'We in the business of trying to judge risk significantly underestimated the extreme tail risk, the so called risk involved in very low probability events and what the consequences would be should they happen,' said former Federal Reserve Chairman Alan Greenspan.
Featured Trades: (JAPAN), (EWJ), (NIKKEI)
Japan iShares ETF
1) Why I Still Hate Japan. Like watching an old friend who fell from the high life as a special bracket investment banker to a stumbling drunk, I can't help but pity Japan's beleaguered stock investors. Since peaking in 1989 at 39,800, they have been mired in a 20 year bear market, the longest in history, and there is no sign of the index climbing substantially off the current 10,000 level anytime soon. I have watched with dismay as GDP growth shriveled from a white hot 10% in the sixties, to 7%, 5%, 3%, and now 1%, and share prices reflect this.
Not even the Japanese want to buy their own stocks, with foreign institutions accounting for up to 60% of trading volume on a good day, while domestic ones generate a paltry 10%. Local investors would much rather buy emerging market funds, currency funds, bond funds, anything but their own equities. This explains the miserable 1.15% yield investors get on ten year JGB's. Nikkei stock index volatility is driven by a handful of foreign hedge funds that rush in, and then right back out.
Although the government launched one Keynesian reflationary package after another during the nineties, the end result was a massive accumulation of debt and a thousand 'bridges to nowhere.' Obama take note.? In four decades I have watched the country degenerate from a paragon of fiscal rectitude to one of the most debt burdened nations on the planet. The country's total debt, net of cross holdings, is 111.6%, and is rocketing towards the 140% now seen in Greece.
Japan used to have a great story up until the eighties, when they were the world's low cost provider of quality manufactured goods. The Nikkei was the place to be when Japan's share of the US car market soared from 3% to 40%, and the yen went hyperbolic from ?360 to ?78. But then a beefy new kid showed up in the neighborhood called China, which has taken over that role. Sure, the quality isn't there yet, but you can't beat those prices! This is why global investors see Asia as a China only bet, and avoid the Land of the Rising Sun like the plague.
Equity price earnings multiples have fallen from 100 down to 15. But even that seems high if the country is only able to eke out 1% GDP growth rate for the foreseeable future. An appreciating yen serves only to tighten the screws on the country's prolific exporters even further. Now it seems they want to raise VAT taxes too. That will simply hobble consumption further. Some 12.7% of Japan's equity is still held in corporate crossholdings, a relic from the old zaibatsu days, that will continue to weigh on share prices. Great thing to have in a rising market, but not so good on the downside.
Japan has the world's worst demographic outlook (click here for my analysis). They're just not making Japanese anymore. Changing governments as often as I change my socks doesn't exactly inspire confidence among foreign investors. What does the center left Democratic Party of Japan (DPJ) stand for, anyway? Politics has degenerated into a scrum of conflicting interests to see who gets a share of an ever shrinking pie.
Independent research analyst Darrel Whitten of Japaninvestor.com (click here for the site ) believes that Japan has to engineer a substantially weaker yen to stimulate exports, aggressively use the Bank of Japan's balance sheet to create inflation, and draw up a new pro growth economic plan, much like the Ministry of International Trade and Industry (MITI) successfully engineered in the fifties. I won't be holding my breath. The strong leadership and ironclad consensus that created the Japanese economic miracle isn't to be found these days. Until then, Japan will, at best, be a single stock story, with money pouring into companies that can still prosper against these incredible force nine gales.
I have made such a massive personal investment in Japan, living there ten years, learning their impossible language, and publishing several books on the topic. I wish I had better news to report. But I don't.
Ownership of Japanese Equities
Featured Trades: (SPX), (YCS), (TBT)
When I boarded my plane in San Francisco on Thursday morning, May 6, the Dow was down an uncomfortable, but tolerable 150 points. When I arrived in New York that night I was greeted with headlines screaming 'CRASH: DOW PLUNGES 1,000.' I was not surprised. In a letter sent to my premium subscribers the day before I predicted a fall in the S&P 500 to 1,050 (click here for the call), although I thought it might take two months to get there. Instead, we got it in two hours!
