More Market Observations 07/28/07
Some tidbits from Bloomberg with a large sprinkle of Nattering love....
The BOJ Yen is a proxy for the PBOC Yuan, when the Yuan rises vs $, the Yen rises, giving a haircut to the Yen carry trade.
The carry trade: Speculators borrow Yen at 0.75% then purchase for example corporate high yield bonds denominated in dollars which could pay 8 to 12%.
While holding the asset, they pocket the difference in cost of Yen and profit on bond. Leveraging increases the profit and most speculators or hedge funds are leveraged at 10X to 30X.
A haircut: When the Yen or Yuan revalue vs the $... carry trade speculators are forced to liquidate their positions to pay off the original loans in Yen.
Regardless of the asset's market or currency denomination, the Yen strengthens while the asset value weakens.
Fact or Bullshit?
On 02/21/07 the BOJ raised 25 bps to 0.50%; stock markets plunge till 03/14
On 03/16/07 the PBOC raised 27 bps, the yen revaluation has already been priced in after the BOJ raise on 02/21.
On 05/17/07 the PBOC raised deposit rate 27 bps and widened trading band vs $ 0.5%. From this point on stock markets have gone sideways.
On 07/19/07 the PBOC raised 27 bps:
U.S. stocks tumbled, giving the Standard & Poor's 500 Index its steepest weekly drop in 4.5 years, after turmoil among borrowers prompted investors to flee riskier assets.
The S&P 500 lost the most since September 2002, while the Dow Jones Industrial Average's weekly slump -4.3% was the biggest since March 2003.
The dollar benefited 1.4% from a record low vs the Euro due to a liquidation of foreign equity positions by U.S. investors, a dynamic which has periodically boosted the dollar during times of equity market stress over the past several years.
The dollar advanced against all 16 of the most actively traded currencies except the yen this week, rising 4% vs New Zealand dollar, 3.2% vs Australian currency, 1.5% vs Canadian dollar and 0.6 % vs Swiss franc.
The increase in risk aversion is forcing people to cut back on the carry trade, which has triggered the usual subsequent yen rally...
The yen rose this week 2.2% vs $, 3.5% vs euro; 3.7% vs sterling pound; 6% vs New Zealand and 5.4% vs Australian dollars.
US Treasuries posted the biggest weekly advance in 10 months as the rout in mortgage and corporate debt and equities drove investors from riskier assets.
European bonds posted their longest winning run in almost five months, gaining for a third week, as traders switched to the safety of government debt after stocks plunged around the world.
Investors fled falling equity markets and more than 40 companies worldwide reorganized or abandoned borrowing plans in the past month as investors balked at extending credit.
Chrysler and Alliance Boots Plc failed to find buyers for $20 billion of buyout loans. The retreat has forced banks to take on at least $32 billion of LBO debt (that could not be sold at any price as in NO TAKERS).
Alcoa the world's 2nd largest aluminum producer, which had been the Dow's best performer in 2007 amid takeover speculation, dropped 13% after loans for buyouts dried up.
Shares of other companies that were the subject of LBO acquisition rumors:
Macy's the second largest U.S. department store chain, dropped 12%. Marsh & McLennan dropped 9%; Level 3 Communications lost 14%.
Meanwhile the housing debacle continued: Countrywide shares fell 13% after reporting a third straight quarterly earnings decline and reducing its 2007 forecast.
Overdue payments cut Q2 profit by $388 M, the company said, adding to signs late payments on consumer loans are spreading from borrowers with poor or limited credit histories to people with more reliable repayment records.
Beazer Homes USA, under investigation by the FBI and securities regulators, dropped 20% after posting a Q3 loss on costs for lowering the value of its inventory and scrapping contracts to buy land.
D.R. Horton, the 2nd largest U.S. homebuilder, plunged 13% after reporting its first quarterly net loss in at least a decade as sales plunged and the company wrote down the value of land.
Akamai Technologies fell 25%, the steepest retreat among members of the S&P 500. Analysts questioned whether the largest maker of technology to speed up delivery of Web content is growing fast enough to justify its stock price.
The risk of owning corporate bonds soared to a record on concern that banks and hedge funds face widening losses on subprime mortgages and leveraged buyouts.
On July 26, $599 billion Treasuries traded, the most since at least June 2004. The three month daily average is about $292 billion.
Price swings in U.S. government debt have increased to the highest since March 2005 during the fallout in credit markets.
Merrill Lynch & Co.'s MOVE index, a measure of expectations for Treasury volatility, rose to 93.5 on July 26. The index fell to a record low of 51.2 on May 15.
Credit-default swaps based on $10 million of debt in the CDX North America Investment Grade Index soared as much as $13,500 yesterday to $81,000, the highest since the CDX indexes were created in 2004.
The iTraxx Europe Series 7 Index of 125 companies with investment grade credit ratings jumped 16,000 euros ($21,800) to as much as 60,000 euros, the biggest increase since the index was created three years ago.
