Several days ago, the Japanese government stepped in and promulgated a major intervention to attempt to prop up the sagging yen. For a brief time, the yen vaulted higher. But it didn’t take long for the strong trend to reassert itself. First, one has to understand- artificial means can be used to prop up a financial instrument. But the cold beauty behind any market is that prices eventually go to where they should go. For instance, just before Thornburg Mortgage went bankrupt a couple of years ago, the stock rallied from 1 to 5 in days before going to 0 almost immediately after touching 5. But the bottom line is to understand what is going on. There are a few reasons. Japan did not get hit as badly as the rest of the world from the subprime mess. So although their banking system isn’t the greatest on the planet, it has become stronger relative to that of many other nations. Next, the yen is now seen as a “safe haven” type of currency –right or wrong- due to ears of economic and debt weakness in Europe and the United States. An even more important reason is the idea of the carry trade. As recently as five years ago, institutions borrowed yen at very low rates of interest and used the yen to invest in other nations where the rate of return was higher. However, with the stock market not having done as well with risk-averseness a major tenet of the thinking of many investors, the cash need is high. Thus a lot of the borrowed money is being paid back- with yen borrowed which has created high demand for the yen. And the number one factor has been a stream of repatriated cash in addition to the yen borrowed from the carry trade. Japanese investors and citizens have been bringing their money back home. In a country notorious for its high savings rate, this is a time where the savings rate hurts. By not spending, the economy cannot get cranking. So a flood of yen by the government combined with the aging of the population has not helped as Japanese debt has skyrocketed. The banks hoard the money, they sell it back to the government, and the banks strengthen a bit (those that are still solvent from the 1990’s mess) while the government’s finances weaken. It’s a vicious cycle. The stronger the yen, the worse the profit margins for Japanese companies that sell their products overseas. Should this yen strength continue, it may well continue to be the number one factor to watch on a daily basis as the move reverberates throughout the currency markets as well as affects the commodity movements. In turn, this could eventually have quite an impact on the stock market over the long-run much less immediate-term.
Markets in Asia were mixed overnight with Hong Kong up 0.2% with Tokyo down 0.2%. Markets are nicely in Europe however with London and Frankfurt both up 0.7%. The dollar is sharply lower with gold and oil sharply higher. Futures have been rallying all morning with the levels at the high of the day as of this writing. The gains should hold if not build as the day progresses as long as the dollar stays weak. Focus on the pool of earnings plays, casinos, financials, techs, and relative weakness plays.
Reiterating-
If the whole story is not there -
If something is good, assume either a short thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified.
If something is bad, assume either a buy thru unchanged or an A-B-A2 (preferably to the downside in a downside market and the upside in an upside market) based on direction of the market unless specified-
Good- The following stocks have good news and/or a strong technical pattern
MCP, REE- closed near their highs
FFIV- closed near a high after posting good earnings
BRCM- closed near a high after posting good earnings
CML- closed near a high after posting good earnings
NTGR- closed near a high after posting good earnings
OII- closed near a high after posting good earnings
LIFE- closed near a high after posting good earnings
DV- closed near a high after posting good earnings
VOCS- closed near a high after posting good earnings
JKS- closed near a high despite announcing an offering
LVS- good earnings; WYNN and MGM may move with it
AKAM- decent earnings
BEC- decent earnings
SYMC- decent earnings
IRBT- decent earnings
FLEX- good earnings
IDCC- decent earnings
AEM- decent earnings and featured on “Mad Money” last night
RITT- closed near a high
RDWR- closed near a high after posting good earnings
NETL- closed near a high
ARUN- closed near a high
SMCI- closed near a high after posting good earnings
GSIC- good earnings
BGS- featured on “Mad Money” last night
UTHR- good earnings
ABX- decent earnings
CELG- decent earnings
MOT- decent earnings
NBL- decent earnings
NIHD- decent earnings
XOM- decent earnings
TKR- decent earnings
Bad-The following stocks have bad news and/or a weak technical pattern
PNRA- closed near a low after posting bad earnings
JNY- closed near a low after posting bad earnings
AMZN- closed near a low
AAPL- disclose lower-than-expected gross margins in a government filing…but the disclosure was actually made in last week’s conference call
V- poor earnings
SKX- terrible earnings
ESRX- poor earnings
FLS- poor earnings
NSC- poor earnings
ALL- poor earnings
RYL- poor earnings
FTI- poor earnings
FIRE- terrible earnings
NLY- poor earnings
UHS- poor earnings
OTEX- poor earnings
ISSI- poor earnings
PLXS- poor earnings
BYI- poor earnings
CAVM- poor earnings
EXXI- share offering
TER- poor earnings
STV- copyright investigation into an online video company in which STV holds a minority stake
AVP- poor earnings
OCLR- poor earnings
AN- poor earnings
CL- poor earnings
PMI- poor earnings
Earnings:
THURS OCT 28 BEFORE
ABX AN AVP
AVT BEN BX
CAH CELG CL
CME DOW EK
EQT FO GT
HOT HRS ITW
LEA LINE LLL
MCO MMM MOT
NBL NIHD NXY
OCLR OMX OSK
PLD PMI PNW
POT PTEN RTN
SII TEL TEN
TKR UTHR WMB
XEL XOM ZMH
THURS OCT 28 AFTER
APKT ARBA BG
BMC BMRN CEPH
CERN CLF CSTR
DECK DRC EGO
EMN EXPE FSLR
GNW HGSI HLS
JAH KLAC LPS
MET MFE MSFT
MTW MWW MXIM
NETL NLY NUVA
NVTL PWER RMD
RNOW ROVI SBAC
SGMS SUN SWI
SWN VAR VPRT
VRSN VSEA
Epiphany Trading, LLC
www.epiphanytrading.com
Erik R. Kolodny- Chief Markets Strategist
Brendan P. Byrne- President
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