The Yen, FXY, rose more than the Euro, FXE, today, August 3, 2010, as seen in the yen euro yen carry trade chart, stopping the rally in world stocks, VT, and the even hotter rally in the European stocks, FEZ; click on chart to enlarge.
The European shares, FEZ, rallied from June 10, 2010, when the EFSF monetary authority was announced through yesterday August 2, 2010, when European Financials, EUFN, announced good earnings. The European stocks, FEZ, closed yesterday August 2, at 36.73, which was just over the April 26, 2010 close of 37.64. This was when world shares, VT, fell to 45.51 as currency traders sold the world currencies against the Yen, FXY, as the European sovereign debt crisis broke out over Greek sovereign debt. The chart of European stocks, compared to US stocks, Asian stocks, and Japanese stocks: FEZ, VTI, DNH, EWJ shows the strong rally in the European stocks relative to the others; click on chart to enlarge.
World stocks, VT, closed yesterday August 2, 2010 at 43.55. The rise in the Yen, FXY, today to 115.39 is not conducive with rising stock values. The high value of the yen stimulates currency traders to back out of carry trades, whether they be in currencies, stocks, bonds, or commodities.
The rise in the Euro, FXE, today to close lower than the Yen percentage wise, at 131.87, provides an opportunity for institutional accounts to start “short selling”, especially given the Stephen Bernard and Dave Carpenter Associated Press report that disappointing earnings and economic reports reminded investors of the obstacles still facing the economy.
Investors were unhappy with just about every major earnings or economic report today. Procter & Gamble Co, PG, and Dow Chemical Co, DOW, reported earnings and revenue that fell short of forecasts. Consumer spending and income figures showed that people are still very cautious with their money. Factory orders fell in June, as did the number of homes that were under contract to be sold.
The topping out of the European Financial shares and disappointing earnings and poor economic reports document the start of a bear financial market. My investment maxim is in a bull market be a bull, and in a bear market be a bear. In a bull market one buys on dips, and in a bear market one sells into strength at the top of a rally.
Yesterday August 2, 2010, marked Peak Credit, as Aggregate Bonds, AGG, turned lower, introducing “debt deflation”, that is “bond deflation” and provides the opportunity to sell those bonds which are likely to fall the fastest, being either longer out in maturity or of poor quality. I provide a Finviz screener of bonds for one’s analysis.
And today August 3, 2010, likely marks a market top in stocks, re-introducing “stock deflation”, that commenced just after the Federal Reserve’s QE ended on March 31, 2010, when the currency traders went short the world’s currencies against the Yen on April 26, 2010.
This provides the opportunity to sell those stocks which are subjectively believed to have the fastest “fall potential” due to economic conditions, or due to high price-earnings ratio, or due the currency traders being able to exploit a rally and run up certain stocks to atmospheric levels (this type of thing happens, it is simply called … a bubble).
With the upset in the euro yen carry trade today August 3, 2010, “commodity deflation” may have commenced. Perhaps now the carry trade base metals, DBB, will unwind. And perhaps, the carry trade in agricultural commodities, RJA, and DBA, may unwind. The 200% inverse agricultural ETN, AGA, rose 2.9%. I provide a Finviz Screener of commodities for one’s analysis.
West Texas Intermediate Crude, $WTIC, rose 1.2%, to 82.39 and USO, increased 1.2% as well before the upcoming report.
Alcoa Aluminum, AA, fell 1.28%. The chart of Alcoa Aluminum, together with basic material stocks, XLB, and base metals, DBB, shows how base metals has pulled up and sustained the basic material stocks: Chart of AA, XLB, and DBB.
The chart of metal manufacturing stocks, XME, together with the steel stocks, SLX, and base metals, DBB, shows how for the last five days, base metals have drawn up the metal manufacturing and steel stocks. Chart of XME, SLX, and DBB.
The chart of RioTinto, RTP, and base metals, DBB, RTP and DBB, shows how rising base metal prices have drawn up this stock.
And finally, with the upset in the euro yen carry trade today August 3, 2010, “competitive currency deflation” may have commenced. On April 26, 2010, the world currencies, DBV, sold off more rapidly than the developing currencies, CEW, only to rally beginning on June 10, 2010. I believe that now, world currencies will start to fall faster, than the developing currencies. And I believe that many carry trades will unwind, and new ones develop. I provide the chart of world currencies and developing currencies, DBV and CEW, and a Finviz Screener of currencies for one’s analysis.
Given that the world has likely entered into a currency deflationary, stock deflationary and bond deflationary bear market, I provide a totally subjective list of ETFs that institutional accounts may want to sell short.
