(YCS) Archives - Page 4 of 5 - Mad Hedge Fund Trader

Ben Gives Green Light to Bull Markets

I told you so!

Ben Bernanke?s decision not to taper $85 billion a month of Federal Reserve bond purchases came as a surprise to everyone, but me.

The reasons were legion. Blame Syria, blame the weak August nonfarm payroll, blame a near zero inflation rate, blame the coming debt ceiling crisis. The bottom line is that the numbers are just not there. The economy is growing at just a 2.5% annualized rate at best. A 7.3% unemployment rate isn?t exactly a security blanket. At this point in the economic cycle, nonfarm payrolls should be at 400,000, not well under 200,000. Ben is afraid that if he takes the training wheels off of the economy now, we?ll crash and burn.

The financial markets didn?t need to be told twice what to do. Stocks and commodities soared on the prospect at least six more weeks of maximum monetary stimulus. Bonds rocketed because there is now another $170 billion of government bond buying no one knew was coming. The ten year Treasury yield plunged from last week?s 3% high to only 2.70%.

Gold (GLD) and silver (SLV) finally had a good day because their yield disadvantage has been placed on a back burner. The barbarous relic screamed $55 to the upside. Oil (USO) was strong. Now that Syrian hostilities have been displaced by diplomatic initiatives, the focus is on renewed economic growth. If any of this sounds contradictory, you?d be right. Every trading market is seeing what it wants to see.

The dollar crashed against the euro (FXE), the Aussie (FXA), and the British pound (FXB), since an anticipated yield advantage for the greenback instantly vanished. The yen popped momentarily, but then gave up most of its gains because the fundamental arguments for it to further weaken are so overwhelming.

We did get some useful hints about the future. Although QE didn?t end today, it is unlikely to be still around in a year. The first actual rises in interest rates may not occur until the unemployment rate declines substantially below 6.5%. The Federal Funds rate is projected to be below 2% as far out as through 2016, far below the historical mean. Low interest rates are here to stay, taper or not.

The Fed?s move basically sets in stone my bullish scenario for stocks and other ?RISK ON? assets for the rest of 2013 (click here for My 2013 Stock Market Outlook?). A target for the S&P 500 of 1,780 looks good, and we might well see that figure print on the last trading day of the year.

It also makes the Mad Hedge Fund Trader?s model portfolio for the Trade Alert service look pretty clever. Right now, it is long US stocks, long the Australian dollar (FXA), and short the Japanese yen (FXY), (YCS). Did I mention that we are now up 44% on the year?

Ben?s September Surprise

It?s All About Larry

Newsletter

When I first heard about Larry Summers decision to withdraw his name from consideration as the next Chairman of the Federal Reserve, I thought ?Whoa! ?RISK ON, here we come.? I knew immediately that global stock (SPY), bond (TLT), and commodity markets would rocket and the dollar would crash (FXA), except against the Japanese yen (FXY), (YCS). That?s what we got in spades at the Monday morning opening.

This has to be one of the greatest left-handed compliments of all time. Who knew Summers choice to remain in the private sector would add 20 points to the S&P 500 and slash 10 basis points off ten year Treasury yields? The markets are saying ?Thank you for staying away,? in the loudest possible voice. It reminds me of the huge pop in Microsoft (MSFT) stock we saw in the wake of CEO Steve Ballmer?s retirement announcement. Is Summers really that bad?

You have to wonder if the guy who got fired as the president of Harvard University for his cantankerousness was the ideal pick to build a consensus among the sitting Fed governors, a group already known for outsized egos. The financial markets were afraid that he would deep six Ben Bernanke?s quantitative easing policy because it might reignite the inflationary fires far down the road.

After all, it wasn?t his idea, and his public comments about the hyper expansionary monetary policy were neutral at best. ?Not invented here? would have been a great reason to end the stimulus once the new governor takes up his post in January. This is why I have been predicting that a Summers pick by Obama would have chopped 10% off the Dow in a matter of days.

