Yen Carry Off

MARKET REVIEW:

Phew! That was quite a ride!

*** Global stock markets dished a nasty surprise this week to spook the
complacent. Financial markets, like the sea, have a habit of punishing the
unprepared. One day you're setting out in a clear blue sky, warm sunshine
and the wind at the back...life is good. A few days later you're fighting
fifty foot waves in howling winds and freezing rain... and wondering whether
your survival suit is up to the job and if you've stowed the emergency
flares.

But markets like sailing the world's oceans are about taking risks and the
skill lies in the calculation of those risks and preparation for them. It
also helps to have a Plan B in case the worst case scenario actually
happens. You want to escape with your life...or at least your shirt.

London-based strategist Albert Edwards of Dresdner Kleinwort reckons: "The
long and widely awaited equity correction is upon us... We are shifting our
asset allocation stance to become much more aggressively underweight
equities." Now he tells the world, to the sound of stable doors slamming and
a barely distant nag crossing the next parish...

Many 'sailors' on the world's financial 'oceans' will be exhausted from this
week's storm as an estimated $1.5trn evaporated from global equity
valuations. What started with a slump in Shanghai on Tuesday quickly spread
to become a global sell off so intense that at one point the New York Stock
Exchange could not process all its sell orders. Suddenly all the news was
bad:
disappointing industrial orders, Greenspan talking recession, distress in
the US subprime mortgage market, slowing US growth, the unwinding Yen carry
trade. The US even wheeled out there biggest guns with Fed governor Ben
Bernanke and Treasury Secretary Hank Paulsen dishing soothing words to calm
fevered brains.

UK and European markets notch up their heaviest losses in four years and
even Japan, a popular recovery pick of late took a fall. Though its
currency, the yen fared better. Japanese officials turning hawkish on
interest rates and slumping emerging markets saw the unwinding of yen carry
trades (borrowing in low interest yen and buying US treasuries and other
higher yielding assets).
If this is not the beginning of the end for this gravy train, then the
writing has got to be on the wall with the yen strengthening 3.3% against
the dollar and 3.2% against the euro.

Indian money manager Rahul Saraogi writing in Daily Wealth, feels it's time
to take the opposite view on the carry trade business and hold tight for
what is likely to be the "mother of all reversals".

Stock market losses for the week:

FTSE 100 - 4.5%
FTSE Eurofirst 300 - 5.2%
S&P 500 - 4.4%
Nikkei - 5.3%
Shanghai Composite - 5.5%

- Even gold, the age old insurance policy for investors, took a hit as it
sustained its biggest fall since July down over $20 on Friday at $644 and
6.2% on the week. Trader Denis Gartman, editor of the Gartman newsletter,
commented to Bloomerg:
``People are getting hurt in their stock positions, and the only place where
they have profits in the past six months is gold, and they're going to take
it." A reminder too that gold itself is a rapidly traded financial asset
these days and not entirely disconnected from equity markets.

- Elsewhere, the alternative fuel business continues to develop. For those
worried that biofuel production might compete with food supply, Shell has
some good news. In a joint venture with German specialist, Choren
Industries, it is launching a new synthetic road fuel later this year made
from wood chip and straw. Munch on that.

- Goldman Sachs, Merrill Lynch and Morgan Stanley are trading as junk
according to their own traders Bloomberg reports. Prices for credit-default
swaps linked to the bonds of these investment banks traded at debt ratings
barely more creditworthy than junk bonds.
Something of a change of fortune then for companies that between them earned
$24.5bn last year.

- "ETFs are truly a disruptive technology, just as disruptive as the
printing press or the internet was."
So says Nat Wasserstein, managing director of XShares, a company working on
a potential 150 new ETF funds to add to over 700 plus already out there at
the end of 2006. The new angles that they're hoping to bring to market
include life cycle and US State specific funds.
So perhaps soon, if you can't actually make it to the sun kissed Hawaiian
beaches you can at least have the consolation of buying its ETF...

- Amid the public debate raging about the merits of private equity's
contribution to the greater good comes a report published this week by KPMG.
Not so good it says. The European private equity market is at a peak and may
be now on the slide as there is "some degree of over-leverage in the buyout
market".

- Bank of England Monetary Policy Committee member, Danny Blanchflower
predicted this week UK inflation will fall steeply over the next two years.
He reckons it will fall back below its target 2% by early summer and below
2% on a two year time horizon. A view if accurate bodes well for UK rates in
the medium term though his governor, Mervyn Davies, is likely to be a little
less bullish.

