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January 31, 2011

Japan’s Downgrade Is a Bullish Sign

Filed under: Investing — Tags: , , , — admin @ 11:58 pm

Last Thursday Standard & Poor’s
cut Japan’s credit rating to -AA from AA, warning that “Japan’s government debt ratios–already among the highest for rated sovereigns—will continue to rise.” A stagnant economy, unchanged in nominal terms since 1992, an aging population and escalating entitlement liabilities were all cited for the downgrade, along with the absence of a coherent strategy from current politicians.

Considering I hold a position in
Japanese equities , the downgrade got my attention, but frankly not so much my concern.

Among all the factors to consider when making an investment decision, downgrades from rating agencies or other research outfits should be the absolute least influential. For me, it’s just something to read while sitting on the can.

Consider the source. Standard & Poor’s, a unit of
McGraw-Hill (
MHP ) , had “A” ratings on both
Lehman Brothers (
LEHMQ ) and
AIG ) through the middle of September 2008, just days before Lehman Brothers declared bankruptcy and
AIG imploded .

And while I know
speculation of any sort is an imperfect science, it’s especially hard to put a lot of faith into what S&P thinks Japan’s economy will be like in the mid 2020s, considering they had an investment-grade rating on
Enron four days before it filed for bankruptcy back in 2001.

Rating agencies and research firms always seem to specialize in telling the market what it already knows, exactly why you’ll frequently see companies downgraded from “buy” to “sell” only minutes after disappointing news is released. By then it’s usually too late.

Just last week, for example,
Infinera (
INFN ) reported earnings that missed expectations, prompting immediate downgrades to “hold” from “buy” at both
Citigroup (
C ) and Miller Tabak and to “neutral” from “overweight” at
JP Morgan (
JPM ) . Of course, by that time the stock was already down nearly 20%.

I know very well the dangers of falling in
love with a position. But I actually think S&P’s downgrade is a bullish sign for Japan and, at least for now, I’m holding my positions.

What matters isn’t an announcement but the market’s reaction, and since the downgrade, Japanese stocks as measured by funds like
iShares Japan (
EWJ ) and
iShares S&P/TOPIX 150 (
ITF ) have retreated roughly 1.5%, in line with drops in the Dow and other equity benchmarks. The Japanese yen, which can be traded through products like
CurrencyShares Japanese Yen Trust (
NYSE ) and
WisdomTree Dreyfus Japanese Yen (
JYF ) , has actually risen. If the downgrade was going to cause a panic sell-off, you’d likely have seen it immediately following the announcement.

No Cause for Concern


iShares Japan (
EWJ ) ,
CurrencyShares Yen (
FXY ) , S&P 500 – since S&P’s downgrade

Standard and Poor’s downgrade, while accurate and well-written, only reflects the already-known facts of a bear market which has infected Japan for the better part of the past twenty years.

Urban real estate price indices have dropped by as much as 50% since 1998, according to the
Land Institute of Japan , and sit well below their late 1980s peaks.

Urban Land Prices in Japan


Source: Land Institute of Japan Monthly Report, December 2010

The country once-synonymous with
Sony (
Walkmans and
Canon (
CAJ ) printers is now a
net importer of consumer electronics.

Last year only 68.8% of college graduates received
job offers , down 4.3 percentage points from 2009 and the lowest level on record.

Japan’s malaise has even made it to the silver screen. In ”
Bubble Fiction ,” a Japanese science fiction film, a housewife uses her
Hitachi (
HIT ) washing machine to travel back in time and prevent the leveraged mortgages which precipitated the early 1990s collapse.

The news on Japan has been bleak for years, which is exactly why many money managers have quite simply abandoned the country. As we
wrote last November, the past decade has seen huge inflows into emerging markets and out of Japanese stocks. S&P seems to be finally coming around to a conclusion that many investors already made.

And while it’s not a perfect comparison, the downgrade made me recall the spring of 2003 when Merrill Lynch dropped their ratings on three Latin banks in which I held a position to “sell” from “neutral.” Still relatively unfollowed and unloved back then, I wrote in this column how ”
from a contrarian’s perspective ,” the downgrade was “a bullish signal.” Obviously,
Latin American stocks have gone on to soar for the better part of the past 8 years.

unrest in Egypt could easily prompt risk assets to consolidate recent gains. But unless it’s accompanied by weakening price action, a downgrade unto itself shouldn’t alter one’s investment thesis. S&P has their opinion. I’ve got mine.

