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Merrill's "Japan call" from yesterday more compelling

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Yesterday in our commentary we mentioned that Merrill Lynch had made an interesting call regarding their thoughts that investors should perhaps look to "overweight" their stock allocations in Japan-based equities and "underweight" their stock allocations in US-based equities.

In last night's market wrap on premierinvestor.net I touched on the currency action that had taken place that day as the Japanese Yen March futures (jy02h) had jumped higher against the US$, and depicted a near-term change in sentiment toward a stronger Yen and weaker US$ scenario.

Today, this very March Yen futures contract is seeing further gains and it looks as if some market participants may indeed be selling the US$ and buying Yen.

Japanese Yen March Futures (jy02h) Chart - Daily Interval

Last night I noted the suspicious looking move higher in the Japanese Yen versus the US$. Today's move has me thinking that there's something definitely in play here. My thought last night was that this type of move could actually be a benefit to US- based multinationals that derive meaningful revenue/sales to many Asian markets where their currency may be pegged to the Yen. A stronger Yen gives consumers in Japan and parts of Asia more purchasing power. In a part of the world that has been in a decade of recession, a strengthening Yen will help consumers there.

This may also help US-based multinationals that target the Asian markets as a place to sell their goods and services. Many corporate executives have complained in recent quarters that the strong US$ has made their products/services less competitive on price in foreign markets and has therefore put a drag on sales.

What's interesting about the stronger Yen is what we see in the Treasury bond market today. We're seeing a good round of selling in the 10-year YIELD ($TNX.X). It has been noted in the past that the Japanese have been big holders of US Treasuries and today's action in the bond market, coupled with that found in the currency markets, hints that the MARKET may indeed be selling some of their Treasury holdings, generating US$, then converting that cash into Yen (sell US$, buy Yen).

If you've ever traveled abroad, the first thing you do when you arrive at your foreign destination is take your US$ to the foreign exchange counter and convert some of it into the local currency. In essence, what you're doing is selling your US$ and buying the local currency. I think this is what may be contributing to today's bond and currency action.

10-year Treasury YIELD Chart - Daily Interval

Today's Treasury action in the 10-year YIELD ($TNX.X) shows a good round of selling taking place in this bond. This action gives some credence to the thought that the market is beginning to not feel that the perceived "safety" of this bond is worth the 5.0% annualize YIELD.

What may also be in play is that there may be some selling in this bond by some of the mortgage loan originators like Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM) as they look to hedge some of their issued mortgages. While there was a rather "big stink" made of some derivative strategies made in the mortgage lending business in recent weeks, both of these mortgage lenders MUST hedge their mortgages. If you recently lent money to a consumer in a 30-year mortgage when mortgage rates were 6%, wouldn't you need to try and hedge a $200,000 note from time-to- time? If you loaned money at 6% and the mortgage rate market (tied to 10-year and 30-year YIELD) moves higher, your spread narrows. If YIELD continues to rise, you would most likely want to sell the bond short, to offset previous loaned dollars to try and capture the spread, or hedge the money previously loaned.

Does the Dow's move make sense?

Now one has to begin wondering if perhaps some of those "boring" stocks we have been profiling as bullish may be making sense. I surely didn't see this current market action unfolding months ago (Yen and Treasury) but perhaps the stock MARKET knew about some of this current activity months ago, thus some of bullishness we were alerted to in many stocks that tend to have a lot of international exposure.

I've got some more thinking to do, but have you noticed the nice two-day gain in shares of Japan-based Sony Corp. (NYSE:SNE) $56.20 +5.24%.

It could well be that in an "early-stage" of economic recovery in Japan, one Japan "bellwether" like Sony (SNE) may be an early benefactor to a recovery in that region of the world.

Sony Corporation Chart - $1 box

Shares of Sony (NYSE:SNE) trade as an American Depository Receipt "ADR" on the NYSE. Yesterday we were eyeballing this stock as a bullish play on a break higher at $51. The stock gapped up to $51.77 (gaps up/down are common among ADR's) and we thought bulls should establish just 1/2 bullish position as the stock was still trading below bearish resistance, but felt early entry still presented good upside with bearish resistance well above at $72.

Your retirement account

Do you have the ability to expose some capital to an "Asian" based sector fund? If so, think about moving a portion of that retirement dollar into that sector of the world. Do some legwork and make sure the fund manager has some good stocks that the MARKET likes. How do you do that? Find the ticker symbol for the mutual fund, then put it to the supply/demand test and pull up a point and figure chart on that fund. Is the basket of stocks that the mutual fund manager has been buying finding the same level of bullishness that he/she feels the stocks hold? If not, look for a fund manager that is on the right side of things and his/her stocks are giving buy signals.

Jeff Bailey
Senior Market Technician
Option Investor

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