Featured Trades: (GLOBAL RISK REVERSAL)
1) There's a Massive Global Risk Reversal Going on. The Gulfstream is fueled up, the flight plan filed, and my pilot is carping about missing our IFR clearance slot, so I'll just quickly dash off a few words here before I take off for the Big Apple. They are rioting in the streets in Athens, and bankers are being burned at the stake. I love it. It's clear that there is a massive global risk reversal going on. The euro has collapsed to the $1.28 handle, crude is under $80, and the Dow has shed 400 points in two days. S&P 500 at 1050, here we come! The yen has just gapped up ?2 as hedge funds rush to unwind their carry trades. There is a rising crescendo of stops going off in all markets that is so loud that I can hear it with my head buried under my pillow. Precious metals proved nowhere to hide, either. Did someone say something about 'Sell in May and Go Away?''
Maybe something about cash fleeing all assets in unison? It is great entertainment watching from the sidelines. As long as flocks of black swans are alighting on the markets, as in Alfred Hitchcock's Birds, it is better to wait for the dust to settle. The big trade here is to wait for the big trade, several of which are setting up. Anyone who believes in 'decoupling' at this stage also believes in the Easter Bunny, Santa Claus, and the Loch Ness Monster, and also that the Chicago Cubs will win the World Series this year. That's the limo driver at the door. Gotta run.
Not a Busy Signal
Featured Trades: (SPX), (BP)
1) Yesterday, the lemmings discovered the Law of Gravity,and the plaintive squeals of the dying mammals could be heard throughout the financial markets. European finance ministers must be depressed that their $140 billion bailout of Greece only bought them 24hours of grace in the eyes of investors. The European finance ministers might as well drown themselves in the seas of red on my screen. Only the Vix and British Petroleum (BP) are green. How perverse. Oil down$3.50! Boiiing! Silver off a buck! Kaboom! The ten year Treasury at 5.59%! Pow!It also looks like the oil spill in the Gulf of Mexico could make a sizeable dent in US Q2 GDP. You all know that I have been negative on equities for a while now (click here for my piece on buying cheap downside protection). The global nature of the sell off across all asset classes also came as no surprise (click here for that prediction). The flight to quality has given another shot of adrenaline to the dollar against my core shorts, the yen and the euro,both of which broke down to new lows for the year today. Most fascinating is that my April surprise came through too (click here for the report). The withdrawal of the Fed at the beginning of the quarter as the sole purchaser of real estate debt in the market, led not to a crash in bond prices, but a huge six point rally, sending yields into the dump. With the coming collapse of the Treasury market the new mantra among traders, it turns out everyone was short! Once again, Shanghai's status as a canary in the coal mine for all global markets is reaffirmed (click here for the explanation). Where am I going to buy the dip first? Shanghai.The hedge fund managers who saw all of these complex pieces fitting together and positioned for it made multiple killings. Those who didn't, have joined their furry cousins at the bottom of the cliff.
A Dead Lemming, RIP
Featured Trades: (UBR), (UPV), (UMX), (UXJ), (TMV)
1) The Leverage Window Just Opened Wider. Just as the public debate on risk control gets underway on Capitol Hill, a number of instruments have been launched that will allow unsophisticated retail investors to ramp up their leverage, big time. It's like handing out free fireworks right after your hometown burns down.? Last week, Proshares launched a gaggle of new leveraged ETF's on key benchmark international stock indexes that give individual investors opportunities to bet the ranch in ways they previously never thought possible. They include 200% leveraged long ETF's on Brazil (UBR), Europe (UPV), Mexico (UMX), and the Pacific ex-Japan (UXJ). These funds carry 0.95% expense ratios, rather hefty for index funds. Short versions of these ETF's already trade. While it's great to have a broader range of instruments to trade in the international arena, remember that these are truly double-edged swords. When you're right, the cash pours in; when you're wrong, you hemorrhage dollars like a hemophiliac spills blood. You also have the additional risks of tracking error, poor management, and liquidity. While on this topic, I'll mention another ETF which should carry a surgeon general's warning on every trade ticket, as with a pack of cigarettes. The Direxion Daily 30 Year Treasury Bear 3X ETF (TMV) gives investors a 300% short bet on the long dated Treasury bond. Triple the 4.6% current yield you are shorting and throw in the expense ratio, and long term investors are facing a 15% per annum headwind. Unless the US embarks on a Grecian style default on its debt in the very near future, it will be tough to make money holding this instrument. That is, unless you are a day trader, in which case, the cost of carry is zero. That is surely the purpose for which this potentially toxic instrument was intended.
