Introduction: The recent stock rally has been short-lived, lasting only two weeks: it began on June 7, 2010 and ended June 21, 2010.
I … World Stocks Down As Europe Debt Fears Creep Back, reports Carlo Piovano, Associated Press. Investor sentiment was undermined after Fitch downgraded its debt rating on BNP Paribas SA — the largest bank in the eurozone by deposits — by one notch Monday June 21, 2010, reviving worries that Europe’s sovereign debt mountain will slow growth and undermine the financial system. Fitch slashed BNP’s long-term rating to AA-minus from AA on deteriorating asset quality. The Hang Seng Index, ^HSI, and the Straits Times Index, ^STI, fell slightly lower Tuesday June 22, 2010 as the chart of the EUR/JPY shows an unwinding to 111.22 The currency traders took the Euro, FXE, down 0.33% and the Yen, FXY, up 0.73%. A rising yen relative to the euro, causes disinvestment from the stock market, and causes greater damage to the Japan shares, EWJ, than the small cap Japanese shares, as is seen in the chart of EWJ and JSC: today’s rise in the Yen, caused EWJ to fall 1.2%, and JSC only 0.35.
The Euro Slide Continues reports Marc Chandler in Seeking Alpha on news that Fitch cut BNP Paribas long-term international rating to AA- from AA (stable outlook).
Relief For Spain writes Marc Chandler in Seeking Alpha as Spain is looking to raise 3-4 bln euros in 3- and 6-month bills. Recent auctions of bills and bonds have done fairly well, but at the cost of dramatically higher yields. Spain’s parliament is also set to vote on the labor market reforms that were proposed earlier this month and have begun going into effect. Separately, note that according to the latest BIS data, banks headquartered in the eurozone account for about 62% of all international bank exposures to Greece, Ireland, Portugal and Spain.
Yahoo Finance chart of ACWI, IWM, EWP, EUFN
Google Finance chart of ACWI, IWM, EWP, EUFN
II … Stephen Bernard and Tim Paradis of Associated Press report that The National Association of Realtors reported that sales of existing homes fell 2.2 percent in May. The report surprised analysts who thought deals would get a lift from a home buyer tax credit. Sales fell to a seasonally adjusted annual rate of 5.66 million from a revised 5.79 million in April. Homebuilders, XHB, fell 2.4%.
III. Global Debt Deflation commenced on April 26, 2010, when the value shares failed to outperform the growth shares, and was interrupted by the brief June 7, 2020 to June 21, 2010 rally, has recommenced.
Global Debt Deflation started on April 26, 2010 when the currency traders heavily sold the EUR/JPY causing stocks to fall globally.
The world shares, VT, have been more exposed to yen carry trade investment over the years in metal mining, XME, steel, SLX, and energy services, OIH; and now with exposure to the European Financials, EUFN, as well as Spain, EWO, Italy, EWI, and Austria, EWO, the global shares, VT, have fallen more than the US shares, VTI, as seen in the chart of VT compared to VTI.
Global Debt Deflation commenced on April 26, 2010, when the value shares failed to outperform the growth shares:
1) mid cap value shares, RFV, failed to outperform the mid cap growth shares, RFG, as seen in the chart of RFV, compared to RFG.
2) Russell 2000 value shares, IWN, failed to outperform the Russell 2000 growth shares, IWO, as seen in the chart of IWN compared to IWO.
3) small cap value shares, RZV, failed to outperform the small cap growth shares, RZG, as seen in the chart of RZV compared to RZG.
4) large cap value shares, ELV, failed to outperform the large cap growth shares, ELG, as seen in the chart of ELV compared to ELG.
The currency traders, selling the EUR/JPY has caused the greatest disinvestment from the small cap value shares, RZV, as is seen in the chart of the EUR/JPY and RZV.
It is the small cap value shares that had benefited the most from the US Federal QE Easing as seen in this two-year chart of RZV, RFV, IWM, and ELV.
But now with lending liquidity evaporating from widening bond interest spreads and steepening yield curve, and European Sovereign Debt Crisis morphing into a European Bond and European Banking and European Lending Crisis, the small cap value shares are being decapitalized more rapidly than their larger peers. The chart of the yield curve, $TYX:$TNX, has been steepening since April 26; the chart of the Ted Spread, $TED, has been increasing since the onset of the European Sovereign Debt Crisis, indicating an ill-liquidity of lending.
