MSN Money: If US Stocks Fall, Blame the Yen
U.S. stocks appear headed for a correction, and investors should blame the Japanese yen as one of the primary factors, according to MSN Money columnist Anthony Mirhaydari.
Mirhaydari said hedge funds have been taking positions against the yen to fund stock purchases, but that trade is unwinding just as U.S. stocks have hit threshold highs.
A wave of selling pressure on equities is ahead, according to Mirhaydari, head of his own money management service, Mirhaydari Capital Management.
“Many technical indicators are now flashing red — suggesting a correction is ahead,” he wrote.
“Surely, this is playing a role. And it’s disappointing to see Wall Street worry more about an ever-so-slight reduction in Fed stimulus than what is developing into the best global economic tailwinds since 2011.”
But the bigger factor in a looming correction is evidenced by the rising Japanese yen, despite the best efforts of Japan’s central bank to keep its value down so as to boost that nation’s export economy.
“All I can tell you is that this is a big deal since ‘yen carry trades’ – or bets against the yen that funded stocks purchases and other investments – has been one of the primary drivers of stocks all year,” Mirhaydari explained. “Now that it’s reversing, hedge fund types are selling their investments, buying the yen and closing the trade.”
It’s getting harder to squeeze profits from revenue
Since the financial crisis, companies have become adept at squeezing more and more profit from every dollar in precious revenue, making for profit margins that are near record highs.
That squeezing has sustained profit margins at their current high rates, but it’s not sustainable without appreciable revenue growth, according to Russ Koesterich, global head of investment strategy for iShares at Blackrock.
“The next leg is going to have to be top-line growth, not just here but globally,” Koesterich said. Lowinterest rates, cheaper labor costs, and lower commodities prices have allowed for those margins in a slow growth environment, Koesterich said. But as interest rates rise and wage growth becomes more of an issue, revenue growth is going to be needed even more to drive profits.
While some corporate commentary has hinted that conditions in Europe and China are improving, a look at second-quarter data from Thomson Reuters shows that’s not a broad sentiment.
According to Thomson Reuters, S&P 500 companies that derive more than half of their revenue from the U.S. have had earnings-per-share growth of 7.6% and revenue growth of 3.5%. On the other hand, companies getting less than half of their revenue domestically, have seen earnings-per-share decline by 4.9% and revenue fall 3.2%.
Eurozone Funding Shortfall Rises To Over $4 Trillion, Increases By More Than $500 Billion In A Year
What happened next was inevitable: Basel III’s implementation was delayed as there was no way Europe’s banks could satisfy their deleveraging requirements, while the actual capital shortfall hole became bigger and bigger. Today, 16 months later, the FT discovers what Zero Hedge readers knew long ago in “Eurozone banks need to shed €3.2tn in assets to meet Basel III.” In other words, not only has Europe not fixed anything in the past year, but the liquidity tsunami injected by the central banks merely taped over the epic capital shortfall that just got epic-er, increasing from €2.8 trillion to €3.2 trillion, an increase of over half a billion to over $4 trillion in one short year.
Sadly, just like back in April 2012, so now, Europe has no hope of actually addressing this much needed deleveraging and so the can kicking will continue until the number rises to $5 trillion, $6, $7 etc until one day the market’s “head in the sand” strategy finally fails and every emperor around the world is found to be naked.
Bank Branch Network Shrinking in Europe
A queue of pensioners waits to board a brown and green bus in the medieval village of Maderuelo on Spain’s arid central plains. It only comes once a month and won’t take them anywhere, but they’re mostly happy with the service.
The bus, parked up alongside a van selling frozen fish, is a mobile bank run by bailed-out Spanish lender Bankia to serve remote areas with no branches. Inside it looks much like any other small branch, but for the elastic bands that keep the furniture in place when it’s on the move.
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Japan’s Q2 GDP Misses By A Huge Margin
The Nikkei is off -1.25%.
Australia’s S&P/ASX 200 has fallen -0.07%.
Korea’s Kospi opened down -0.13% but has since recovered to +0.58.