My long time friend, Federal Reserve co-chairperson, Janet Yellen, is now the no brainer winner here. For a start, her co-chair position makes it an easy transition to the top job that will be welcomed by the markets. She is widely loved and respected at the UC Berkeley Haas School of Business, where she taught for many years, and where I also have been known to address the occasional class.

She is already viewed as an ultra dove who will keep QE initiative alive and well. Fed governors tend to be more representative of their local economy than national trends. Texas governors reflect what is happening in the oil industry. As the most populous state in the nation, California governors are a mirror image of what is going on in the housing market, the Golden State?s largest industry. Education and technology are not far behind.

That is great news for the rest of us. A housing priority means keeping interest rates lower for longer. It will not only help the real estate market, but all ?RISK ON? assets as well. It makes our jobs as traders easy. You just close your eyes and BUY. That?s why stocks are inches short of all time highs as I write this.

I have been ramping up risk in my model-trading portfolio all month, as have most other hedge fund managers. But I was doing so for different reasons. I did not believe Bernanke would taper this month, as the economic data are lukewarm, at best. I thought a taper no show would send markets soaring, and was positioned accordingly. It turns out that a Summers no show has the same effect. It?s all a classic example of ?The harder I work, the luckier I get.?

Which begs us to ask the question, ?Is Yellen really that good?? the permabulls shouldn?t get too deep over their heads here. The things that Janet looks at to track the health of business activity are starting to light up. Housing in San Francisco is up a blistering 32% YOY. And Silicon Valley is probably the only part of the country that is seeing real wage inflation. There are rampant bidding wars here for competent computer programmers and engineers. Soaring asset and wage prices are the traditional reason for the Fed to throttle back and raise interest rates. Therefore, the ultra easy monetary policy the markets expect from Yellen may, like Larry Summers, be dead on arrival.

Obama also has an opportunity here to address a frequent complaint from his base, that he hasn?t been appointing enough women in senior positions in his administration. Here is a great one all tied up with a bow and ready to go.

Janet Yellen grew up in the Bay Ridge section of Brooklyn, New York, from which the Italian branch of my OWN family originates. She graduated summa cum laude from Brown University (I thought they didn?t give grades?), and went on to get a PhD from Yale, where she rubbed shoulders with Hillary Clinton.

She started work as an economist at the Federal Reserve in 1977. Her first political appointment came in 1997 when Bill Clinton named her to the Council of Economic Advisors. From 2004-2010 she was president of the Federal Reserve Bank of San Francisco, where she was a voting member of the Federal Open Market Committee. In 2010, Obama made her vice chairperson of the Federal Reserve.

Oh, and for good measure, her husband, George Akerlof, has a Nobel Prize in economics. The kitchen talk must be fascinating.

A woman in charge of the national purse strings? Yikes! There goes my bowling allowance!

Next Up for Bernanke?s Job

Why I?m Doubling My Yen Short

Newsletter

The summer us coming to a close this weekend, and the longer term, fundamentally driven trends that have been sunning themselves at the beach are about to reassert themselves. The sideways churning moves on low volume that started as early as March are about to come to an end. Therefore, it is time to bulk up my portfolio.

So I am taking this opportunity to double up my short position in the Japanese yen, the currency that everyone loves to hate. My existing (FXY) September, 2013 $103-$106 bear put spread is now well in the money and expires in 15 trading days. Today?s alert doubles my exposure and takes in additional premium by going one month further out to October.

I have written endlessly on the fundamental case for a weak yen for the past two years (for a link why you should sell short the yen, please click on any of the following: ?http://madhedgefundradio.com/rumblings-in-tokyo-2/, http://madhedgefundradio.com/new-boj-governor-craters-yen/,? http://madhedgefundradio.com/new-boj-governor-crushes-the-yen/).

From a technical point of view, what is unfolding here is classic chart reading 101. When you get a huge move over a short period of time, such as the 25% collapse in the yen that started in November, the consolidation and digestion period that follows can be very long. In March, I was warning it could be as long as six months, and that is exactly what we got. My friend, Mad Day Trader, Jim Parker, agrees with me. Whenever that happens, you always want to run a double position.

