Astute reader Shaun forwarded along a great email with his thoughts about the sovereign debt situation, and included a couple of fantastic charts that illustrate examples from Japan and Argentina. Both charts are courtesy of Reggie Middleton's excellent BoomBustBlog.
The first item we'll explore is Japan, a nation that has become increasingly hooked on public sector stimulus since its credit bubble burst in 1990. As you can see below, when stimulus waned, the Nikkei was soon to follow:
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Vitaliy N. Katsenelson, CFA submits: I gave a presentation last week at the Value Investment Seminar in Trani, Italy (here is a link to the PDF). I strongly suggest you visit their website in a few weeks, as it will have presentations and videos. It was a terrific event; I learned a lot.
I spoke about China, Japan, and our favorite stock idea: eBay (EBAY). I changed the title of the China presentation to “China, the Mother of All Grey Swans” (instead of “Black Swans”). A while back, when I shared this presentation with my readers, I was corrected: China is not a black swan, because a black swan is a rare, significant, and unpredictable event. However, the consequences of what is transpiring in China and Japan are for the most part predictable (especially if I am writing about it). We don't know when they will play out, but they are predictable.
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By David Veitch
The Bullish and Bearish Outlook for the Japanese Yen.
Home of sumos, samurais and sushi, Japan occupies a unique place within world history. Part of this history involves Japan’s ascendency as a centre for international trade and commerce: salarymen, massive conglomerates and innovation serve as some of the defining features of the Japanese economy. In the world of finance, Japan has also played a pivotal role. Take, for example, the development of the first organized exchange with standardized futures contracts in Dojima, circa 1730.
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Since taking office last month, Prime Minister Naoto Kan has dramatically shifted the focus of political and economic debate in Japan to the nation’s shocking finances.
Japan is in danger of financial collapse, Kan warned, as he called for a hike of the 5 percent consumption tax. Coming just before an important upper house election on Sunday, it was a bold move to touch a traditional ‘third rail’ of politics. And in doing so, he has turned the poll into something of a referendum on increasing the sales tax.
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By Brenon Daly
Japanese telecommunications giant Nippon Telegraph and Telephone (NTT) has made a surprise offer for one of its existing partners, Dimension Data Holdings, an LSE- and Johannesburg Securities Exchange-listed IT services firm with roots in South Africa. This is an unusually large acquisition for a Japanese company, worth 120 pence per share, approximately £2.12bn ($3.2bn) in cash. That’s just over a 15 times EV/EBITDA multiple and 18x the closing share price before the announcement. (NTT has plenty of cash, with about $10bn on hand).
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According to the Financial Times, "China replaced the US as Japan’s biggest export market last year(2009)".(1) Here's a chart from RIETI showing the relative shares of Japan's total exports:
It's remarkable that the proportion of exports to the USA has practically halved in ten years. Figures from Japan's Ministry of Finance show that Japan actually had a trade deficit with China in 2009, while maintaining a trade surplus with the US.(2) This result would be consistent with the idea that Japanese companies source components from China for products that are in part then exported to the rest of the world.
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Japan's Ministry of Finance publishes portfolio flows on a weekly basis. The latest data released earlier today shows the general continuation of recent trends. Japanese investors continue to buy foreign bonds and stocks. Over the past nine weeks, Japanese investors have purchased roughly $87 bln of foreign bonds and $15 bln of foreign equities.
Foreign investors have sold a little less than $20 bln of Japanese shares and sold a smidgen of Japanese bonds. The net portfolio flows out of Japan have been dominated by Japanese investors themselves.
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The Japanese yen ETF has surged this year by close to 5%, putting it at a pivotal point. Either safe-haven seeking by investors could push it further upward or political uncertainty could weigh it down.
The news of political uncertainty may put an end to the yen rally, as traders are worried that a drop in equity prices could increase the chance of a double-dip recession. James A. Hyrczyk for Forex hound says that Japanese equities broke after the nation’s ruling party lost more seats than expected in Sunday’s upper-house elections.
