Yen Carry Trade Has Massively Unwound As Investors Traded Out Of Stocks For Commodities

Financial Market Report For Wednesday, July, 2, 2008

Introduction
Oil, USO, traded up 1.95% to close at 116.8 as oil went past $144 on news that US oil supplies have fallen lower, Adam Schreck, of the Associated Press reports. West Texas Intermediate Crude, $WTIC, closed at 142.

There was a massive unwinding of the yen carry trade today; to complement two others that occurred on June 6, 2008, and June 20, 2008, which can be seen in the BRICs, EEB, falling 3.8% today.

The spigots of investment liquidity have been turned off
The chart of the Brics, EEB, shows that the twin spigots of liquidity have been turned off.

The first spigot of liquidity, the Alan Greenspan, Ben Bernanke Federal Reserve liquidity has exhausted, as seen in the TAF, TSLF, and PDCF rally of March 18, 2008 to May 19, 2008, ending, with a doji and island reversal dark cloud cover candlestick.

The second spigot of liquidity, the Bank of Japan, BOJ, liquidity of 0.5% interest lending, has been turned off by risk aversion due to oil based inflation, a market place loss of value, and a higher yen, FXE, at 94.

Yen carry traders massively sold out of stocks today
Yen carry traders massively sold out of their deep trades made long ago as seen in the following ETFs falling sharply:
metal and mining producers, XME, 12%
coal producers, KOL, 10%
steel producer, SLX, 10%
solar, TAN, 8%
basic materials, IYM, 7%
agriculture, MOO, 6%
water, FIW, 5%
alternative energy, GEX, 5%
transportation, IYT, and additional selling pressure came from today's higher oil price, 4%
Russell 2000 Growth, IWO, 3.3%

Today's massive sell off in interest rate differentially favored investments can be seen in the fall of the following stocks:
James River Coal, JRCC, 22.1% (producer of both steam and metallurgical coal)
Cleveland-Cliffs, CLF, 17.2% (producer of iron ore pellets)
Consol Energy, CNX, 14.6% (producer of steam coal)
AK Steel Holding Corp, AKS, 13.6% (steel manufacturer)
United States Steel, X, 12.5% (US based steel manufacturer)
Intrepid Potash, IPI, 8.2%
BHP Billiton Ltd, 6.2%, (producer of base metals)
Peru Copper, PCU, 5.8%,
Aluminum Corp of China, ACH, 3.9%

The Russell 2000, fell heavily: 3.2%; the reason being that it has seen a lot of yen carry trade investment, i.e. the case of the small US natural gas producer, Cabot Oil And Gas, COG, which fell 3.4%.

The Russell 2000, got oversold on March 18, 2008 with the collapse of US investment banking which produced the Federal Reserve assisted JP Morgan buyout of Bear Stearns; and then "the RUTT" got overbought on June 6th and June 19, these being the days that the yen carry trade really started to unwind, as can be seen in the chart of the Russell 2000 compared to the S&P, IWM:SPY.

In addition to the BRICS, other investments which were inflated by the yen carry trade, saw disinvestment today: Chinese real estate, TAO, and latin america, ILF, both fell 4%.

BRIC components fell as follows Brazil, EWZ, 4.3%, Russia, RSX, 3.0%, China, FXI; 3.6%, India, INP, having fallen a lot of late rose 0.7%.

The barometer of the yen carry trade, EUR/JPY, was up today on the ECB's high interest rate policy, and on activation of lending to go long commodities, RJI, oil, USO, gold, GLD and agricultural products, DBA ... EUR/JPY, FXE:FXY, closed at 1.69.

It's going to be just like July 2007 all over again. The weekly chart of EUR/JPY, FXE:FXY shows a double top: we have three weeks now of 1.68 or above which makes for the second double top that matches the former top in July 2007.

