Shanghai stock market CRASH

[pchang]

let's hear it for

the Japanese Post Office!

[Kidlicious]

Carry Trade

This says that the carry trade isn't unwinding and that it will continue to be supported because of Japanese retirees getting a big load of lump sums.

I'm just wondering what would happen in Japan if they experienced some inflation. That would make it difficult for the BoJ to keep rates low.

Yen’s rebound defies carry trade fears

By David Pilling in Tokyo and Peter Garnham and Gillian Tett in London

Published: March 7 2007 22:11 | Last updated: March 7 2007 22:11

Japanese retail and institutional investors have continued to put money overseas in recent days, defying concerns that the global yen carry trade has been unwinding, according to fund managers and analysts in Tokyo.

The yen outflows may have helped to halt the recent appreciation of the Japanese currency, after signs that some global investors pulled out of risky assets last week and reduced their use of the carry trade – the practice of borrowing in low yielding assets, such as the yen, to buy higher-yielding assets.

The Japanese currency traded yesterday at about Y116 to the dollar in a calm market. This followed a sharp rise from Y121 to the dollar to nearly Y115 after a bout of market turbulence last week that was triggered by a fall in the Chinese stock market.

However, opinions about the future trend of the yen remain divided, since there is currently considerable disagreement about the size of the carry trade among analysts. Also, contradictory signals are emerging from different investor groups.

While many Japanese investors appear keen to continue using the carry trade, some analysts think institutional investors will continue unwinding their positions in coming weeks because they are reducing risk in other areas that are entirely unrelated to the Japanese currency. That could create opposing pressures on the yen.

Brian Garvey, senior currency strategist at State Street Global Markets in Boston, said the bank’s own recent flow data from global institutional clients, such as mutual funds, suggested that there were still large yen short positions waiting to be unwound.

“Spring cleaning of carry trades will be a major undertaking, which gives us confidence that the yen’s rally is not over,” said Mr Garvey. “Institutional investors are significantly underwater.”

Meanwhile, Kazumasa Iwata – the Bank of Japan board member who last month opposed the central bank’s interest rate rise – said in a speech yesterday that recent volatility on global markets was the result of investors “technically adjusting their positions”.

In a reference to the carry trade, he said that recent yen appreciation coupled with a retreat from risky assets “represent position adjustment [by investors who] have so far taken excessive risks”.

But Mr Iwata pointed to a swift recovery from similar market volatility last May – which also followed a tightening of BoJ policy – saying that it “fortunately did not hurt the mechanism of global or Japanese economic expansion”.

Analysts also pointed out that Japanese investors were continuing to purchase foreign assets, showing no sign of panicking over recent market turmoil. JPMorgan in Tokyo said three-quarters of the so-called carry trade – which it estimated at Y40,000bn (€261bn) – comprised a fairly stable flow of Japanese investment into foreign bonds.

Because more than 8m baby-boomers, due to receive an estimated Y50,000bn in lump sum benefits, will retire in the next three years, it expects those flows to accelerate.

Japanese interest rates are still only 0.5 per cent following last month’s 0.25 per cent rate increase. That is 300 basis points behind European rates and even lower than the UK, US and other favoured destinations of yen outflows, including the Australian and New Zealand dollar and the South African rand.

Ed Yardeni, chief investment strategist for Yardeni Research, noted that the carry trade “may be a global legend, in other words, an exaggerated phenomenon”.

Additional reporting by Michiyo Nakamoto in Tokyo

Copyright The Financial Times Limited 2007

[Kidlicious]

And another article from FT. This is about Japanese investors who participate in the carry trade instead of putting money in savings accounts because interest rates are so low there.

It also says that the BoJ monitors this daily.

Tokyo’s forex market draws more investors

By Michiyo Nakamoto in Tokyo

Published: March 7 2007 22:10 | Last updated: March 7 2007 22:10

Masanao Yamada is waiting for an opportunity to buy dollars.

The 39-year-old insurance salesman is part of a growing Japanese army of individual investors who have emerged as a force in foreign exchange markets in recent years as they have sold low-yielding yen to buy into the currencies of countries with higher interest rates. The sort of highly-leveraged foreign exchange trading practised by Mr Yamada has become so popular among individual investors that the Bank of Japan, the central bank, has been monitoring trading daily.


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Japanese individual investors now account for about 20 per cent of daily spot trading in the Tokyo foreign exchange market, according to Gaitame.com, a foreign exchange broker.