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The Nikkei is reporting that the GPIF (Government Pension Investment Fund) sold a net JPY443.2 billion of Japanese government bonds (JGBs) in fiscal 2009 to March 2010 for the first time in nine years. This was due to a continued decline in pension reserves with rising benefit payouts that Japan's Welfare Ministry sees continuing at least until fiscal 2013.
This is a big deal because the GPIF owns nearly 12% of outstanding JGBs. At the end of FY2009, the fund held JPY79.5 trillion of JGBs, excluding discount bills. Fund reserves have been dropping since fiscal 2006 and fell below JPY124 trillion at the end of FY2009, from a peak of JPY150 trillion. Reserves could fall another several trillion in FY2010. While the fund has not released a forecast for JGB sales this fiscal year, net sales could far exceed FY2009 amounts, say analysts. From FY2014, the Welfare Ministry sees reserve balances recovering as incremental increases in pension premiums kick in, based on reforms enacted in 2004.
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Background
A real estate and stock market bubble occurred in the years from 1986 to 1991. This did not burst all at once because the financial banking system was never under threat of collapse. Instead there was a gradual decline from 1991 to 2003. Thus the 1990's are called the “Lost Decade” in Japan. The bubble was caused by easy money being made available, which resulted in bank loans unreasonable bank loans being made for real estate purchases. Tens of trillions of dollars worth were wiped out with the combined collapse of the Tokyo stock and real estate markets. Only in 2007 had property prices begun to rise; however, they began to fall in late 2008 due to the U.S. financial crisis.
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With ongoing weakness in Europe pushing the euro to double digit losses against major rival currencies this year, many investors have sought out safe havens such as the U.S. dollar to ride out the storm. The presence of general economic uncertainty has sent the greenback sharply higher against virtually every major currency year-to-date. However, a few countries have seen currencies rise against the dollar despite the obvious appeal of the U.S. currency in tumultuous environments. One of these is Japan, as the yen has proven to be stubbornly strong despite implementation of policies designed to weaken the currency.
A perfect storm over the past few months has helped send the value of the yen higher as many other currencies have plunged. One of the most important factors in the recent rise is the unwinding of the carry trade in which investors would borrow in low yielding currencies (such as the yen) and buy into higher yielding ones (such as the Australian dollar or even the euro). However, as interest rates have converged and loan losses build up at banks around the world, this once profitable trading strategy becomes unsustainable, forcing many to buy back yen in order to ‘unwind’ their trades. Another reason for the relative strength of the Japanese yen as of late is the rock-solid balance sheets that many Japanese banks currently maintain, a fact that has helped the country to avoid the worst of the recent financial crisis.
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The Eurogroup of eurozone finance ministers meet ahead of tomorrow’s ecofin meeting and there is interesting in more details about the stress tests. The general political climate in the big 3 eurozone countries has deteriorated. Italy is poised to hold a vote of confidence around mid-week, with problems in the center-right coalition more important that the nipping by the opposition. French President Sarkozy’s support is crumbling. Two junior ministers have already resigned and the campaign financing scandal is diverting attention and energy away from vital economic issues. German Chancellor Merkel’s support continues to flounder.
The Japanese governing coalition failed to secure a majority in the upper house elections held yesterday. The DPJ appear to have won 44 seats, though Prime Minister Kan had set the goal at 54 of the 126 seats at stake. Kan will not resign, but is vulnerable to a challenge at the September leadership contest. The government still has a 60% majority in the more powerful lower house. The rating agencies were cautious, suggesting Japan’s rating could be downgraded if there political situation hampers fiscal consolidation. No action by the three major rating agencies is likely in the near-term, but of the G7, Japan seems the most vulnerable to a downgrade later this year. The yen itself is little changed as the main driver for the yen appears to be the general appetite for risk, which seems to overwhelm purely domestic factors.
