I … “Debt deflation” took European stocks lower July 30, 2010 as the GDP Report shows imports slowed economic growth.
Currency traders sold the EUR/JPY before markets opening on news that the GDP report showed that imports slowed economic growth. The EUR/JPY, that is the euro yen carry trade, traded 1% lower at opening at 112.15 … Chart of EUR/JPY together with IWM, FEZ, AGG and DBV shows the today’s drama.
The growing rise in the Yen, FXY, during the last week, 1.1%, month, 1.3%, three months, 8.6%, is not conducive to rising stocks. The high Yen will stimulate the currency traders to sell the Euro, FXE, and European stocks, FEZ, and World Stocks, VT, will turn down.
Chart of RZV, RZG, GDX, GLD, and FEZ shows that gold stocks disconnected from the price of gold on June 29, 2010, and that the European shares, started to rise on July 7, 2010 on a higher Euro, FXE. which stared to rise on June 29, 2010 from 121.56.
Chart of Japan, Asia, Europe and the Russell 2000 .. EWJ, DNH, FEZ and IWM shows the weak rise of Japanese shares and Asian shares this week. Over the last three months the small Japanese shares have performed better than their larger peers as a higher yen has injured the profits of the larger exporters.
Chart of Japan, Japan Small Shares and world shares … EWJ, JSC, VT shows that the small Japanese shares closed unchanged for the week. Over the last year world Japanese stocks, EWJ, have fallen lower than the overall world shares on a rising yen, FXY. The Bank of Japan over decades has provided 0.50 and now 0.25% or less financing to currency traders world-wide and in so doing has destabilized the Japanese economy enforcing ongoing deflation.
Yasuhiko Seki and Hiroko Komiya of Bloomberg report on July 26, 2010 report: “The yen may climb next month as tighter regulations force Japanese households controlling about $76 billion in daily exchange trading to unwind bets on higher-yielding currencies, analysts said. The government will cap debt used to boost trading bets, or leverage, at 50 times committed cash from August 2010, down to 25 times in 2011 … ‘If margin traders decide to discontinue highly leveraged transactions, it will put upward pressure on the yen as those positions are unwound,’ said Yuji Kameoka, senior economist … at Daiwa Institute of Research.”
Aki Ito of Bloomberg reports Japan’s unemployment rate unexpectedly rose to a seven-month high in June, adding to concern consumer spending will stall.
Base Metals, DBB, continued its rise of eleven days, largely on the rise of copper, JJC as seen in the chart below.
Oil USO rose to resistance.
Silver, SLV, manifested a questioning doji at 17.50, just above support at 17.00.
Gold, GLD, rose to resistance at 115. Support is lower at 114, 113 and 112. It will either break out here, or at one of those lower levels as investors transfer out of bonds, AGG, and stocks, VT, fall lower, and as the yield curve, $TYX:$TNX, continues to STEEPEN. The dark cloud covering candlestick in the yield curve suggests that investment demand for the Ten Year note, relative to the Year Bond, is over. And that a top in the ten-year note, IEF, is now in.
And the yield curve $TYX:$TNX in manifesting a dark cloud covering candlestick, suggests that the yield curve will cool for a bit, before it continues on even higher, as debt deflation raves fiat investments.
The lollipop hanging man candlestick, and the pop to the previous high, suggests that a high is now in for the US Government note IEF.
Chart of IYR, IBB, XLI, IYM, XLV, XLU, XRT, XHB shows relative US market share performance.
Because stock deflation is entering the markets into Kondratieff Winter, the potential for further gains from biotechnology research appears limited, therefore IBB seems to be a good short selling opportunity.
Semiconductors, SMH, led technology, MTK, fell lower.
Solar stocks, TAN, fell hard documenting that stocks have recommenced into a bear market; because TAN was a recent stock market loss leader, its current elevated rise is a good thing to short selling into.
European Financials, EUFN, fell lower.
Emerging Market Financials, EMFN, fell lower.
World currencies, DBV, turned lower July 27, 2010. The chart of world currencies, DBV, compared to, CEW, shows that currencies fell lower on July 27, 2010, documenting that the “currency deflation” that started April 26, 2010, has recommenced … DBV compared CEW … DBV:CEW.
