Global Money Trends Magazine
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February 16, 2007
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Dow Jones Industrials Eyes 13,000
by Gary Dorsch, Editor
In the land of Goldilocks, all negative news is twisted with a bullish spin, and positive
news of course, is ample reason enough to bid prices higher. With the Dow Jones
Industrials zeroing in on the once un-imaginable 13,000-level, even the radical
inflationist, Bank of England chief Mervyn King quipped on Feb 14th, “When you see a
conjunction of money and credit and asset prices, nominal spending and liquidity
around the world all growing quite rapidly, some questions marks start to arise.”
News that DaimlerChrysler (DCX.N), the #5 automaker by global sales, said it would
eliminate 11,000 hourly union workers, 9,000 in the United States and 2,000 in
Canada, sent DCX.N up more than 8% on the NYSE to its highest level since June
2002. With Chrysler, the Detroit-based automakers, including General Motors GM.N
and Ford Motor F.N, have cut more than 80,000 factory jobs in the past year.
HSBC bank HBC.N is not listed in the Dow Jones Industrials (DJI), but it is the world’s
third largest bank, behind Citigroup and Bank of America. HSBC’s shares slumped to a
9-month low on Feb 8th after Europe’s biggest bank announced its bad debt charge
last year would be a whopping $10.6 billion, or $1.8 billion higher than expected as
defaults grew in its sub-prime US mortgage lending.
Suddenly, the US housing downturn went from being a question of housing starts,
permits and sales, to having a widening impact on US banking shares. Shares of top
US mortgage lender Countrywide Financial CFC.N fell 2.6%, and luxury home builder
Toll Brothers TOL.N stock slid 3%, after it forecast a 19% drop in home-building
revenue. US homebuilder share fell for five straight days, their worst spell since
August. But in a goldilocks scenario, all dark clouds usually have a silver lining.
The DJI is climbing along an upward sloping trend-line to the 13,000-level.
(Only a close below the 12,550-level would spell trouble and a slide to 12,350).
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Global Money Trends Magazine
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February 16, 2007
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Federal Reserve Chairman Ben Bernanke laid out the “silver lining” for the DJI on Feb
14th, in testimony before the Senate Banking Committee. “Overall, the US economy
seems likely to expand at a moderate pace this year and next, with growth
strengthening somewhat as the drag from housing diminishes. There are also some
indications that inflation pressures are beginning to diminish,” he said.
But the Fed chief said it was hard to forecast prices for crude oil and other
commodities adding, “They remain a key source of uncertainty to the inflation
outlook.” Still, the Fed’s preferred “core inflation” price index, minus food and energy,
is expected to be 2% to 2.25% this year, and to edge down to a range of 1.75% to
2% in 2008. “The recent readings on inflation have been encouraging,” he said.
Thus, reading between the lines, Bernanke is laying the groundwork for Fed rate
cuts later this year, the “silver lining”, behind the worrisome deterioration of the
sub-prime mortgage loan market. Greater doses of liquidity are required to keep
highly inflated stock markets moving higher and relieve budding pressures in the
mortgage lending market. To stay ahead of massive monetary inflation, macro
traders have two primary choices, stock market ETF’s or precious metals.
With 373 of the Standard & Poor’s 500 companies having reported results so far,
fourth-quarter earnings are projected to rise 10.1% from a year ago, barely
extending the S&P 500’s streak of double-digit earnings growth to 18-quarters. But
Q’1 and Q’2 earnings are expected to grow only 6.5% and 5.5% respectively. Thus, in
future liquidity driven rallies, gold should outperform inflated blue-chip stocks.
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Global Money Trends Magazine
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February 16, 2007
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Rising stock prices along with slowing earnings growth could lift the P/E for the S&P
500 towards 20 from 17 today, if it reaches the Fed’s upside target of 1550. That
could make stocks much riskier than gold, which can retain its value as a safe haven
from financial panics. Last week, the DJI to Gold ratio tumbled to critical support at
18.9 oz’s, as the yellow metal outperformed the blue-chip indicator. After a short
lived bounce, GMT expects the DJI /Gold ratio to break-down below 18.9 oz’s.