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Telecommunications• Softbank Corp. (SFTBF.PK) will book an additional corporate tax payment of 26.5 billion yen ($302 million) for the April-June quarter due to a payment order received by its subsidiary Yahoo (YHOO) Japan Corp. The additional tax payment will push down Softbank's net profit in the quarter by 24.8 billion yen ($282.9 million). The payment order from the Tokyo Regional Taxation Bureau relates to Yahoo Japan's acquisition of Softbank's data center and network business unit in February 2009.Internet• The B2C joint venture established by Chinese search engine company Baidu.com (BIDU) and Japanese e-commerce operator Rakuten (RKUNF.PK) is scheduled to commence in-house tests and come into official operation in third quarter this year. The online mall will provide customers with high-quality merchandises produced by well-known Chinese and foreign brands as well as small- and medium-sized enterprises. Baidu and Rakuten disclosed that they will invest $50 million in the JV, with Rakuten and Baidu taking up 51 percent and 49 percent stake, respectively.KoreaTelecommunications• SK Telecom Co. Ltd. (SKM) will acquire a 25.8 percent stake in Packet One Networks (Malaysia) Sdn. Bhd. for $100 million. The deal will make SK Telecom the second-largest shareholder in Packet One after Green Packet Bhd., which will own a 57.1 percent stake on completion of the exercise. The partnership will allow SK Telecom to expand its global presence while giving Packet One the capital it needs to expand its WiMAX high speed broadband network in Malaysia. The company needs 280,000 customers to break even, which it expects to occur by the fourth quarter of this year.• LG Uplus Corp. aims to reach a profit of 1 trillion won ($816 million) by 2014 by improving its healthcare and banking. LG Uplus was renamed as it absorbed LG Dacom Corp. and LG Powercom. The firm is eyeing on 20 projects which would see its telecom services utilized in new ways. The business would help the firm to generate around 1 trillion won ($813 million) in annual sales two or three years from now. The firm had operating profit of 582.7 billion won ($474 million) in the first quarter while sales were 2.42 trillion won ($1.9 billion). The firm started reporting all its consolidated figures based on International Financial Reporting Standards, or IFRS. The firm will offer around seven to eight of smart phones this year, most of which will be running Google's (GOOG) Android operating system.Hardware• Samsung Electronics Co. (SSNLF.PK) expects sales of its flat-screen TVs to reach 45 million to 50 million units this year, revising up its earlier target by about 20 percent on higher demand. An insufficient supply of 3D TV panels is limiting its ability to set an even more aggressive goal. Suppliers of 3D TV panels are able to meet only 80 percent of the demand from 3D TV makers such as Samsung and Sony. It will take another one or two months to resolve the shortage issue. Samsung was targeting 40 million flat-screen TV sales, including 35 million LCD TVs. Sales outlook will be limited. The firm will have common currency's weakness. Yoon's remark came as Samsung introduced a paid application store for select Web-connected TVs in South Korea and the US in a bid to make a splash in the smart TV area. Google, Sony and Intel (INTC) will cooperate with each other to improve connected TVs in coming months, stoking expectations that smart TV may be the next big wave after the smartphone's success.ChinaInternet• Google (GOOG) might not be able to control website in China. Google’s Internet license won’t be renewed if it keeps automatically redirecting users of the Chinese service to its Hong Kong site. Google’s dispute with the Chinese government over censorship has cost Google partnerships with China Unicom (CHU) (Hong Kong) Ltd. and Motorola (MOT) in the country. Google closed its China search engine and began directing users to the Hong Kong site.• Taobao and Wasu Media Internet have established a joint venture called Wasu Taobao Digital Technology to launch shopping services via interactive digital television as well as a digital products platform called Taohua.com. The joint venture has been registered with a capitalization of 100 million yuan (US$14.8 million). Taohua.com will offer free and premium fee-based content that includes video, audio, e-books, educational materials and interactive entertainment. It is expected to offer a selection of 4,000 motion pictures and 20,000 popular television show episodes at launch. The platform will gradually introduce e-books, music and other digital products. Content providers for Taohua.com include Joy.com and Wasu. The Wasu Television Taobao Mall will initially have twelve main product categories including household goods, consumer electronics, and apparel.• Baidu (BIDU) is looking to hire 30 software engineers from the US next month to help make the company more innovative as it seeks to take advantage of rival Google Inc.'s shrinking participation in China. Baidu will gain market share in China from Google as the Chinese government objects to Google's recent strategy of redirecting Chinese users to an uncensored site in Hong Kong and threatened Google with the loss of its license. Kaiser Kuo will hold a job fair in Milpitas, Calif., and is aiming to hire mid-level to senior engineers. Baidu's hiring in the US market underscores the need for more experienced engineers in China. Analysts say having insufficient number of engineers means companies will fall behind other rivals as competition intensifies in the Internet space.