Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: pater tenebrarum who wrote (31148)	10/22/1999 10:22:00 PM
From: dennis michael patterson	Read Replies (2) \| Respond to of 99985

Hey Heinz, do you ever sleep?? It's 4am in the land of Mahler,Klimt,Musil, and Bernhard!!

To: pater tenebrarum who wrote (31148)	10/24/1999 11:23:00 AM
From: KM	Read Replies (1) \| Respond to of 99985

To Heinz particularly, but a different take on the dollar/yen and an argument that foreigners may not be selling U.S. stocks: Global Briefing: Reassembling the Puzzle of the Strong Yen By Marc Chandler Special to TheStreet.com 10/24/99 12:10 AM ET What happens in the present often helps shed light on what happened in the past and what may occur in the future. This is especially appropriate regarding the recent performance of the yen. Pundits generally would offer two explanations for the yen's strength. The first was that foreign investors were driving the yen higher as they scrambled to re-weight portfolios in favor of Japanese equities. This sounded good because the benchmark Nikkei Average has been the best performer among the major industrialized countries by a wide margin after underperforming in recent years. However, the explanation was flawed because it did not sufficiently account for other facts. Most importantly, while foreigners were indeed significant buyers of Japanese stocks, they were even more significant sellers of Japanese bonds, by a magnitude of about 3 to 1. There was a net outflow of foreign portfolio investment from Japan in April, May and June. The second explanation claimed that rather than foreigners, it was Japanese investors selling off their foreign assets and repatriating the money that accounted for the yen's strength. If the first explanation was selective in its use of facts, the second seemed to ignore them altogether. It simply wove a (not-too-creative) story relating the strength of the yen to weakness in the U.S. and European asset markets. But if truth be told, in the first half of the fiscal year, Japanese investors purchased 11.23 trillion yen ($97 billion at 115 yen/dollar) of foreign assets. This is at the upper end of past Japanese investor behavior. Cut to the present. The dollar stabilized against the yen this month after falling precipitously during the summer. The most striking thing about this is that the same general group of Japanese investors who were reportedly the featured buyers of yen earlier are now the consistent sellers. Japanese life insurers and trust banks have reportedly been buying the dollar and the euro. The difference appears largely temporal in nature, i.e., the start of the new fiscal half-year. Putting this together like a jigsaw puzzle with what we know about the general pattern of portfolio flows offers a better explanation for the swings in the yen's value and may give us a sense of what might happen going forward. First, the explanation. The yen's strength in the summer appears to have been driven by Japanese life insurers and trusts raising their hedging ratios. That means, for example, that a Japanese life insurer may be buying a U.S. corporate bond but selling dollars to offset in whole or in part the risk-associated swings in the yen's value against the dollar. Money management and regulatory issues encouraged such strategic decisions. In recent years, as the yen trended lower and the Japanese asset markets underperformed, Japanese institutional investors generally ran low hedge ratios. But the tide began to turn at the end of the third quarter and early in the fourth quarter of 1998. The Federal Reserve and the Bank of Japan intervened (and sterilized that intervention, by the way) to strengthen the yen. This helped inititate the process by which Japanese institutional investors re-examined their hedging strategies. This was also encouraged by two regulatory-type changes. The life insurers, which had been significant buyers of foreign bonds in 1997 and 1998, came under the regulatory scrutiny of the Financial Supervisory Agency, the watchdog that had been focused on addressing Japanese banks' bad loan problem. In addition, starting in April, the Japanese regulatory authorities took more seriously the common-sense idea of marking-to-market, or the valuing of securities at market rather than book price. The life insurers were under pressure to strengthen their balance sheets. The best way to do this was to remove or reduce the component or components with the greatest volatility, in this case foreign exchange. That operation appears to have been completed in the first half of the fiscal year. This explanation has several implications. First, with the life insurers finished reformulating their portfolios, one of the sources of the yen's strength has come to an end. The high point of yen strength against the dollar and the euro appears to be behind us for the remainder of the year. Second, the next leg up for the yen may occur in February-March as the fiscal year winds down. During that period we may see another run at the 100 yen level. There are several forces blocking a more significant decline in the yen. These include purchases by Japanese exporters, currently believed to be in the 106-106.5 yen range, and leveraged funds buying the yen, as a couple are rumored to still be unwinding losing positions. In addition, if the yen were to weaken significantly, say with the dollar moving back above 115 yen, Japanese institutional investors would likely take advantage of the opportunity to raise hedge ratios again by buying yen. A further implication here is that the decline in the U.S. stock market is not the result of the Japanese liquidating their holdings. The most recent data suggest that foreigners, and especially European investors, continue to have a strong appetite for U.S. assets, including stocks and corporate bonds. This suggests that the market may be on more solid footing than would be the case if foreigners were indeed significant sellers. -------------------------------------------------------------------------------- thestreet.com