After the worst day for the US stock market in many months, it appears that we are getting some reprieve from the selling. Gold has recovered over 1.5% as of right now, US stocks are up over 1% and the USD/JPY has recovered rather well from it's steep fall yesterday.
Was yesterday just a bad dream, or was it the beginning of a larger correction? Time will tell, but what we do know is that yesterday witnessed some seriously massive moves in some major markets. The severity of the moves suggests that major liquidation by big players were taking place (here's looking at you John Paulson).
Gold's move over the past few days clocked in at well over 7 standard deviations, this means that it should only occur once ever couple thousand years! This may reflect the fact that this move is unlikely to happen again, or it may simply indicate that using standard distributions to model financial securities is not ideal. Either way, it was a wild day in the gold market.
The markets had a rought start to the day today due to the sell-off in Gold, which spread to other commodities, stocks and equities. Then, a very tragic event occured in Boston, right in the midst of the famed Boston Marathon. Around 2:50 pm, somewhere near the finish line of the marathon, at least two explosions occured almost simultaneously, injuring over 20 people and killing 2 (though details are still emerging). There have also been reports of a third explosion at JFK library.
Needless to say, our thoughts go out to the families of those killed and injured in this tragic event.
The broader impact on the markets is unclear at the moment. The explosions occurred near the end of the trading day and markets merely continued their broad-based sell-off that was already underway. Very sad day indeed, and we will report details as the come out.
You can see that the US stock market had a very rough day, with the SPY (SPDR S&P 500 ETF) down -2.3%, it's biggest lost in over 4 months (the day after the election). 154.00 is the next level of support to watch.
Reports have emerged about an unfolding drama regarding Cyprus's gold reserves. The Governor of the central bank of Cyprus, Panicos Demetriades, has come out and accused his own goverment of undermining the independance of Central Bank. Demetriadeshas said that the goverment of Cyprus does not have the authority to sell the nation's gold reserves without consent from the Central Bank.
Central Bank independance is enshrined in EU treaties, and the situation has even drawn the attention of Mario Draghi, the President of the ECB. He has come out and said that, regarding the potential gold sale, “The decision is going to be taken by the central bank." He also stated that “The independence of central banks in the euro area is enshrined in the treaty. The ECB will look at developments in Cyprus from this angle.” Original Bloomberg Stories can be found here and here. And a more critical article from the Telegraph is here.
This has caused gold to sell off rather dramatically today, as a sale of 14 tons of gold, which is roughly how much gold Cyprus is expected to sell, would add some significant selling pressure to the market. The precious metal is down over 3% today and has broken a pretty solid horizontal support at 1530.
Crude Oil prices have been in a large consolidation pattern since summer of last year. We are watcing for the next major move to emerge from a resolution of the wedge formation that has been in place for the last 9 months. A breakout above $98 or below $92 would signal the next major move for Crude prices. Earnings season have kicked off with Alcoa issuing a slightly more positive projections for economic growth in 2013, it will be important to hear what the general tone is from other multinational companies.
A few quick quick facts about the oil market
the U.S. Energy Information Administration said domestic gasoline demand in the peak spring-summer driving season will slip to a 12-year low of 8.877 million barrels a day this year
U.S. inventories are at their highest level since July 1990. (Link)
Looking closer at the energy sector XLE has also been consolidating and is bouncing off support on strong volume. The price action looks like a head and soulders pattern but may be transforming into a trading range after the recent bounce of $76. A breakout below $76 would unleash the bears while a breakout above $80 should fuel the next adance. A breakout of this range would suggest a $4 move.
The transportation index is about to present an attractive short entry for those willing. After advancing around 25% YTD the Tranny may be ready to cool off. The 109-110 level would provide a great low risk short entry. Check out the bonus Jesse Livermore chart below. See any similarities?
There has been a lot of buzz around Japan's all-in quantitative easing that was announced last week. The analysts seem to fall into two camps, and I will do my best to outline their positions below. Keep in mind that between the polar ends of the bear and the bull camp are many, many shades of grey where the truth usually resides.