• The Internet Corporation for Assigned Names and Numbers (Icann) has approved a set of Chinese language internationalized domain names. Millions of Chinese language users will soon be able to access the internet using Chinese script. The new IDN country code top-level domains and the associated organizations approved include CNNIC (China Internet Network Information Centre), HKIRC (Hong Kong Internet Registration Corporation Limited) and TWNIC (Taiwan Network Information Centre). The Icann board has also allowed the application for the .xxx top-level domain ((TLD)) to move forward. The ICM registry applied for the .XXX sponsored top-level domain as a potential community site for the adult entertainment industry. Icann has adopted the next steps for the application, including expedited due diligence, negotiations on a draft registry agreement, and consultation with Icann's Governmental Advisory Committee.Telecommunications• China's telecom companies will be constructing manufacturing facilities in India in partnership with local firms. The government asked operators to acquire security clearance before buying any key telecom gear from foreign firms. The Department of Telecom (DoT) spread that the telecom companies need to meet with regard to security issues, and has asked the industry to give their views on the same. Telecom companies hopes that import of equipment from foreign suppliers will be permitted only after an International Certification Agency visits the vendor's plant and gives a security clearance.• Public Mobile and ZTE (ZTCOF.PK) cooperated with the Export-Import Bank of China and will receive $350 million in financing to help build a wireless network from Windsor to Quebec City. The partnership with Public Mobile is ZTE’s first end-to-end wireless network project in Canada. Public Mobile is launching a CDMA network using frequencies auctioned by Canada in 2008. Service started in Toronto in May and is due to start in Montreal in late June. The company is backed by US investors including Columbia Capital and M/C Venture Partners as well as the Ontario Municipal Employees Retirement Systems. Canada normally bans foreign investment in telecoms operators. The vendor financing arrangement provides support for the network build using equipment and services provided by ZTE and its Canadian subsidiary. The financing arrangement is backed by export credit insurance from the China Export and Credit Insurance.• China PTAC Communications Services Co. Ltd. had a deal worth 700 million yuan ($103.04 million) with Huawei Technologies Co. Ltd. to acquire 2.3 million handsets. The contract includes the purchase of the low-end C5900, C5110, and C2823 handset models priced between 300 yuan ($44.16) and 1,000 yuan ($147.2). Two of the models, the C5900 and C5110, are 3G handsets. PTAC have at least 30 percent of the domestic market for telecom equipment distribution. Low-end to mid-range 3G handsets will be demanded form the Chinese market as it is currently saturated with high-end products.• ZTE Corp. (ZTCOF.PK) maintained the leading position in China in the CDMA market in the first half of this year with the market share increasing to 43.2 percent, said Li Jian, general manager of ZTE's CDMA and LTE products. ZTE has undertaken Nortel's CDMA equipment transfer work in 12 out of 14 prefecture-level cities, which expanded its CDMA market share. ZTE attaches great importance for the development of CDMA market, and keeps large-scale investment in CDMA technologies. The telecom equipment producers took the lead in completing the EV-DO Rev. B outfield commercial test in April in Chengdu. Besides, ZTE is the first firm in the industry to roll out CDMA/LTE dual-mode remote radio unit ((RRU)), and the CDMA/LTE integrated solutions, capable of upgrading to future's networks smoothly, and evolving to LTE with the fastest speed in business deployment.• AsiaInfo Holdings Inc (ASIA) confirmed the completion of its merger with Linkage Technologies International Holdings Limited (BOSS). The two companies have joined together to form AsiaInfo-Linkage Inc. Under the terms of the merger agreement Linkage shareholders received $60 million in cash plus approximately 26.8 million AsiaInfo shares. AsiaInfo-Linkage will have an expanded service offering, stronger R&D capacity and complementary customer bases for cross-selling opportunities.• All three of China's telecom operators garnered a total of 9.58 million mobile-phone users in the month, which accelerated the mobile-phone users to 776 million. China Unicom (CHU) adopted an aggressive marketing strategy and accomplished the fastest growth in cell-phone service subscribers in May, and its 3G user base broke 1 million. Mobile service subscribers signed up by China's largest telecom operator in terms of revenue. China Mobile (CHL) had rapid and stable progress. The telecom giant gained 917,000 3G subscribers to its service. China Telecom recruited 3.02 million new cell-phone users in May, broadly the same as the 3.03 million net addition in April, and in accord with its expectations of gaining about 3 million users each month. Industrial insiders said that China Telecom focused more on attracting ordinary users to customers of higher average revenue per user.