Unrelenting Mess

It seem that by early  yesterday morning session Wall Street will decouple itself from the bad day of Asian bourses with a September rebound in new homes sales. But in the afternoon U.S. stocks are slammed again at the close to end sharply lower. See the chart of intraday S&P 500.

The EURUSD was steadier during the Asian session but fall on the wayside during the European trading period and recovered at American trading time and closed lower than the previous day. See the daily chart of EURUSD below.

Heavy buying by a Swiss bank has helped carry EUR/US through the 1.25 level during the early US session.

The financial crisis spreading through the former Soviet bloc is setting up  a second  banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

A few of analysts rated the upcoming banking crisis in Europe to be the biggest currency crisis the world has ever seen.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the Eastern Europe  market bubble..

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of  current US credit problems.

Iceland’s financial difficulties foretaste of what the crisis may mean. Iceland’s demise has left them nursing likely losses of $74bn (£47bn). The Germans have lost $22bn.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc.

Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn). 

The low interest rate in US and Japan sat out the emerging market credit boom. The lending spree was followed eagerly by the Europeans – often using dollar and yen balance sheets, adding another ugly twist as global “deleveraging” causes the dollar and yen shot upward.

Note: This was written during lunch break of Bursa Saham Malaysia.

The morning session, Asian bourses was badly wacked especially the Bursa Malaysia and Singapore exchange.

It seem that the financial crisis is far from over or in fact is not yet stabalised.

Mr. Limp.....catch any falling durians?..ouch..ouch  ouch...

Ringgit And US Dollar

The US Dollar Index (USDX) is an index or measure of the value of the United States dollar relative to a basket of foreign currencies(the euro(EUR), Japanese yen (JPY), Pound sterling (GBP), Canadian dollar (CAD), Swedish krona (SEK) andSwiss franc (CHF).

The chart below is a weekly US Dollar index since July 2005. It clearly depicted that US dollar was in despaired from third quarter 2005 to March 2008.

The next chart show the daily movement of US Dollar Index from October 2007.
It indicates that the dollar went sideway from March 17 to end of July 2008. Technically, a classic W bottom or double bottom was formed indicating a reversal of price trend.

It was widely speculated that the reversal of dollar downward movement was initiated through currencies intervention by US, European and Japanese governments to check the downward slide of the dollar. The intervention was partly helped by the Chinese government forcing its commercial banks to hold more dollars and also by a huge buying American treasury bills by foreign central banks, especially the Chinese and the Middle Eastern Countries. It was reported that in August, the increase in Treasury bill buying far exceeded that which is needed, to offset the huge U.S. trade deficit. The Treasury bill buying happened right before the value of the U.S. dollar started surging.

At the dollar gained a momentum upwards of its own in August despite the first sign of the credit crisis, people who were previously short, and “stopped out”, decided that the wind was blowing in favor of the dollar. These opportunistic speculatos converted their funds to go long on the dollar and short on euros, yen, and whatever

EURUSD WEEKLY

GBPUSD WEEKLY

USDJPY WEEKLY

USDSEK WEEKLY

From the above weekly charts which are the charts of Euro against USD (EURUSD), UK Pound against USD (GBPUSD), USD against the Japanese Yen (USDJPY) and USD against Swedish Krona (USDSEK) by March the dollar stalled and reversed its direction by end of July. With the exception of the Yen all currencies continued its reversed direction.

And The Ringgit moved in similar fashion. From March to June the Ringgit formed a cup and saucer pattern.

USDMYR

Let us examined what financial disaster is unfold in March?.

In March 2008, the Federal Reserve Bank of New York provided an emergency loan to Bear Stearns to avert a sudden collapse of the company. The company could not be saved, however, and was sold to JP Morgan Chase for as low as ten dollars per share, a price far below the 52-week high of $133.20 per share, traded before the crisis, although not as low as the two dollars per share originally agreed upon by Bear Stearns and JP Morgan Chase on March 17, 2008. This is when the start of the bull run of the dollar.

The dollar moved upward uninterrupted until September and corrected itself upon The US Government takeover Fannie Mae and Freddie Mac in September 2008.

On Sunday, September 14, it was announced that Lehman Brothers would file for bankruptcy after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers.