The bull case on Japan is rather simple. The BOJ has been using half-measures for over 20 years to try and get Japan out of it's crippling deflation and stagnation. The two lost decades were the result of half-assed policies that did just enough to placate Japanese politicians but did not do nearly enough to help the economy grow or stimulate demand in any way.
The latest moves from the BOJ are great because at least Japan is finally doing something! A big move like what Japan did last Thursday is the only hope Japan has of escaping the deflationary environment their economy has been stagnating in ever since the epic crash of the early 1990s. With a little luck, Japan will be able to manage the negative fallout from their massive money-printing, force consumers to spend, stimulate domestic investment and this will eventually jolt their economy back into health. The massive rally in Japanese stocks is one data-point the bulls point to as evidence that confidence has returned (though we should note that the BOJ is effectively pushing the Nikkei 225 up by buying ETFs).
The Bulls argue that Japan is a very advanced country with a strong manufacturing base and a lot of capital (human and otherwise) that just needs a little kick in the ass to get out of its 20 year deflationary slump. The most vocal of these bulls is Paul Krugman, who has been calling for Japan to enact such a policy for a long, long time. Dennis Gartman also seems rather sympathetic to this approach, saying that "at least they are doing something". I will post a few Japan bull videos below to illustrate this perspective further.
In the bear camp, Japan has just embarked on a radical experiment which will surely end in their demise, one way or another. For the bears, Japan has too many structural issues to over-come by simply printing money, and in fact, printing money will actually accelerate their inevitable downfall.
Here is the logic: Japan has crippling debt, which sits at over 200% debt to GDP, more than any other country. The only way they can maintain this crazy level of debt is to borrow money, which they use to pay interest on old debt, at ridiculously low rates (Japanese 10 year bond yields around 0.6%). By printing this money, one of two things will happen to cause their collapse.
The first is that investors may lose faith in the Japanese currency, which will cause capital flight as Japanese citizens look to exchange their yen-denominated assets for anything else (gold, US treasures, even European bonds). As this happens, it will become more expensive for Japan to import raw materials they need to manufacture, investors will shy away from investing in Japan and it will cause a currency crisis because the Bank of Japan has unlimited firepower to weaken the Yen, but must use scarce foreign currency to strengthen it. The currency crisis will lead to a broader financial crisis in Japanese banks (as currency crises tend to do) and there will be weeping and nashing of teeth.
The second scenario is in fact kind of linked to the first. In this scenario, Japanese savers, insurance companies and foreign bond holders will flee the Japanese government bond market en mass. The Bank of Japan will, of course, buy these bonds (as they have announced they will do), but investor confidence will be lost. Who wants to own an asset which is created by the Japanese government sold to the BOJ and mainly owned by the BOJ. The BOJ will lose all credibility and investors will scramble to remove their capital from Japan, leading to capital and that whole nashing of teeth thing again. The Yen has in fact already jumped 7% since the announcement a massive move for a currency in 3 trading sessions.
The bear case believes that the BOJ's actions are a bridge too far and that the policy decisions taken last week will lead to a loss of confidence in the entire Japanese financial system. Japan has an unsustainable mountain of debt, and is printing too much money and buying too much of their own bonds. The biggest proponents of this view are Kyle Bass, Adair Turner and George Soros (kind of) a number of Foreign Exchange traders.
The Japanese Yen continues to deteriorate this morning, jumping another 1.7% today, which is a big move for a currency (though not as impressive as the initial move on Thursday). The nikkei 225 rose 2.8% todas as it hit a 4 year high, reaching levels not seen since August of 2008.
Markets are still digesting the implications of Japan's move on Thursday. The knock-on effects of such a bold monetary policy are still unknown, despite the euphoric reaction of Japanese stocks. Currency devaluation, while good for Japanese exports and the Japanese stock market has a number of costs. These include higher prices for imports and the potential for uncontrolled currency devaluation, capital flight and rampant inflation. It remains unclear whether the benefits will fully outweigh the risks at this point.