Japanese portfolio managers and corporations have now had half a year to realize their windfall profits on their foreign investments in dollar denominated assets. That was generating hundreds of billions of dollars of dollar selling and yen buying that was supporting the beleaguered Japanese currency, no matter how lousy the fundamentals.

That support is about to end. Whoever has not sold their yen by now is in for the duration, or at least until the next 10% drop, which may be upon us. A breakdown to new lows could take us as far as ?110 in the cash market, or $88 in the (FXY).

For those who can?t play the options markets, better to just buy outright the ETF (YCS).

In the end, this is a bet that Japan will continue to expand its monetary base at a breakneck rate. My friend, Bank of Japan governor, Haruhiko Kuroda, has nailed to the mast his intention to double his country?s money supply in two years. Now that Japan?s economy is growing at a 3.5% rate, the fastest in the industrialized world, this radical, last-ditch monetary policy has the merit in that it is working.

Therefore, it will continue, if not accelerate. In my book, it means it is time to double up.

Time to Double Up

The Yen Carry Trade Blow Up

Newsletter

When I staggered downstairs at 11:00 PM to check the close for the Tokyo stock market, my eyes just about popped out of my head. Yikes! Down 6.3%! The yen was up another 2% to ?94 against the US dollar as well!! It looked like the world was in for another round of ?RISK OFF? with a turbocharger. Fasten your seatbelts, and pack an extra pair of shorts.

So I called an old friend in Japan who always seems to know what is going on whenever the wheels fall off there. Ed Merner is the CEO of the Atlantis Japan Growth Fund (LSE-AJG), who has long been rated the number one stock picker in the Land of the Rising Sun. Ed?s fund, which trades on the London Stock Exchange, was, at one point, up a gob smacking 53% this year without a stitch of leverage.

When the ink was barely dry on the US Japan peace treaty in 1950, Ed?s father uprooted his family from the rural High Sierra hamlet of Truckee, California, and moved them to Tokyo. That gave him a front row seat to the economic miracle that followed in the fifties and sixties.

Ed started managing money just a few years before me, in 1970. He toiled away as a portfolio manager at Schroeder?s & Co. in Tokyo for 25 years and then launched his own firm in 1995. Ed, who is a fascinating individual and a genuine nice guy, is the man I always turn to for my long-term view on Japan. Suffice it to say, Ed knows which end of a piece of sushi to hold upward, and is said to be able to snatch a fly midair with a pair of chopsticks. His Japanese is flawless, and he is now regarded as a local celebrity.

Ed says that the ?Rebirth of Japan? story is anything but over, and in fact, is just getting started. He thinks that the Nikkei index could soar from the current ?12,445 to above the 1989 all time high of ?39,000 in years to come. What we are seeing now is a long overdue rest for the world?s best performing major stock market. Bank of Japan mouthing?s of empty platitudes, rather than concrete action is what triggered the current rout.

Much of the money that went into Japan this year was of the hot, algorithm driven variety. You saw this in the dominance of the index names in trading, like Sony (SNE), Toyota (TM), and Honda Motors (HMC). Individual stock picking almost ceased to exist as an investment strategy. When the same hedge funds all tried to unwind their Japanese stock longs and yen shorts at the same time, you got the predictable flash fire in the movie theater. Margin calls became the order of the day.

As the index money leaves in this correction, it will be replaced by more traditional mutual fund and individual investors, who have a more stable orientation. Stock selection will become more fundamentally driven. That?s when Japan transitions from the flavor of the day to a serious core investment.

Now is about the time you should expect that to happen. Japan?s upper House of Councilors election will take place on July 21, and Prime Minister Abe?s ruling Liberal Democratic Party will win by a landslide. After that, you can expand Abe?s plans for an overdue major restructuring of the economy to mature from idle speculation to specific proposals. That is what the market wants to hear. Until then, he is loath to ruffle political feathers. He is going to have to break a lot of eggs to make this omelet.

On the table in his ?Third Arrow? plan are deregulation of virtually all financial markets, modernization of the health care system, immigration reform to open the way for more foreign workers, and rationalization of a bloated government bureaucracy. International trade will get streamlined and capital investment incentivized. More infrastructure spending will be aimed at maintenance and repair, so there will be no more ?bridges to nowhere.?