The individual traders are generally not so-called day traders but ordinary office workers, like Mr Yamada, or retirees and housewives with most men in their 40s, says Toshiyasu Endo of Himawari Securities, a pioneer in the business.

While some may see a recent rally in the yen against the dollar as a sign of a global unravelling of the so-called carry trade, Mr Yamada sees it as an opportunity to get back into action. “People are saying that Y114 [to the dollar] is likely to be the bottom so when it hits that level, I am thinking of buying,” he says. The yen yesterday was trading above Y116 to the dollar.

His order has already been placed and, if or when the yen rises to that level, his trade will automatically be processed. “It’s so easy to trade, It’s like playing a [video] game,” he says.

That ease of trading and the depressing thought of the pitiful interest rates offered by Japanese banks is a large part of what has drawn many Japanese investors to forex margin trading. “I feel that keeping my money in the bank is a waste, so I don’t have much money in the bank, just enough to cover my daily expenses,” Mr Yamada says.

Many Japanese brokers now also allow traders to leverage 20-30 times the amount they put up as collateral and pay interest on holdings on a daily basis.

But, by and large, the Japanese taking up those offers remain conservative players, investing surplus cash rather than betting the house in search of a fast fortune.

Mr Yamada says he has made the equivalent of $15,000 or more in a single trade but tends to make more modest gains. He therefore treats his trading income as additional pocket money to buy luxuries such as an LCD TV or fund a night out drinking rather than a way out of his office job. “I use what extra money I have,” he says. “It’s like gambling so I feel that even if I lose money, it’s just bad luck.”

Copyright The Financial Times Limited 2007

[Colon™]

Holy christ, how retarded can you get...

So, establishment data shows meagre growth of employment and household data shows a decline. But since people have been pulling out of the labour market in droves (bad sign), the unemployment rate drops as well. Hence: labour market in "good" shape, less change of an fed fund's cut soon and 10 years' treasuries plunge.

[DanS]

I don't know why we're watching the unemployment closely from month-to-month. Probably, we shouldn't even watch payrolls that closely and wait until the annual revisions are in.

After revisions, it appears that I should have been doing "Let the good times roll" threads all last year. Opportunity lost.

[Colon™]

Originally posted by DanS
I don't know why you're watching the unemployment closely from month-to-month.

That's not the issue. The issue is that the markets do, and if you're going to do it anyway then at least do it right.

[DanS]

I don't know that the markets do. What tells you that they do?

[Colon™]

The headlines in the financial media? The plunge of 10 years treasuries for no good other reason than the "strong labour market -> no near fed fund's cut" thesis?

[DanS]

People were probably looking at the 0.4% hourly earnings growth wrt to inflation rather than the things that you mention.

But in any event, I've been waiting a couple years for the hourly earnings growth to start taking it's share out of corporate earnings growth. Looks like it is finally starting to occur.

[Colon™]

It's just as dumb to look at wages as a indicator of future inflation. It's like considering inflation to predict inflation.

I think the productivity report is more indicative of the profits vs wages distribution BTW.

[DanS]

Another day that opened lower and then proceeded to fall apart toward the end of the day. S&P 500, Dow, and NASDAQ composite all down about 2%.

I wonder when people are going to start talking bear market?

[Zkribbler]

Originally posted by DanS
I wonder when people are going to start talking bear market?

I believe most analysts are still calling this a correction.

IMHO (which, when added together to $5 will get you a cup of coffee at Starbucks), we'll get a bear market when the downturn in the residential real estate market k.o.s consumer spending.

[Zkribbler]

Originally posted by Zkribbler
IMHO (which, when added together to $5 will get you a cup of coffee at Starbucks), we'll get a bear market when the downturn in the residential real estate market k.o.s consumer spending.

Irony of ironies. I just walked passed a copy of today's L.A. Times. There's a front-page story on how a major Orange County real-estate lender is facing bankrupty because of all the forfeitures on its loans.

[Kidlicious]

Actually DanS didn't post the reason for the downturn. Some major real estate lenders anounced financial troubles. New foreclosures are at an all time high. Good guess Z.

[One_more_turn]

Whether we get bear market at this point is unclear, but macro-economic data don't look great. The 200 day moving average of S&P 500 tells you more about our economy than any expert ever will.

When Roach and Rubini warned about recession in mid July last year, the market bottomed out exactly at that point and rallied more than 20% afterwards. Later it turned out that Q3 was ugly and Q4 was quite decent.

Famous economists, New York Times, and Consumer Confidence are among the best contrarian indicators when it comes to stock market.