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New Rules for Global Investing in 2007By Gary Dorsch Jesse Livermore, widely regarded as one of the greatest stock market operators of all-time, considered himself a humble student of the market until his last day in 1940. "I study the market, because it's my business to trade. In the forty years which I have devoted to making speculation a successful business venture, I am still discovering new rules to apply to that business," he once remarked. "Experience has taught me the way a market behaves is an excellent guide for an operator to follow. Observation gives you the best tips of all, and the behavior of a certain market is all you need at times. You observe, and then experience shows you how to profit by variations from the usual, that is to say, from the probable." Had Livermore been operating in today's markets, he might have found it intriguing that the direction of the Japanese yen would become a key driver of the Dow Jones Industrials. Traditional indicators such as the health of the US economy, company earnings, cash flow, and future sales forecasts are all taking a backseat to forecasting the direction of the heavily manipulated Japanese yen in the foreign exchange market, in order to predict the Dow Jones Industrials. The infamous "yen carry" trade, which involves borrowing in Japanese yen at less than 1% to invest in riskier assets like commodities and stocks, has mushroomed to an estimated $500 billion to $800 billion in size. It's made the Bank of Japan, the world's top central banker, and the US Treasury and the Federal Reserve are key collaborators with Tokyo in guiding the dollar /yen and the Dow Jones Industrials.  Someday, the Dow Industrials' obsession with the dollar /yen exchange rate will fade into oblivion. But for now, it's the endless flow of cheap capital from Tokyo that is pumping up the DJI Index to record highs, at a time when the US economy is slowing towards zero percent growth, and S&P 500 earnings growth is expected to slow to +6 to 8% YoY in Q'1, after 4-_ years of straight double-digit profit gains. The DJI's 416-point plunge on February 27th, the seventh largest daily point loss in history, ignited by a sudden plunge in the US dollar from 120.75-yen to 118-yen, is just a fading memory. Five weeks later, the DJI is once again riding high, recouping most of its panic stricken losses from the Feb 27th to March 13th shakeout, the shortest and shallowest correction from a record high in history. Instead, it's the US dollar's recovery from a low of 115.25-yen on March 5th to 119.25-yen on April 10th that has revived bullish sentiment on Wall Street. Higher stock prices at a time of slowing earnings growth can raise S&P 500 P/E ratios to dangerously high levels. But it's the Bank of Japan's 0.50% overnight loan rate and the Fed's purchases of long-dated bonds in the Treasury market, that are the primary obsession of US and global stock market operators these days. US Labor Apparatchniks Prop-Up the US Dollar The "yen carry" trade appears to be a "risk-free" trade, with both the Japanese ministry of finance and the US Treasury working for a stronger dollar against the yen. However, the "yen carry" trade did blow-up on February 27th, from unexpected meltdowns in shares of US sub-prime lenders. Top US mortgage lender Countrywide Financial (CFC.N) extended its recent losses to $32.50 /share on April 2nd, after top sub-prime lender New Century Financial filed for Chapter 11 bankruptcy. The demise of New Century came less than two months after it had first disclosed problems with delinquent and defaulted loans. It stopped making loans last month, after having made nearly $60 billion in 2006. "Sub-prime woes are not a small issue," said the 81-year-old former Fed kingpin "Easy" Al Greenspan on March 16th. "Much of the strength in consumer spending over the past five years could be traced to capital gains, both realized and unrealized, on surging housing prices." "If home prices keep falling, there could be more of an impact on the broader US economy's momentum," Greenspan warned. But the US Plunge Protection Team has been working overtime with Japan's ministry of finance, to repair the damage to the global stock markets, by downplaying the risks to the US economy from the sub-prime loan meltdown, and pursuing policies to keep the yen weak.  After "closely tracking" the slide CFC.N in February and March, the dollar /yen exchange rate began to diverge from CFC.N in April, as currency traders bet on a rosy US employment report on April 6th. "Observation, experience, and memory, are what a successful trader must depend on. He must not only observe accurately, but remember at all times, what he has observed," said Livermore. "He cannot bet on the unreasonable or the unexpected. He must always bet on probabilities and try to anticipate them. Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens, as well as when the expected comes to pass," said Livermore. To read the rest of this article, please click on the hyperlink below http://www.sirchartsalot.com/article.php?id=57 Gary Dorsch 321gold Ltd |