The rise in world currencies, DBV, has turned down.
The rise of emerging market currencies, CEW, has been stopped out.
World stocks, VT, fell lower July 26, 2010, documenting that “stock deflation” has commenced.
World shares, VT, fell more than emerging market shares. EEM, recommencing a ”stock deflation” trend that was established on April 26, 2010 … VT:EEM.
The US Dollar Bull ETF, UUP, rose slightly.
II … “Peak credit” likely occurred July 30, 2010; and thus “credit deflation” that is “bond deflation” and “sovereign debt deflation” will commence beginning in August 2010 with interest rates going higher across the board.
Aggregate Bonds, AGG, jumped higher from its previous July 21, 2010 high, manifesting a black lollipop hanging man candlestick; US Government Notes, IEF, manifested a black lollipop as well; and US Government Bonds, TLT, popped higher. The chart of AGG, TLT, IEF, CFT, CMF, HYD makes for a handy reference chart. The jump higher in bonds today suggests that peak credit is occurring …. and that …. “credit deflation” is coming soon.
Chart of aggregate bonds, AGG, shows the lollipop hanging man candlestick.
Chart of the US Government Ten Year Note, IEF shows a topping out in the US Ten Year Note.
The fall in Anworth Asset Mortgage, ANH, confirms peak credit has occurred.
Corporate Bonds, CFT, rose to 106.06
High Yield Bonds, HYD, fell lower.
Junk Bonds, JNK, fell lower.
California Municipal Debt, CMF, fell lower.
Municipal Bonds, MUB, fell lower.
High yield municipal debt, HYD, fell lower.
Mike Mish Shedlock writes California approaches “fiscal meltdown”; The chart of CMF Daily presented below shows its dramatic rise as investors have sought safe haven from stock debt deflation.
Investors have found significant reward by investing in California debt as seen in CMF weekly
BAB rose slightly above resistance. Michael McDonald and Esme E. Deprez of Bloomberg report on July 30, 2010: “New York City will sell $470 million of Build America Bonds next week with the amount of the federally subsidized securities issued on pace to total $165 billion by year-end, when the program is set to expire … Build America Bonds became the fastest-growing part of the $2.8 trillion municipal bond market after they were created last year in President Barack Obama’s economic-stimulus package. More than $124 billion of the securities have been sold so far … The federal government pays 35% of the interest cost of Build Americas, saving states and cities money on public works projects … The subsidy helps issuers offer higher yields on the taxables than on tax-exempt debt, making them attractive to international investors and others who aren’t seeking tax shelters.”
The spike down, in the $TYX, that is the 10 Year Yield to 3.87 on July 1, 2010, and the rise in the Direxion 300% inverse of the 30 Year US Government Bond, TMV, suggests that interest rates are on their way up. And the US Dollar, $USD, also began its fall on July 1, 2010; so July likely marks the month for the tide turning for rising interest rates and a falling US Dollar.
The fall in the 300% inverse of US Government Bonds, TMV, represents a good entrance point for short sellers.
III … The EU Stress Tests errored on three counts. First, they missed an opportunity to fortify the banks. Second, they failed to mention the systemic risk poised by the plummeting liabilities in the shadow Landesbanken banking system. And Third, they failed to highlight the tight credit existing in Europe, specifically the continual contraction of interbank lending.
1) Andrew MacAskill in Bloomberg article EU Stress Tests May Be `Missed Opportunity’ to Fortify Banks relates: Before the results were published, analysts at Nomura Holdings Inc. estimated the banks would have to raise 30 billion euros. Goldman Sachs Group Inc. predicted they would need 38 billion euros and Barclays Capital said they would require as much as 85 billion euros. Tests carried out in the U.S. last year found that 10 lenders, including Bank of America Corp. and Citigroup Inc., needed $74.6 billion.
“If we had at least one bank which the markets hadn’t really expected to fail, that would have given the stress tests more credibility,” said Lothar Mentel, chief investment officer at Octopus Investments Ltd. in London, whose team manages more than 600 million pounds ($926 million). “That hasn’t happened.”
The European tests ignored the majority of banks’ holdings of sovereign debt. Regulators don’t believe there will be a national default, European Central Bank Vice President Vitor Constancio said July 23. The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding until maturity, CEBS said.
