit for 2009 would be “above 15pc” of GDP, higher than the last estimate of 13.8pc and five time the original claim of 3pc by the previous government.  … Julian Callow from Barclays Capital said politics is intruding in the eurozone fiscal crisis. “It is one thing to promise cuts but it is very different to agree on details and decide where the axe will fall. There are some encouraging signs but Portugal has an awesome undertaking ahead in squeezing fiscal policy by 4pc of GDP over the next year, and the the task may be too great.” Yields on 10-bonds jumped 25 basis points on Wednesday to 5.77pc, far above the likely rate available from the EU’s bail-out fund and the International Monatery Fund. A string of top economists in Portugual have said the country should call in the IMF to gain breathing time. As members of the eurozone, Portugal, Ireland, Greece cannot devalue or resort to monetary stimulus offset fiscal tightening. They must each pursue a policy of “internal devaluation”, meaning deflation within the currency bloc to regain lost competitiveness. This is risky for economies with total debt levels above 300pc of GDP, as is the case in Ireland and Portugal. Ireland’s nominal GDP has already contracted by over 20pc of GDP, yet the debt burden has not diminished. The test will be whether these countries can generate enough exports to trade their way out of crisis over coming years, or remain trapped in slump with rising political tensions. Gavan Nolan from Markit said fears of “political instability in sovereign credits” had moved onto the radar screen, with investors now paying closer attention to whether or not governments can actually deliver on austerity plans.

John Glover and Abigail Moses of Bloomberg report Ireland Debt-Default Swaps Advance on Anglo Bond Standoff. The cost of insuring against a default on Ireland’s debt surged to the highest in a month as Anglo Irish Bank Corp. note holders headed for a showdown with the nation’s government. Creditors holding a “blocking position” of Anglo Irish subordinated bonds plan to oppose a debt exchange worth 20 percent of their 1.6 billion euros ($2.2 billion) of securities, adviser Houlihan Lokey said in a statement today. The government has said it will legislate to allow it to impose penalties on subordinated creditors while making senior investors whole, while the bank’s chairman, Alan Dukes, said today he won’t negotiate with junior bondholders opposing the exchange. Credit-default swaps insuring Irish sovereign debt jumped 19 basis points to 463, according to data provider CMA.

The chart of the Yen, FXY, looks stronger than that of the Euro, FXE.  It appears that today’s unstable rise in the world stocks, ACWI, will not hold and/or that the stocks will not move higher than the October 18, 2010 high of 45.12.


The major currencies yen carry trade, DBV:FXY, and the emerging markets currencies, CEW:FXY, are both trading lower this morning; this suggest on going unwinding of carry trade investments in world stocks ACWI and the emerging markets, EEM is at hand.

Jim Willie CB says in his article today relates that The Yen Carry Trade has a vast hidden doorway; Japan has revealed a hidden pressure point; It is the unwind of the great Yen Carry Trade: It was the greatest financial engineering project in modern history. I appreciate Elaine Meinel Supkis who helped me understand the Yen Carry Trade as she wrote many over the years on this subject. One article I think is quite helpful is The Yen Continues To Rise, The Carry Trade Is Dead, written on October 23, 2008. This was written at a time when carry trades were unraveling; little did she think, little did many think, that the Fed would come out with its QE 1 and trade out US Treasury Bonds, for Mortgage Backed Securities, MBB, and Distressed Securities, like those in the mutual fund FAGIX. Little did many think that the Bank of Japan, would continue to issue bonds and continue its ZIRP, and lend out money once again at 0.25% to the well-connected. But that is what they did. And the emerging markets, EEM, soared, as is seen in the MSN Finance chart of DBC, EEM, BWX, IEF, and VTI

Investors invested not so much in commodities but rather in the Frontier Countries, FRN, and in emerging markets, EEM, and in the emerging market small cap dividends, DGS.  In other words, as far as possible away from the United States, VTI, and Europe, VGK. And the Yen, FXY, is trading today at 122.06. I believe it represents an insurmountable obstacle to continued investing long in carry trades, especially given the recent rise in the Interest on the 30 Year US Treasury Bond, $TYX

II … Going back to bonds, BND; they are up in early morning trading, with World Government Bonds, BWX, up strongly, and the 7 to 10 Year US Government Bonds, IEF, up more than the 20 to 30 Year US Government Bond, TLT.