The same day, the sale of Merrill Lynch to Bank of America was announced. The beginning of the week was marked by extreme instability in global stock markets, with dramatic drops in market values on Monday, September 15,

On September 16, the large insurer American International Group (AIG), a significant participant in the credit default swaps markets suffered a liquidity crisis following the downgrade of its credit rating.

The Federal Reserve, at AIG's request created a credit facility for up to US$85 billion in exchange for an 79.9% equity interest,

Toward the end of the week, short selling of financial stocks was suspended by the Financial Services Authority in the United Kingdom and by the Securities and Exchange Commission in the United States.

From the week of September 15, the dollar and the Yen become a safe-haven currencies as both currencies appreciated against all other countries’ currencies.

-The Yen remains boosted by capital fleeing back to Japan from all major currencies while Japanese investors are keeping capital at home as the Nikkei hits 26-year lows,

- While the dollar enjoyed its safe-haven status of its own, boosted in part by repatriation as U.S. investors flee emerging markets and other overseas investments.

The UK Pound was pounded due to the similar problems that has besetting the US financial industry while the Euro Zone countries have their problems with their banks exposure in Emerging market of Europe and Latin America which is to a greater degree than US banks are exposed to the sub-primes.

As for the ringgit....against our Southie neighbour, the Aussie Dollar. We can get about One Aussie Dollar for RM2.20 as against RM3.10 three months ago.

Bank Negara's Monetary Policy

Malaysia's overnight policy rate, introduced in April 2004, is the third lowest in Asia outside Japan. Only Hong Kong and Taiwan have lower borrowing costs.

Last Friday, Bank Negara has kept its overnight policy rate at 3.5 percent in  20 straight meetings since April 2006, even as other Asian nations raised borrowing costs this year to cool soaring prices.

Asia has the highest trade/GDP exposure of any emerging market region. The credit turmoil and the coming recession in The West dictated that the direction of both monetary  policy and currencies in Asia is  - rates to be cut and currencies to weaken across the board. Asian countries have so far followed a policy of intervening to cushion the pressure of depreciating  currencies.

Asian countries have not pursued such policy done by the Hungarian Government by increasing interest rate to bolster the currency.

The current financial turmoil present a dilemma   in choosing how to support their currencies without damaging economic growth. A lower interest rate helps the limping economy but depreciated the currencies.

The chart below showed, the currencies of four SE Asian countries Singapore, Malaysia, Indonesia and Thailand as against the US dollar. The four currencies since one year ago have moved downward with Indonesia and Thailand fared much worse than Malaysia and Singapore.

In the second chart, since 3 months ago, Singaporean, Malaysian and Indonesian currencies have fallen at the same rate but Thai currency is not much affected. Note. Thai Baht suffered a heavy fall since early this year as compared to the three other currencies.

Why does Bank Negara done a rate cut as do other Asian Countries?

 ``Having been the only central bank in the region not to hike rates this year, Bank Negara will likely argue monetary conditions remain extremely accommodative, and there is no need for easing,'' said Kit Wei Zheng, a Singapore-based economist at Citigroup Inc. ``Bank Negara will probably need to see decisive signs of a sharp economic slowdown in the data before it decides to cut rates.''

-With one of the lowest rate in Asia, The Bank Negara feels that the low rate is already accommodative to the present economic situation.

- The government cut gasoline prices three times since late August as crude oil fell from a record in July. With Consumer-price gains slowed to 8.2 percent last month from 8.5 percent in August and falling fuel price, Bank Negara stated that inflation has peaked.

-Bank Negara has generally been cautious rather than using pre-emptive approach to monetary policy making. Bank Negara will probably need to see decisive signs of a sharp economic slowdown in the data before it decides to cut rates.

DBS Bank in its report said that any impact of the financial turmoil on third quarter GDP data, which will be announced late next month, will enable Bank Negara to assess the ground before changing its policy stance.

 As for the depreciating currencies against the dollar, most of us wonder with all the tumultuous   banking/financial  situation in US, why does the dollar is still strengthening?

