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Hello fellow speculators
This following article has had the effect of taking a valium for me (not that I've ever taken it before). I would be interested in your thoughts, I might wait until the morning to read them as I am a buy/accumulate and hold 12 month "real equities" trader, I managed to free up some strongly profitable long positions in Jan and Feb and was sitting on a fair bit of cash, however now even my conservatively geared "Blue Chip" margin loan looks very sick and it appears that the vet is shut. My cash portfolio is full of speculative gas and gold stocks so you can imagine the hiding it's had since last week. T
That's why I was amazed to read last Tuesday on this forum, the crazed so called bargin buying activity that was going on. "What did you buy, how much, what volume" etc, especially PDN - that got to hurt. I thought I was samrt buying them in Jan for $8 during a mini-pullback. Anyway corrections never last a day, you are lucky if the only go for a week. The sucker rally on Wednesday must really have hurt some of the punters. Hope this helps.
Anyway here's the article it's GaveKal's take on the Yen Carry Trade, a different view from what we've all been reading of late.
Cheers - Sleep well!
Where To Now?
Source FN Arena News - March 05 2007
By Greg Peel
Is economic growth really slowing across the globe? If so, investors should sell stocks and buy bonds. Is the yen carry trade being unwound? If so, investors should buy Japanese bonds and sell everything else. Is the earnings growth of recent years coming to an end? If so, investors should sell stocks.
If the opposite is true, investors should buy stocks, and risk assets.
These are the questions facing very nervous financial market investors this week. Investment consultants at GaveKal have given a lot of thought to the answers over the past few days.
To understand how we got to this point it is necessary to recap.
Markets in the US and around the world have been surging ahead since the lows of June last year. The peak close in the Dow Jones occurred on February 20. It needs to be remembered that the index fell for four consecutive days before the Chinese market did its thing. Asian markets were similarly weak following the return from the Lunar New Year celebrations. The scene was set.
The reason for the four days of weakness in the US was mostly concerns over sub-prime lending defaults. Financial stocks began to underperform despite falling bond yields, and this was a bit of an alarm bell. The price of credit default insurance shot up markedly in that time, and GaveKal suggested last Monday that risk-taking seemed to be waning. The analysts questioned the magnitude of their own bullishness from a short term perspective.
At the same time, economic data for February were not holding up as well as they had done in January. The US dollar began to weaken once more, and the oil price was threatening to break up – another source of concern.
When China came out and announced new measures in curbing market speculation – just another in a seemingly endless series of such announcements - the Chinese market took it rather badly. Had the announcement occurred in January, who knows? Maybe the Chinese reaction would not have been so severe, or if it had been, maybe the US would have been more likely to simply shrug.
But there was a discomforting feeling of nervousness in the air on the morning of February 27. We all know what happened next.
Equity market reaction aside, the unsettling response was a rise in the value of the yen against popular carry trade currencies such as the Aussie, Kiwi and real. Next the yen began rising against all currencies, including the strong euro. The Swiss franc – popular destination in times of trouble – also began to rise.
The call was then made – the carry trade is being unwound.
Given longstanding speculation and warnings about what would happen to financial markets if the yen carry trade was to be unwound, the market became spooked. However, GaveKal would like to put the realities of the yen carry trade into perspective.
GaveKal has held the view that Japanese interest rates would remain at low levels for the foreseeable future, despite a growing market belief to the contrary. This view was underpinned by the most recent statement from the Bank of Japan. The BoJ has more or less guaranteed no abrupt tightening in 2007, and GaveKal believes Japanese rates will remain below 1.00% until at least the end of the decade.
So apart from a bit of short term panic, what could really cause the yen carry trade to be turned around in a big way?
It is important to note, GaveKal warns, that the carry trade is not just about greedy hedge funds looking for a quick buck. It is more about Japan's wealthy, ageing population and the vast amount of savings that population has accumulated. If an ageing Japanese saver wanted to buy an annuity to provide for retirement, where would he buy it?
Working off the 20-year JGB rate of 2.1%, if our retiree invested the equivalent of US$1 million at home, he would receive an annuity payment of US$60,478 per year. If he invested in the US, the 20-year US treasury rate of 4.7% provides for US$75,000 per year – 23% more.
This means that the retiree would only be worse off investing in the US if the US dollar fell by an average of 23% against the yen over the twenty year period. Taking today's US dollar rate as JPY121, it would have to depreciate to JPY65 by 2027. While this is not inconceivable, the US dollar has never been below JPY81 and hasn't been below JPY100 since 1995.
GaveKal's conclusion is that we haven't seen any meaningful unwinding of the yen carry trade as yet, and nor are we likely to in the foreseeable future. If we had, then rates around the world would be rising, as they did mid last year, not falling, as they are tending to do now. It is not the end of the world as we know it just yet.
In the case of the sub-prime mortgage scare in the US, that, too, needs to be put in some perspective. A recent Bloomberg article suggested that households with variable-rate mortgages – both prime and sub-prime – would experience around US$10 billion in additional payments if rates adjusted up over 2007-08. This figure is only about 0.1% of the US$9 trillion US consumers spent in 2006.
So returning to the questions at the beginning of this article, GaveKal suggests the answer to each of them should be "no". The question then is: how long will it take a nervous market to stop being spooked by its own shadow? The yen was previously ridiculously undervalued against the euro, and now it is only slightly less so. Investors just need something which will spark a return to confidence. Perhaps stronger earnings, more massive M&A deals, or a fall in the oil price.
In the meantime, it's a case of waiting out the panic. Or, for the bold of heart, taking advantage of the dips.