If correct, it would signal a further decline for the DJI /Gold ratio to its next support
at 17.5 oz’s in the weeks ahead. The catalyst could be a weaker than expected US
economy, central bank diversification out of the dollar and into gold, or a surge in oil
prices. Although it’s perfectly sound to buy DIA (Dow Industrials ETF) and GLD (gold
tracker share), GMT expects gold to outperform the DJI to the upside.
If correct, an expected DJI rally to 13,000, accompanied by a drop in the DJI /Gold
ratio to 17.5 oz’s would translate into a gold price of $743 /oz.
Yet schizophrenic hedge fund traders in gold miner shares are skeptical of gold’s rally,
and don’t believe the yellow metal can sustain a rally above $700 /oz. South Africa’s
Gold Fields GFI.N and Canada’s Agnico Eagle AEM.N are issuing large blocks of stock
to acquire other miners, diluting their share values, but also bolstering their longterm reserve life, for an asset that is bound to go higher. More takeovers put more
gold into fewer hands, lending gold miners more control over prices. Gold miners
are now at attractive levels compared to the price of gold.
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Global Money Trends Magazine
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February 16, 2007
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The Gold Bugs Index, (HUI) of 14 un-hedged gold miners, has been losing ground to
the price of gold, falling from as high as 0.56 to as low as 0.50, before rebounding to
0.52 today. South Africa’s Goldfields, Harmony Gold, and Randgold suffered 15%
devaluations, but are finding a floor and no longer undermining the HUI Index.
Gold has entered
the $650 to $675 /oz
trading range, and
should
find
stiff
resistance at $675
in late February.
Fed chief Bernanke
engaged in psycho
warfare
with
gold
traders on Feb 15th.
“If inflation becomes
higher
for
some
reason, then the Fed
would
have
to
respond to that by
raising
interest
rates,” he warned.
But with flat retail
sales in January and
trouble for mortgage
lenders, GMT thinks
Bernanke is bluffing.
With gold breaking out above the psychological $650 /oz level, the IMF’s Managing
Director Rodrigo Rato threatened to sell 400 tons of its 3200 tons of gold reserves,
spread out over several years, as part of a wider solution to its flawed income
system. But the IMF sales are expected to take place under the existing European
central bank framework of limiting total gold sales each year to 500 tons.
Meanwhile, Tokyo
gold
traders,
are
buying the metal as a
hedge against a weak
Japanese yen, and
lifted gold to a 21year high of 81,500yen /oz this week.
The
Group
of
Seven
central
bankers
did
not
pressure Japan to
raise its interest rates
to boost the yen.
Against a basket of
currencies, the yen is
at its lowest level
since
September
1985, and hitting a
14-year low against
the British pound.
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Global Money Trends Magazine
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February 16, 2007
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Tokyo gold is the locomotive behind gold’s global rally and one can observe
gold trading higher in Asia, before European central banks depress the price with
sales at the London opening. Still, GMT expects Chinese and Japanese traders to
carry the yellow metal higher in 2007. Tokyo gold hit GMT’s initial upside target
of 82,000-yen, and a profit-taking to 76,000-yen /oz is possible.
The catalyst for such a pullback to 76,000-yen could be a baby-step rate hike by
the Bank of Japan to 0.50% in March, but that wouldn’t violate gold’s longer-term
uptrend. Tokyo gold’s break-out from its perfectly symmetrical pennant formation,
projects an eventual to rally to 94,000-yen /oz. If correct, an Asian stampede can
also inspire gold higher to 540 Euros /oz, and to $740 /oz against the US dollar.
Senior Democrats dispute US Treasury Secretary Henry Paulson’s assertion that the
value of Japan’s yen currency is fairly set in the currency markets. “We believe that a
weak yen is a reflection of Japanese government policy,” said Charles Rangel, Barney
Franks, John Dingell, and Sander Levin. “The Japanese government should be selling
its massive reserves, thereby changing the imbalances with the dollar and the Euro.”
