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The Yen Returns To Pre Intervention Levels ... Bonds Rise As Analysts Relate The Fed Will Unleash QE 2 ... Technology Shares Sell Off


Financial Market Report for October 6, 2010

The Bank of Japan ZIRP announcement of October 5, 2010, did nothing to weaken the Yen, FXY, as today it rose to 119.33. And the USD/JPY, seen in the chart of JYN; is now back to where it was, when the Bank of Japan sold Yen on September 15, 2010,  to prevent the rise of its currency.

Japan, EWJ, and EZJ, rose.  This may very well be a high for the Japanese shares; the full effect of stimulus may have been achieved. The Nikkei 225, ^N225, traded at 9,691 as of this writing.

A higher EUR/JPY, trading at 115.27. Seen here ActionForex chart; and seen in the chart of FXE:FXY, took Austria, EWO, European Shares, VGK, and UPV, Turkey, TUR, Copper Mining, CU, and Australia, EWA, higher.  

The higher EUR/JPY took commodities, DBC, base metals, DBB, Lead, LD, and Tin, JJT, higher. The epitome of invigorated carry trade investing, BHP Billiton, BHP, moved sharply higher, on today’s higher Euro, FXE, which closed at 138.83.

Exxon Mobil, XOM, rose to close at 63.94, on higher oil, UCO. Oil has been rising on yen carry trade investing. Will the price of oil continue strong when the sovereign debt bond bubbles burst; will speculative investment come to oil as the value of US Treasuries and Japanese Government Bonds fall in value. I believe that once the Euro, FXE, falls in price, then the price of Tin, JJT, will fall quickly as the US Dollar goes up; and as I believe, there is so much more speculative interest in this commodity than oil. Tony C. Dreibus and Anna Stablum of Bloomberg: Commodities Rise to Two-Year High on Central-Bank Debt Buying Speculation. Commodities rose to the highest in almost two years on speculation central banks around the world will join the Bank of Japan in increasing purchases of government debt to boost economic recovery. Bespoke Investment Group Blog Oil Inventories Much Higher Than Expected.  
International Dividends, DOO, and the Small Cap Pure Value Shares, RZV, rose to strong resistance for two days now. First, on yesterday’s BoJ announcement of ZIRP, and secondly on today’s Wall Street announcement of a likely QE 2 Federal Reserve purchase of Government Debt at the November 3, 2010 FOMC meeting. We are at peak value. Returns from investing in value shares will soon be going down; one can’t squeeze much more from the value shares.   

Total Bonds, BND, closed strongly higher at 82.79, with a strong rise in 2 Year Notes, SHY, the 5-7 Year Notes, IEF, and the 10-20 year US Bonds, TLT, but less of a rise in the Zeroes, ZROZ. The various TIPS including LTZP and TIP, soared awesomely.  Emerging market bonds, EMB, and emerging markets small cap dividends, DGS, continued higher on higher emerging countries currencies, CEW. The flow of money into bonds that has come buy the BoJ monetization of sovereign debt and the likely US Fed monetization of its sovereign debt, suggests that we are approaching the ultimate value in developed world indebtedness. One of the last places a person will want to be invested is in the Zeroes, ZROZ, due to their great fall potential. The developed markets such as Ireland, EIRL, the US and Japan, all with their high level of debts will be the places of greatest austerity and social suffering. We are near peak debt value.

The 30:10 US Sovereign Debt Yield, $TYX:$TNX, curve jumped higher, presenting a lollipop handing man candlestick in an awesomely steep yield curve, suggesting that it has reached full steepening. A flattening yield curve will bring greater falling bond prices to those invested at the longer out duration, compared to those invested in the shorter duration.

Gold, $GOLD, and a number of gold mining companies soared to new highs on Japan’s stock market liquefaction, and on today’s announcement of a likely QE 2; these included AEM ... ASA  ... BVN ... GFI ... GOLD ... GSS ... NGD as seen in this Yahoo Finance Chart of AEM, GFI, ASA, BVN, GOLD, GSS, NGD. The HUI Precious Metal shares, ^HUI, traded by GDX, rose to an all time new high of 530.84. The Junior gold mining stocks, GDXJ, rose to a new all time high as well.  
Bespoke Investment Group Blog provides the chart article S&P 500 Priced in Gold which shows how the S&P has declined in value as the European Sovereign Debt Crisis broke out in April 2010, then increased with the value of the US Dollar in August, but then fell as the US Dollar fell lower. Fears over European Sovereign Debt has propelled gold up; and then here more recently, “the S&P in terms of gold”, has fallen as gold, which trades inversely with the Dollar has soared.       
The ratio of small cap pure value, RZV, to small cap pure growth, RZG, ... RZV:RZG ... rose, on the BoJ announced  ZIRP, and on Wall Street’s announcement of a likely QE2, which sent both major currencies, DBV, and emerging market currencies, CEW, higher, with major currencies rising more than emerging currencies as seen in DBV:CEW rising.  