Oh, and he wants to enable the national pension fund system to step up its purchases of Japanese stocks. Abe wants to compress all of the deregulation that the US has enacted in the past 30 years into the next three.

The truly encouraging thing here is that Abe?s early actions are already bearing fruit. ?Arrows? 1 and 2 put the country on track to double its money supply in two years and paved the way for a staggering $150 billion in new public works spending. The crash in the yen this prompted is causing corporate earnings to go through the roof. Those results will be reported in the fall.

Then, the best company performance in two decades and a national reorganization plan on the scale of Roosevelt?s New Deal will be the impetus for the next leg up in the Great Japanese Bull Market of the 2010?s. That is why I banged out Trade Alerts on Wednesday to buy Japanese stocks through the Wisdom Tree Japan Hedge Equity ETF (DXJ) and sell short the yen through the Currency Shares Japan Yen Trust ETF (FXY) and the Proshares Ultra Short Yen ETF (YCS).

Atlantis Japan Growth Fund

Use the Dip to Buy Japan

Learning in the School of Hard Knocks

Newsletter

I always believe that any loss you don?t learn from is a loss wasted. One reason I know so much is because I have suffered a lot of losses, mostly at my own expense when I was young and stupid, well before the Trade Alert Service started.

So what did we learn from our most recent ill-advised attempt to profit from selling short the Japanese yen against the US dollar? Let me count the ways.

1) When the world?s largest short-term positions all key off of the identical stop loss points, watch out! The 15 minute 3% move we saw today was one of the sharpest in the 40-year history of the free floating foreign exchange markets. This is the bitter fruit of a crowded trade.

2) No one ever got fired for taking a profit. At one point, we had a 1.40 profit on this trade, leaving only 40 basis points left to expiration, instead of a -1.95% loss.

3) When there is nothing to do, don?t do anything.

4) Watch those stop losses. I think I?ll include underlying stop loss points in my Trade Alerts from here on out. It took an 8% move in two weeks to take us out of this one, which is unbelievable for the foreign exchange market. I thought a 5% safety margin was more than enough room to take us into expiration, but I was wrong. These days, the unbelievable happens on a regular basis, both on the upside and the downside.

5) Limiting position sizes to 10% of your total portfolio is a total winner. That?s why I?m laughing now, instead of crying, or looking for a new job on Craig?s List. At a certain point, leverage quits being investment and become reckless gambling.

6) Next May, sell and go away!

7) Never complain that I am not sending out enough Trade Alerts. I can understand why you want as many as you can get, as 90% have been profitable this year. Doing nothing doesn?t mean I have suddenly become lazy in my old age, am out spending my millions, or am developing dementia. It means the current risk levels in the markets are extremely elevated, as I warned you all many times, that the risk/reward ratio totally sucks, and that you are better off making room in your sock drawer for your cash than placing it in the market. ?Nothing to do? really does mean ?nothing to do.?

The next time you are in a hurry to get another Trade Alert, take a look at the profit and loss in this yen trade. Read it and weep.

Japan is Just Getting Started

Diary, Newsletter

Constantly chained to my MacBook Pro at home writing this letter, it is not often that I am in the room when a major market-moving event occurs. That is what happened at the SkyBridge Alternatives Asset Conference (SALT) in Las Vegas on Thursday (click here for the link at http://www.saltconference.com/).

I was listening to one of the legendary titans of the hedge fund industry make the case for Japan. According to the rules of engagement, I can?t tell you who he was, or I would have to kill you. I don?t want to do that because if you?re dead, you might not renew your subscription, and that would be bad for business. But I can pass on the gist of his arguments, which are already well known to the readers of this letter.

He said Japanese companies have tremendous leverage to a falling yen. The Bank of Japan was doing what was necessary to move the yen down from ?100 to ?110 to the dollar. The game changer will come when the government announces its restructuring plan in a few months.

Therefore, Japan?s TOPIX Index at a 13-14X earnings multiple looks cheap. That?s why his fund has been running a major long Japanese stock/short yen position since last year. If he is right, a Nikkei average of 20,000 is in the cards, up another 36% from last night?s close.

