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Five Things You Need to Know: Now THAT'S GDP; Yen for Gold?; The Illusionists; Large and in Charge?; Picturing Annihilation


What you need to know (and what it means!)


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:


Gross Domestic Product in Japan for the October-December quarter checked in at 1.2% from the previous quarter, much stronger than was expected.

  • The Japanese economy in the October to December quarter grew 1.2% from the previous quarter, much stronger than the consensus forecast of a 0.9% increase.
  • The yen jumped immediately following the data release, hitting its best level since early January ahead of the most recent Bank of Japan meeting on interest rates.
  • The Japan GDP print raised the annualized growth rate in Japan to a whopping 4.8%, much stronger than the consensus forecast of 3.8% to 4%.
  • Meanwhile, personal consumption also came in ahead of forecast, at 4.4% annualized versus 3.8% expected.
  • The GDP print means the Bank of Japan is now far more likely to raise rates at its next meeting scheduled for next week than was previously thought.
  • As we noted earlier this year, back in 2000, the last time the Bank of Japan attempted to end its zero interest rate policy, GDP was printing at a 3.2% annualized rate.
  • Does an interest rate boost from the Bank of Japan spell the end of the carry trade?
  • According to some estimates, interest rates in Japan would need to move higher by more than two percentage points before the carry trade stops making sense... which leads us to today's Number Two.

2. Yen for Gold?

Despite all the talk about the rising Yen, what if people are continuing to exchange Yen for, say, gold? What would make them stop?

  • Well, higher interest rates on the paper, for one.
  • Below is a chart of gold in Yen. Isn't that a breakout?
  • It is until something happens to cause a change of course.
  • Something like the Bank of Japan raising interest rates?
  • Which leads us, indirectly, to today's Number Three...

3. The Illusionists

See, there's also this: a chart of the Nikkei versus gold (red) and the Nikkei in nominal terms (overlaid in black).

  • Things look much better without gold, don't they?
  • After all, didn't Asian stocks hit new highs this morning?
  • So how do we continue making things look much better?
  • Keep the carry trade alive.
  • If asset price increases globally are strictly a monetary phenomena, that is, not "real," then everything depends on the illusion continuing.

4. Large and in Charge?

We've talked about this quite a bit, the coming outperformance of large cap stocks versus average stocks.

  • In December we were questioned by two separate reporters from two separate publications after we wrote a piece talking about this very thing.
  • Alas, their incredulity prevented our comments from finding the light of day beyond Minyanville.
  • Be that as it may, today we're going to look at a chart showing the S&P 500 SPYDER (SPY) versus the S&P 500 Equal-Weight ETF (RSP).
  • The SPY is capitalization-weighted. The RSP is equal-weighted.
  • Why is that important? Because the largest stocks in the S&P 500 have the most influence over its movement, while in the RSP every stock gets one, and only one, vote.
  • So looking at this ratio helps illustrate a very simple concept:
    When the SPY is outperforming the RSP then that means the largest stocks (which have the most sway over the SPY's capitalization-weighted movements) are outperforming the one-stock, one-vote RSP.
    - When the RSP is outperforming the SPY, as has been the case for most of the past six years, then that means the average stock is beating the sleeping giants.
  • For example, in 1998-2000, the S&P 500 gained 51%, compared to a meager 21% for the S&P 500 equal-weighted index.
  • That's why the average investor with a diversified portfolio felt short-changed each morning by the morning paper showing the S&P 500 hitting new highs during that time span.
  • However, between January 2000 and the present, the S&P 500 equal-weighted index has gained a massive 71.4%, compared to a loss of 1.7% for the S&P 500. Talk about short changed.
  • So below, we see that in point and figure terms, the SPY has recently given its first buy signal versus the RSP in more than three years.

5. Picturing Annihilation

While Federal Reserve Chairman Ben Bernanke continues with this semi-annual congressional testimony, it occurs to us that, "Who says economists make the best central bankers?" Hedge funds hire non-finance people all the time. Some even prefer it.

  • We would suggest that the fact that American physicist Richard Feynman never was at least considered for chairman of the Federal Reserve in his lifetime might have been one the gravest policy errors ever committed.
  • You probably thought we were being tongue in cheek above when we were momentarily distracted by quantum mechanics, but markets demand cross-disciplinary thought... at least they do if we wish to think outside the herd.
  • We can't pretend to even partially comprehend Richard Feynman's work, but interactions and collisions between "particles" (economic data, price, time, macro concepts) in financial markets often result in bizarre transformations.
  • These interactions and "collisions" between, say, crude oil, Japanese stocks, gold and US Treasuries can be difficult to conceptualize and even talk about, just as in physics, calculating interactions between (matter) electrons and (antimatter) positrons) can be difficult and unapproachable.
  • One of Feynman's many, many contributions to physics were Feynman diagrams, pictures that allowed physicists to work with challenging concepts.
  • Below is a Feynman diagram from the American Scientist Online.
  • It looks difficult to me. But it can also be expressed in story format and even related to finance: Two particles (say, crude and 10-year Treasury) are traveling along in time at a relative speed. Before long they meet up, perhaps have a few drinks together, then depart. Upon leaving, they discover that not only has their speed changed (too many pomegranate margaritas), but that they are not really even the same anymore at all (you know how booze changes some personalities).
  • The story and diagrams may not be wholly analogous to finance, but the conceptualization is useful we think in imagining new ways of thinking about financial markets.

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