Google Finance chart shows that IEF has returned 11% Year To Date, compared to 6% for the S&P and 5% for the European, VGK, shares. There was a flight to safety in US Treasury bonds as the European Sovereign Debt Crisis arose in April. Then in May, euro yen carry trade investment and hopes of QE 2 carried IEF higher to 100.08 on October Oct 11, 2010. But it was on October 21, 2010, that the Interest Rate on The 10 Year Note, $TNX,  turned up to 2.53% and it rose to stand on October 27, 2010 at 2.71%, breaking the upward trend in IEF, sending the 7 to 10 Year US Government Bonds lower, to the edge of a head and shoulders pattern at 97.76.


I believe that the rise in the 7 to 10 Year US Government Bonds, IEF, is simply a bounce up in a strong down draft that presents today an opportunity to go short World Government Bonds, BWX, the Zeroes, ZROZ, and the 20 to 30 Year US Government Bonds TLT, as well as the 200% of the 30 Year US Government Bonds, UBT, and the 300% of the US Government Bonds, TMF

Selling world sovereign debt, BWX, short today, is a low risk and high reward investment opportunity, as my investment maxim is in a bull market buy in dips, and in a bear market sell into strength. World sovereign debt, BWX, turned down on October 15, 2010, as the major currencies, DBV, and the emerging currencies, CEW, turned down, as the Interest Rate on the US Government 30 Year Bond, $TYX, rose.   

III … Yesterday, October 27, 2010 was a day that will live in financial infamy, as I wrote in my article Bond Vigilantes Call Interest Rates Higher And Currency Traders Call Currencies Lower On Concerns That QE 2 Is Monetization Of US Debt … A global bear stock and bond market commenced October 27, 2010, out of concern that the Federal Reserve’s QE II amounts to simply printing of dollars to sustain the value of short term US Government debt, as well as to support mortgage-backed securities.  

Interest rates on the US Government Debt, that is the 2 Year US Note, $UST2Y, the 10 Year US Note, $TNX, and the 30 Year US Treasury Bond, $TYX, rose sharply, not on concerns that the upcoming US Federal Reserve’s QE II is too little; but that it monetizes the nation’s debt. So investors sold bonds across the board: Total Bonds, BND, US Government Debt, SHY, IEF, TLT, ZROZ and MBB, the Inflation Protected Bonds, TIP, STPZ, LTPZ, the Corporate Bonds, LQD, BLV, PICB, the Emerging Market Bonds, EMB, and World Government Bonds, BWX

The world currencies traded lower continuing yesterday’s, October 26, 2010, world-wide currency sell-off, as the currency traders are exercising their sovereignty over the world’s currencies and implementing competitive currency deflation, by selling the yen based carry trades, causing an unwinding of investment globally.

The US Dollar, $USD, rose to 78.10, as the Yahoo Currency Center shows the currencies in this Finviz Screener traded sharply lower:  SZR, XRU, FXA, BZF, FXS, BNZ, FXE, FXF, FXB,  FXC, CEW, FXY, FXM,  and ICN. The USD/JPY traded up to 81.50; causing its inverse ETF, JYN, to fall lower. 

Chart of the Australian Dollar, FXA, perhaps the world’s strongest currency, fell lower .

The fall of the small cap pure value shares, RZV, relative to the small cap pure growth shares, RZG, RZV:RZG, communicates that a bear market started today as the major currencies, DBV, turned strongly lower, as the Interest Rate on the 30 Year US Government bond, $TYX, rose above 4%, and as the emerging market currencies, CEW, have fallen lower since October 14, 2010, when the Interest Rate on the 30 Year US Government Bond, $TYX, first rose strongly higher. 