 There are a lot of reasons forwarded by market commentators for the perceived status of US dollar as safe heaven. But one thing is certain that the credit crisis caused the downward spiral in stock market in US and this affected the local Asian markets. Foreign  funds in local market which is dominated by the Americans and Europeans have fled fast and furious from the region's emerging markets, repatriating cash to cover positions in home markets left exposed by seized up credit facilities and driving down drastically the region's share prices and currencies. When the situation getting stabilized, the Asian currencies are expected to swing in the opposite direction.

Warren Buffet Pretender

The relationship between the stock market and the economy especially it relationship to the the barometer of economic wealth. .the GDP or GNP has befuddled not only layman but also economic analysts especially the press. But the fact is….stock market index..like KLSE Composite Index is one of the country economic leading indicator….there is other leading indicators, eg the trade balance, consumer confidence index..etc.

The big question is can we influence the index thereby with a positive move in the index, the economy will showed a better health?....Most economist will said that it is totally hogwash strategy i.e.. to prop-up the economy by pumping monies into the stock market. The index is just the sentiment and reaction what the average Joe, Mat, Ah Chong or Muniandy..the investors see what is going to happen in the economy in near future. The problem is our economy is intertwined with the world economy especially in US, Europe and Japan ..and also Asia. The stock market also is subject to influence by outside force.. For example, the factor of foreign investors in our stock market …the outflow of foreign fund from local stock market caused a downward spiral on the index as shown currently where the European and the American fund managers shifted their portfolio out of the country since their home countries are facing credit crisis….thereby the argument “ Given that the stock market index is a vital barometer of our economic health, it should not be left entirely to market forces to influence its movement.” Thereby, the dimwit’s injection of 5 billion ringgit in the market is a good strategy to invigorate the economy……… is just blamed dumb.

Where is the market now….by October 22nd the market is as per chart below. The blue color chart is the KLSE Composite Index while the black color is the Singapore ST Index. Our KLSE Composite Index is still above the Jun 2006 low while the ST Index has blown passed the June 2006 low. The ST Index clearly leads to confirm the recession in Singapore…Are we still in denial and try to manipulate the Index….If the fund of 5 millions ringgit was an initiative to invest ala Warren Buffet…than I welcome it…..but please be reminded that….it hurts to catch a falling durian….on technical….the Composite Index showed a classic head and shoulder pattern…it is expected the target downward is to 850-830 level…

Correct, correct, correct....or denial, denial, denial

What was written in the local newspaper today.

THE STAR (www.thestar.com.my)

-- To revitalize the economy, 5.0 billion ringgit more will be pumped into the market to support undervalued stocks, Deputy Prime Minister Najib Razak said.

-- The government's pre-emptive move to stabilise the stock market and the economy is seen as a right step in arresting any external-led economic weakness on the domestic economy, analysts said.

 BUSINESS TIMES

-- The government will double the size of Valuecap Sdn Bhd to 10 billion ringgit to buy undervalued shares, providing support to the local market, Deputy Prime Minister Najib Razak said.

 My reaction…..

 What the f……….

       Prop up the stock market to stabilize the economy?....My Ass( opps sensitive)   My foot….to     The Limp.

 At the same time, however, The Limp also highlighted the country's resilience.

"Yes, our stock market is affected by the sentiment in other markets, but I would like to say that we are not in a financial crisis and certainly we should not talk ourselves into one,"

What our historian and political analyst Dr. Khoo Kay Peng had said……correct, correct. correct… opps wrong words.. he did actually said….denial, denial, denial.. He emphasized that "The government cannot hold back on solid economic responses especially in terms of policy direction and market liberalization,".

You are right Dr. Khoo. Maybe.. we could have another  swearing event for The Limp to swear that the country economy is all right…Believe in him…Duh…..  