From a technical perspective, the USD/JPY is rapidly approaching the psychologically important 100 level. If this levels is breached, another important resistance level can be found at 101.3, which has served as support and resistance many times in the past, as you can tell from the weekly USD/JPY chart below.
There were two big events today that FX markets have been waiting for all week, and the violent moves did not disappoint First, the Bank of Japan's new boss, Haruhiko Kuroda, unveiled a new monetary policy for Japan in the wee hours of the morning (in North America anyways). Details of the announcement can be found here (great FT Alphaville analysis), but the coles notes of what happend are:
the BOJ will double its monetary base (!!)
It will aim to get the inflation rate to 2% in 1-2 years
It will dramatically increase its purchases of Japanese government bonds (by 50 trillion yen per year, about $500 billion USD) - This is Massive when you consider the size of Japan's economy
BOJ will increase the amount of stock ETFs and REITs it purchases (helping push up the Stock market and real estate prices)
So in essence the BOJ is throwing everything it has at reviving the Japanese economy and getting that coveted 2% inflation rate by buying up tons of government bonds and by indirectly buying Japanese stocks (via the ETFs). This is a very aggressive move that is considered highly experimental. It is not every day that a central bank decides to double its monetary base. Many observers, such as Kyle Bass, argue that this is a dangerous strategy, but that is a story for another day (check out the embedded video at the bottom for Kyle's take).
The second big piece of news was the ECB's interest rate decision and press conference. What happened with that? In short, nothing. The ECB did not move on rates (though Draghi sort of hinted that he might lower rates later) it did not unveil any new program and it generally toed the Eurozone party line. I will write more about this one late
USD/JPY 4 hr chart - the pair rallied sharply after the announcement from around 93 to 96. Overhead resistance is 96.7.
Kyle Bass's take - note that he has been bearish on Japan for a very long time, and thinks that the recent moves by Japan have just accelerated their downfall..
For those unfamiliar, here is Bass's essential thesis: Japan has insanely high debt (over 200% of GDP) and the percent of its government revenue that it uses to pay interest on said debt is growing to an unreasonable level. The only thing that is keeping the party going is the insanely low borrowing costs Japan has managed to maintain on its bonds (under 1% on a 10-year bond). If the interest rate on Japanese bonds ever move up, even slightly, Japan is bankrupt. Below is a long video in which Bass explains his theory.
On Monday we wrote about how NFLX had been in a well-defined trading band for the past few weeks. Well, it appears that NFLX has broken out of this band to the downside and is down over 5% on the day as I write this.
The exact catalyst for the move remains unclear at the moment, though it may simply be a technically motivated selling, as many traders have been attentively watching the meteoritic rise of this once great stock waiting for a break in either direction out of the band. Levels to watch now are 160-163 as a downside support and 176 as an upside resistance. Below is the 4 hr chart showing the trading band that NFLX had been stuck in since early February.
Apple's CEO, Tim Cook, appologized to Chinese consumers in an open letter published on Apple's chinese website today. This was a reaction to criticism that Apple had not been treating Chinese consumers fairly, criticism that came from Chinese media, particuliarily state-owned media, over the past few weeks. In other Apple news, Goldman Sachs removed the stock from its conviction buy list and Fidelity announced that it was cutting its position in Apple by 10% yesterday.
Technically, Apple had bounced off of the $420 support level at the begining of March and has rallied until the stock met resistance at $470. Some technical analysists speculate that AAPL looks like it may be poised to retest that $420 support.
As the S&P 500 has rallied around 10% in the first quarter, Hedge funds have only returned 3.26%, according to Merrill Lynch's Hedge Fund Monitor. This was mainly due to their bullishness on commodities and their cautious stance towards the rally in US stocks. Hedge funds had a pretty bad 2012 as well, returning 6.6% while the S&P 500 returned 16%. With these kind of returns, it will be difficult for these guys to justify their high fees (2% on capital invested + 20% of profits is the standard).