The “MARKET” will resolve to test the GRIT of traders and investors as the mysteries of politics and economics collide to make the daily lives of traders difficult, to say the least. In 2011, the markets left traders and various investors sleeping like babies as we were relegated to getting up every hour to cry. We must remember that the market’s “JOB” is to cause as much heartache and pain to as many people as possible as money seeks to attain a positive return Last year the market was in its full glory as it caused some of the world’s foremost global macro investors to be humbled in a capacity not seen since the credit market debacle of 1994-95. This year seems to be of a similar ilk as the travails of the EUROPEAN UNION will continue to weigh upon the flows of global capital.
In a piece in the weekend’s Financial Times, columnist Gregory Meyer brings to my attention the fact that UBS has launched an ETF that tracks the dynamic of the RISK-OFF trade. Its symbol is OFF and it sells OIL, THE EURO and STOCKS, and BUYS TREASURIES, YEN and GERMAN BUNDS .The one thing we can be sure of as 2012 proceeds is that the RISK-ON/RISK-OFF PARADIGM will break down. As the readers of NOTES FROM UNDERGROUND know full well, this BLOG firmly believes in the DYNAMIC NATURE OF ALL INVESTMENT RELATIONSHIPS and that what correlates well today does not guarantee synchronicity tomorrow.
When 2011 came to a close, the markets continued to track the RISK-ON/RISK-OFF profile but some cracks had already begun to show. It is mind numbing to think that the U.S. TREASURY market was the star performer unless of course one happened to be short emerging market and European EQUITIES. Many are pointing to further U.S. equity strength as the U.S. and North America outperforms the rest of the world; if this is to be so then it will be difficult for U.S. DEBT to continue to be the outstanding investment. Yes, there are many reasons why the TREASURY market performed so well:
1. The FED’S intervention has left the BOND VIGILANTES financially wounded and forced to the sidelines … for the moment
2. The lack of good collateral in EUROPE has meant that U.S. sovereign debt is a needed instrument to continue the functioning of the REPO market
3. Of course the amount of global uncertainty has pushed global investors and central banks to find the most liquid haven
Will the U.S. continue to benefit from the confluence of these elements? Will investors maintain accepting real negative returns on their investments as 10-year yields are lower than inflation and that is before taxes?
As I argued at the beginning of last year, large-cap stocks with a 4% dividend yield were a better place for investment capital. The DOW’S outperformance certainly lent credence to that view but it seems that the trade is now all the rage as FUND MANAGERS have stopped chasing the high fliers as stocks such as NETFLIX, ZIP, SODA and many others were ravaged. Until the ALL-CLEAR is given in Europe and other areas of financial concern is sound, STRONG DIVIDEND PAYERS ARE THE SAFEST HARBOR. It is important to be aware of when the changes in the popular paradigm begin to breakdown. With hard work, good analysis and the use of technicals, let’s identify the sea changes and profit from preparation. OK MR. MARKET, let’s get to work.
***DOLLAR/YEN is the proverbial RIDDLE, MYSTERY, ENIGMA as the YEN strengthened against all currencies, even the U.S. DOLLAR. The YEN has befuddled more traders than even the U.S. debt markets. Japan is saddled with a huge GDP/DEBT ratio, declining population,a nd being a dominant exporter in a slowing global economy. The Japanese stock market was down 17% on the year as the STRONG YEN proved a drag on corporate, industrial Japan.
The release of the IMF COFFER data made the YEN strength that much more intriguing as the YEN’S appreciation cannot be blamed on Japan’s role as a RESERVE CURRENCY. Total international reserves of YEN are 3.8%, which is a rounding error compared to the use of EUROS and DOLLARS in that capacity.
The YEN certainly has haven status and that helps explain some of its relative strength but its eroding fundamentals means that the MOF cannot allow YEN APPRECIATION to continue. If Japan suffers under TOO STRONG A YEN it will be time for corporate Japan to go on an international spending spree so as to buy cheaper global assets to assure its market share of high-quality, well-engineered products. The rise of the GERMAN AUTO INDUSTRY in the last few years is becoming a significant problem for the Japanese car makers. The outflow of investment may be able to weaken the YEN in a way that BOJ intervention hasn’t succeeded–looking for the resolution of a great RIDDLE.