However, Paulson sided with Tokyo at the G-7 meeting, urging Japan to keep its
interest rates artificially low, which in turn, helps to keep US bond yields artificially
low. The Bush administration has overseen the loss of 2.8 million US manufacturing
jobs, as US based factories struggle to compete with Chinese and Japanese imports,
made cheaper with a weak yuan and yen. That’s the price the US must pay to attract
surplus capital from Asia in order to keep long-term mortgage rates artificially low.
Tokyo has complete mastery over the Japanese bond market, confining movements
to a designated trading range. By pegging its overnight loan rate at 0.25%, the Bank
of Japan has locked the 10-year Japanese bond yield in a tight range of 1.60% to
1.80% for the past five months. That is turn, has kept the US Treasury’s 10-year
yield in a range between 1.50% and 1.90% since September.
Since Japanese bond yields do not compensate local investors for the devaluation of
the yen, Japanese traders are seeking alternatives such as gold, higher yielding bonds
in foreign currencies, or export oriented Nikkei stocks. Japanese investors bought 21
trillion yen ($174.7 billion) in foreign bonds in 2005 and 2006, or $1.7 billion each
week. Japanese overseas mutual funds ballooned by 14.5 trillion yen in that time.
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Global Money Trends Magazine
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February 16, 2007
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US Treasury and the Fed keep Housing Sector Rally Intact
Warnings of losses stemming from bad home loans from two of the top three US subprime mortgage lenders, HSBC Holdings Plc and New Century Financial NEW.N,
punished the US homebuilder market for five days. Traders were unconvinced that
the US housing market has stabilized after its worst decline in many years, especially
after Toll Brothers TOL.N said home-building revenue will fall significantly, while
shares of New Century tumbled over 30%, its largest daily loss since June 1997.
On Feb 8th, TOL.N said its preliminary home-building revenue fell 19% to $1.09 billion
in its fiscal first quarter, ended in January. First-quarter net contracts were off 33
percent to 1,027 units, while the value dropped 34 percent to $749 million. The firstquarter cancellation rate was 29.8%, down from the prior quarter's rate of 36.9%,
but still well above the company's historic average of about 7 percent.
KB Home KBH.N, posted a quarterly of $49.6 million, compared with net income of
$304.4 million a year earlier. The cancellation rate was 48% in the fourth quarter, up
from 31% a year earlier. Revenue rose 13 % to $3.55 billion, but gross margins fell
to 11.7% including the land charges, from a record 27.1% in the fourth quarter 2005,
in part because of sales incentives used to entice buyers.
Jeffrey Mezger, KBH.N chief executive said on Feb 13th, “We expect the next two
quarters to be challenging, with continued pressure on pricing until supply and
demand become more in balance.” Yet despite the barrage of bad news, the US
home-builder ETF rally, symbol XHB.N, remains intact on a technical basis, climbing in
an orderly fashion within a well defined upward sloping channel.
Furthermore, XHB.N managed to break-away from the tight grip of the US 10-year TNote market, which had captivated XHB.N for the previous two years. Homebuilder
traders bought former Fed guru “Easy” Al Greenspan’s advice from Nov 7th, “The
sharpest decline is over for housing as inventories of unsold homes decrease. This is
not the bottom, but the worst is behind us,” he said.
Thus, traders look for a silver lining in every piece of bad news for homebuilders, but
confidence the Fed will save the day with future rate cuts also helps.
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Global Money Trends Magazine
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February 16, 2007
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While the US
Treasury granted
Tokyo a free hand
to manipulate the
yen, with an easy
BoJ money policy,
the US Congress
is on a collision
course
with
Beijing over its
cheap
yuan
policy.
The US trade
deficit with China
reached
$232.5
billion last year,
up
15%
from
2005.
Imports
from China surged
18.2% to a record
$287.8 billion.
US Treasury chief Paulson told the Senate Banking Committee on Jan 31st, that it
would be very helpful for China to diversify its reserves to strengthen the yuan. He
was not overly concerned about China’s large holdings of US debt, saying “Given the
size of our debt outstanding, that is not at the top of the list of concerns”. On Feb
14th, Fed chief Bernanke said China was unlikely to use its huge US Treasury holdings
as a weapon against the US, as this would mean major financial pain for Beijing.