Now that the bear market has resumed, TZA, is likely to perform the best of any of the bear market ETFs, as it is 300% short of the small cap value shares. The fact that the Direxion 300% short of real estate ETF, DRV, has underperformed the other Direxion 3X ETFs, is attributable to the FASB 157 entitlement that real estate has, in being marked-to-fantasy rather than marked-to-market.
The European Financials, EUFN, fell heavily today, inducing a flight from financial stocks globally as is seen in the chart of EUFN, IYF, and IXG
Large caps have the benefit of being largely sovereign entities that escape taxation and regulation imposed on the small caps; and they are in many ways, and in many places, integrated into government, forming the basis of corporatism or state corporate rule; the large caps have benefited from and have been active agents in globalization.
April 26, 2010 marked significant stock market asset disinvestment, liquidity evaporation, decapitalization of the small cap value shares more than other shares, and entrance into Kondratieff Winter, as Debt Deflation commenced.
Widespread social and wealth dislocation has commenced, as the broad base of small cap value shares, that is critically dependent on credit and investment capital, is being progressively lost.
A rising yen, FXY, has preserved the value of Japanese Small Caps, JSC, better than the overall Japanese overall shares, EWJ, as is seen in the chart of JSC and EWJ
Yen carry trade disinvestment and contagion from the risk of sovereign debt default and banking ill-liquidity as seen in a rising Ted Spread, $TED, has finally caused growth prospects to fall lower as Tyler Durden reports in ECRI Leading Economic Index Drops To 44 Week Low, Predicts Massive Economic Contraction.
The ECB in purchasing bank debt, failed Greece sovereign debt, and other nation’s distressed sovereign debt, amounts to monetization of sovereign debt, and will eventually prove inflationary, both to nations in the Eurozone, and to all types of debt in Europe, destroying the value of that debt.
Of historical note, one might reflect on a prophetic warning, and the announcement by the EU Finance Ministers of an EU fiscal and monetary union.
First, the prophetic words of Doug Noland in article Doug Noland: “There Is No Concern For Short-Term Funding Issues” by John Rubino in DollarCollapse on April 24, 2010 … Just two days before the fateful April 26, 2010.
“Prudent Bear’s Doug Noland was a must-read in the years leading up to the bursting of the housing bubble. Almost alone out there, he got not just the fact that we were heading off a cliff, but the exact mechanism of our demise: “Wall Street alchemy” was creating unlimited amounts of artificial securities that the marketplace was treating like money, which sent the effective global money supply through the roof and fueled a series of ever-bigger bubbles.
The bullish contingent is these days increasingly confident that there is much more to the recovery than a mere stimulus-induced “sugar high.” The marketplace now comfortably disregards bearish developments – and becomes further emboldened by “market resiliency”. The market this week brushed aside issues with Greece, China, Goldman and financial reform.
Complacency abounds, in true Bubble fashion. The U.S. stock market dismisses that there could be meaningful ramifications from the unfolding Greek debt crisis. Chinese authorities’ recent determination to restrict mortgage Credit barely garners a headline.
Count me a subscriber of the “sugar high” thesis. The combination of double-digit (to GDP) deficits, protracted near-zero rates, and the Fed’s unprecedented Trillion-plus monetization has worked wonders. Government stimulus stabilized the Credit system, asset prices, system incomes and economic output. The bulls today believe that a new expansionary cycle has commenced, and fundamentals and prospects couldn’t be much more encouraging from their point of view. Surging stock prices have the optimists disregarding the possibility of a systemic addiction to massive government spending, ultra-low rates, and overabundant marketplace liquidity. Potential issues in the area of risk intermediation are not on the radar screen.
Yet, the sustainability of this recovery will be determined by private sector Credit – eventually. The markets assume private Credit growth will snap back after its long recuperation – as it always has in the past
Greek Credit default protection began December at 176 bps. Not many months ago there was little fear of a debt Crisis and no worry of default. Yet here we are today with Greece 2-year debt yielding 11% and annual default protection priced at about 600 bps. Markets fear insolvency and debt restructuring.
The unfolding Greek debt crisis, China Bubble vulnerability, and more intense scrutiny of Wall Street risk intermediation now work in confluence to increase the probability for a negative surprise in our risk markets.”