Falling emerging market currencies, CEW, has caused all the emerging market ETFs to fall.  Emerging market dividend payers, DGS, the emerging markets, EEM, and EET, such as Turkey, TUR, and Thailand, THD, and the emerging markets financial titans, EFN have all fallen lower.

The EUR/JPY traded lower to 112.42; which can be seen in the chart of FXE:FXY trading lower at 1.133.  

The Euro, FXE, fell from 138.04, to 137.17, causing European

Financials, EUFN, and European Shares, VGK, Spain, EWP, to fall lower. 

Chart of the Euro, FXE.  

Small cap shares sold off significantly; these included: Brazil Small Caps, BRF, Russell 2000, IWM, Small Cap Pure Value, RZV, South Korea Small Caps, SKOR, Small Cap Consumer Discretionary, XLYS, Australia Small Caps, Australia Small Caps, KROO, China Small Caps, HAO,  Canada Small Caps, CNDA.

Countries trading lower included Sweden, EWD, Japan, EWJ, Mexico, EWW, Emerging Europe, ESR, India, INP, Singapore, EWS, Hong Kong, EWH, Emerging Markets, EEM, Australia, EWA, Poland, EPOL, Austria, EWO, Brazil, EWZ, and the Asian High Yielding Equity, DNH.

World Stocks, ACWI, and VT, the S&P, SPY, the New York Composite, NYC, energy producer Exxon Mobil, XOM, and basic material supplier BHP Billiton, BHP, and the Russell IWM, all fell lower.

Copper Miners, COPX, Metal Manufacturing, XME, Steel, SLX, traded lower on falling base metals, DBB, prices, particularly, Lead, LD, Tin, JJT, and Timber, CUT, prices. 

Oil, $WTIC, USO, and UCO, prices fell on reports of great abundance of product available in the marketplace.

Growth sectors falling lower included, Nuclear Energy, NLR, Solar Energy, TAN, Housing, ITB, Nanotechnology, PXN, Retail, XRT, and RTH,

Cyclical sectors falling lower included Gaming, BJK

Staples, XLP, fell lower.

Higher interest rates means inflation; this caused US Healthcare Provider, IHF, Utilities, XLU, to trade sharply lower; this marks five consecutive days of trading lower in the Utilities.   

Inverse Volatility, XXV, fell lower. The S&P Mid Term Futures Volatility, VXZ, and Volatility, VXX, rose.

Gold, GLD, and the Junior Gold Miners, GDXJ, fell lower, as carry traders took profit on the precious metals.

The turning down today of the real estate sector, PSR,  and IYR, REZ, FIO, Apartment Investment and Management Co., AIV, and Brookfield Properties, BPO, confirms that competitive currency devaluation by the currency traders has started a debt deflationary bear market.

Historical records show that monetization of sovereign debt stimulates an investment demand for gold, $GOLD; and that it inflates agricultural commodity, RJA, and food commodity, FUD, prices.

IV … My concluding remarks are that the currency vigilantes have been effective bond vigilantes, calling interest rates higher, as they, the currency vigilantes implement competitive currency devaluation, that is competitive currency deflation. As QE 2 gets underway, I believe investors will be jumping out of bonds of all types as well as stocks into the safe haven of gold.

I find it interesting that Las Vegas, was a “bet on the vice”, that didn’t pan out as Les Christie of CNN Money reports Sin City is still foreclosure central, according to RealtyTrac:  The usual suspects led the list of top cities for foreclosure filings during the last three months. Cities in four states, California, Florida, Nevada, and Arizona, accounted for the 13 hardest hit areas, according to foreclosure marketer RealtyTrac, which released its third quarter report on Thursday. Las Vegas, NV was far and away the hardest hit metro area. One out of every 25 housing units — more than 32,000 homes — attracted some kind of foreclosure filing, including notices of default, auction notices and repossessions.  Cape Coral, FL, had the second highest foreclosure rate, with one in 35 homes getting hit with a filing. It was trailed by three Central Valley California cities: Modesto (one in 36), Stockton (one in 39) and Merced (one in 40). The main causes of foreclosure are high unemployment, underemployment, toxic loans and negative equity, and “these historically high foreclosure rates will continue until those problems are resolved,” said James Saccacio, RealtyTrac’s CEO. Miami had a total of nearly 59,000 properties with filings, more than any other metro area. Los Angeles had nearly 49,000. Several metro areas experienced significant increases in already substantial foreclosure numbers. Filings almost doubled in the Riverside-San Bernardino area compared with three months earlier, to nearly 36,000 properties.”

