Mel's Blog

"Carry on my wayward son, there'll be peace when you are done" - Kansas.  And you can't turn on any business channel without hearing about the "carry trade".  Today, Stocks are under selling pressure in response to weak Asian stock markets from what appears to be an unwinding of the carry trade.  Let's explain what this means.  The carry trade means borrowing in a low interest rate currency, like the Yen, and investing the proceeds in higher interest rate assets in other countries such as the US or Australia.  While this strategy may appear to make sense and be relatively safe, the risk is in fluctuations between the two currencies.  For example, with low interest rates in Japan, they may decide to go for higher yields in the US, by purchasing our Bonds and dividend yielding Stocks.  But if the Dollar weakens against the Yen, the percentage loss in the currency can more than wipe out any percentage arbitrage in the yield.  And of late, the Japanese Yen is strengthening against foreign currencies, wiping out any gains in the carry trade - and this is putting some selling pressure on both Stocks and Bonds in other nations, including the US as the carry trade is "unwound".

The Institute of Supply Management (ISM) Services was reported at 54.3, which was lower than expectations of 57.0.  This is another concern for the long term health of our economy, and comes on the heels of Alan Greenspan's warning of a potential recession.  The chances for a Fed rate cut later this year have been escalating, and this adds even more importance to Friday's Jobs number.

On the technical side, Bond Traders are trying to figure their next move and will be highly influenced by Stocks.  At the moment, the Dow has tested and bounced higher off of support near the 12,000 level.  Should stocks remain above this important level, Bonds may move lower, especially since they are overbought and ripe for a reversal lower.  We will continue to float, but cautiously, as the market is very volatile and the Bond appears unstable at the moment.