• China added 40.8 million phone users during the Jan.-May period, bringing the nationwide total to more than 1.1 billion in a country with a 1.3 billion population. Fixed-line telephone users decelerated by 7.8 million to 306 million while mobile phone users jumped 48.5 million to 796 million. The telecommunications industry had about 1.23 trillion yuan (US$181 billion) of business income in the five-month period, up 21.6 percent year on year.• China Telecom (CHA) had 16.97 million CDMA terminals sold at home in the first five months of this year. Such a robust sale pushed the company's market share up four percentage points from the comparable period of 2009 to 21 percent. The growth in CDMA terminal sales drove the telecom market up by 8.4 percentage points in the January-May period. The company sets a goal to sell over 50 million CDMA mobile phones in the entire 2010, of which 10 million-plus are medium priced. 146 models of CDMA terminals are rolled out in the market, making up 24 of the total newly-launched products in the country. More than 800 models of CDMA terminals under 111 brands are available in the market now, of which 581 are CDMA 1X terminals, 143 are EVDO products, 45 are data cards, and 17 are netbooks and MIDs.Media, Entertainment and Gaming· Shanda Games Ltd. (GAME) launched Mochi China, a Chinese version of an online games network originally developed by Mochi Media Inc. Mochi China is located at zh-cn.mochimedia.com. Mochi Media had over 35 million active subscribers in China before the launch of the Chinese site. Shanda Games acquired Mochi Media Inc. for $80 million in January 2010, Interfax previously reported. Mochi Media provides a platform to distribute games from developers to other Web sites including blogs and social networking sites. It also provides tools for advertising and sales of virtual items. The launch of Mochi China gives domestic Flash game developers a new platform for distribution, allows advertisements to be included in games and revenues generated to be easily monitored. It also gives Chinese game developers an international platform and a potential revenue stream from abroad.· China Xinhua News Network Corporation ((CNC)) will speed up expansion in the fast-growing new media market to profit from the 3G era. CNC will capitalize on the opportunities arising from the evolution of global news media into mobile and interactive new media to turn into an integrated operator of traditional and new media networks. The firm launches an English-language TV channel, a move that makes the TV service structure of Xinhua News Agency clear. The great potential of personal computers (PCs) and mobile phones to grow into the new carrier of TV programs is emerging, although a majority of the people watch TV programs on TV. China is the world's biggest TV, PC, and mobile phone market, with 253 million Internet users and over 600 million mobile phone users.Hardware• TCL Corp. will garner 210 million yuan ($31 million) in subsidies from the government of the southern Chinese city of Shenzhen. The electronics company’s units have already gotten 341.8 million yuan ($50.5 million) of subsidies from the Shenzhen government.• Lenovo Group (LNVGY.PK) aims to sell 1 million units of its self-developed smartphone in the China market this year. The phone, called Lephone, is based on Google's Android operating system. It was showcased at a mobile fair in January this year. The firm thinks that the phone will be a great shot. It was cooperating with developers to come up with applications to target that market. Mobile Internet products would account for 10-20 percent of revenue in five years.Alternative Energy• Yingli Green Energy Holding Co. (YGE) aims to triple solar panel production capacity in the next three years to 3 gigawatts a year at a total cost of roughly 200 billion yen ($2.3 billion). The firm is spending some 130 billion yen over three years to construct a large production facility on Hainan Island. The site's No. 1 plant was recently completed and will begin operations in the near future. It will have an annual production capacity of 100mw. A plant with a capacity of 200mw a year will also be built. A new plant will be added to an existing one in Hebei Province. The new facility will come onstream in 2012 with 300mw of capacity, with the possibility of expanding to 800mw as domestic and foreign demand warrant. The firm's investment will likely come to 40-80 billion yen ($5.9 billion- $11.8 billion). Yingli is also looking at building a 100mw-per-year panel plant in the southwestern US at a cost of 5 billion yen ($57 billion).Disclosure: No positions
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On June 16th we published a note 'Japanese Stimulus Plan Unveiled,' and concluded this article by saying:
For the past six weeks the USD/JPY has been coiling into a triangle, getting ready for a move......There are many Japanese exporting companies whose profit can be enhanced by proper positioning in the yen, and you can be assured they have technicians studying the triangle chart pattern. Note what happened when the trend line was broken on March 24.... This market, in the futures, is fairly even. A breakout in either direction should give us a nice move. We intend to watch carefully and go with a break out.
