Sunday, July 31, 2016

GDP And Yen - The Good Gets Better: Stock Market Risk

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*We now know why the Fed held off on Wednesday. GDP Friday.
*Japan's hands are tied, there are no bond sellers, that's why they went with ETFs.
*We said this week that we thought Yen would rip ("Pepsi Max Rating") and GDP would miss.
*This is a recipe for down markets at some point.
*The US is sporting the lowest real rates in the world at -4% if inflation continues. Ouch.
We had two (not so bold) predictions this week. One prediction was that theyen would jump after the BOJ meeting and the other that GDP would missestimates today based on the Fed's dovish commentary Wednesday. Both materialized and are market risks.
Here's what we said this week on the Yen on July 26th:
The BOJ meets and will have an announcement to update their policy onFriday. We think the BOJ is totally maxed out. We've reported that the BOJ is running out of bonds to buy in Japan (Fed Prays). That tells us that whatever they decide to do this week, they are already at full throttle. That means the yen should strengthen against the dollar. Until recently there was a very tight correlation between a strong dollar/yen and a strong US stock market (NYSEARCA:SPY). For that reason we are bearish on US stocks. (Pepsi Max Rating)
Here's what we said on the GDP on July 27th:
We would guess that the change in [Fed] language that didn't change could mean that Friday's GDP number could be weak. The economy may not pick up in jobs and GDP. Inflation is picking up however. We think that underlying fundamental backdrop is for stock market risk.
Let's do a quick review of events today:
Yen is strong today.
The BOJ made no change to their bond buying plans and instead just said they will increase ETF purchases.
We reported several times that the BOJ is maxed out. There are no more bond SELLERS to buy from in Japan. That's why Japan went with ETFs instead of bond.
That has disappointed investors expecting a big stimulus boost that would weaken the yen. That disappointment is driving the yen higher.
Market Risk To A Strong Yen
We pointed out that the yen reaching and crossing below 100 dollar/yen is a major risk for a several of reasons:
1. It would frustrate Japan's policy makers that all their stimulus failed to drive the yen lower.
2. It will push a frustrated government to toy with the idea of weakening their currency. That will anger US finance ministers. Japan would be accused of being a currency manipulator. If it happens the US will levy penalties and tariffs against Japan.
3. 100 dollar/yen will be a chart breakdown of US dollar denominated investments for Japanese investors. They will more quickly sell those investments when they see this crossover point. It will remind them their investments are losing money.
Here's an amazing grid. This shows the amount of investment of US Treasuries by Japan. You can see it's just starting to turn down.
We think this has further to go on the downside especially if the dollar drops below 100 yen. Keep in mind this is despite Japanese investors having NO bonds to buy at home. Even with that they are selling bonds in the US.
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Chaim Siegel has been working with hedge funds and mutual funds as an analyst and PM his entire career. Chaim specializes in earnings and predicts, analyzes and reacts to earnings and earnings events as well as developing current company stories with a hedge fund perspective. If you want his analysis real time sign up to the right for real time email alerts. #in, $spy, $qqq, $iwm, $vxx, $ycs, $fxe, $EUO, $YCS, ^GSPC, INDEXSP:.INX, #elazaradvisorsllc, CME Globex: ES Disclosure: These trades can lose you money and principal especially when using leverage BY USING THIS SITE YOU AGREE TO TAKE ALL RESPONSIBILITY FOR YOUR OUTCOMES AND LOSSES AND HOLD BESTIDEAS, ITS CONTRIBUTORS AND ELAZAR ADVISORS, LLC HARMLESS