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Arbing The Nikkei-S&P Divergence
For all the talk about how the US and Japan are becoming identical, there remains a very distinct and visible way in which the two are still very much different: charting the S&P and the Nikkei shows that the two indices are now at the widest spreads in 2010, and the widest since November 2009, when we last proposed a convergence trade. With the two indices historically trading with a R2 of 0.90, the current spread of roughly 10% seems like a relatively easy way to pick up 10%, once the world realizes that "Japan vs the world" doesn't really work, and recoupling is once again the dominant regime. Which would mean that either deflation will once again set foot in the US pushing stocks at least 10% lower, or Japan will finally import some inflation, leading to an inverse and comparable rise in the Nikkei. Thus, we believe a short ES, long NKY trade is a sufficiently attractive arb at this point. Furthermore, this is the cheapest and easiest way to hedge what is becoming increasingly inevitable: that the BoJ will have no choice but to follow our own Fed down the rabbit hole of money printing.
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Woot woot!
good trade, i agree.
how about a short everything trade ?
US would be lucky to become a Japan but Japanese assets are not fairly priced by any means as long as global trade is so manipulated & distorted!!
Since Nov 2009?
+1 Tyler, this needs a fix.
the BOJ is already "printing" since more than 10 years. Printing money doesn't work, this is all BS-analysis.
QUANTITATIVE EASING: “THE GREATEST MONETARY NON-EVENT”
http://pragcap.com/quantitative-easing-the-greatest-monetary-non-event
Feel free to explain to those desks with steepeners on who lost a few billion in the last week since QE Lite came on why they are now looking for a job due to a non- event
The "pragmatic capitalist" must be incapable of reading charts.
non event??? have you seen the 30yr? it may be a non-event in terms of inflation (until M3 is no longer eating dirt), but it is was not immaterial to my long bond position last week...
Even for an index, the technical deterioration in the sore Japanese market is clear. The long deflationary action jeopardized the market structure itself to the point it’s getting harder and harder to apply solid quant models.
http://screencast.com/t/YzgwNmE1Y
I’m using Dow instead of S&P. The Dow chart is much more desperate,
http://screencast.com/t/MTFlMWRhZDY
full of grease fingerprints of those pressing buttons to avoid the triggering of the huge head and shoulders (of what would be a materialization of the “impending” collapse). It’s foolish to blindly bet on such formations when a white candle emerges right at the decisive technical points, as it is silly to doubt it when it suddenly turns red, drawing another little piece of the figure. I awe as it unfolds.
A comparison in the longer term (this is a weekly) between Dow and Nikkei, leads to further considerations concerning arbitrage trades.
Weekly comparison http://screencast.com/t/YzNhOWUyYzE
Daily comparison http://screencast.com/t/MTQ5ZGQyNmQ
Chart: ES
Today's bounce simply broadened the downward channel.
http://www.screencast.com/t/NWZkYzI3
Well 2/3rds of topix companies are trading below book and the average price of the 'value indices' is about 0.7x book. this is partly due to low RoEs, but that is a function of low benchmark rates as there are many world class industrial companies in Japan and I mean, MANY.
As such if the MoF/ BoJ meeting on Monday leads to currency accomodation then the TPX could rerate. Re the SPX RoEs well they are flattered by the current dynamic of the US and other governments writing cheques to the large corporate sector via deficit spending.
Spread will come in once Japanese pensions allocate more to stocks. They too have to join the party.
They're net sellers of JGBs. Do you think the government will allow them to go outside bonds in any substantial way when they have 44 trillion yen in JGBs to sell this year?
What would be the equivalent ETF to trade here in order to get long the Nikkei....something similar to the SPY. Does something like that exist?
EWJ
Tell me Chemba, what did Goldman load its treasury profits into today aside from the equity ramp? Anything... exotic?
It has the same spread as the S&P. The upside potential is pathetic for a 10% move.
I'm not sure this will work. It's supposed to be an EWJ chart compared to Nikkei 225. (JP:NI225)
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=ewj&tim...
No no no!
First, EWJ is MSCI japan index not the Nikkei. Now this may actually be preferable as the Nikkei is a really fucked up index, its not cap-weighted, it's price weighted which is insane but hey, welcome to Asia.
Second MSCI Japan and hence EWJ is a composite index, ie its measured in USD. So if hte Nikkei and all the stocks go up, but the USD rallies even more, then EWJ will go down.
Caveat emptor. You are taking more FX and index risk than you know.
Thanks for the headsup as I was trying to figure out how to do this using etf's. Quite frankly, a little voice inside my head says, "don't do this fucking trade as you really don't know what the fuck you are doing". So, just moving along. But, did learn something.
Respectfully, CHEMBA, don't post stuff you're not 100% on.
Mr Yen says on BBG TV - "BOJ will not intervene against Yen because US doesn't want it to, therefore any intervention by BOJ would be ineffective...."
Is there a link, please?
Asked and answered.
http://www.bloomberg.com/news/2010-08-17/japan-will-struggle-to-halt-yen...
double post
I'm looking forward to the full and in-depth coverage Steve Liesman and Co. give this tomorrow morning on Small Pox:
"The legendary investor's Soros Fund Management – which has approximately $25bn (£16bn) under management – reduced its equity investments by 42pc to $5.1bn by the end of June, down from $8.8bn at the end of March."
http://www.telegraph.co.uk/finance/markets/7950771/George-Soros-slashes-...
interesting post. it's not immediately clear why this should be happening now, but the strenghtening yen and JGBs probably have money flowing out of Nikkei, I'd guess.
how about arbing real vol with vxx... in the one case you are buying gamma, the other not...
Remedy that with the (relatively) new VXX options.
If you are going to do ARB then at least convert each index to the same currency. Nikkeh is down on the yen. Same way the FTSE sits so high due to the much weaker pound.
If the divergence between SPX and NKY comes to an end, what will happen to Yen? It should be headed south...
and....
If we are going to experience a double dip ...
Will we have a sell off with JPY cratering instead of surging?
I'm starting to feel confused...
Or we could have at the same time surging both jpy and nikkey. That could be an interesting win win situation...
And what about the double dip?
Delayed?
Thought about this for a bit and I don't like this trade. For me this whole equity bounce since June is FX-related. The weaker USD is helping US businesses and the strong yen is hurting the Nikkei.
If you want to play these factors then trade the FX, not the 'idiot kid brother' that is the stock market. Just buy USDJPY. 1 trade, your stop loss is easier to find too.
However, if you believe the USD is spiralling down the bowl, then USDJPY will continue falling. (If it does it slowly then BOJ may not intervene - they may believe helping US inflation is the only way out of their own troubles.) And if USDJPY keeps falling, SPX will surely keep outperforming.
Many thanks for stopping me from playing with matches while standing in a bucket of gasoline.
Nikkei is a price weighted - SPX is Cap weighted. NKY on the chart above is in JPY and SPX is obviously in USD.
One of the most reckless 'arb' ideas I have seen on this otherwise excellent website.