Friday’s market action on the very weak U.S. jobs number—just 88,000 jobs created in March—put worries about U.S. economic growth on center stage.
At least in the short term.
What with earnings season highlighting companies’ growth for the first quarter and projected growth for the second quarter, and what with the Commerce Department set to release retail sales figures for March on April 12, I think it will be easy for the market to get caught up in growth worries and for the bulk of investors to start behaving as if growth were the most important issue facing the market.
Don’t go with the crowd. Recent numbers casting doubt on U.S. growth rates shouldn’t be ignored, but they haven’t changed the basic forces driving global financial markets.
This is still the central banks’ game. And currencies—the relative price of the dollar, the euro, and the yen—are still the most important mechanism for transmitting messages from the central bank to the markets.
If I’m right and this remains the central banks’ game, I’m looking for a strengthening dollar (and a weakening yen and euro) to continue to put downward pressure on the price of oil, copper and other commodities—and to continue the rout in gold.
U.S. economic growth does figure into this equation since weaker than expected U.S. growth will temper the boost that the dollar might otherwise deliver to Japanese and U.S. equities. Decent growth in the U.S. economy is likely to give the current rally more room to run.
But growth is really a sidebar to the main story.
Which isn’t to say that the story hasn’t changed at all. Read more
Too far too fast?
The yen fell another 1.7% against the U.S. dollar today to 99.23 to the dollar. The currency has now tumbled 6.2% since Thursday’s more aggressive than expected move by the Bank of Japan. The yen is now down 21.4% in six months.
Support for the yen is just ahead, though, at 99.75 to the dollar and I think the Japanese currency may need to make a couple of runs at 100 yen to the dollar before it breaks below that level.
Some backing and filling would be only normal after this big a move and I’d expect to see some profit taking over the next few days, especially among stocks of exporters and big banks that have moved up so strongly in the last week. For example, shares of auto exporter Mazda Motor (7261.JP in Tokyo) are up 17% from April 2 through the Tokyo close on April 8. Read more
New Bank of Japan Governor Haruhiko Kuroda didn’t disappoint today. After his first meeting as head of Japan’s central bank, Kuroda announced that the bank will buy 7.5 trillion yen of bonds a month, significantly more than the 5.2 trillion yen projection by economists surveyed by Bloomberg. The bank will also double Japan’s monetary base within two years.
And finally Kuroda suspended the Bank of Japan’s “banknote rule.” Under the rule, the central bank had pledged to keep the value of its bond holdings below the amount of cash in circulation (excluding securities held in its asset-purchase program.) That rule is “temporarily suspended,” the Bank of Japan announced.
The Tokyo market, which had sold off yesterday on worries that Kuroda might be timid in his first moves, rallied, climbing 2.2% overnight. With the massive program of bond buying certain to put downward pressure on Japan’s currency, the yen fell 3.23% against the dollar to 96.14.
Meanwhile in Frankfurt, the European Central Bank kept its benchmark interest rate at 0.75%.
It’s more accurate to think of Mitsubishi UFJ Financial Group (MTU in New York) as a securities portfolio rather than as a bank right now. And from that perspective, Mitsubishi UFJ is likely to be one of the biggest beneficiaries of the downward trend in the yen that I expect to resume as soon as the financial markets move past the chaos that is Cyprus.
For an indication of what the weak yen does to the income statement at Japan’s biggest bank just take a look at the February 1 report of third quarter earnings. Third quarter profit doubled as the rally in the Tokyo stock market based on a falling yen led to higher fee income and smaller stock portfolio losses. That doubling in earnings came even though as a bank Mitsubishi’s business continued to lag. Income from lending—a core bank business, no?—fell by 7.8%, for example. Making up for that weakness was a big reduction in impairment charges on the bank’s equity portfolio—Japanese banks typically take big equity positions in the companies they lend to—and an increase in earnings from the bank’s brokerage unit.
Impairment charges from the bank’s shareholdings dropped to 90.9 billion yen in the nine months that ended on December 3. That was a 41% drop from the same period a year earlier and was down from 174 billion yen in the first six months of 2012.
Earnings at the company’s brokerage business, Mitsubishi UFJ Securities Holdings, rebounded to a 10 billion yen profit from a loss of 12 billion yen in the year-earlier quarter.
With the Bank of Japan signaling that it will announce aggressive moves to weaken the yen at its April 3 to 4 meeting, I think we’re likely to see a resumption of the rally in Japanese stocks that has stalled as turmoil in the EuroZone has led to a flight to safety in the yen that stopped the decline of that currency.
Japan’s big banks give you broad-based exposure to any upward move in Japanese equities. Any of Japan’s Big 3 banks can do the job in your portfolio. I prefer Mitsubishi UFJ because the ADRs trade with a 1.2 million unit average daily volume in New York. That gives them better liquidity—easier entrances and exists—than ADRs of Sumitomo Mitsui (SMFG in New York with 670,000 unit volume) or Mizuhi (MFG in New York with 530,000 unit volume.)
I’m not looking to hold Mitsubishi UFJ for any longer than the yen decline continues. I’m adding the ADRs to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ today with an initial target price of $7.10, about 22% above the $5.92 New York close today, March 26, on the ADRs. I’d re-evaluate policy at the Bank of Japan if the ADRs get to that level—or if it looks like the yen’s downward trend has stalled to see how much life there is left in a falling yen.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own positions in any stock mentioned in this post as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
Yesterday,, March 14, Germany left the EuroZone.
Oh, nothing official. And I’m not holding my breath waiting for any objective confirmation such as the re-introduction of the Deutschmark. But the new German budget marks the beginning of the eventual effective end of the EuroZone and the euro.
What exactly happened that’s so momentous? How can a single national budget make such a difference?
The German budget for 2014, announced by German Finance Minister Wolfgang Schauble Wednesday, March 13, on the eve of the March 14-15 European summit, includes another 5 billion euros in spending cuts. Total net new borrowing for 2014 will drop to 6.4 billion euro, a 40-year low. And it puts the German budget on a path to balance in 2015. That’s a year earlier than required by the German constitution.
If fiscal prudence is your goal, then this budget deserves the praise heaped upon it by Philipp Rosler, Germany’s Economy Minister, who said: “With all modesty, this is a result of historic proportions. The lesson from the sovereign debt crisis is that solid finances are essential. Thanks to this approach Germany is in the vanguard in Europe. Our success with a policy of growth-oriented consolidation is the envy of the world.”
The problem—aside from the smugness of those comments–is that fiscal prudence isn’t the most pressing goal in the biggest economies—next to Germany—in Europe. Read more