This Is A Time For Great Caution (Money Monkeys Revisited)
By Bert Dohmen , Editor
Dohmen's Wellington Letter
tfc.com
Posted Monday, June 14, 1999 at 09:27 AM EST
As Yogi Bera would say, it's deja vu all over again. The market reminds me of
July-August 1998. Last year, fundamentals in the corporate environment were
positive, and the majority of analysts were looking for a continued upmove in
the market, while I predicted a crash on CNBC in July. It occurred. My
analysis at the time was that the Fed was keeping interest rates too high, which
was putting extreme pressure on the international financial markets. Now it's
slightly different, but we may be in for a rerun.
Today's Producer Price Index number was benign. There is no sign of inflation.
The market should have greeted it with enthusiasm, but instead plunged after
the initial positive reaction. When good news cannot move a market up, it's
time to be very careful.
There were rumors of one or two very large hedge funds in trouble, seeking
help from the Federal Reserve. The so-called "yen carry trade" appears to be
the source of the problem. I've discussed this problem many times. The hedge
funds borrow yen at very low interest rates, convert them to dollars, and then
buy U.S. Treasury Bonds. They do this with up to 100 to 1 leverage. It's
beautiful. But when the markets reverse, you can lose it all even faster, because
then everyone else scrambles to unwind. There are signs that it may be
happening now.
Unwinding of the yen carry trade involves the dumping of U.S. Treasury
Bonds, the purchasing of yen, and dumping of many other good investments in
the portfolio just to meet margin calls. Isn't that what we are seeing?
The stock market on Friday was very weak with the DJI falling as much as
190 points intra-day, and closing with a loss of 130 points. For the week, the
index was down 309 points, back at the correction low of late May. The rally I
had expected lasted only a few days. If the 10,430 level does not hold, then
we have to look at the 10,000 area for next support. The NASDAQ
Composite lost 36 points today and was down 30 points for the week.
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