This following article has had the effect of taking a valium for me (not that I've ever taken it before). I would be interested in your thoughts, I might wait until the morning to read them as I am a buy/accumulate and hold 12 month "real equities" trader, I managed to free up some strongly profitable long positions in Jan and Feb and was sitting on a fair bit of cash, however now even my conservatively geared "Blue Chip" margin loan looks very sick and it appears that the vet is shut. My cash portfolio is full of speculative gas and gold stocks so you can imagine the hiding it's had since last week. T
That's why I was amazed to read last Tuesday on this forum, the crazed so called bargin buying activity that was going on. "What did you buy, how much, what volume" etc, especially PDN - that got to hurt. I thought I was samrt buying them in Jan for $8 during a mini-pullback. Anyway corrections never last a day, you are lucky if the only go for a week. The sucker rally on Wednesday must really have hurt some of the punters. Hope this helps.
Anyway here's the article it's GaveKal's take on the Yen Carry Trade, a different view from what we've all been reading of late.
Cheers - Sleep well!
Where To Now?
Source FN Arena News - March 05 2007
By Greg Peel
Is economic growth really slowing across the globe? If so, investors should sell stocks and buy bonds. Is the yen carry trade being unwound? If so, investors should buy Japanese bonds and sell everything else. Is the earnings growth of recent years coming to an end? If so, investors should sell stocks.
If the opposite is true, investors should buy stocks, and risk assets.
These are the questions facing very nervous financial market investors this week. Investment consultants at GaveKal have given a lot of thought to the answers over the past few days.
To understand how we got to this point it is necessary to recap.
Markets in the US and around the world have been surging ahead since the lows of June last year. The peak close in the Dow Jones occurred on February 20. It needs to be remembered that the index fell for four consecutive days before the Chinese market did its thing. Asian markets were similarly weak following the return from the Lunar New Year celebrations. The scene was set.
The reason for the four days of weakness in the US was mostly concerns over sub-prime lending defaults. Financial stocks began to underperform despite falling bond yields, and this was a bit of an alarm bell. The price of credit default insurance shot up markedly in that time, and GaveKal suggested last Monday that risk-taking seemed to be waning. The analysts questioned the magnitude of their own bullishness from a short term perspective.
At the same time, economic data for February were not holding up as well as they had done in January. The US dollar began to weaken once more, and the oil price was threatening to break up – another source of concern.
When China came out and announced new measures in curbing market speculation – just another in a seemingly endless series of such announcements - the Chinese market took it rather badly. Had the announcement occurred in January, who knows? Maybe the Chinese reaction would not have been so severe, or if it had been, maybe the US would have been more likely to simply shrug.
But there was a discomforting feeling of nervousness in the air on the morning of February 27. We all know what happened next.
Equity market reaction aside, the unsettling response was a rise in the value of the yen against popular carry trade currencies such as the Aussie, Kiwi and real. Next the yen began rising against all currencies, including the strong euro. The Swiss franc – popular destination in times of trouble – also began to rise.
The call was then made – the carry trade is being unwound.
Given longstanding speculation and warnings about what would happen to financial markets if the yen carry trade was to be unwound, the market became spooked. However, GaveKal would like to put the realities of the yen carry trade into perspective.
GaveKal has held the view that Japanese interest rates would remain at low levels for the foreseeable future, despite a growing market belief to the contrary. This view was underpinned by the most recent statement from the Bank of Japan. The BoJ has more or less guaranteed no abrupt tightening in 2007, and GaveKal believes Japanese rates will remain below 1.00% until at least the end of the decade.
So apart from a bit of short term panic, what could really cause the yen carry trade to be turned around in a big way?
It is important to note, GaveKal warns, that the carry trade is not just about greedy hedge funds looking for a quick buck. It is more about Japan's wealthy, ageing population and the vast amount of savings that population has accumulated. If an ageing Japanese saver wanted to buy an annuity to provide for retirement, where would he buy it?
Working off the 20-year JGB rate of 2.1%, if our retiree invested the equivalent of US$1 million at home, he would receive an annuity payment of US$60,478 per year. If he invested in the US, the 20-year US treasury rate of 4.7% provides for US$75,000 per year – 23% more.
This means that the retiree would only be worse off investing in the US if the US dollar fell by an average of 23% against the yen over the twenty year period. Taking today's US dollar rate as JPY121, it would have to depreciate to JPY65 by 2027. While this is not inconceivable, the US dollar has never been below JPY81 and hasn't been below JPY100 since 1995.
GaveKal's conclusion is that we haven't seen any meaningful unwinding of the yen carry trade as yet, and nor are we likely to in the foreseeable future. If we had, then rates around the world would be rising, as they did mid last year, not falling, as they are tending to do now. It is not the end of the world as we know it just yet.
In the case of the sub-prime mortgage scare in the US, that, too, needs to be put in some perspective. A recent Bloomberg article suggested that households with variable-rate mortgages – both prime and sub-prime – would experience around US$10 billion in additional payments if rates adjusted up over 2007-08. This figure is only about 0.1% of the US$9 trillion US consumers spent in 2006.
So returning to the questions at the beginning of this article, GaveKal suggests the answer to each of them should be "no". The question then is: how long will it take a nervous market to stop being spooked by its own shadow? The yen was previously ridiculously undervalued against the euro, and now it is only slightly less so. Investors just need something which will spark a return to confidence. Perhaps stronger earnings, more massive M&A deals, or a fall in the oil price.
In the meantime, it's a case of waiting out the panic. Or, for the bold of heart, taking advantage of the dips.
