Sunday, November 11, 2007
The US market and emerging markets are ranging from marginally overvalued with catalysts to the downside, to, grossly overvalued speculative time bombs.
I now offer you a quote from Horace and “Ars Poetica”, for those of you who possibly visited my blog, you will remember it;
“Multa renascentur quae iam cecidere cadentque quae nunc sunt in honore”
The moral being that bull markets invariably create bear markets, and that eventually, the bull markets revert to bear markets, while bear markets grow to bulls.
True bear markets offer very low risk entry points with huge potential upside reward potential. True bear markets are reviled by investors as they have underperformed for long periods of time, frequently teasing with cyclical bull rallies in a secular bear trend.
I have emphasized, at least for those paying attention the importance of a catalyst within investment decisions. This is not an area that I have particularly emphasized within my own investments or trading. It is however an attribute that has been on prominent display on this blog for those who were attentive.
The catalyst in this particular opportunity is particularly important as the quantitative valuation is pretty much useless. The numbers themselves provide only the merest hint and they are difficult in any case.
Thus, we are left with an almost pure qualitative play.
Japan has been in a deflationary spiral for some 20yrs now. The stock market, the real estate market, the currency have all been in a secular downtrend.
A number of qualitative factors and one quantitative factor; I shall dispense with the quantitative factor first.
Japanese interest rates are slowly working their way upwards, from 0.25% to 0.5% currently, with further rises planned. Higher interest rates will strengthen, in time the currency.
Let’s now move to the qualitative factors; interest rates around the rest of the world have been slowly rising, faster in New Zealand, Iceland and Australia. As the world economy slows, so these rate rises will slow, freeze, or start to reverse.
Bankruptcy proceedings, both business and consumer are accelerating here in New Zealand. As the US economy slows, so the exponential growth in China will start to slow. The Chinese economy is addicted to export led growth, internal consumption is anaemic.
Thus, a closing of the interest rate spread and thus the carry trade, successful for the last 20yrs will come under increasing pressure.
Further, overpriced assets, that find themselves correcting will also find themselves if purchased with cheap Yen, under pressure to reverse.
Real estate values have again started to rise in Tokyo and other cities. Goldman Sachs, Morgan Stanley and Citibank have been purchasing commercial property in the last couple of months, positioning themselves for the end of the great Japanese bear market.
Rising real estate prices, in time force a rise in the interest rate, which for the purpose of this trade is a good thing.
Currencies trend for very long periods of time and the potential for this trade due to the massive undervaluation engendered by the carry trade is large.
Who are you trading against?
In manias, the last people to get sucked in tend to be the amateurs, seduced by the idea that markets only ever move in one direction. That easy money can be made, that the leverage available via margin can make them very rich, very quickly.
Some time ago, possibly 2 months, an article appeared detailing the extraordinary story that Japanese housewives were dominating the Fx market, engaged in the carry trade. Thus, you are trading against the leveraged Japanese housewife.
It is easy to take an unleveraged position within the Japanese Yen via FXY an ETF that has previously been mentioned on this blog.
In summary, we have some quantitative data via interest rates and numerous qualitative underpinnings to catch a secular bull market in its infancy.
I shall return anon, just off to the gym, information I'm sure that you all were needing to know....but just afraid to ask.
Untl next time-
Ducati, I am curious what is your educational background?
Grant, I'm not sure if I understand the Japanese housewife angle.
Also, you are saying that the world economy will slow, but the Japanese economy is going to pick up, and they will subsequently experience a bull market in equities? Or just the Yen?
Good call on the halfwits.
The Japanese housewives are playing the carry trade, viz selling short the Yen and buying whatever. That pretty much calls the top in a mania.
Of course there will be volatility, but, I feel the risk/reward ratio is definitely in our favour.
I didn't say anything of the sort, in fact I specifically valued the market via a number of methods, and made little or no comment.
It is simply your bias expressing itself.
Sorry only half an answer, currency only at this point, Japanese stocks are not really that cheap atm.
Yes, we spoke about the Yen a few months ago, it's been a good trade ever since.
I personally wouldn't pair it with anything.....but, Short NZ$
Our exporters are screaming, the government raised rates to cool the housing market....it's starting to cool....thus rates could come down.
FXY you don't need an Fx account and it's unleveraged....just buy it and forget about it for the next 3/5yrs
Your information regarding Japan is inaccurate, irresponsible and just plain wrong.
Isnt anything written in these pages a reflection of one's individual bias? Everything anyone says is bias. That is no way to counter a discussion
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