The BOJ Yen is a proxy for the PBOC Yuan, when the Yuan rises vs $, the Yen rises, giving a haircut to the Yen carry trade.
The carry trade: Speculators borrow Yen at 0.75% then purchase for example corporate high yield bonds denominated in dollars which could pay 8 to 12%.
While holding the asset, they pocket the difference in cost of Yen and profit on bond. Leveraging increases the profit and most speculators or hedge funds are leveraged at 10X to 30X.
A haircut: When the Yen or Yuan revalue vs the $... carry trade speculators are forced to liquidate their positions to pay off the original loans in Yen.
Regardless of the asset's market or currency denomination, the Yen strengthens while the asset value weakens.
Fact or Bullshit?
On 02/21/07 the BOJ raised 25 bps to 0.50%; stock markets plunge till 03/14
On 03/16/07 the PBOC raised 27 bps, the yen revaluation has already been priced in after the BOJ raise on 02/21.
On 05/17/07 the PBOC raised deposit rate 27 bps and widened trading band vs $ 0.5%. From this point on stock markets have gone sideways.
On 07/19/07 the PBOC raised 27 bps:
U.S. stocks tumbled, giving the Standard & Poor's 500 Index its steepest weekly drop in 4.5 years, after turmoil among borrowers prompted investors to flee riskier assets.
The S&P 500 lost the most since September 2002, while the Dow Jones Industrial Average's weekly slump -4.3% was the biggest since March 2003.
The dollar benefited 1.4% from a record low vs the Euro due to a liquidation of foreign equity positions by U.S. investors, a dynamic which has periodically boosted the dollar during times of equity market stress over the past several years.
The dollar advanced against all 16 of the most actively traded currencies except the yen this week, rising 4% vs New Zealand dollar, 3.2% vs Australian currency, 1.5% vs Canadian dollar and 0.6 % vs Swiss franc.
The increase in risk aversion is forcing people to cut back on the carry trade, which has triggered the usual subsequent yen rally...
The yen rose this week 2.2% vs $, 3.5% vs euro; 3.7% vs sterling pound; 6% vs New Zealand and 5.4% vs Australian dollars.
US Treasuries posted the biggest weekly advance in 10 months as the rout in mortgage and corporate debt and equities drove investors from riskier assets.
European bonds posted their longest winning run in almost five months, gaining for a third week, as traders switched to the safety of government debt after stocks plunged around the world.
Investors fled falling equity markets and more than 40 companies worldwide reorganized or abandoned borrowing plans in the past month as investors balked at extending credit.
Chrysler and Alliance Boots Plc failed to find buyers for $20 billion of buyout loans. The retreat has forced banks to take on at least $32 billion of LBO debt (that could not be sold at any price as in NO TAKERS).
Alcoa the world's 2nd largest aluminum producer, which had been the Dow's best performer in 2007 amid takeover speculation, dropped 13% after loans for buyouts dried up.
Shares of other companies that were the subject of LBO acquisition rumors:
Macy's the second largest U.S. department store chain, dropped 12%. Marsh & McLennan dropped 9%; Level 3 Communications lost 14%.
Meanwhile the housing debacle continued: Countrywide shares fell 13% after reporting a third straight quarterly earnings decline and reducing its 2007 forecast.
Overdue payments cut Q2 profit by $388 M, the company said, adding to signs late payments on consumer loans are spreading from borrowers with poor or limited credit histories to people with more reliable repayment records.
Beazer Homes USA, under investigation by the FBI and securities regulators, dropped 20% after posting a Q3 loss on costs for lowering the value of its inventory and scrapping contracts to buy land.
D.R. Horton, the 2nd largest U.S. homebuilder, plunged 13% after reporting its first quarterly net loss in at least a decade as sales plunged and the company wrote down the value of land.
Akamai Technologies fell 25%, the steepest retreat among members of the S&P 500. Analysts questioned whether the largest maker of technology to speed up delivery of Web content is growing fast enough to justify its stock price.
The risk of owning corporate bonds soared to a record on concern that banks and hedge funds face widening losses on subprime mortgages and leveraged buyouts.
On July 26, $599 billion Treasuries traded, the most since at least June 2004. The three month daily average is about $292 billion.
Price swings in U.S. government debt have increased to the highest since March 2005 during the fallout in credit markets.
Merrill Lynch & Co.'s MOVE index, a measure of expectations for Treasury volatility, rose to 93.5 on July 26. The index fell to a record low of 51.2 on May 15.
Credit-default swaps based on $10 million of debt in the CDX North America Investment Grade Index soared as much as $13,500 yesterday to $81,000, the highest since the CDX indexes were created in 2004.
The iTraxx Europe Series 7 Index of 125 companies with investment grade credit ratings jumped 16,000 euros ($21,800) to as much as 60,000 euros, the biggest increase since the index was created three years ago.
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