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Can the Yen Carry Trade offset Fed Tapering?Gary Dorsch For the Nasdaq-100 Index, the Bull market turned five years old in November. Wall Street hopes the hard-charging Nasdaq Bull - that has more than tripled investors’ money since Nov 2008 is still in good enough shape to keep the gains coming in Year Six. Many Main Street investors are still wary of the “Least Loved” Bull market, - and they’ve missed out on the money minting rally. Since the turnaround began on March 9th, 2009, the S&P-500 index has chalked up gains of +175%, - ranking it as the fourth longest bull market of all-time. In cash terms, the US-stock market has generated $13.5-trillion in paper wealth. In the past year alone, the market value of US-listed stocks increased by more than $4-trillion. On the flip side of the coin, the average bond fund suffered a loss of -5.7% last year, wiping out $2.4-trillion of wealth for US-bond holders. The sharp divergence between booming stock markets and slumping bond markets, - has been dubbed the “Great Rotation.” It’s been ongoing for the past 1-½ years. Only until the second half of 2013 did the small retail investor decide to jump abroad the “Great Rotation,” by yanking $193-billion out from bond mutual funds and plowing $175-billion into stock funds. For market contrarians, the fact that Main Street investors are finally warming up to the high flying stock market in the fifth year of the Bull Run, is a warning sign to be on the lookout for a market top. On the flip side, Wall Street salesmen say the torrent of retail monies flowing into stocks is a Bullish signal, as it shows there is lots of fresh cash that’s still sitting on the sidelines, mostly parked in money market funds, that can fuel further market gains. Yet even the Perma-Bulls on Wall Street admit that a long awaited correction of -10% or more is looming sometime in 2014, albeit, beginning from higher levels. Therefore, a climactic rally for the S&P-500 index to the 2,000-level, for example, would fizzle out and begin a descent to today’s starting point, thus wiping the speculative froth out of the marketplace. Stock market Bulls say the “Least Loved” rally is the real thing, and it has the potential to extend into a decade long Mega or “secular bull” market. They point out that the biggest buyers of stocks are the S&P-500 companies themselves. They’re generating around $1-trillion in profits each year, and hold about $2-trillion in cash. From late 2009 through all of 2013, the S&P-500 companies spent $1.5-trillion of their surplus cash, buying back their own company shares on the open market. Of course, companies sell stock too, but the net reduction from share buy-ins minus new offerings was an extraordinary $1-trillion in four years. Last year, stock acquired under buyback programs equaled 6.4% of the daily trading volume in the Russell-3000 Index through Sept 30th, exceeding 2007’s level of 4.1-percent.
The stock market Bears were blind sighted by the buyback binge. It’s estimated that financial engineering was responsible for about 60% of the increase in Earnings per Share (EPS) for the S&P-500 companies, while cost costing, automation, and organic growth padded the rest. The Bears also underestimated the inflationary effects on equity prices that were engineered by the Federal Reserve and the Bank of Japan (BoJ). With their double barreled QE-schemes, the Fed injected $1-trillion into the US-money markets, and the BoJ pumped ¥56-trillion ($500-billion) into the Tokyo money market in 2013, and in turn, fueled powerful rallies in the European, Japanese, and US-stock markets. Last year, the market value of the Nasdaq-100 index exhibited a +87% degree of correlation with the expansion in the MZM money supply. In the four years leading up to 2009, the correlation was just +36%. So while US-share markets were soaring to record highs, it became clear that the liquidity created by the central banks wasn’t flowing to where it is most needed, like business investment. Instead it followed the path of least resistance, ending up in the hands of speculators to bid up equity values. And the higher the stock prices climb, the more enthusiastic Corporate CEO’s and directors become for buying back the company’s shares and so on, thus inflating the share price upon which their stock option plans are based. A lot of what’s called investment these days is just a transfer of cash to shareholders at ever-inflating prices. The Fed’s QE scheme did strengthen the demand for Tiffany bags and Ferraris and fine wines and equities, but the “trickle down” effect to the struggling masses was too small to boost the stagnant wages of the working class. Instead, the Fed’s QE-scheme has simply widened the schism of wealth inequality in America. This is so, since 10% of the US-households own 82% of the listed shares. During the course of 2013, there was a brief interruption in the Nasdaq’-100’s parabolic ascent. There was a pullback of -7.3% in the May–June timeframe, when Fed chief Ben Bernanke shocked the markets, saying the central bank would soon begin to reduce the size of its money injections. Bernanke tried the calm shareholders, saying “Tapering” of QE is not the same as “Tightening.” He pledged to keep the federal funds rate locked at 0.25% for as far as the eye could see. As such, the Nasdaq-100 index quickly regained its footing and zoomed +27% higher in the second half of 2013. On Dec 18th, the Fed said it would begin tapering its QE injections, starting with a modest reduction of $10-billion per month in January to $75-billion. Again, despite the Fed’s alert, the stock Bulls were unfazed, and continued bid-up the share prices of high flyers such as Amazon, Google, Price-Line, MasterCard, Visa, and Boston Beer.
In Tokyo, Bank of Japan (BoJ) chief Haruhiko Kuroda put a positive spin on the Fed’s decision to begin winding down its radical QE-3 scheme, saying it’s a sign the US-economy is steadily recovering, and that it can continue to grow without the need of extraordinary stimulus, - which bodes well for global growth and Japan. While Kuroda spoke, the US-dollar hit a fresh five-year high of ¥104.60. “Frankly speaking, the correction of excessive yen strength has had a positive effect on Japan’s economy. Corporate earnings have risen and sentiment has improved,” Kuroda said, as the Nikkei-225 index crossed the 16,000 line. Soon after taking office in Dec ‘12, Japan’s Prime Minister Shinzo Abe promised to end the 15-year bout with deflation and pull the world’s third largest economy out of a recession. Firing the first arrow of “Abenomics” – the BoJ began to unleash a sharp devaluation of the Japanese yen against the currencies of its major trading partners. On April 4th, 2013, the BoJ vowed to double the amount of Japanese yen in circulation to ¥270-trillion, within a time span of just 2-years. “The BoJ’s policy steps could indirectly result in a weaker yen and boost share prices, helping to lift corporate earnings,” Abe declared. Tokyo got the green light from its Group-of-20 peers at a Feb ‘13 meeting in Moscow for its aggressive plans to weaken the yen. With liquidity injections of ¥7-trillion per month, Tokyo has engineered the yen’s -18% devaluation against the US$, -23% against the Euro, -15% against the Korean won, and a -12% slide against the Chinese yuan. For Nissan Motor, which gets 80% of its revenue outside of its home market, whenever the US-dollar’s value rises by 1-yen, it boosts its operating income by ¥15-billion ($151-million). Sony and Honda Motor get more than 65% of sales outside Japan, and also profit from a weaker yen. As a result, profit for Japanese companies listed on the broader Topix index increased to ¥74.70 /share last year, up from ¥50.29 in 2012, and ¥38.05 in 2011. The $4.3-trillion Topix index posted a +49% advance last year, - its best annual gain since 1999. To read the rest of this article, please click on the hyper-link located below: http://www.sirchartsalot.com/article.php?id=185 ### Jan 8, 2014 321gold Ltd |