“The fact that they did not stress the bank book is going to be seen as a weakness,” said Robert Talbut, chief investment officer at Royal London Asset Management Ltd., which oversees about $52 billion. “I don’t think the results of the tests will resolve anything.”
Lenders hold about 90 percent of their Greek government bonds in their banking book and 10 percent in their trading book, according to a survey by Morgan Stanley. They have to write down the value of bonds in their banking book only if there is serious doubt about a state’s ability to repay in full or make interest payments.
Citigroup said that 85 banks provided breakdowns of their government-debt holdings when they published the stress test results. The six that didn’t are all German banks and include Deutsche Bank AG, the country’s biggest bank, Citigroup said.
2) There is very much a black swan leading to the of depression will be Europe, FEZ, and the European Financials, EUFN, as the banking and lending institutions crack due to the plunging liabilities in the shadow banking system, primarily the Landesbanken, that is the German state-owned wholesale banking system, responsible for securitization of debt, and accounting for mortgage-backed securities, much like America’s Fannie Mae and Freddie Mac, as reported by Tyler Durden who references the report “Shadow Banking,” by Zoltan Pozsar.
IV … Analyst Doug Noland warns of Quantitative Easing Two
Doug Noland writes “I see risks altogether differently. We are in the late-phase of a multi-decade historic Credit Bubble. The greatest risk at this point is that massive issuance of non-productive governmental debt foments a crisis of confidence at the very heart of our monetary system. The top priority must be to ensure that such a devastating outcome is avoided – and at significant unavoidable cost. It is imperative that we as a nation come to the recognition that real financial and economic pain must be endured to protect the long-term viability of our monetary system. The inflation rate is not the key issue. And efforts to try to inflate our way out of structural debt problems are a lost cause. We must instead move forcefully to rein in our deficits and avoid further debt monetization in order to protect the soundness of our money and Credit – or else risk a financial crash.”
“Most regrettably, Washington policymaking (fiscal and monetary) is on a trajectory that will inevitably destroy the creditworthiness of our nation’s vast liabilities. With ominous parallels to the mortgage/Wall Street finance Bubble, Federal Reserve policies have fostered Bubble dynamics throughout our Treasury, agency and debt markets, more generally. Instead of market dynamics working to discipline Washington’s profligate debt expansion, Federal Reserve interventions ensure that a distorted marketplace again accommodates perilous Credit excess. Our central bankers should heed Mr. Trichet’s warning. Additional quantitative ease will only fuel the Bubble and risk calamity.”
Gary Dorsch writes on QE 2 relating: The Fed Flashes the Nuclear QE Trump Card
V … Many have noted that the markets seems to move in the opposite direction of Goldman Sachs advice … Goldman is currently recommending that one go long the Euro, FXE.
Matthew Brown of Bloomberg reports on July 26, 2010: “The combination of growing confidence in Europe’s economy and mounting evidence of a slowdown in the U.S. is driving euro bears into hiding… Goldman Sachs Group Inc. and Wells Fargo & Co. raised their estimates in the past two weeks, joining HSBC Holdings Plc and Deutsche Bank AG in predicting a stronger euro.”
VI … Inflation seen in Europe.
Bloomberg (Simone Meier of Bloomberg reports on July 30, 2010: “European inflation accelerated to the fastest pace in more than 1 1/2 years on rising energy costs and unemployment held at the highest in almost 12 years. Euro-area consumer prices rose 1.7% from a year earlier in July… The jobless rate remained at 10% for a fourth month in June… That’s the highest since August 1998.”
VII … Bear Market ETFs rose some this week.
Gains for selected ProShares 200% inverse ETFs seen in this Finviz Screener are as follows
SDP 3.7% … -2X of Utilities
SSG 3.6 … -2X of Semiconductors
RXD 0.3% … -2X of Health Care
EPV 2.2% … -2X of Europe
EWV 2.2% … -2X of Japan
BIS -2.7% … -2X of the Nasdaq biotechnology shares
SIJ 0.4% … -2X of Industrials
SJH 0.6% … -2X of the Russell 2000 Value
Disclosure: I am invested in gold coins