World shares, ACWI, rose on rising global currencies; where as the S&P, SPY, manifested a bearish harami, as the US Dollar, $USD, traded by UUP closed lower at 77.39.

Technology shares fell lower on the day; these included, Nanotechnology, PXN, Nasdaq Biotechnology, IBB, Nasdaq Internet, PNQI, Dow Internet, FDN, Internet, HHH, Semiconductors, SMH,

The S&P Mid Cap 400 Pure Growth shares, RFG, have fallen lower for seven days, suggesting that the market has priced in all growth in the up coming earnings season which starts tomorrow October 7, 2010. Thus we are likely at a market top; and those invested long in the coming earnings season are going to have a hard going.

While International currencies got invigorated by the announcement of ZIRP and QE 2, the US dollar, $USD, got smashed, rewarding those invested in gold, commodities, bonds and international stocks. The United States is loosing the global currencies war and the small cap US shares, highly dependent upon easy access to low cost capital, the Russell 2000, IWM, turned lower as banks, KBE turned lower. This at a time when emerging markets, EEM, and Frontier Markets, FRN, moved up to new year-to-date highs.

American Express, AXP, traded lower for the sixth straight day; its the Ireland, EIRL of US Shares ... Leisure and Entertainment, PEJ, being the Greece ...  Semiconductors, SMH, being the Spain ...  Small Cap Consumer Discretionary, XLYS, being the France ... Retailers, RTH, being the Iceland, ... and Health Care being, IHF, and  RXL, being the Italy of American Shares.  

The chart of tax managed buy write opportunities, ETW, is terifically bearish, as it shows two lollipop hanging man candlesticks and a turn lower.

The Bank of Japan Zero Interest Rate Policy, and the Federal Reserve anticipated QE 2 Policy cannot bring either Japan or the United States out of their current deflationary vortexes. These policies do not stimulate growth, they cause commodity price inflation ie raise the price of gold, GLD, and food, FUD; and generate fiat asset price inflation, ie short term US Government Notes, SHY, and short term US Treasuries, IEF; but this is simply a sugar high, that is a temporary boost before awesome debt deflation strikes at and destroys bond values, together with a flattening yield curve..     

Japan’s deflation started with with the Yen Carry Trade Syndrome, that is the phenomena where the ruling class in Japan encouraged continual leveraging of borrowed funds to make global investments, which finally resulted in its September 15, 2010 Yen Intervention Policy, and its  October 5, 2010, Zero Interest Rate Policy, which has resulted in US dollar debasement, and soaring commodity prices as well as gold and silver prices; and will issue in worldwide debt servitude when the Japanese Sovereign Debt Bubble and the US Sovereign Debt Bubble, burst.

The United States deflationary syndrome started with the the Subprime Syndrome as renters bought homes that they could not sustain; and with the HELOC Syndrome, that is the phenomena where those taking out mortgages, leveraged their indebtedness to obtain mortgage equity withdrawals for discretionary consumption, which has resulted in mortgage holders Strategically Defaulting and residing payment free in homes as banks, KBE, and as mortgage finance organizations, KME, use their FASB 157 entitlement to mark real estate to the manager’s best estimate rather than to market; thereby sustaining real estate, PSR, at unrealistic values, and with a mortgage foreclosure moratorium reinforcing those unrealistic values. FASB 157 has enabled Industrial And Office Real Estate shares, FIO, to be price far above the underlying asset true and real value as Calculate Risk reports Office vacancy rate at 17 year high.   

Suggested Reading

Tomoyuki Tachikawa of Wall Street Journal: Japanese Yields Tumble

Lily Nonomiya of Bloomberg: Japanese Banks' Government Bond Holdings Pose Risk to Stability, IMF Says

Brian Bakst of Associated Press: Gingrich Brands Democrats 'Party Of Food Stamps' July foodstamp has just climbed to a new all time high. According to the Supplemental Nutrition Assistance Program (NYSE:SNAP) at the Food and Nutrion Service, July foodstamp usage rose 1.4% from June, hitting a new record of 41.8 million, and 17.5% higher than the 35.6 million on assistance from a year ago. Participation has set records for 20 straight months. Business Weeke: "An average of 43.3 million people, more than an eighth of the population, will get food stamps each month in the year that began Oct. 1, according to White House estimates."

Wes Goodman of Bloomberg: Goldman Sachs Says U.S. Economy May Be ‘Fairly Bad’: The Fed bought $1.7 trillion worth of Treasury and mortgage debt in a program that ended in March. The purchases helped push mortgage rates to historic lows….Investors forecasting Fed purchases pushed two-year Treasury yields to a record low of 0.3987 percent on October 4.

EuroIntelligence: French President Nicolas Sarkozy told his fellow leaders that he wants to see a new world monetary order to prevent a beggar-thy-neighbour race to the bottom. France is to take over the chair of the G20 in November. The idea was shot down by German Deputy Foreign Minister Werner Hoyer, who deemed it "particularly vague”, La Tribune reports.

Disclosure: I am invested in gold bullion