Jonathan Hoenig is managing member at
Capitalistpig Hedge Fund LLC . At the time of writing, Hoenig’s fund held positions in many of the securities mentioned.

EUR/USD – Bullish Recovery From Bearish Retracement

Filed under: Technical Analysis — Tags: , , , , , — admin @ 5:47 pm

Price action on EUR/USD (a daily chart of which is shown) as of Monday (1/31/2011) has recovered much of the losses it suffered on the last day of last week, when the pair made a corrective drop after hitting a high at 1.3756. As long as a breakdown below key support at 1.3500 does not occur, which has not occurred as of yet, the short-term uptrend that has been in place for the last three weeks should continue to be intact. For more technical analysis on this currency pair, please click here for Monday’s (1/31/2011) Chart of the Day.

James Chen, CTA, CMT

* For information on my DVD set, High-Probability Trend Following in the Forex Market, please click here.
* For information on my book,
Essentials of Foreign Exchange Trading (Wiley), please click here.
* For information on my new book, Essentials of Technical Analysis for Financial Markets (Wiley), please click here.

ECB bought no bonds last week

Filed under: Central Banks — Tags: , , , — admin @ 5:40 pm

Is the ECB taking off the training wheels, letting the European bond markets function on their own? Seems to be.

European bonds had a good week last week (except for German bunds), so kudos to the ECB for keeping hands off.

EUR/USD trades within 15 pips of another large 1.3700 expiry  this morning after a remarkable recovery overnight.

Philippine Stock Exchange Composite Index (PSEi): Uptrend Still Intact

Filed under: Forex News — Tags: , , , , , , , , — admin @ 3:13 am

The Philippine Stock Exchange Composite Index (PSEi), which is composed of thirty listed companies, bounced at the at the 3,881.34 level last Monday after a 5% drop a week ago due to China’s inflation concerns. In the process, it could have formed a falling wedge pattern inside the 2-year ascending channel. A falling wedge, as some of you might know, is in fact a bullish pattern as it represents a temporary retracement. This pattern will be validated once the breakout occurs. If the resistance gets cleared out, we could get the size of the falling wedge’s base and add it to the possible breakout point. In that case, there could be a minimum upside target for the PSEi that would reach the 4,413.42 all-time high. However, before it reaches that level, it first needs to surpass the 4,246.27 resistance. On the flip side, if the falling wedge fails to perform and the index drops, the ascending channel’s support could be a good stronghold. The PSEi however is currently moving below the 50 and 100-period  moving average which hints weakness. But if you personally ask me, I’m still bullish on this as long as the 2-year ascending channel remains intact.

More on …

Euro approaching next important resistance at 1.37

Filed under: Technical Analysis — Tags: , , , , , — admin @ 3:13 am

Quote of the day: “There are tons of people who are late to trends by nature and adopt a trend after it’s no longer in fashion. They exist in mutual funds. They exist in clothes. They exist in cars. They exist in lifestyles.” – Jim Cramer

EURUSD – 1.3603 @06:33 GMT

Trading strategy: looking to buy on pullback to 1.3530, stop at 1.3470(0.5% risk), 1st objective at 1.3590, 2nd objective at 1.3650

Good morning. Euro’s recovery continues and former resistance level at 1.3430 looks ‘cheaper’ now, while the single currency flirts with $1.36. My Friday plan to buy on rally – at 1.3530 – was a good bet, but looking for a pullback now is probably safer than buying into the top side. First intraday support stands at 1.3530, backed by 1.3500 and 1.3430/50. On the upside we have resistance at 1.3650 followed by 1.3700/30 and 1.3800. Both short-term and intraday studies are bullish at time of writing and so far the euro doesn’t seem tired.

EURUSD 4hrs chart 1-24-2011
EURUSD 4hrs chart 1-24-2011
EURUSD daily chart 1-24-2011
EURUSD daily chart 1-24-2011

Have a great day and good luck trading!