I was watching the Currency Shares Japanese Yen Trust (FXY) tick on my iPhone 5s as he spoke. It immediately gapped down 100 basis points. I surveyed the room and saw many heads bowed, fingers furiously typing the news to trading desks, or entering their own ?SELL? orders into online trading platforms.

That smashed the cash market through major resistance at the ?100 barrier, a new four year low. If I had been as digitally endowed, I would have sent out my own Trade Alert to dump the yen. But I?m not. By the Friday opening the next day, (FXY) had given up an additional 100 basis points.

I had been holding back on selling the yen in recent weeks for several reasons. First, we have covered a lot of ground very quickly, the beleaguered Japanese currency plunging 25% in just six months. That is prompting Japanese owners of the $2 trillion in direct and indirect foreign assets to realize some of the recent $500 billion in paper gains. That creates yen buying and downward pressure on the dollar.

Finally, my own trading gains have been so enormous this year, up some 35%, that I am becoming less inclined to stick my neck out and take inordinate risks. Trading has become more of a cherry picking game.

However, the yen?s move through ?100 has been so violent, and on such big volume, that it looks like the real deal. That means the old ?100 upside resistance level now becomes support. That equates to $101.00 in the (FXY). So my (FXY) June, 2013 $100-$103 in-the-money bear put spread actually looks pretty cautious.

This lines up nicely with my own long term downside target for the yen of ?150. This may sound like one of those outrageous predictions one finds so often on the Internet. For me it is not such a stretch. When I first arrived in Tokyo in 1974 and Nixon was taking the US off the gold standard, the yen had just devalued from the old Dodge Line of ?360 to ?305. The move I am predicting represents a give back of only a quarter of the gains since then.

If I am right, it would make my hedge fund friend?s upside predictions for the Nikkei look downright conservative. It would take the ProShares Ultra Short Yen ETF (YCS) from $68 to over $110. It would also boost the Wisdom Tree Japan Hedge Equity ETF (DXJ) from $49.67 to as high as $100.

I indicated to readers at the beginning of the year that this could be the trade that keeps on giving, like having a rich uncle. It looks like, so far, I am right.

Looks Like We?re Just Getting Started

New BOJ Governor Crushes the Yen

Newsletter

Wow! What a day! In perhaps the most dramatic policy move by any central bank, anywhere in history, the Bank of Japan pulled out all the stops to stimulate its moribund, demographically challenged economy. Japan is now lapping its competitors in Europe and the US in the international race to the bottom.

The markets certainly got the memo. Japan?s beleaguered currency collapsed nearly 4% over night, one of the biggest single day moves ever. The ten-year Japanese government bond yield plummeted to a breathtaking 44 basis points, another record low, making our own Treasuries look positively high yield. The Japanese stock market rocketed.

I was busier than the proverbial one-handed paperhanger. There?s nothing like waking up early in the morning and finding that your largest short position has just enjoyed one of the sharpest falls on record. It doesn?t get any better than that in hedge fund land.

So I shipped out the Trade Alerts as fast as I could write them, burning up the national broadband covering those shorts. I also took profits on my short in United Continental Group (UAL). I then turned around and plowed some of my profits back into an increased short position on the S&P 500 Index.

The actions on the new BOJ governor, Haruhiko Kuroda, who only moved into his office on Monday, were nothing less than mind blowing. He plans to double the money supply in two years. He broadened the range of instruments it plans to buy to cover everything from 20 year government bonds to equity ETF?s. No time wasted getting one?s feet under the desk here!

Quantitative easing will be increased to $82 billion a month, nearly the same as Ben Bernanke?s munificent efforts. Keep in mind that Japan?s economy is only one third that of the US. It is the most inflationary and currency depreciating set of policies since Indonesia?s hyperinflation of the 1960?s. All of this, just to get the country?s inflation rate back up to 2% after decades of negative real numbers.