“I think the cost to them of doing this would be greater than the cost to us. A
substantial move on their part would be disruptive in the market in the short term. I
think in the longer term the dollar, the Treasury yields would largely recover.”
Bernanke noted Chinese holdings of US bonds was less than 5% of the total, which
while large “is not by itself enough to be a monopoly,” he said.
Since the start of Q’4, the US Treasury’s 10-year note, measured against the Chinese
yuan has lost 2.8%, while gold has climbed 13.7% against the yuan. Beijing was a
net buyer of $3.4 billion of T-notes in December, and owns a record $349.6 billion,
but traders are several steps ahead, and have already marked US T-note prices
lower, and bid gold higher, in anticipation of eventual Chinese diversification.
Outlook for XHB remains Neutral, The trend is your friend, so while XHB.N
remains within its upward sloping channel, GMT looks for a speculative rally to
overhead resistance at $40 per share. However, Fed chief Bernanke won’t cut interest
rates until after June, according to futures traders, so the XHB.N rally should fizzle
out at $40 /share, especially due to its wider divergence with US T-Notes, which are
expected to remain submerged in the 106.50 to 108.50 range.
Chinese diversification out of US debt in the months ahead and a possible Bank of
Japan rate hike to 0.50% next month, could exert downward pressure on US bonds in
the weeks ahead. Thus, XHB could rally towards $40 /share in the near term, but
submerged US T-notes, should eventually knock XHB.N to support at $37 /share.
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Global Money Trends Magazine
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February 16, 2007
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German DAX Zeroes in on the Psychological 7,000 Level
Europe’s economy started 2007 on a promising note, with inflation stable,
unemployment in retreat and more evidence of Germany’s resurgence as the force
behind a broader rebound. German unemployment fell three times as much as
forecast in January, dropping 106,000, and its economy expanded 2.5% in 2006,
which was the best in six years.
European Union statistics office Eurostat said growth for the Euro zone economy
expanded by 0.9 percent in the October-December period compared with the previous
quarter, and over 2006 as a whole, the economy expanded by 2.7 percent, but slower
than 3.4 percent in the United States. Still, Euro zone growth was 3.3 percent in the
last quarter of 2006, compared with the same period of 2005.
Germany’s economy was powered by a record amount of exports, but an improving
labor picture is also boosting imports. For 2006, the German trade surplus rose to a
record 161.9 billion euros as exports surged 13.7% to 893.6 billion euros and imports
jumped 16.5% to 731.7 billion. However, exports dipped 2% in December, stung by
the Euro’s advance above $1.30 and a surge to a record high of 158-yen.
With the German economy on the upswing, at its exports at record highs, it’s difficult
to conjure up a reason to sell the German DAX, or the US-listed ETF for Germany,
symbol EWG.N, even as the DAX approaches GMT’s upside target of 7,000. The only
reason to sell the DAX would be a breakdown in the German bund below key support
at the 114.70 level, which corresponds with a yield of 4.15%. A breakdown below
114.70 would signal a further rise in yields to 4.50%, and hurt the DAX. However,
German bunds are building a “double bottom” at key support of 114.70.
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Global Money Trends Magazine
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February 16, 2007
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A double bottom at 114.70 for the German bunds and a subsequent rally to higher
ground, removes the only major threat to the powerful German DAX rally. The
market has already discounted an ECB rate hike to 3.75% next month, and would
have another three months before the central bank contemplates another rate hike to
4 percent. Neither measure would slow the explosive Euro M3 money supply, which
expanded at a 9.7% annual clip in December it’s fastest in 16-years.
For
whatever
reason, and for all
practical
purposes,
the
German
DAX
simply
tracks
the
direction of the Dow
Jones Industrials, or
vice versa.
Given
GMT’s
expectation
of
a
further 2% rally for
the DJI to the 13,000
level, it’s possible
that
the
German
DAX can rally 3%
higher to 7,200.
To ride the DAX
bull, simply raise sell
stops to below key
support at the 6,750
level.