© liviu for, a Forex Analysis blog, 2011. |
Article Source | Post tags: EURUSD

Stocks: All eyes on Egypt, jobs

Filed under: Business — Tags: , , , — admin @ 12:29 am

NEW YORK (CNNMoney) — Stocks have been on a run since late August, and investment experts have been warning that the market is due for a short-term correction. With political unrest in the Arab world and the January jobs report taking center stage this week, the catalyst for a downward move may finally be here.

After rising to the highest levels since the summer of 2008 and crossing key psychological milestones — the Dow topped 12,000 and the S&P hit 1,300 last week — stocks took a hard hit Friday as investors watched anti-government demonstrations unfold in Egypt.

“We are worried about the developing geopolitical risk in the Middle East and North Africa,” said David Kotok, chief investment officer at Cumberland Advisors. “We do not know where it will spread, nor do we know how it will run its course.”

Protests in Tunisia, Algeria, Jordan, Yemen, and now Egypt, could continue to have a domino effect across the Arab world. As such, Kotok said he raised the cash positions in his portfolios at the end last week to the highest levels since 2008.

While political instability alone will likely upset the market, the wounds could be deeper if the turmoil spills over to major oil producers like Iran. Amid the uncertainty, oil prices spiked more than 4% last Friday.

Tensions rise on surging food prices

Jobs report: The week’s most closely-watched reading on employment is due Friday. Employers are expected to have added 150,000 jobs in January after adding 103,000 jobs in December.

Despite the gains, the unemployment rate is expected to tick back up to 9.6% as some of the unemployed return to the labor force to search for jobs. The unemployment rate dropped to 9.4% in December.

Kim Caughey, senior equity analyst at Fort Pitt Capital Group, said the market can’t continue to rally “without a sustained recovery, which means we need to get people back to work.”

Last week, unemployment claims jumped back above 450,000, signaling that the roller coaster ride for the job market has not yet come to an end.

Earnings: Though a bulk of companies have already posted quarterly results, investors will continue to watch as major players including Dow component Exxon Mobil (XOM, Fortune 500) open their books next week.

The oil giant will release results Monday before the opening bell, while fellow blue-chip Merck (MRK, Fortune 500) will post earnings Thursday morning.

More than 100 companies from the S&P 500 are also due to report, including Pfizer (PFE, Fortune 500); media giants News Corp. (NWSA), Viacom (VIA), and CNNMoney’s parent company Time Warner (TWX, Fortune 500); and credit card giants Visa (V, Fortune 500) and Mastercard (MA, Fortune 500).

Of the 207 S&P 500 companies that have reported results so far, more than 70% have beat earnings and sales estimates, according to Thomson Reuters. Earnings have climbed by 36% on average, while revenues have increased 5% from a year earlier.

On the docket

Monday: A government report on personal income and spending is due before the opening bell. Economists surveyed by expect income to have risen 0.5% in December after rising 0.3% the previous month. Spending is forecast to have edged up 0.6% after increasing 0.4% in December.

The January reading of Chicago PMI, a regional manufacturing index, is due shortly after the start of trading. Economists expect that it slipped to 65.0 from 68.6 in December. Any index reading over 50 indicates expansion.

Tuesday: The Institute for Supply Management’s index of manufacturing is due after the start of trading. Economists forecast the index to have increased to 58.2 in January from 57.0 in December. Any number above 50 indicates growth in the sector.

Construction spending, also due after the opening bell, is forecast to have dropped 0.5% in December, following a rise of 0.4% in November.

Auto and truck sales for January are due throughout the day.

The Senate Budget Committee kicks off three days of hearings on the economic outlook, tax reform and challenges to the economic recovery.

Wednesday: A report from payroll services firm ADP is expected to show that employers in the private sector added 150,000 workers in January after boosting payrolls by 297,000 in the previous month.

Separately, outplacement firm Challenger, Gray & Christmas issues its report on planned job cuts in January.

Meanwhile, the U.S. government’s weekly crude oil inventories report and readings on mortgage applications are also on tap.

Thursday: The government’s weekly jobless claims report comes out before the start of trading, with 425,000 Americans expected to file new claims for unemployment, after 454,000 were filed in the previous week.

Factory orders are due from the Commerce Department after the start of trading. Orders are forecast to have dropped 0.7% in December after increasing 0.7% in November.

