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Friday, February 8, 2008

Dennis Gartman and the Yen

Dennis Gartman of The Gartman Letter is somebody this Ninja greatly respects. Dennis is more often ‘spot on’ than not, as he has a finely tuned ear to financial market developments and many years of experience to rely on. When Dennis speaks or writes, we listen… and take note: As do a large number of traders and speculators.

So when Dennis voices his concern over the Yen, it is wise to take serious notice and position accordingly.

“Since '01, the trend has been inordinately clear as it moves "from the lower left to the upper right" as the Yen has weakened almost relentlessly against the EUR. From a low near 90 to its high near 170, the cross has trended steadily higher, consistent with the thesis that it was wise to borrow in Yen and to invest those funds elsewhere... anywhere... with increasing abandon. The proverbial "Mr. and Mrs. Watanabe" have done exactly that; they've sent the Yen denominated savings abroad in search of returns not available in Japan. Hence Japanese stocks have seriously under-performed stocks anywhere else in the world; the yen has weakened relative to all of the major currencies of the world, and the cross has served as a very, very good thermometer of the world's "fever" for risk.

We are now clearly at an important juncture for the cross and therefore, in our opinion, for the global economy.

The questions before the global economy may simply boil down to this one question: Will long term support between 150-155 hold? As we write, the cross is trading 155.50. Our concern is that 150 won't hold, and if that proves true, then the weakness in the global stock markets may be shockingly severe... so much so that we'd prefer not even considering that notion at the moment.

Of closer concern is whether 155 shall hold? We fear it shall not, at the same time hoping that 150 shall. If 155 is "given" and if that "given" holds for a day or so, 150 will be put to test. Further, if 155 is given, 12,000 on the Dow will be "given" also. Attention then must be paid.” –Dennis Gartman, 02/08/08

Related Posts:
The Yen As A Leading Indicator
Watch The Yen, Carry Trade Unwind

The Yen As A Leading Indicator

The Yen as a leading indicator worked well intraday yesterday. I mentioned it possibility yesterday in Watch The Yen, Carry Trade Unwind.

Ever since the Credit Crunch first hit, equities have been extremely sensitive to risk aversion and de-leveraging. The Yen best captures both these elements and captures them quickly.

This relationship was apparent early in the Credit Crunch:
(07/26/07) Yen Advances After Equity Declines Prompt Carry Trade Unwinds
(07/27/07) Bond Risk Soars by Record as Investors Flee Corporate Debt
(07/31/07) The Yen Carry Trade: Will They Put It Back On?
(08/17/07) Bernanke Flinches

This relationship will be most pronounced during times of financial stress and will gradually fade as the great global de-leveraging winds down.

Thursday, February 7, 2008

Watch The Yen, Carry Trade Unwind

Watch the Yen. Watch for the (forced) Carry Trade Unwind.
If the Yen falls, look for a bounce in equities.
If the Yen rises, look DOWN to find equities.
Nuff said.

Wednesday, February 6, 2008

Cramer Off His Meds, Calls for Housing Shortage!

This is just beyond ridiculous.
Jim Cramer is off his meds again.
This time he’s calling for a HOUSING SHORTAGE IN 12 MONTHS.

“If we get any tick up… I’m predicting a housing shortage and a bank stock shortage… right here…”

“I’m telling you there will be a housing shortage a year from now…”

“…I tell you to burn your house down, now I’m telling you to build one.”

How the FUCK does Cramer have a show on CNBC? I admit, watching him rage IS entertaining… but come on! You WILL DO YOUR ASS listening to this clown.

He got all caught up in the SHORT COVERING rally in the home builders.

Charts from Calculated Risk.
December Existing Home Sales

That Was Quick: Biggest Two Day Plunge in Years

That was quick: From 1396 to 1334 in two days.
Equity futures are up early this morning after Walt Disney and JDS Uniphase reported earnings that beat. After yesterday’s plunge, that is fair enough.

Rumors out of Europe are that Deutsche Bank will report massive subprime and derivative losses.

Did anybody notice the dollar strength yesterday? Despite the route in equities? Let me emphasize again: The Dollar Smile Theory.

Commodities are getting slammed on global recession talk. Should the dollar show a ‘safe haven bid’ as money is rapidly repatriated… well then that would just slam commodities. Even gold is not immune.

CDO Market Is Almost Frozen, JPMorgan, Merrill Say (Update2): “Buying and selling of collateralized debt obligations based on mortgage bonds, high-yield loans or preferred shares has ground to a near-halt, traders said at the securitization industry's largest conference.

The slowdown of the more than $2 trillion CDO market follows record downgrades in mortgage-linked securities last year. Some AAA rated debt lost all its value. CDOs, which have fueled unprecedented bank writedowns since mid-2007, repackage assets into new securities with varying risks.

Lighter trading volumes for asset-backed bonds and larger- than-typical differences between the prices at which they can be bought and sold have made valuing holdings difficult and dissuaded investors from purchasing the debt, said Sanjeev Handa, head of global public markets at TIAA-CREF.

Demand for new CDOs has stalled, with just one created in the U.S. so far this year, according to JPMorgan. The creation of CDOs dipped about 10 percent last year to $494.7 billion, according to the company. The figures include only issuance for which investor money was collected upfront.”

The rating agencies have been dragging their feet. So now, when the downgrades finally come in, they’re brutal:

“Fitch Ratings today said it may downgrade the $220 billion of CDOs it assesses that are based on corporate securities. The New York-based company said it may lower the notes by as much as five levels after failing to accurately assess the risk of debt that packages other assets.”