Las Vegas was also a gamble as real estate flippers flocked to the town to trade up homes, and as investors sought a second home, that is a vacation home, and as people who never should have become mortgage owners took out subprime, Option Arms and Alt-A loans that were prevalent under the Czar of Credit Liquidity, Alan Greenspan. These things did not pan out.

But one thing that has panned out better over the last year than investing in Bonds, BND, the 7-10 Year US Government Bonds, IEF, and the S&P, SPY, has been investing in vice, particularly in the mutual fund VICEX and the world’s gaming stocks, BJK, which is up strongly today, as Las Vegas Sands, LVS, has jumped 8%. 

How about you? Are you willing to bet on bonds? Are you willing to bet that the US Federal Reserve program to buy government debt will stimulate aggregate demand and stabilize the economy? Will its efforts stimulate inflation in “just the right way”?

Like Mike Krieger of KAM LP, I believe The Tipping Point has Arrived

V … In Today’s News

The quote of the day comes from Damon Silvers, a member of the independent Congressional Oversight Panel: We Can Either Have a Rational Resolution to the Foreclosure Crisis or We Can Preserve the Capital Structure of the Banks. We Can’t Do Both  … GeorgeWashington relates in ZeroHedge post

Irvine Renter relates Large Banks Survive on Government Largess: Major US Banks are distressed and closer to collapse than most realize.

The banks, the federal reserve and our government have been trying to conceal the true level of distress with our banking system. The policies being put forth in Washington only serve to extend this crisis and inhibit economic growth. First, let’s take a look at how much REO the banks already have.  Kerry Curry of HousingWire relates JPMorgan, Wells Fargo and BofA each hold more than $20 billion in foreclosures. And readers here know, part of the reason for banks having so much REO is because Banks are being Forced to Repurchase Bad Bubble Loans. The issue of bank REO is critical to the housing market because How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate. What’s worse is that bank REOs are not the only problem as GSE Foreclosures Shatter Record Highs, Keep Climbing. Also, for every home in REO, there are four that are delinquent on their mortgage and tied up in shadow inventory (Shadow Inventory Signals Three Years of Falling Prices). 

Lenders are becoming non-operating REITs. In the first story, we documented that the banks now own billions in non-performing real estate. At some point, banks no longer operate by making loans and collecting interest, they operate by buying property at foreclosure and collecting rent just like a REIT. When you buy bank stocks, are you really buying a disguised REIT? I think you are, except that REITs are generally well managed, and bank portfolios are not.

If bank portfolios weren’t so poor operated, the non-interest income would be rising and non-performing loans would be converted to performing rentals. For example, right now in Las Vegas, I can buy properties and obtain a 9% return based on rental cashflow, so I know the banks can too. If they began renting out their REO, they can obtain income superior to the loan interest they would obtain on a 4.25% note. In fact, I think they are rather foolish for not renting out more of their REO in beaten down markets like Las Vegas. I guess that means I will have plenty of properties to recycle over the next several years.

I provide the chart of the Too-Big-To-Fail Banks, RWW. These are the banks that were capitalized by the US Federal Reserve with QE 1, where the US Treasury traded out over 1 Trillion in US Treasury bonds and accepted back in distressed securities like those held by mutual fund FAGIX. The TARP facility was largely one of nationalizing the banks, or perhaps said integrating the banks into the US Federal Government, an operation which for now has privatized gains and profits to the banks, and socialized losses unto the taxpayers and the American Public. Charles Hugh Smith of Two Minds relates in Business Insider that Ben Bernanke effected The Stealth Coup D’Etat in the U.S., which was called “The Quiet Coup” by Simon Johnson, and was begun long ago, but the takeover reached fruition in the 2008-2010 timeframe.

