There is a known tendency for JPY to appreciate in August. As Citi's FX Technicals group notes, this tendency is particularly strong when the differential between Japanese and US policy rates is less than 2%, and given the current rate gap, JPY is highly likely to rise again this August. USD selling for JPY by Japanese exporters puts larger downward pressure on USD in August than usual, partly since trading is thin because market players are on vacation. However, in recent years the income account surplus has had a larger impact and along with the major Treasury auctions (interest payments and redemptions) there is an appreciable fundamental flow. In addition, the much-watched technicals (considerably more widely followed in Asian FX markets than the US) are not supportive (of either JPY weakness of Nikkei strength) and given the massively crowded trade, for a foreigner who has purchased the Nikkei on a hedged basis (Long Nikkei and Long USD JPY) this trade could become very painful.
President Obama recently stopped in Phoenix to deliver his latest diatribe on how he is going to fix the economy. Yes, that is correct, another round of "campaign speeches" that, as has been the hallmark of this Administration to date, have generally wound up mired in an abyss of a broken congressional system. What really struck me, however, was his comprehensive plan designed to further boost the housing market. Another housing bailout program is the last thing we need. It's time to stop trying to fix what is broken by trying to cure the symptoms rather than the disease.
With euphoria returning to equity markets, it's worth remembering that stocks are unlikely to make you really rich. We have some ideas what might though.
When is the last time you got a stock tip from a cab driver or chatty not-in-the-business neighbor? It’s probably been the better part of a decade, if not longer. Yes, that’s probably the most bullish argument for owning stocks just now, but, as ConvergEx's Nick Colas notes, it also raises a question. What investments are retail investors considering, exactly? Various online tools and resources provide some answers. From Yahoo! Finance’s analysis of number of requested price quotes last week: AAPL, BAC, TSLA, INTC and CALL. From Google Trends: AAPL, GOOG, and YHOO. And from one very popular online brokerage for today’s volume: AAPL, F, BRCM, BAC, and NUGT. Whether this interest indicates a top or a crowded momentum trade is in the eye of the beholder, of course. But in a light volume period like summer, Nick notes, tracking individual investor attention can be an important piece of the day-to-day trading puzzle.
The optimism over the housing recovery has gotten well ahead of the underlying fundamentals. While the belief was that the Government, and Fed's, interventions would ignite the housing market creating an self-perpetuating recovery in the economy - it did not turn out that way. Instead it led to a speculative rush into buying rental properties creating a temporary, and artificial, inventory suppression. The risks to the housing story remains high due to the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts and a slowdown of speculative investment due to reduced profit margins. While there are many hopes pinned on the housing recovery as a "driver" of economic growth in 2013 and beyond - the data suggests that it might be quite a bit of wishful thinking.
Much has been made of the inflows into US equity markets in the last few weeks with the heralding of The Great Rotation that will lift us to Dow 36,000 and beyond. The only problem with this rather wonderful meme-du-jour (being the only thing left in the asset-gatherer's armor since bottom-up and top-down fundamentals are nothing but collapsing near-term, hockey-stick mid-term flights of fantasy) is that, as BofAML notes, institutional investors have never (that's a long time) sold as much stock as they have in the last 4 weeks - as retail has been piling in. So it would appear the 'real' great rotation is passing the hot-potato of liquidity-driven stocks from the 'smart' money to the 'dumb' money once again.
The on-again-off-again 'great rotation' from bonds to money-markets to stocks has (so far) seen retail flood into stocks as the BTFATH mentality is rife. As BofAML notes, through soothing "word of mouth" intervention, Bernanke's most important accomplishment over the past few weeks has been to significantly reduce the market's perception of upside tail risk for longer term interest rates. But, they remain very concerned in the short term about the scenario of a more disorderly rotation out of high grade funds, where credit spreads widen in response to further increases in interest rates. In this case, institutional investors will 'leave' risk markets en masse (with no rotation to stocks) as unwinds occur en masse. For now, it appears a 3.5% 10Y rate is the line-in-the-sand for a 'disordely' rotation.
Federal Reserve Chairman Bernanke's term expires January 31, 2014. While his continuation as Fed chair cannot be ruled out, he has given no public indications that he plans to seek another term and most market participants - as well as many members of Congress in last week's Humphrey-Hawkins hearings - seem to believe he will retire from public service early next year. As Goldman notes, the announcement of the next Chair of the Federal Reserve seems most likely to come in October, though nominations for Fed Chair have been announced as early as five months before the current term expires and as late as less than a month before expiration. There does not appear to be much risk to the Senate's ultimate confirmation of whomever the President chooses, though the Fed nominations have become more politically controversial over the last few years, which is likely to lengthen the confirmation process. Following previous confirmations, financial market volatility has typically increased slightly, though whether this occurs following the upcoming transition will of course depend on who is nominated.