At that time Gary Dorsch writing in Safehaven.com article Stock Market Gyrations and the "Yen Carry" Trade wrote: "The sharp unwinding of "yen carry" trades from July 19th through August 16th, highlighted by the US dollar's slide from 123.50-yen to as low as 112.10-yen, contributed significantly to the downfall of the Dow Jones Industrials from the 14,000 level to as low as 12,500 ... This time, with the dollar falling under the March low at 116-yen, the unwinding of the "yen-carry" trade hit the stock markets like a hurricane. Global traders, who leverage about 10 times their own cash to trade stock index futures contracts, were unwinding losing positions with the trigger of automatic stop-loss limits. The dollar quickly plummeted 4.5-yen to as low as 112.10-yen on August 16th."


Many investment sectors fell hard today
Small cap value, which trades much like the Russell 2000, RZV, fell 3.3%; home construction, XHB, 3% and the industrials, XLI, 3%.

The HUI indexed precious metal, GDX, fell 2.8% lower with the basic materials; I have consistently warned investors that gold stocks are disconnecting from the price of gold, and no longer serve as leverage over gold. The chart of gold stocks relative to gold, GDX:GLD weekly shows the ongoing disconnect and failure of gold mining stocks.

Silver mining exploration company Silver Standard Resources Inc, SSRI, fell 3%; and silver producer Pan American Silver PAAS 4% on silver's, SLV, 1.9% rise.

Energy service shares, OIH, fell 3.9%, and energy producers, XLE, fell 3% even though oil rose today.

Needless to say, the days of profitable natural resource investing are over.

Investors sold out of the "global stock leaders"
First Trust IPOX-100 Index, FPX, fell 3.5%; in as much as it trades as a hyper-variant, a volatile multiple of the Russell, 2000: one can expect the IPOX companies to begin to fall very quickly now.

Global design, build and construction, PKB, fell 5%, evidencing that global deflation in stock wealth is at hand, even though that stock wealth be based on gulf nation oil reserves and recent booming construction. Disinvestment in global construction companies is exemplified by today's fall of Fluor Corporation, FLR, 6%, and Catepillar, CAT, 5%.

Exxon Mobil, XOM, closed down 1% at 87.41; for historical purposes I record its Market Cap as $462 Billion; with a PE (ttm) of 11.36; dividend of $1.60 and yield of 1.80%.

The Financial Jockeys, those who ride the midcaps sold out today; the 3.32% loss in the Joc-K-Hee iShares Morningstar Mid Growth Index, JKH, being a case in point; its trading stock values show a May 20th, 2008 termination of Bernanke rally, and June 6,2008 and June 18, 2008, unwinding of yen carry trade investing as they were moved by announcement of the minutes of Bank of Japan meetings that inflation presents investment risk.

Banks, such as Regions Financial, and Bank of America together with bond guarantor, MBIA, led the financial sector lower today
MBIA, MBI, 7.2%, and Regions Financial, RF, 8.5%, Bank of America, BAC, 5.3%, taking the financial sector, IYF, 1.5% lower.

The chart of overall stock market relative to the financial sector, VTI:IYF weekly, relates the dislocation that is coming from the financialization sector. The sector that was the financial engine of capitalism has gone into reverse -- that which once financial asset inflationary is now financial asset asset deflationary.

The issue that is the catalyst for deflation of overall world stock wealth, VEU, is debt of all types; which is seen in debt's weekly charts: aggregate, AGG, corporate, HYG, governmental, BTTRX.

This debt is now being liquidated and will continually be done away with with the result being the application of the Liquidation Thesis: government services and payments, service sector jobs, public and private debt of all types, and unfunded retiree benefits are going liquidated, that is done away with.

Currencies were volatile today, with the "gold currencies" supporting gold and moving the dollar lower
British Pound, FXB down to 199.44
Aussie, FXA, up to 96.39
Swiss krona, FXS, up to 157.75
Yen, FXY, unchanged at 94.15
Euro, FXE, up to 158.81
Lonnie, FXC, up to 98.66

An investment demand for gold is clearly underway
The chart of gold relative to stocks, GLD:VEU, shows an investment demand for gold is underway which began strongly in late 2007 in response to the Fed's December 11, 2007 announcement of a 0.75% interest rate cut. And then the investment demand for gold picked up steam on May 11, 2008 as institutional investors traded out of the high paying bank and investment banker stocks, PEY, to go long commodity indexed funds, such as RJI, and oil, USO, and gold, GLD.