Fibonacci, The Limp, The Market and The Economy

In mathematics, the Fibonacci numbers are a sequence of numbers named after Leonardo of Pisa, known as Fibonacci. Fibonacci's 1202 book Liber Abaci introduced the sequence to Western European mathematics, although the sequence had been previously described in Indian mathematics.
The first number of the sequence is 0, the second number is 1, and each subsequent number is equal to the sum of the previous two numbers of the sequence itself, yielding the sequence 0, 1, 1, 2, 3, 5, 8, 13, 21 .. etc.
One of the remarkable characteristics of this numerical sequence is that each number is approximately 1.618 times greater than the preceding number. This common relationship between every number in the series is the foundation of the common ratios used in retracement studies.
The key Fibonacci ratio of 61.8% - also referred to as "the golden ratio" or "the golden mean" - is found by dividing one number in the series by the number that follows it. For example: 8/13 = 0.6153, and 55/89 = 0.6179..
The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right. For example: 55/144 = 0.3819.The 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. For example: 8/34 = 0.2352.
In addition to the ratios described above, many technical analyst and traders also like using the 50% and 78.6% levels. The 50% retracement level is not really a Fibonacci ratio, but it is used because of the overwhelming tendency for an asset to continue in a certain direction once it completes a 50% retracement (Gann Analysis).
This sequence and the retracement are important in finance/investment especially for technical analysts. The most important thing about Fibonacci retracement is that it act as support and resistance. When the price goes up, they act as the resistance and visa versa. Also like ordinary supports and resistances, when a Fibonacci level is broken as a resistance, it can act as a support and to be retested. It is the same as when a Fibonacci retracement level becomes broken as a support (it can act as a resistance then).
It is proven that the effect of Fibonacci retracement have on the market is not negligible and in fact is highly considerable.
Why Fibonacci numbers have such a big effect on the market. Why the prices become stopped sometimes for several days below or above the Fibonacci levels?
Fibonacci was originally investigating the pace at which rabbit will multiply when breeding when he made his mathematic discovery. The Fibonacci ratios play an important role in nature and in Biology it is discovered that the numbers are used in the formation of our body, from our genes (DNA molecule) to our internal and external organs, So they are also effective in our behavior. And the price of the market goes up and down because of the behavior of the traders: Buying and Selling >>> Bulls and Bears

Consequently, the market has to show reactions to the Fibonacci levels.

Let us review the Fibonacci retracement in our stock market.

The 1997 monetary crisis, brought the KLSE Composite to a low of 261.33 by September 1998 (point B). From the top at Point A (1278,94 on March 1997) to point B, the market rebound way above the 61.8% level to point C. (979.10 a February 2000), but it don’t touch 78.4% level. Such a moved could be attributed to a sharp market fall during the monetary crisis and within a short period i.e. in 18 months.

The market subsequently corrected downward to point D (at 547.72 May 2001).

Than from hereon, the market had a long bull run that ended in January 2008 at 1,452.57 point. From this point we could extrapolated base on past historical market movement that the market could fall to a Fibo retracement of 61.8% or 78.4%.

If we base on a retracement from point D-E, the 61.8% retarcement level is already violated and the 78.4% retracement level is at 760.5. On the basis of point B-E, the market is expected to touch the 50% level at 889 and than to 61.8% level at 739 point.

Base on on the last major bear market n 1997-1998, the index is expected to recover before the final plunged. The most probable support level is expected at 750 point. At current level of 905.3, the market has about 17.0% more to go.

From looking at the KLSE Composite index and using the Fibonacci analysis, we could probably expecting that our economy is following Singapore into recession or a very low growth rate. Remember that from my last post, our market reach its height in January 2008, while for Singapore and US the high was reached in October 2007.

The Limp and the dimwits have been harping that our economy is very resilient to the current credit crisis. Hope the dimwits have the facts right.

Follow Me

The credit crisis that started in US, whacked the stock market hard.

The chart below is two years weekly chart of S&P 500 that represent Wall Street, ST Index the Singapore counterpart and KLSE Composite.

The three index clearly shown that the moved downward mimic each other..With the American market lead the way.

The S&P 500 went toppish on October 11, 2007 at 15,761 points, than to a of 12,570 on March 17,2008.It rebound back to a high of 14,216 on May 19  before falling to a low of 12,344 on July 15. Before the heavy fall due to the credit crisis it went to a high of 13,053 on August 11. Last week it closed at 9,406 points.

The Singapore market reached its peak on October 10, 2007 at 3,906.16 and fall to a low of 2,745.96 on March 17, 2008. It corrected to a high of 3,269 on May 5^th and closed at 1,878.51 last week.