CEOs have a primary job: manipulating up the stock of their company. But why they now wallowing worldwide in 2009-like gloom about the economy’s future?
- Bernanke Seeks to Divorce QE Tapering From Interest Rates (BBG)
- China launches crackdown on pharmaceutical sector (Reuters)
- Barclays, Traders Fined $487.9 Million by U.S. Regulator (BBG) - or a few days profit
- Barclays to fight $453 million power fine in U.S. court (Reuters)
- When an IPO fails, raise money privately: Ally Said to Weigh Raising $1 Billion to Pass Fed Stress Tests (BBG)
- Bank of England signals retreat from quantitative easing (FT) ... Let's refresh on this headline in 6 months, shall we.
- Russia's Putin puts U.S. ties above Snowden (Reuters)
- Smartphone Upgrades Slow as 'Wow' Factor Fades (WSJ)
- Snowden could leave Moscow airport in next few days (FT)
- New Egypt government may promote welfare, not economic reform (Reuters)
That Marx's prescription for a socialist/Communist alternative to capitalism failed does not necessarily negate his critique of capitalism. Marx spent hundreds of pages analyzing capital and capitalism and relatively few sketching out a pie-in-the-sky alternative that was not grounded in historical examples or working models. So it is no surprise that his prescriptive work is an occasionally risible historical curiosity while his critique stands as a systemic analysis. Marx got a number of things right, one of which appears to be playing out on a global scale.
“The Year of the Glitch” - The Dark (Pool) Truth About What Really Goes On In The Stock Market: Part 4Submitted by Tyler Durden on 07/07/2013 11:31 -0400
There was more. BATS, Facebook, and Knight were just the three most prominent computer glitches of the year. Outsiders were realizing what the insiders had known for years: The U.S. stock market was plagued with glitches that happened on a daily basis, and not just in stocks. Markets for commodities, bonds, and currencies all had their fair share of computer-driven mishaps. Increasingly, investors were wondering not only if the market was rigged, but whether it was completely broken. Indeed, the trade publication Traders Magazine called 2012 “The Year of the Glitch.”
Following the drubbing in commodities in Q2 it is was only a matter of time that the pendulum swung the other way. At least that is the view of JPMorgan's commodities team led by Colin Fenton who says to "go overweight commodity indices now." JPM's summary: "It’s our first OW call on commodities since September 2010… we turned underweight commodities as an asset class in November 2011, shortly after it became apparent that Europe and Australia had entered manufacturing recessions and commodities were likely to underperform equities and bonds over the following 6 to 12 months, likely yielding negative returns in 1H12. Over the past year, we have grown more positive on the asset class, as energy has improved, expected menaces in bulks and metals have arrived, and sentiment across commodities has belatedly soured. However, our strategies have sought to be directionally neutral. Now, we move to recommend a net long, overweight exposure for institutional investors for the first time in more than two years, based on ten fundamental factors we quantify in this note." Yes, that includes gold, although as a hedge JPM adds: "Liquidity could fall quickly in summertime. Buy 25-delta puts in oil, copper, and gold to protect a core position in commodity index total return swaps."
The Fed has managed to remove some of the complacency in financial markets for now, but we would also argue that financial markets have managed to remove any complacency the Fed (and any other central banks) may have had regarding how easy the exit strategy from QE was going to be. As we discussed here, the market and the Fed are trapped in a prisoner’s dilemma, and, as Citi notes, the events over the past three weeks make it clear that 'collaboration' is the best strategy – i.e. a non-complacent market and no hawkish surprises from central banks. There is a big risk to this scenario though. As Citi explains, a risk that we fear not even the recent dovish messages by central banks may be able to do much about. The recent sell-off has, unlike the previous sell-offs this year, managed to trigger outflows in funds and ETFs; as we mentioned above, our credit survey reports the first outflows since 2008. The negative feedback loop which has been triggered around (retail-driven) fund and ETF outflows has gained a momentum of its own and the following four charts suggest bonds are in fact primed for the perfect storm.
Here's my take on the key events for investors in the week ahead, with an attempt to place them in a somewhat larger context.