The ISM services sector index for January is expected to have decreased to 57.0 from 63.5 in December.

Readings on unit labor costs and fourth–quarter business productivity are also due.

Ben Bernanke, chairman of the Federal Reserve, will address the National Press Club in Washington at 12:30 p.m. ET.

Friday: The government will release the highly-anticipated January jobs report before the opening bell.  To top of page

Google Vs. Facebook: Let the Battle Begin

Filed under: Investing — Tags: , , , — admin @ 12:08 am

“How can we not be happy?”
Google (
GOOG ) CFO Patrick Pichette asked rhetorically last week as the Internet search giant unveiled stellar earnings and revenue for the fourth quarter and full year 2010.

He got his answer: a swift $28 drop in Google’s stock price. Shares closed Thursday at $616 and change.

On the face of it, Google management and shareholders had plenty to celebrate. In the fourth quarter, sales surged 26%, profits rose 29%, profit margins increased to 40% and operating cash flow was $3.5 billion — all above Wall Street’s expectations. Growth in Google’s core search business accelerated, and Pichette stressed that newer businesses in display and mobile search were “another growth engine” for the company. Analysts rushed to increase their one-year stock price targets, with some going as high as $800 a share.

So why the tepid response?

The elephant in the Google press briefing was barely mentioned: Facebook. Google’s news came in the midst of Facebook’s controversial private placement, in which Goldman Sachs Group and a Russian investment firm invested $500 million on terms that valued Facebook at $50 billion. But the metric that seems to have caught the attention of many investors is that Facebook surpassed Google as the most-visited website in the U.S. In other words, Google’s real competition isn’t other search engines like Microsoft’s Bing or Yahoo. That war is largely over. Nor does Facebook currently face much of a threat from other social-networking sites. What’s shaping up is a monumental Google-Facebook showdown to win the hearts, minds and wallets of Internet users worldwide. As one person in California told me, “If I were Google I’d be quaking in my boots.”

This has apparently been obvious for months in Silicon Valley, where the two companies have been in an arms race to hire talent. But the catalyst for this realization reaching a broader public seems to have been last week’s surprise announcement that Google co-founder Larry Page will replace Eric Schmidt as chief executive. Under this scenario, the visionary Page rather than the seasoned manager Schmidt was urgently needed to combat the threat from Facebook, which is controlled by 26-year-old wunderkind Mark Zuckerberg. Google couched the announcement in terms of management clarity and efficiency (“We’ll operate and execute even better” in Schmidt’s words), but the real need is to reestablish the entrepreneurial drive that is propelling Facebook.

How will Google and Facebook compete? The goal of each is to be the point of entry for users of the Internet, the theory being that whoever controls the gateway ultimately will deliver the most effective advertising platform. As I discovered in reporting for my column last week, Facebook is so important to some users that it’s on their computer screens 24 hours a day, seven days a week. I feel like I’m constantly using Google, but I don’t sleep with it.

Exactly how this competition will unfold remains to be seen. Last week Google co-founder Sergei Brin remarked that what’s been done already in Social Search, Google’s social-networking feature, is “just the tip of the ice berg” and represents only “1% of the capabilities that can be deployed in that realm.” This is obviously one of the areas he’ll be targeting in his new role as head of strategic projects.

So does the rise of Facebook threaten Google’s robust profit margins and stock price?

Many investors seem to think so, judging from Google’s decline this week. But my sense is the competitive landscape is much more dynamic and complex. Google may be facing the first serious competition in its thus far charmed life, but this isn’t necessarily bad for either Google or Facebook. The market isn’t static. As Google’s Pichette noted, there are “huge opportunities for innovation and growth at Google as well as the entire ecosystem.”

As I said last week, I wish I were a Facebook shareholder, but I’m not a member of that exclusive circle. I have been a Google shareholder since its public offering, and in my experience, widespread doubts about Google have often been an opportunity to buy. With a forward price/earnings ratio of 15.5, Google is priced like a value stock.

For now, I say let the competition begin. I hope Page is right when he said last week that “our computing life is still at the very early stages…we’re really only at the beginning. I can’t wait to get started.”