Our local bourse when to its height of 1,524.69 on Jan 14, 2008,and fall to 1,296.33 on March 7. It recovered to 1,305.9 by April 29 and closed this week at 905.23.

Since its high, wall street has fall by 40.3%, Singapore by 51.9% and Malaysia by 40.6%..

Stock market is one of the leading indicator of the country economic health. Singapore become the first regional economy in recession and looks like it will remain so for at least a year. According to Song Seng Wun, an economist at CIMB "In terms of the recession, we have written off 2009 and there's a question mark over 2010. We're expecting up to two years of contraction in GDP (gross domestic product) because Singapore is such a small, open economy and so dependent on external demand,"

For Malaysia, CIMB also  has cut its growth forecast for 2009 to 3 percent from 5 percent. That is way below the government forecast of 5.4 percent growth and the Bank Negara's 4-5 percent. According to research from investment bank UBS, Malaysia is third ranked in terms of exports as a percentage of gross domestic product in its emerging market universe, after Singapore and Hong Kong

The Malaysian Institute of Economic Research (MIER) forecasts economic growth to slow to just 3.4 percent next year as exports slow on the back of declining demand due to the global financial crisis.

MIER also expected that the country will not change its fiscal policy therefore its budget deficit is likely to surge to its highest level in five years this year and will remain stubbornly high in 2009 as economic growth slows in the face of a global credit crisis. MIER stated that the country's budget deficit could exceed 5 percent of gross domestic product (GDP) this year, the highest since 2003, and could be as much as 4 percent in 2009. The government predicts the budget deficit will drop to 3.6 percent of GDP in 2009 from 4.8 percent predicted for this year.

So Mr. Limp..better listen to your younger brother.

Falling Knife or Durian

Stock market around the globe has been falling like a falling knife or durian last week. It moved straight down heavily.A few commentators have been particularly insightful during this time of wrenching falling knife/durian, and it is refreshing for me to read all the commentaries and tried to grasp what have been written so far. 

By Friday, most analysis either opinionated that the market:
a) has completed this capitulation and reversed upwards very hard, or
b) going to drop further.

Let us see what analysts in the world biggest and influential stock market, Wall Street have commented. 

1. Barry L. Ritholtz, CEO and Director of Equity Research at FuisonIQ, an online quantitative research firm, outline 10 reasons for bullish market. There are: 

1.      Relative Strength Indicator, SPX, 1928-2008

Ever since the beginning of the S&P500, the RSI's monthly indicator has only dropped below 30 on four occasions: 1929, 1973, 2002, and 2008.

All 3 prior instances were very close to lows.

2.  SPX Losses

The S&P has given up nearly the entire gain from the 2002-03 period to the October '07 highs.

        This is a major correction that, like the many trading rallies in the 1970s, should set the stage for the          next leg up.

Note that these were not buy and hold rallies, but 6 - 18 month trades.

3. Dow Components and the 200 Day Moving Average

All 30 Dow stocks are below their 200 day moving average -- a condition that has only occurred once before -- and the last time was right after the 1987 crash.

4. Cash Allocation

Investors current allocation to Cash is well above its 21 year mean and are at the highest levels since ’02, ’98 and ’90 lows.

   5. 90/10 days

This week has seen three 90% downside days, reflecting massive liquidations. They can only continue for so long.

6. Percentage NYSE over 200 Day MA

The percentage of stocks trading over their 200 day moving average is at multi year lows. Yet another historically excellent entry point.

7.  Gold vs SPX

The cost of an ounce of Gold is now greater than the S&P500; This last occurred in the early phase of the 1982-2000 bull market -- around 1984.

8. VIX Moving Average

The VIX (also known as the Fear Index) hit a multi-year high of 70.90, reflecting extreme levels of emotion in the markets. We like to look at this on a 50 day moving average.

                                          VIX Deviation From 50-Day Moving Average

1998 Reading    Market Up + 27 % (3 Months Later) and + 36 % (6 Months Later) 

2001 Reading   Market Up + 22 % (3 Months Later) and + 22 % (6 Months Later)

2002 Reading  Market Up + 14 % (3 Months Later)  and + 19% (6 Months Later)

If History bears out this should be a good buying opportunity with a 3 to 6 month horizon.