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By Cathy Carlson
When Beijing announced last month a change in its universally-criticized currency policy, perhaps the loudest cheer came from Japan. With prospects of a floating Chinese yuan tightening the trade gap, Japan momentarily saw light at the end of a very long tunnel. Hindered by structural deflation, Japan’s economy has lagged behind the rest of the world, missing out on the rally that allowed many markets to reclaim ground lost during the recession. An appreciating yuan could potentially allow Japan to accelerate a move out of the post-recessionary phase by providing the opportunity to compete more fairly in export markets.
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In this edition we look at the PMI numbers for China, and the U.S., and review the results of the quarterly Tankan in Japan. We then look more closely at some of the other data points out of the U.S. last week; the Case-Shiller house price index, consumer confidence, and of course nonfarm payrolls.
1. China PMI
China showed further signs of slowing down following the moves by the authorities to prevent asset bubbles. The official CFLP index registered at 52.1, down both against consensus estimates (Reuters) 53.1, and the May figure of 53.9. The HSBC index (which surveys 400 businesses, and is more weighted to smaller/privately owned businesses than the CFLP index) confirmed the direction; down to 50.4 vs 52.7 in May. So these figures potentially point to a slowdown in the manufacturing sector, but will the other sectors of the Chinese economy offset the slowdown? Will rising wages help lift consumption? The next big regular data release is due on the 15th of July, and will provide a timely update.
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Unemployment rates across the G7 illustrate a broad-based labor recovery. Fantastic - now let's get to the underlying stories (click to enlarge).
(Note: The US is the first to release the June 2010 figures. All other unemployment rates, except for the UK, are current as of May 2010.)
Germany, France, and Italy: Germany's labor market is ostensibly improving, as the unemployment rate continues its descent. However, don't be fooled by these statistics: the German government is subsidizing firms to drop hours in lieu of outright layoffs.
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In 1989, the Nikkei 225 hit a new all-time high near 39,800. Today, more than 20 years later, it languishes near 10,000 – almost 75% lower. The Nikkei 225 would have to rise 300% just to get back where it was in 1989. Japanese stocks are now among the cheapest and most unloved in the world.
Despite all the global gloom and doom regarding equities, foreign investors were again net buyers of Japanese equities in the fourth week of June by JPY154 billion, which is relatively modest compared to weekly net buying values earlier in the year.
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The DJII Momentum Indicator is in free fall down to -14.4%. The 200 day moving average on the DJII turned negative at Friday’s close (2 July 2010). 'The Death Cross' where the 50 day moving average breaks downward through the 200 day moving average on the Dow is 7 trading days away at current levels but further weakness will bring the crossover forward.
An important observation is that the Death Cross will take place with the 200 day moving average in decent. Bearish dominance is now a given. Momentum is decisively downwards with the bull in retreat.
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By Alexander Green
The Wall Street Journal reported last week that, for the first time in three years, foreign investors are increasing their holdings in the Japanese stock market. Data released by the Tokyo Stock Exchange shows that foreign ownership of Japanese shares rose to 26% for the year that ended in March, up from 23.5% a year earlier. The Journal suggests that a recovery in Japanese corporate earnings is tempting foreign investors back to the country's equity markets.
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