January 30, 2011

Trichet: Eu’s fiscal reforms too timid

Filed under: Central Banks — Tags: , , , , — admin @ 6:09 pm
  • Repeats call for quantum leap in EU governance
  • Euro zone’s deficit (when taken as a whole, lower than UK or US

Trichet loves that useless stat…If you could ignore the Greek and Irish deficits, there wouldn’t have been a debt crisis…File under nice, but useless.

IMF: Urgent that US, Japan spell out medium-term deficit reduction

Filed under: Central Banks — Tags: , , , , , — admin @ 6:07 pm
  • Largest European countries will consolidate deficit in 2011; Spain’s reduction will be the largest
  • Fiscal outlook weakened more than projected in Indian, Brazil, China; Brazil the most

The Armchair General Rides Again

Filed under: Forex Strategies — Tags: , , , — admin @ 4:54 pm

Well, well, well, its been an eventful few months and aside from the ongoing messy situations in Pakistan and North Korea it appears that Twitter and Facebook have accidentally put the entire Arab world in play. Mark Zuckerberg, what hast thou wrought? The Armchair Generals are back, and most amusingly of all given that they are

a) almost all on the sellside and therefore
b) their employers block all social media at the office

Its even harder to take them seriously given that the best on the ground coverage comes from stuff like this (note, translated):

All the people are in Liberation Square. Kebab business off the hook. – Abduls_Kebabs, Thu 12:36 via IPhone 

Got overexcited and threw a kebab at the police. Felt good. Mubarak Resign! – Abduls_Kebabs, Thu 20:36 via IPhone

WTF my Kebab Stand is on fire! – Abduls_Kebabs, Fri 01:22 via IPhone

Ok fuck it I’m getting in on this Molotov cocktail thing. Next up – plasma TV 4 free. – Abduls_Kebabs, Fri 03:48 via IPhone

All TMM can say is that they are quickly getting into Twitter and Weibo – Reuters and Bloomberg just aren’t fast enough anymore. Nemo is here and others may follow. With the madness raging on in Cairo TMM were a bit too busy at the end of the week trying to work out how to play this and getting trades done to post but here it is. Given that we are already on the long oil bandwagon that is more or less taken care of so our thoughts as to how things might evolve in rates and FX was more of interest. For some quite astute commentary on oil and the Suez Crisis, go here.

Firstly, how bad rioting resulting in government getting turfed out is really determined by 1) how long it goes on for and 2) who the viable alternatives are. In countries like Thailand the pluto-clepto-crat prime minister Thaksin getting booted doesn’t really help political stability but it’s not as if there aren’t a number of viable alternatives. The kind of disaster zone that ensues when a dictator withdraws and there is a power vacuum has plenty of nasty precedents in places like Indonesia circa 1998 which really makes one worry about what is going on in Egypt. Egypt does have some civil society that could vaguely form a caretaker government in a lead up to elections but many places don’t and also have the same simmering pot of political resentment. We are of course, referring to Saudi Arabia who as of late last week did not seem to be having much go on in CDS land which TMM find odd.

As can be seen above, Egypt 5 yr CDS in white has been breaking new highs and the currency has been taking some serious pain though that is more due to underlying fundamentals. In  contrast, Saudi 5yr has been rock solid and the Saudi Riyal has been kept pegged. TMM take the view that given Saudi doesn’t have much of a political plan B 75bps is a small price to pay to sleep well and night but what does one do to offset the trade? For those with hands made of Kevlar you could buy some Orascom Construction or Centamin but TMM view the Saudi Riyal as a decent bet too. If the problem is food inflation and you have truly enormous FX reserves a one-off revaluation is a good way to cut inflation very quickly in the short term — and when the political landscape is moving as fast as you can Tweet the short term is all you’ve got. Long SAR, long Saudi CDS would seem to be a good way to sleep well and get paid at this point.

In the interim, the broader picture is as such (according to what we’ve heard): if Saudi goes you simply can’t own enough 5 delta oil calls and 5 delta spoos puts because it will completely screw up the oil market and likely spill over into Iraq, Jordan, you name it – banks aren’t the only thing that can be TBTF. If Iran goes that isn’t necessarily a bad thing – TMM are generally not pro-Islamic state – but you can bet that before Ahmadinejad goes he will angry up his proxies in Lebanon to try to create an external drama to distract the populace. At any sign of trouble in Iran getting short all things Israel does not seem that silly at all.

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