Featured Trades: (Q1 GDP)
1) My Square Root Scenario is Happening. The 'square root' scenario that I have been forecasting for the US economy is coming to pass. On Friday, the Commerce Department's Bureau of Economic Analysis confirmed that the US grew at a 3.2% annualized rate in Q1, compared to a 2009 Q3 figure of 2.2%,? and 2009 Q4 growth of 5.6%. What's more, the recovery remains very lopsided, with only export oriented businesses booming and large swaths of the domestic economy, like construction and real estate, still struggling. Keep in mind that the S & P 500 over 1,200 is discounting growth continuing its torrid 3% or more growth rate for the rest of the year. It's all going to make this coming Friday's nonfarm payroll more interesting than usual. The whisper number is now calling for job growth of 200,000. A beat will deliver another leg up in the stock market, possibly to 1,250. A shortfall could trigger our annual summer correction. Whatever the outcome, Obama's political future may depend on it.
Featured Trades: (AUSSIE/EURO CROSS), (AUSSIE/YEN CROSS)
Featured Trades: (NEW YORK STRATEGY LUNCHEON)
1) Just a reminder that you only have a week left to buy tickets to my New York? Global Strategy Update. It will be held at 12:00 noon on Friday, May 7, at the New York Athletic Club. The club can be found at 180 Central Park South, New York, NY 10019. You can find me at the Presidential Room on the 10th floor. A three course lunch will be followed by a 45 minute PowerPoint presentation and a 30 minute question and answer period. I'll be giving you my up to date view on stocks, bonds, currencies commodities, precious metals, and real estate. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. I'll be arriving an hour early and leaving late in case anyone wants to have a one on one discussion, or just sit around and chew the fat about the financial markets. I look forward to meeting you, and thank you for supporting my research.
Featured Trades: (TBT), (TBF)
1) Treasury Bonds Are Not for Me. Last week's downward revision to Q4 GDP from 5.9% to 5.6% brings me to reiterate my advice to take profits in your long positions in the TBT, the leveraged short Treasury bond ETF. In the last year, the TBT has achieved seven 10% moves up in the $45-$50 range, and I expect this sideways grind to continue. A sale into a price spike on a positive nonfarm payroll number on Friday might be an ideal exit point. Better to take the bird in the hand than the ten in the bush. We're going to get more downward revisions to the headline GDP figures. Car sales have pulled themselves off the mat from 9.5 million annualized sales to 12 million, but it will take years to revisit past peaks of 16-20 million units. New home sales are crawling along a bottom at 500,000 units/ months, and probably will not recover in our lifetimes the 2.2 million annual units seen at the last peak. Interest rates are still at zero, and inflation a distant memory. We live in a low return world. As John Mauldin has pointed out, the velocity of money is collapsing, suggesting that a rate spike is still years off. In 2007, I received three credit card applications in the mail every day. Now I get a similar number of offers from foreclosure specialists. Remember also, that this leveraged short ETF has an effective cost of carry of negative 10%, which means you'll lose about five points a year just letting a position sit an grow hair on it. Mind you, I still think the 30 year Treasury bond is still the world's most overpriced asset. However, Armageddon will have to wait a little longer.
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