Then once again, investment demand for gold picked on June, 6, 2008 and June 20, 2008 (as evidenced by sell off in the trading of the Russell 2000 Growth, IWO, and Aluminum Corporation of China, ACH), as yen carry trade investors sold out of their traditional investments in the BRICS, and transportation, IYT, and Russell 2000, IWO; and went long commodities, RJI, oil, uso, gold, GLD, and agriculture, DBA.

The recent Ben Bernanke-FOMC announcement of a 2.0% central bank interest rate is seen as a weak dollar policy: this can be seen in the chart of USD/JPY turning down from 108.4 to today's 105.86: this has stimulated gold, as gold trades inversely of the US Dollar.

Accumulated evidence presented in this blog, the Resourceful Bear Blog, is clear, cogent and convincing: the Federal Reserve's actions of lowering the central bank interest rate and the provision of TAF, TSLF, and PDCF facilities have debased the US Currency and inflated the price of commodities, oil gold and agricultural products and deflated stock value world wide.

Gold, $GOLD, close up at $945; and the gold ETF, GLD at $93; while the US Dollar, $USD, closed down at strong resistance at $72, yet this is also the edge of a massive head and shoulder pattern, with support lower at 71.25; and then nothing but thin air until $69.

Commodities across the board rose with oil
Oil's, USO, 1.95% price rise, took $CRB, commodities across the board higher:
Commodities, RJI, 1.3%
Gold, GLD, 0.5%
Base Metals, JJM, 1.9%
Copper, JJC, 2.8%
Agriculture, DBA, 1.9%

Commodities, as a whole, both oil and gold look very much topped out: RJI Daily shows a dark cloud cover candlestick followed by weakness; and RJI weekly shows a dragon fly candlestick.

I believe that a sell off is imminent in commodities, only to be followed by oil moving higher once again and gold soaring beyond belief.

US Treasuries manifest as bearish
Although trading up today, the US Government Bond ETF, TLT, manifests as bearish having fallen in a bear cross, with 50 day moving average crossing over 200 day average; and the chart shows a lollipop hanging man candlestick in late 2007 serving as a dark cloud covering; and the shooting star candlestick of March 19, 2008, all relate that wealth can no longer be preserve by investing in Treasuries.

Fugitive financier turns himself in
Eddy Elfenbein reports that Samuel Israel, the fugitive hedge-fund firm founder convicted of directing a $400 million fraud at Bayou Group LLC, surrendered in Massachusetts, almost a month after fleeing instead of starting his 20-year prison sentence.

The 'Age of financial disinvestment and instability' and the 'Age of State Corporate Rule' have commenced
The five year crack up boom in stock wealth, seen in the ongoing five year Yahoo Finance chart of the energy service companies, OIH, and the HUI indexed precious metal mining shares, is history.

The above facts show that a higher oil price has unwound the traditional stock based yen carry trade; the unwinding of the yen carry trade will be ongoing. It is all part of what economist Mike Mish Sheldon relates as Deflationary Hurricanes To Hit U.S. And U.K.

He writes of hurricanes plural, yes not only stock wealth is going to be destroyed, but bond wealth, and possibly commodity wealth as wealth as well. And I believe a hurricane is coming to destroy currency wealth as well: the US dollar will lead all currencies lower in a death spiral lower together; it's as Elaine Meinel Supkis relates: "red ink kills currencies".

Higher inflation in consumer goods, is likely Jesse writes, as producers pass on oil and chemical related costs; frankly I believe that the current governmental CPI inflation reports are unreliable; yet at least they are better than nothing; I believe CPI will be going up soon.

As long as the interest rates remain negative in real terms, inflation in oil prices will get worse. Hence we have inflation coming through producer prices and not consumer or wage factors.

Higher inflation in food and fuel, is likely relate Mary Anne and Pamela Aden of The Aden Forecast in Safehaven.com article.