While the yen made it back up to ?95.6 this morning, we are clearly targeting ?100 in coming months. That has the ETF (FXY) falling from today?s $101.60 to $96, and the leverage short ETF (YCS) rising from $61.4 to $67. Use every two-point rally to slam the daylights out of the yen on the short side. That has been my advice for the past six months, and I?m going to stick with it as long as it is working.

Get to 100, and the international community will rise up against Japan?s obvious efforts to grow its economy at their expense. Korean companies are getting slaughtered by the six-month, 20% devaluation of the yen against the Won, rendering their exports prices uncompetitive. China is also pretty unhappy, and could well step up their military posture as a way of expressing its displeasure. Then, watch the fur fly!

I See You a Trillion and Raise You Two Trillion

New BOJ Governor Craters Yen

Newsletter

At long last, Japanese Prime Minister, Shinzo Abe, has appointed a new governor to the Bank of Japan, Haruhiko Kuroda.

The foreign currency markets responded immediately, taking the Japanese yen down to ?94.60, a new three year low. It also broke new ground in a range of currency crosses, including Euro/Yen, Ausie/Yen, and Kiwi/Yen. It even weakened against that other despised asset class, gold, plunging to ?152,500. No surprise there.

I have known the good Mr. Kuroda for years, back when he was the Ministry of Finance official responsible for monetary affairs. He has a keen wit and a decent sense of humor that is rare for a Japanese government bureaucrat.

Most recently, I have bumped into him at various international economic forums in his capacity as president of the Asian Development Bank. Our running inside joke is that I go there to obtain English lessons from him, his being so incredibly fluent. That?s what a Master?s in Philosophy from Oxford University will do for you.

Kuroda?s language talents could well come into heavy demand in the coming months and years. He will have to explain to other developed nations why Japan has no choice but to collapse their currency to rescue its economy, at their expense. I believe the yen could fall to as low as ?150 in the years to come. You start hitting international political resistance at ?100.

So it is likely to be a long and drawn out battle. Expect to see a lot of dire headlines from the US government owned auto industry, and their for-hire congressional representatives. I saw this entire movie play out during the early 1980?s with the predictable end result that Japanese language ability is now a great advantage when looking for a blue-collar job in Ohio, Tennessee, Indiana, and Kentucky.

Kuroda?s appointment is a clear signal to the rest of us that the Abe government will be as aggressive as humanly possible in their yen weakening efforts. For those of us who trade, it means selling the current Berlusconi inspired rally in the yen, which may prove to be ephemeral, and buying the dip in the leveraged short yen ETF (YCS). The starting gun has been fired, and the leg to ?96 has begun.

Time to Start Selling Yen Rallies Again

Rumblings in Tokyo

Diary, Newsletter

I spent ten years of my life tramping in and out of Japan?s Ministry of Finance headquarters in Tokyo?s Kasumigaseki district. It was a dreadful reinforced steel and concrete affair with a dull grey tile siding that was so solidly built that it was one of the few structures in the city to survive WWII. But the building offered spacious prewar dimensions, with lovely high ceilings, and I never tired of walking its worn hardwood floors. I was there so often that some government officials thought I worked there, and they did eventually give me an office, the first ever granted to a foreign correspondent.

So to get an update on the Land of the Rising Sun I called a senior official whose father I knew well as a Deputy Minister of Finance for International Affairs during the 1970?s. I was a regular at his apartment in Shinjuku on Saturday nights, where we spent endless hours alternately playing chess and Scrabble over a bottle of Johnny Walker Red and smoking acrid Mild Sevens. We did everything we could to expand each other?s? Japanese and English vocabularies with the words not found in dictionaries. When the bottle was almost finished and his face was beet red, the Elvis impersonations would start.

My friend told me that the ongoing strength of the yen is rapidly becoming a major political issue in Japan. The spot market is threatened an all-time high only three months ago, and on a trade-weighted basis it was already at a new peak. Exporters were getting destroyed by the strong yen, which was making their goods increasingly expensive in a cost cutting competitive world.

This was forcing them to accelerate a 20-year effort by corporations to offshore production to China, which was ?hollowing out? Japan, and causing economic growth to bleed away, and unemployment to rocket. The situation was getting so bad that American companies that offshored jobs to Japan years ago, like Caterpillar (CAT), were taking them back home because labor costs are so high. His fears were confirmed by a Japanese GDP that shrank in Q4, 2012.