Until the DAX tumbles below key support at the 6,750 area, GMT will assume the
trend is still UP, and won’t attempt to pick a top, in a liquidity driven rally, which pays
little attention to bearish news when it does enter the marketplace. Look for EWG.N,
the German I-share to rally 3% higher, padding its gains with a slowly appreciating
Euro to as high as $29.25 /share in the weeks ahead.
The ECB talks a tough
game, but its actions
don’t back up its rhetoric.
The ECB has left its repo
rate at 3.50% knowing
that the Euro M3 money
supply was exploding at
a 9.7% annual rate in
December.
The ECB lost its antiinflation credentials, and
gold has climbed above
500 euros per ounce,
despite “Tricky” Trichet’s
speech about his strong
vigilance against inflation
last week. A rate hike to
3.75% won’t control M3
growth nor derail gold’s
rally vs the Euro.
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Global Money Trends Magazine
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February 16, 2007
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Also bullish for gold, were comments by Belgium’s central banker Guy Quaden,
acknowledging that low ECB interest rates had driven Euro M3 growth to a 16-year
high, but “The link seen in the past between the movements in M3 and prices seems
to have weakened, owing to the increasing importance of portfolio considerations in
the holding of monetary assets, or even perhaps a change in behavior due to the new
environment of price stability and low interest rates.”
In other words, the ECB is willing to tolerate above average rates of growth of the
Euro money supply, perhaps to keep its currency from appreciating too rapidly
against the Japanese yen and US dollar. But in the end, as gold rallies to GMT’s next
upside target of 540 euros /oz, the ECB would be forced to hike its repo rate to
4.00% in Q’2, to keep inflation expectations under control.
We will find out more about the efficiency of the German bund market, and whether it
will react negatively to the Euro’s impending devaluation against gold. On Dec 28th,
Luxembourg’s central banker Yves Mersch warned, “Any attempt to boost growth by
loosening monetary policy, an approach urged by several leading French politicians
over recent weeks, would be doomed to failure.”
The game of competitive devaluation of paper currency goes on, with the ECB and the
Federal Reserve jawboning and maneuvering to keep the Euro in a tight range
between $1.29 and $1.33. Fed chief Bernanke opened the door on Feb 14th, to the
possibility of a rate cut in the second half of 2007, arguing that inflation is
diminishing, but the ECB is under pressure to lift the repo rate to 4.00% by June.
Interest rate shifts are in the Euro’s favor, the lesser ugly of the inflated currencies.
Russia’s central bank said on Feb 8th, it was cutting the weighting of the US dollar in
the dual currency basket it uses as a guide to its management of the rouble exchange
rate. The central bank said the shift has taken immediate effect, and the basket
would be composed of 55 US cents, down from 60 US cents previously. The share of
euros rises to 45 Euro cents from 40 cents.
Moscow owns $309 billion of FX reserves and can provide a floor of support for the
Euro near $1.29. A Euro rally to $1.33 is on the horizon, once time gets closer to the
ECB’s next rate hike in early March. A downward revision to US GDP for Q’4 is
expected due to the wider US trade deficit and lower biz inventories in December.
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Global Money Trends Magazine
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February 16, 2007
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The US trade deficit widened more than expected in December and grew 6.5% during
all of 2006 to a record $763.6 billion. With average prices for imported oil a record
$58.00 per barrel in 2006, the United States imports of petroleum rose to a record
$302.5 billion. The deficit in non-oil goods also was a record at $547.2 billion.
Still, the weak US dollar helped propel total exports in 2006 to a record $1.44 trillion,
up 12.8% from the prior year. But imports grew faster. The politically sensitive trade
gap with China expanded 15.4% to a record $232.5 billion in 2006, despite record US
exports to China of $55.2 billion. But Imports from China surged 18.2% to a record
$287.8 billion. The US also ran record trade deficits with Japan and Mexico in 2006.
On the flip side, China’s trade surplus widened to $15.9 billion in January, or 65%
higher than a year earlier, as exports gained by the most in 17 months. Exports rose
33% from a year earlier. Imports jumped 27.5%, more than double December’s gain,
highlighting china’s importance as an engine of global economic growth. China’s trade
gap widened to a record $177.5 billion in 2006 and pushed its foreign currency
reserves to $1.07 trillion. The Chinese commerce ministry has estimated every 10%
gain in the yuan will slow export growth by 4% percent.