Inflation currently is more of a misery factor in the emerging markets that in the US as Kartik Goya reports in Bloomberg that: "Indian truckers, who haul the majority of the nation's goods, went on strike today to protest against taxes and rising fuel costs, a union official said. More than 4 million heavy and light commercial vehicles are staying off the nation's roads from today after talks with the government to avert the strike failed last night, said Charan Singh Lohara, president of the All India Motor Transport Congress, an umbrella organization representing the truckers."

Higher interest rates are coming due to risk avoidance of debt: the 30 US Treasury bond rate, $TYX, and the 10 Year Government bond rate, $TNX, which rose as the Federal Reserve announced the TAF, TSLF, and PDCF facilities, are at some point going to move higher as the market place declares a bond interest rate hike independent of Federal Reserve action; there is just too much swapped out junk debt in the US Treasury for rates to stay as low as they are now.

The age of 'investment prosperity' is over, its as good as it is ever going to get; it is not going to get better: traditional wealth is turning down.

The age of 'financial disinvestment and instability', and the age of 'state corporate rule' is rising.

The western governmental powers are poised to take security actions against global security threats as authorized by the Declaration of EU US 2008: US military chief Admiral Michael Mullen is expected in Israel this week, amid speculation of a possible aerial strike aimed at Tehran’s nuclear weapons program. “Obviously, when Chairman Mullen speaks with the Israelis, they will no doubt discuss the threat posed by Iran,” said Pentagon spokesman Geoff Morrell on June 25th. “The US is committed to resolving the nuclear threat posed by Iran through diplomacy and international sanctions, while at the same time holding out the option of a military strike, if necessary,” he warned.

Toby Harnden in Telegraph.co.uk article relates that Israel 'will attack Iran' before new US president sworn in, John Bolton predicts

Investment Application
The chart of gold relative to stocks, GLD:VEU, documents that a strong investment demand for gold is underway.

If oil falls faster than stocks, which is very possible, then for a while the investment demand for gold, GLD:VEU, will fall quickly; GLD could easily fall from its current 93 to 85 or 84 very rapidly as gold tumbles lower with oil.

Yet, chaos is at hand: chaos is going to be more of an 'investment moving factor' than deflation!

A systemic risk event, that is a financial system breakdown, is imminent, stemming from the one or more of following factors:
1) bond insurers failure, MBIA, MBI, and Ambac, ABK, causing a municipal bond market freeze up.
2) mortgage insurers failure PMI Group, PMI, and MGIC Investment, MTG, causing a meltdown of banks and investment bankers,
3) commercial lending gridlock and lending failure, CIT Group, CIT, and Capitol One Financial, COF,
4) mortgage GSE failure, Fannie Mae, FNM, Freddie Mac, FRE,
5) run on home loan savings and loans and banks Regions Financial, RF, or Wachovia, WB,
6) run on money center banks, Bank of America, BAC

A systemic risk event or risk events would cause an immediate investment demand for gold: gold will likely gap limit higher in price for many days.

Of note: the USA Today in article Black Currency writes that the record oil prices are also a "no-confidence vote in the U.S. economy and currency." Take the dollar. If it hadn't weakened 45 percent against the euro this decade, oil would be at $100 a barrel. Investors are turning to oil as a sort of bet that the U.S. won't "face up to its problems," namely a "destructive borrow-and-spend habit" afflicting consumer and government alike. In that way, oil is now "a kind of alternative currency," like gold.

The negative for oil is its parabolic rise.

Ultimately the factor influencing gold is a falling price of the US Dollar: I expect the US Dollar, to lead currencies in a deflationary death spiral lower together; and in as much as gold trades inversely of the US Dollar, gold will be going higher.

From the charts, $850, "any which way you deflate it" seems to be a floor for gold.

Given the deflationary outlook above, but most importantly the chaos ensuing from the imminent risk of a financial system breakdown, where one may not be able to have access to one's wealth, I recommend that one dollar cost average an investment in gold in the gold ETF, GLD, in a trust account over the next two weeks, as well as a dollar cost average purchase of gold at both BullionVault.com and GoldIsMoney.com.