 9.   S&P500 is down 47% from its peak level one year ago. Transports are down 38%.       Naother significant fall. 

10. Look at the charge below: Can you tell which chart is which ?  Very interesting how the top chart (the 2002 low) and the (the current market chart - lower chart) look almost identical 

B.   Corey Rosenbloom, trader, educator, analyst , wrote in his blog: http://blog.afraidtotrade.com

 The two prior 7 day decline in Dow since 2000.

 “ I thought it might be helpful to look back since 2000 to show the two previous times the Dow Jones Index was down seven consecutive days in a row. “

 

The  two charts below show the before, during, and aftermath of these instances ……

The first time it happened was  before and after the September 11th terrorist attacks. The Dow moved downward for three days prior to the attack, and the market was closed for a week after the attack.  The first chart showed what happen.

The market actually fell for 8 days in a row before recovering sharply back to the 10,000 level by the end of the year.  Price ultimately went lower, bottoming at 7,200 almost exactly a year later in 2002.

 

Ultimately, price peaked at 10,600 in March, 2002 before heading lower to bottom in October.

The next time it happened was in mid-2002 in the throes of the Bear Market a few months prior to the actual bottom.

“If you look closely, you see my strategy (buy at the next open after a seven-day consecutive decline occurred) backfired actually in the middle of the consecutive move.  There was a white (up-day) candle in the middle, and were it NOT for that solitary up-day, price would have closed lower for 12 days in a row.

 

Price ultimately “snapped back” but not before plunging 1,000 more Dow points before a reversal.  Even then, the ’snap-back’ reversal only took price to 9,000 before plunging down to 7,200, marking the Bear Market bottom (price ultimately retested this low in March, 2003 before beginning the Bull Market that ended just a year ago - October 2007).

 

So now that the Dow Jones index has declined 7 days in a row, which will it be? A snap-back rally or a continuation?  We can go back further to test, but since 2000, a seven-day consecutive price decline has happened only two times, and for both times, a divergently different outcome resulted.”

C.  Finally , we took a look at Elliot Wave as written by Mike Shedlock , a registered investment advisor representative for Sitka Pacific Capital Management. 

S&P 500 Crash Count 

 In Elliott Wave terms the heavy fall this week, The S&P 500 index is in wave 3 of 3 down.

 In Elliot Wave theory, "impulsive" waves trace out in patterns of 5 and corrective waves in patterns of 3.

Note the blue wave 5 clearly distinct waves down off the October 2007 high until the March 2008 bottom (the big red Impulse Wave 1).

In theory, wave 3 like wave 1 should subdivide into 5 clearly distinct waves. Currently that is how it seems to be playing out. (the blue number 1,2 and 3). 

Base on the above chart we are at  wave 3 of 3 "crash count" highlighted.

Once the wave 3 of 3 is done, there will be wave 4 of 3 which is expected to be short

before Wave 5 of 3 follow through downward. Once 5 of 3 down ends, we place a big red Impulse 3 on the chart. 

Wave 4 up will begin after 5 of 3 down finishes. Look like wave 4 up to be choppy and overlapping (ups and downs in seemingly random patterns). 4 up will be tough to play. It is best to avoid it unless you are extremely nimble.

Wave 5 i.e the big red 5, down will be the washout phase where everyone throws in the towel. Pessimism will reign supreme and many will swear off the stock market for good. Given that we blew straight past 960 without so much as a pause, the likelihood that wave 5 down blows right through the 2002 bottom is quite high. 

The chart below is what we expect the five impulse wave down.

From my experience, timing the real bottom of the market is quite an obvious treacherous job especially the current market situation where it has obliterated historical trends or patterns. Simply, said is that the current nature of the market downside is a totally new animal due the fundamental weakness of American financial system that had a contagious effect to the Europeans and than to other nations.

Analogically, I think the stock market or any financial markets  frequently operates like a rubber band. It gets too stretched (oversold or overbought) and we see a snap back. The more extreme the rubber band is stretched, the more extreme the subsequent bounce and sell off. The problem that we're dealing with now we've seen absolutely no significant snap back which now opens the door to the question that no one wants to face. Which is, to put it bluntly, has the rubber band (i.e. the market) finally been broken? And, if so, what does that mean for the future of the market and the economy?