This also provides opportunities for nimble traders:

“Some buyers have been seeking out specific mortgage-tied CDO classes that won't ever be offering payments to investors again, said Richard Rizzo, a director at Deutsche Bank AG.

Those investors previously bet the classes would default by using derivatives called credit-default swaps. By buying the classes, they want to collect their windfalls sooner, as well as end the regular default-protection payments they owe, which may stretch on for more than a decade, he said.

Under about half of the swap contracts, Rizzo said, they can collect their windfalls sooner by delivering the class after a steep-enough downgrade to the bank that's taken their wager. The bank, which doesn't want to own the class, could then sell it to a similar investor.

“I've traded one bond that's worthless eight times this year,” Rizzo said. “So it's like, “How many times can I trade the same bond that's worthless for five cents?' It is kind of funny.””
God I love trading.

Tuesday, February 5, 2008

Bank Troubles, This Bounce Looks Exhausted

Rumors from Europe about Royal Bank of Scotland are giving equity futures the willies this morning. Apparently RBS has a $12.5 Euro funding gap and clearing problems. RBS is said to have gone to the ECB discount window.

Also, rumors are making the rounds of a ‘muni arb’ hedge fund getting into trouble.

No matter. The iTraxx index has been sneaking higher since late last week. Yesterday we took note of 1 and 3 month LIBOR also sneaking higher. Stress is creeping back into the system. It would appear that this bounce may have exhausted itself.

Yesterday morning the S&P 500 couldn’t tag the psychologically significant 1400 mark on the open. Prices opened lower and never closed the gap. That was the signal to close out any remaining ‘bounce’ longs and to get net short.

Some of the more interesting short positions I put on early yesterday are:

XLF (Puts)
BAC (Puts)
C (Puts)
XLB (Puts)
ES (Futures)

Tread carefully and make damn sure you’re flat or net short. To get you in the mood I present the following headlines for today:

Company Default Risk Jumps as Banks Toughen Lending Standards: “The risk of companies defaulting rose to the highest in two weeks on concern borrowers will find it tougher to raise cash after the Federal Reserve said banks are tightening lending standards.”

CDO Ratings to Fall as Losses Trigger Fitch Overhaul (Update1): “Collateralized debt obligations may be downgraded as many as five levels as mortgage-related losses force Fitch Ratings to review its criteria.

The biggest cuts will be to AAA rated CDOs that are based on credit-default swaps and aren't actively managed, according to ratings guidelines proposed by Fitch today. CDOs that package high-yield assets may be cut as many as three levels for the portions first in line for losses.”

Those SWEET SWEET AAA tranches weren’t those the invincible ones? Oh wait. Never mind. >grin<

European Services Growth Slows, Retail Sales Tumble (Update1): “Europe's service industries grew at the slowest pace in more than four years and retail sales dropped the most since 1995 after stock markets slumped, the U.S. economy faltered and inflation accelerated.”

Not pretty. Nuff said.

Monday, February 4, 2008

Fed CHANGES Really Scary Fed Charts

It looks like the Fed took the TAF (Term Auction Facility) borrowing out of the data calculation, thus neatly removing $50 billion dollars from the picture. See my original post here: Really Scary Fed Charts, Why Bernanke Will Furiously Cut

The original chart I posted did not yet include the January TAF results as they were only released on January 29th. I posted the charts on January 30th. Therefore, the chart was short $30 billion… making the real spike down much larger.

Removing TAF borrowings results in a less ‘distressing’ picture. TAF auctions are ongoing. The next one is on February 11th. We won’t know the results until February 25th.

Notice the change in the definition of the data on for 2007-12-01 has been changed in the notes to:

Observation Range: 1959-01-01 to 2007-12-01
Last Updated: 2008-02-01
Notes: Prior to 2003-01-01, the data are calculated as excess reserves minus total borrowings plus extended borrowings. From 2003-01-01 till 2007-11-01, the observations reflect excess reserves minus total borrowings plus secondary borrowings. From 2007-12-01, the definition changes to excess reserves minus discount window borrowings plus secondary borrowings.

TAF results to date:

Release Date: December 21, 2007

For release at 10:00 a.m. EST
On December 20, 2007, the Federal Reserve conducted an auction of $20 billion in 35-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 4.67 percent

Total propositions submitted: $57.664 billion
Total propositions accepted: $20.000 billion
Bid/cover ratio: 2.88

Number of bidders: 73

Release Date: January 29, 2008

For release at 10:00 a.m. EST
On January 28, 2008, the Federal Reserve conducted an auction of $30 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 3.123 percent

Total propositions submitted: $37.452 billion
Total propositions accepted: $30.000 billion
Bid/cover ratio: 1.25

Number of bidders: 52

The next TAF auction is on February 11th, 2008. The results will be announced on February 25th, 2008.

Term Auction Facility
Under the term auction facility (TAF), the Federal Reserve will auction term funds to depository institutions. All depository institutions that are eligible to borrow under the primary credit program will be eligible to participate in TAF auctions. All advances must be fully collateralized. Each TAF auction will be for a fixed amount, with the rate determined by the auction process (subject to a minimum bid rate). Bids will be submitted by phone through local Reserve Banks.

Everything you ever wanted to know about the TAF.

Money-Market Rates in Dollars Rise for First Time in a Week: “Money-market rates in dollars rose for the first time in a week.

The London interbank offered rate, or Libor, for overnight loans in dollars climbed 9 basis points to 3.24 percent today, its biggest one-day gain since Dec. 31, according to British Bankers' Association data. The three-month rate rose 5 basis points to 3.15 percent.”

Some stress is definitely creeping back into the system...