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Global Money Trends Magazine
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February 16, 2007
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Japanese Economy Energized by cheap Yen
Tokyo’s cheap yen policy paid off in spades in the fourth quarter, with Japan’s
economy expanding 1.2%, or an annualized rate of 4.8%, its strongest pace in nearly
three years. The weakening of the yen to a 21-year low against a basket of foreign
currencies, proved so potent, that it’s been the equivalent of a 0.50% cut in interest
rates, more than offsetting the BOJ’s baby-step rate hike to 0.25% last July.
It was the eighth straight quarter of growth and the fastest since January-March
2004. It also far exceeded the July-September figure of 0.1% real growth or 0.3%
annualized. The stronger-than-expected fourth-quarter growth figures raises
questions why the world’s second-largest economy can’t afford to lift its interest rates
above a quarter percent? The BoJ has kept the rate steady since last July, when it
raised interest rates for the first time in six years.
Chief Cabinet Secretary Yasuhisa Shiozaki was asked how the GDP figures could affect
the BOJ policy, “Monetary policy is up to the BOJ. We expect the BOJ to make an
appropriate decision while paying attention to the government’s broad economic
policy.” Last August, the Japanese government rigged the consumer price index by
shaving inflation stats by two-thirds, handcuffing the BoJ from raising rates.
Because Beijing pegs the Chinese yuan to the US dollar, Tokyo’s management of the
yen /US dollar exchange rate, also has a direct impact on the yen /yuan cross rate.
And that’s important because China moved closer to becoming Japan’s largest trading
partner, with exports and imports totaling 24.6 trillion yen in 2006, compared with
24.8 trillion yen in trade with the US.
Japanese exports rose 8.6% to 6.6 trillion yen in December, which was the highest
amount on record, while that of imports rose 7.2% to 5.38 trillion yen, with autos
accounting for a third of export growth. Exports to China and the European Union
advanced to the highest ever. For 2006, exports and imports increased to a record,
75.3 trillion yen and imports climbing to 67.2 trillion yen.
The Bank of Japan’s super low interest rates have encouraged traders to borrow in
yen, and re-lend the funds in higher yielding currencies, known as the “yen carry”
trade. JP Morgan estimates that $330 billion in yen carry trades are in place.
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Global Money Trends Magazine
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February 16, 2007
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In Japan, Tokyo’s financial warlords work overtime to manipulate the yen’s value, to
boost the profits of its exporters in the Nikkei-225 index. Honda Motor (HMC.N) gets
as much as 70% of its operating profit from the US and benefited from the US dollar’s
recent 7-yen rally to 122-yen. Honda’s annual operating profit gains about 11.5 billion
yen for every 1 yen Japan’s currency weakens against the dollar.
With the US dollar climbing from 115-yen on Dec 5th to as high as 122-yen on
February 9th, the Nikkei-225 index rallied by 2,000 points to as high as 17,852, it’s
highest in six-years. Japan fended off pressure from European ministers to raise its
interest rate at the G-7 meeting in Essen, Germany, thanks to support from US
Treasury chief Paulson. But European central bankers are not satisfied with Tokyo’s
rigging of the yen, which robs European exporters of market share abroad.
The G-7 industrial powers, warned investors on Feb 10th, that yen carry traders could
get burned betting in one direction when Japan’s economy was continuing to
strengthen. “Japan’s recovery is on track and is expected to continue. We are
confident that the implications of these developments will be recognized by market
participants and will be incorporated in their assessments of risks,” it said.
ECB chief Jean “Trcky” Trichet added an extra layer of jawboning, “We want the
markets to be aware of the risks of one-way bets, in particular on the foreign
exchange market. One-way bets in the present circumstances would not be
appropriate. We want the markets to be aware of the risks they contain,” he said.
Trichet was quite vocal on Feb 15th, “I will read again what we just said in Essen, we
reaffirm that exchange rates should reflect economic fundamentals. We believe that
the Japanese economy is on a sustainable economic path and that exchange rates
should reflect these economic fundamentals,” Trichet said.