His masters have made repeated comments in the Diet, the Japanese Parliament, made comments in the Diet this week about his concern over yen strength. More specifically, the road is now clear is seeking approval for a much more aggressive stance to pursue Bernanke style quantitative easing to knock the stuffing out of the yen and stimulate the economy.
This time, the ministry has much more ammunition to work with. Japan has been running its first trade deficit in 30 years. This may not be an anomaly. In response to the tsunami induced melt down at the Fukushima plant, Japan is permanently shutting down a large part of its nuclear power generating capacity. At its peak, nuclear accounted for 25% of the country?s electric power supply. That is forcing a huge surge in oil imports from the Middle East that has greatly tipped Japan?s balance of trade against it. Crude?s recent surge from $84/barrel to as high as $98 has only made matters worse.

He then told me that, he too, was now learning to play Scrabble and asked me for my list of words where the letter ?Q? is not followed by a ?U?. I said that I was not inclined to disclose America?s most valuable trade secrets to a foreign competitor. However, in deference to his late father, he couldn?t go wrong starting with ?Qi?, ?Qabala?, ?Qadi?, ?Qaid?, ?Qat? and ?Qanat?. I hung up the phone and immediately sold more yen against the dollar.

Look at That Yen!

Newsletter

All of those years spent living in rabbit hutch sized apartments, getting hand packed by white gloved railway men into rush hour train cars, and learning an impossible language, are finally paying off.

I have to tell you, I really have to think hard to recall a plunge in a major currency that has been as dramatic as the yen?s over the past two months. Since the Mid-November route began in earnest, the cash market has collapsed from ?76.80 to ?92.60 to the dollar. That has taken the ETF (FXY) down from $126.30 to an eye popping $105.50. The double leveraged short ETF (YCS) soared from $42 to $57.93. It?s a good thing that I was short the entire time.

In fact, I have devoted 20% of my entire capital to short yen plays since the beginning of the year. Newly elected Prime Minister, Shinzo Abe, was my willing coconspirator this week, announcing one of the most ambitious, expansionary budgets in history. The vice governor of the Bank of Japan chipped in, suggesting that the yen had more room to fall. Another senior government official suggested that ?100 to the dollar might be a reasonable target. It seems that any time someone in Tokyo says ?boo?, another round of yen selling by traders ensues.

But like all good things, this trade is getting rather long in the tooth. I?ll tell you how this is going to end. When the cash market declines to ?96 to the dollar, the grumblings about unfair import competition by the US car industry will escalate to an uproar. At ?100 to the dollar it will balloon into a full blown trade dispute. So get ready to start hearing a lot about Japan?s unfair manipulation of their currency to undervalued levels, especially from congressmen from Midwest states with large car plants.

The yen will probably fall short of that. The last time this happened, in the early 1990?s, the US was afraid that Japan was taking over the world. Our country was recoiling from a Japanese share of the American car market that had ratcheted up from 1% to 43% in just 20 years. Remember the tome ?Japan is Number One?? You have to laugh now.

Those fears abated long ago. A Japanese collapse on the scale of an IMF bailout is now much more likely than Japanese dominance. It?s tough to smack down an international competitor that is trying to claw its way up after 20 years on the mat. One complicating factor this time is that the principal lobbyist against a stronger yen is now US government owned, General Motors (GM).

I get emails every day from readers asking if they should initiate, double up, or triple up their short positions in the yen. As of today, I am saying no more. My best-case scenario had Japan?s beleaguered currency plunging to ?92 over the course of the next several months. Here we are over that figure in just ten weeks. So at best, a short yen position is a ?HOLD? here. Don?t chase it any more. Remember, hogs get fed, but pigs get slaughtered.

Japan is not an entirely bad place. Certainly the world would be a duller, more boring place without sushi, sake, hot tubs, and karaoke. And I never heard anyone complain about those coed public baths. Too bad I could never find a pair of sandals that fit.

Six Month Chart