Secondly, the european sovereign debt crisis, and the accompanying Debt Deflation, stimulated the creation, by the EU Finance Ministers, of an EU fiscal and monetary union within two weeks of April 26, 2010.
Debt deflation is consequence of credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is that “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.”
Examples of Debt Deflation:
Mike Mish Shedlock: Philly Fed Business Index Dramatically Slows, Lowest Reading in 10 Months.
Mary Schlangenstein and Mary Jane Credeur of Bloomberg: stagflation FedEx Outlook Trails Estimates As Employee Costs Rise
Seeking Alpha author Greece Collapses Into Recession.
Corey Rosenbloom presents the weekly chart of the Baltic Dry Index, $BDI, breaking a rising trend line at the 3,000 level last week; this to me means that the stock markets are grossly overvalued.
John Hara provides the details of debt deflation in article Into The Abyss: The Cycle Of Debt Deflation posted in Gold Speculator as well as posted in 24HGold; and as he does, he describes the entrance into Kondratievv Winter.
Debt deflation has created and investment demand for gold, as can be seen in the chart of SVFCX, GLD, and ISFSX.
While the bear market ETFs, TZA, and soon TMV, may be appropriate for institutional investors; gold, GLD, and gold alone will preserve the personal investor’s wealth. I am invested in gold coins.
IV … Today’s ETF Report
The Chart of FXE relative to fxm, bnz, fxc, inr, fxa, xru, fxf shows how two weeks of investing in currencies has caused a global stock market rally; the Kiwi has had a strong rise. On April 26, 2010, we entered into the age of competitive currency devaluations.
FXE -0.33 to close at 122.38
FXY +0.73 to close at 109.65
$USD +0.13 to close at 86.06
IYT -3.8 (had risen dramatically in the two-week rally)
FAA -3.3 (had risen significantly in the two-week rally)
RWR -3.3 (down on announcement of pending Citigroup, C, shares by the US Government)
FXI -1.5 The chart of FXI, compared to EWJ, DNH, VTI, FEZ shows, for the last three months, it has held up better than Japan, Asia, the US and Europe; probably because of its previous US Dollar peg, comparative lack of perceived banking and sovereign debt issues, and a strong housing market. It is a resource driven country, not thought to be a debt driven country, and not subject to currency fluctuations up until yesterday, when it liberated itself from US dollar hegemony.
GUR -2.3 (Emerging Europe fell more than Europe, as it is more reliant upon and sensitive to changes in credit)
EWA -1.8 Bespoke Investment Group reports Australia and Spain both have negative PEGs – Australia because it has a negative P/E and Spain because it has negative GDP growth; chart of EWA, shows it trades like FEZ.
The chart of Apple, AAPL, looks like it has topped out at 273.85; it represents an excellent short selling opportunity.
IYR -2.8 (fell heavily on the realtor’s report)
KME -2.6 (fell hard on the realtor’s report)
Chart of DBU, JXI, GRID, XLU shows that International Utilities, DBU, is likely to fall the fastest of all the utility ETFs now that debt deflation is seriously underway again. Fixed income investors depending on utility income will be decimated by debt deflation, the chart of DBU, compared compared to DOO and ACWI Prior to the subprime collapse beginning in late 2007, DOO and DBU performed as well as ACWI; but now, since April 26, 2010, debt deflation is destroying the fixed income investor.
GOLD & MINING (Gold mining stocks are likely to continue to detach from the price of gold as the bear market intensifies)
GDXJ -1.0 Your blog author, theyenguy, believes that these are topping out, and represent a good short selling opportunity for the institutional investor. I also believe that ZROZ is topping out; and that lacking debt support, liquidity support, they will fall lower when ZROS falls lower. Yahoo Finance chart of GDXJ and ZROZ.
GLD +0.9 Gold is the sovereign investment; gold is the sovereign currency, theyenguy says.
HGD.TO +0.5 perhaps it is time to go 200% inverse of the gold mining stocks; as the chart shows a two-day rise.
TMV -3.6 (Because of the Realtor’s report, investors favored the longer out debt, causing a heavy fall in TMV)
TLT +1.1 A triple top has formed in the 30 Year US Government Bond
IEF +.6 A triple top has formed in the 10 Year US Government Note
AGG +0.1 (Aggregate debt is likely topping out)
Disclosure: I am invested in gold coins