URR, 200% of the Euro; chart of URR weekly …
EUFN, European Financial stocks; chart of EUFN weekly; High-Yield Default Swaps Gauge Falls to 13-Week Low in Europe. The cost of protecting European corporate bonds from default fell, with a gauge of high-yield company debt risk dropping to the lowest level in 13 weeks. The Markit iTraxx Crossover Index of credit-default swaps linked to 50 companies with mostly junk credit ratings declined 6.5 basis points to 451, the lowest since May 4, according to JPMorgan Chase & Co. at 12 p.m. in London. The cost of protecting bank bonds from default fell to the lowest since April 21, with the Markit iTraxx Financial Index of 25 banks and insurers down 1.75 at 108.5 and the subordinated index 3 lower at 173.5. The cost of insuring against losses on government debt also fell. Yet these falls did not cause a rise in European Financials as has been in the past.
EWO, Austria stocks; Austria banks have many carry trade loans to developing Europe, GUR.
EWP, Spain stocks and EWI, Italy stocks have been at the epicenter of the European sovereign debt crisis.
EWA, Australia stocks; this ETF is largely comprised of banks and some basic material stocks.
FAA, Airline stocks; chart of FAA, AMJ, XHB, TAN; FAA fell 1.7% today
AMJ, High dividend paying basic material stock ETN; chart of AMJ weekly;
XHB, Housing stocks; these fell 2.9% today.
TAN, Solar stocks … these were recently the worst performing stocks, but rallied strongly and now may be a good short selling opportunity.
RZV, Small cap pure value stocks; for the last ten days, that is from July 21, 2010 through August 3, 2010, have been rallying above the small cap pure growth shares, RZG, as is seen in this chart of RPV, RZG and EUFN; but as stocks turn lower, I expect RZV to fall quickly; it fell 1.1% today
BRF, Brazil small caps have been a stock market leader; these fell 1.2% today
PSAU, Gold mining stocks and GDXJ, Small cap gold mining stocks. These have disconnected from the price of gold, and as the stock market falls lower, they will fall lower as well. At past market turns, US Government bonds, and the HUI precious metal mining shares have turned lower together, as is seen in the chart of the HUI and USB; I expect the same to be the case at the current time. Great patience will be required in short selling the gold mining stocks, as they will rise with the price of gold, but their high PE, will eventually draw them lower and lower, rewarding the patient short seller.
UYG, 200% of Financial stocks; these fell 1.9% today
UXI, 200% of Industrial stocks; these fell 1.3% today.
BIB, 200% of Nasdaq Biotechnology stocks.
LTL, 200% of Telecommunication stocks; these fell 1.3% today.
UPW, 200% of Utility stocks;
USD, 200% of Semiconductor stocks; these fell 2.5% today.
EZJ, 200% of Japan stocks; these fell 1.1% today.
UBT, 200% US Treasuries; these rose 1.0% today.
Chart of the 200% sock ETFs and ETNs URR, UYG, UXI, BIB, LTL, UPW, USD, EZJ
News of the day
Bloomberg reports that U.S. Treasuries fail to provide safety or liquidity when it comes to managing China’s $2.45 trillion foreign-exchange reserves, Yu Yongding, a former central bank adviser said … “I do not think U.S. Treasuries are safe in the medium and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions. China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said.
The American reports that the next sovereign debt crisis … will be here in America.
And a top has been made in Annaly Capital Management, NLY, which for years has done excellently in securitizing mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans.
The mortgage backed seurities mutual fund GSUAX rose 0.1% today to close at 10.23; it has had a year-to-date return of 4.62% and 7.18% in the last year and 4.48% in the last three years. It along with all of the other mortgage backed mutual funds are going to fall quickly in value.
On top of the bond deflation bear market that the world entered into on August 2, 2010, as AGG, turned lower; and the stock deflation that the world entered into today August 3, 2010, as VT turned lower. We are on the verge of going into a currency deflation bear market as the Euro, FXE, is likely to turn lower tomorrow or very soon. This will take the world into the vortex of the worst of all possible debt deflation scenarios where Kondratieff Winter commences.
I do not invest in stocks or bonds as I have no risk capital. I am invested in gold coins, that I purchased some time ago. I see an investment demand for gold coming from debt deflation manifesting as stock deflation, bond deflation, and currency deflation that began April 26, 2010, when the currency traders sold the world’s currencies against the Yen and from a steepening yield curve, $TYX:$TNX. The Bespoke Investment Group in article Another Lower High in Gold? seems to caution against investing in gold at the current time. It could easily fall lower, with fall base metals, DBB. And their article suggests that the S&P is coming down and the US Dollar up; this would be a negative for gold. Jesse provides a chart article suggesting that gold, $GOLD, could fall to 1,155 before moving substantially higher.
Disclosure: I am invested in gold coins