The banks have for the most part placed the Treasuries on Reserve with Fed, they abide unused as Excess Reserves. As the bond vigilantes call interest rates higher, the value of the Excess Reserves will fall unless the banks reclaim them and use the funds to go short Treasuries.

Over the 90 days FAGIX has increased with the marketplace anticipation of a QE 2, whereas the value of the 10 to 20 Year US Government bonds, TLT, has fallen, as the currency traders have been acting as bond vigilantes calling the interest rate higher on the US Ten Year Note, $TNX, and the 30 Year US Government Bond, $TYX, on the concept that the Fed’s QE 2 will monetize debt.  This has reduced the value of the major currencies, DBV, and of the emerging market currencies, CEW, as is seen in the combined chart of FAGIX, TLT, DBV, and CEW, and has started debt deflation, that is a sell off in the emerging market shares, EEM, and EET, as is seen in the combined chart of EEM, EET.

Chart of FAGIX, TLT, DBV and CEW

Chart of  EEM and EET

And I provide the chart of the Residential REIT, REZ, and the chart of Apartment Investment And Management Co, AIV, both of which finally turned down this week; and I provide the chart of AIV and REZ together with the too-big-too-fail banks, RWW.

Rob Chrisman provides the list of the top 10 servicers with 70% market shares and asks: Just who is servicing all those loans out there? Bank of America, BAC, is #1 with $2.1 trillion (20% of the market). Wells, WF, is #2 with $1.8 trillion (17% of the market). Chase, JPM, has $1.4 trillion for about 13% of the market, Citi has about $700 billion for a 6% market share, and GMAC/Ally has about $300 billion for 3% of the market. The next five are USB, SunTrust, PHH, OneWest Bank and PNC, all with less than $200 billion and all with less than a 2% market share. In total there is about $10.6 trillion of 1-4 unit servicing outstanding. These 10 companies have about 70% of all residential servicing! And I provide the chart of BAC, JPM,C, and WF

Dian L. Chu  of Business Insider reports Here’s Why Massive Mortgage Write-Offs Could Be The Only Way To Save Iceland’s Middle Class: The Icelandic financial crisis has been ongoing since 2008 when all three of the country’s major commercial banks collapsed after they failed to refinancing their short-term debt and a run on deposits in the U.K. In July, I talked about how Iceland is totally not a post-crisis miracle as Paul Krugman claims, but just how are things now with Land of Fire and Ice? $2 Billion Mortgage Write-off – Who Will Pay? Bloomberg (clip below) reported that Iceland government last week proposed a debt relief bill to write off up to 220 billion króna ($1.99 billion) in mortgage loans. This is after about 8,000 protesters gathered outside parliament demonstrating their anger over rising homeowner insolvencies. Most of Iceland’s mortgage debt is inflation-linked. So, what that means is that the principal has gone up 41% in three years, while everything from wage, income to real purchasing power has gone the opposite direction. This debt relief sounds all nice and dandy, but the problem is a write-down of almost $2 billion is equivalent to about 8 percent of total assets at Iceland’s three biggest banks, their 2009 balance sheets show. Moreover, Iceland’s pension funds, which hold most of the bonds behind the nation’s mortgage debt, said they will try to block proposals. If the banks are forced to take a flat write-off, the government most likely will need to cover the loss of pension funds, i.e. taking on more debt.

Gregor Horvat reports in ForexChruch of a Bullish Reversal in the USD/JPY. The USD/JPY formed a sharp impulsive downtrend over the past few weeks, from 85.95 top, which was established after the BOJ intervened in September. Obviously, intervention did not work as pair formed a nice five wave, called an impulsive decline with a recent low at 80.40. Always when five sequence is finished, a correction in the opposite direction occurs; and this is exactly what is unfolding right now on the USD/JPY. USDJPY Bullish Reversal

James Chen of ForexPath reports EUR/USD Drops Below Wedge Path. Chart of USD/JPY Droping Below Wedge Path

I provide the chart of UUP. A rising dollar means the end of rising stock prices.

Disclosure: I am invested in gold bullion