Japanese Finance Minister Koji Omi appeared to be singing the same tune. “This
means that G7 countries think that foreign exchange markets should recognize the
risk of moving in one direction too heavily,” he said.
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Global Money Trends Magazine
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February 16, 2007
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So far, concerted G-7 jawboning has managed to scare “yen carry” traders and
knocked the US dollar from a high of 122-yen to as low as 119-yen today. The odds
of a BoJ rate hike to 0.50% in March have improved markedly, with Japan’s economy
steaming ahead at a 4.8% clip. The Nikkei-225 is therefore over-extended near
18,000, and vulnerable to a correction to 17,200 from a weaker dollar.
Likewise, the I-share for Japan, symbol EWJ.N could encounter stiff resistance at $15
per share, and suffer a setback to the $14.25 area. A stronger yen can provide
foreign investors with currency appreciation and cushion EWJ.N’s losses. GMT advised
a purchase in EWJ.N on Jan 16th, and would take its chips off the table.
Jawboning and a baby-step BoJ rate hike to 0.50%, would still leave Tokyo with the
lowest interest rates on the planet, and given all the political wrangling involved with
BoJ policy, it’s unlikely that Japanese interest rates would move higher for the first
half of the year. A speculative unwinding of the yen carry trade could knock the dollar
to horizontal support at 118-yen, or the upward sloping trend-line at 117-yen, before
strong handed buyers enter the marketplace to buy high yielding US dollars.
Rydex Investments launched a yen exchange traded fund on the New York Stock
Exchange on February 14th, under the symbol FXY.N.
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Global Money Trends Magazine
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February 16, 2007
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Pyongyang Surrenders to Beijing’s blackmail
After North Korea tested a nuclear device in October, Beijing harshly criticized
Pyongyang and cut off exports of oil to its client state for several weeks. North Korea
depends on China for up to 90% of its oil needs, and it’s always within Beijing’s power
to resolve the stand-off over North Korea’s nuclear weapons program. What prompted
Beijing to give up a key bargaining chip with the US is unclear.
Under the agreement reached at six-party talks, North Korea must take the steps
within 60 days, to shut the Yongbyon reactor complex and in return it will receive
50,000 tons of fuel oil or economic aid of equal value. Pyongyang will receive another
950,000 tons of oil when it disables its nuclear capabilities, and provides a complete
inventory of its plutonium used in Pyongyang’s first nuclear test blast in October.
It’s a long saga, but South Korea’s Kospi Index and the won have lived and thrived
under the dark shadow of the North for the past five years. The US dollar has declined
from around 1300-won to 934-won today, and the Kospi index has doubled over the
past few years, despite Pyongyang’s acquisition of a nuclear bomb. On October 9th,
after Pyongyang detonated the bomb, the knee-jerk panic selling in the Kospi and the
Korean I-share EWY.N, were simply better buying opportunities.
Still, after a stellar 50% gain in 2005, the Kospi could only eek out a 5% gain last
year, lagging far behind the Chinese H-share index’s 105% gain. But earlier this
week, EWY.N broke thru stiff resistance at $50 per share, anticipating a return of
foreign capital to the nuclear free peninsula.
The surge comes on the heels of a Feb 8th report that the Bank of Korea is studying a
proposal to invest some of its $240 billion of foreign exchange reserves into Kospi
stocks. It the equivalent of the US plunge protection team, and just another example
of how governments try to manipulate markets as tools of economic policy.
With Korea’s M3 money supply expanding at a 10.3% rate, and the BoK as a possible
buyer of stocks, GMT switches from neutral to bullish on EWY.N, regardless of Seoul’s
prediction of a slowdown in exports this year. Although a pullback to $49.50 /share is
possible, GMT expects EWY.N to climb 10% to $55 /share in the weeks ahead,
in a belated catch-up with elevated Chinese stock markets.
Copyright ©2006-07 SirChartsAlot, Inc All rights reserved.
Global Money Trends Magazine
16
February 16, 2007
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