As a reference, we observed the 1997 Asian monetary crisis that have a great effect on our wealth and the economic foundation of our country. Till today, those countries that have been affected are unable to recover to the pre monetary crisis level. There is no more Asian Tigers with an economic growth of 10% (except for China and India.

Anyway, the big question now is....who want to catch the falling knife or durian?.  As for me….better let if fall to the ground…and pick it up later.

Fall...Fall.....It's the season

The yen carry trade is a "cheap money" gambit that exploits the extraordinarily low borrowing rates available in Japan. The carry trade, which involves cheaply borrowing the Japanese currency to buy other assets, comes unstuck in the current banking and financial crisis.

What is Yen Carry Trade?

In the Bank for International Settlements (BIS) Quarterly Review dated March 1999 there is a section titled "The yen carry trade and recent foreign exchange market volatility." This report describes the phenomenon known as the "carry trade" and then explains what happened in the foreign exchange markets with regards to the Japanese yen during the period from 1995 to 1998.

Japan's low interest rates, an anomaly in the financial world, result from Japanese central bank monetary policy, which has, Richard Jerram, the Macquarie economist, said, "defied orthodox economic thinking for more than 20 years."

For the carry trade, the ploy involves borrowing yen and immediately selling them for a currency that is either itself a higher-yield instrument (e.g., the New Zealand Dollar, Brazilian Real and Mexican Peso) because of the interest rates in the other country, or using them to buy higher-yield or higher-risk instruments (e.g., Turkish stocks). Because it combines risks of high leverage with risks inherent in a higher-yield asset class, the carry trade is highly sensitive to foreign exchange moves and liquidity fears.

As reported by The Times of London, hedge funds have long used the carry trade for cheap leverage, but there are also thought to be vast exposures to yen volatility in the Thai, Korean, and Indonesian banking sectors, where the Japanese currency has been borrowed heavily to meet funding needs. The British banking sector turned to a version of the carry trade -- yen-denominated bond issuance -- when credit conditions tightened around the Northern Rock crisis. Indian banks' use of the carry trade surged 180 per cent between 2005 and 2007.

After seven years of providing the cheapest source of funds for investors buying higher-yielding financial assets, the yen is appreciating as $US587 billion ($757 billion) of subprime mortgage-related losses force banks to restrict credit. It strengthened 4.4 percnt; on a trade weighted basis in September, according to the Bank of Japan's effective exchange rate, the most since August 2007, when the seizure in capital markets began.

The yen rose toward a six-month high against the dollar after the International Monetary Fund said the world economy is headed for a recession next year, with expansion in the U.S. forecast to grind to a halt. The yen also traded near its strongest in three years versus the euro on speculation a global stocks sell-off will prompt investors to reduce holdings of higher-yielding assets.

The current stocks dismal performance helped deter carry trades.

Richard Benson, who oversees $US14 billion of currency funds at Millennium Asset Management in London refer the Yen as “ a counter-cyclical currency, When the global economy looks bad, the yen should do well”.

The US Dollar/Japanese Yen currency pair continues to trades almost lock-step with the Dow Jones Industrial Average (highly correlated), while the US dollar has likewise moved with the price of Crude Oil through recent trade.

The correlation of US Dollar/Japanese Yen pair and the Dow Jones Industrial Average is currently almost at its highest. The current investment theme is every downward move in global equity indices will be follow by short positions in the low-yielding Yen.



Dow Jones Industrial Index



USD/YEN



Yesterday, stocks plunged, sending the Dow Jones industrial average down 679 points -- more than 7 percent -- to its lowest level in five years. Refer to Dow Chart above. The USD/YEN was moved up to previous day high during the Asian session, moved sideway during European session with high volatility before plunge down during US session.

October is usually the best time for bottom buying for the stocks. Yesterday heavy fall in Dow indicate further downward fall is expected before market stabilize. The USD/YEN chart indicates that the pair is currently looking for the 4th wave of Elliot Wave retracement before the final 5th wave down. Retracement is expected at 38.2% level.