- Finally, we homeowners both moan and marvel at ever spiraling housing
prices. Why do prices keep going up and when's the party going to end?
Here's a clue. The fundamental problem of housing is supply says Kate
Barker, Bank of England policy maker, and it will take a long time to fix,
as she battles away trying to loosen up the sluggish planning system. "It's
unlikely we will see it solved in the South-east." She adds. So squashed we
are and squashed we will remain. £250,000 for a Kensington broom cupboard
anyone...bargain!

Enjoy your week-end.

Regards,

Robin Mackrill
The Daily Reckoning

THE SUNDAY RECKONING: Sermon Lent II
with the Rev'd Dr Peter Mullen,
Chaplain to the stock exchange

Sermon Lent II

There is a tendency in English Christianity to treat our faith as if it were
a set of high-minded precepts.
As if it were a matter of etiquette and restraint – little more than good
manners in fact. And sin itself not so much worse than being caught eating
peas with your knife. Let me say at once, there's nothing wrong with these
outlines of decency. Good manners enrich our lives together and to come
across someone who knows how to behave is a pleasure. But Christianity is a
lot more than good manners.

In fact Christianity is not a set of precepts at all.
It would be so much easier if it were. Because then we could all content
ourselves that it was enough to say Yes Sir, No Sir, three bags full Sir and
to tip our spoon the right way for the soup course, to be upstanding when
the Lord Mayor comes in. Don't misquote me please. There's nothing wrong
with these things, but they're not Christianity. This preoccupation with
outward show is what Jesus satirised the Pharisees
about: Ye blind guides which strain at a gnat and swallow a camel. Ye make
clean the outside of the cup and of the platter...Ye are like unto whited
sepulchres...

Contrary to what your modern social-gospelling clergyman tells you, Jesus
was very friendly with the Pharisees. There are dozens of stories in the
gospels about the hot dinners he enjoyed with them. But he satirised them
for being so keen on appearances and missing the main point. And what is the
main point? It is that our Faith is not about appearances and
precepts: it is about wholehearted commitment to a Person. And that Person
is Jesus Christ.

I have told you before that I want us to use some of these Lent sermons to
draw closer to this Person, to draw closer to Jesus. And if we are to come
closer to him, we must know what he is like. This is the hard bit – because
there is so much disinformation, false perception and downright mischief
talked and written about Jesus.

I mean, along with all this good manners worship, there is the creed of the
Englishman. And the creed of the Englishman is that there is no God and it
is wise to pray to him from time to time. The creed of the Englishman –
washing his hands before he comes out of the loo at Drapers' Hall,
remembering not to call his napkin a serviette and leaving the bottom button
of his waistcoat – sorry, his weskit – unfastened – the creed of the
Englishman when it comes to Jesus is this: I don't go along with all that
supernatural stuff – Virgin Births and raising the dead and that – but I do
believe Jesus was a great man, an inspired spiritual teacher and a fine
example to us all.

You see what I mean by disinformation? That picture of Jesus is fiction.
Actually it's utter rubbish. Jesus without the supernatural stuff? That
would involve doing away with nine tenths of the gospels. For in the gospels
– as opposed to the fastidious cult of deference and respect for the great
teacher – Jesus says this sort of thing: I and the Father are one...ye shall
see the Son of Man coming on the clouds of Heaven. He prophesises his
resurrection, works innumerable miracles and institutes a miraculous
Sacrament of his Body and Blood. You can believe in Jesus the great teacher
and the fine example if you like. But it has no resemblance to the Jesus
given to us in the gospels. It would be like admiring Wayne Rooney for his
embroidery skills. We had better make up our minds: accept that Jesus is the
eternal Son of God, the Second Person of the Blessed Trinity – or else have
nothing to do with him.

We need to draw closer to the real Jesus because he is our life and to be
near him is all our happiness. But to get close to him, we have to clear
away so many misconceptions about him. Next to the great teacher and fine
example nonsense, is the view of Jesus as a sort of super-philanthropist, a
kind of proto-socialist who was nasty to the rich and kind to the poor. This
ignores all those lavish dinners with the hierarchy.
And when his do-gooding disciples rebuked him over the costly oil with which
Mary Magdalene anointed him and said This could have been sold and the money
given to the poor – he replied The poor you have always with you. This woman
hath anointed me for burial and what she hath done will be remembered
forever.

And then Jesus is misrepresented not only as a socialist but as a pacifist,
a sort of peace- campaigner. How does this square then with Jesus's saying
Think not that I come to bring peace but a sword? And how he said that
because of him and the gospel, mothers would de divided from daughters and
fathers at odds with their sons? And a Roman commander, a centurion, chosen
as the example of faith. And another centurion praised for building a
synagogue. And yet another centurion to recognise him for who he was even
while he hung on the Cross: Truly this man was the Son of God.

You see, if Jesus were only the personification of our best ideals, if he
were only human kindness writ big, he would be no use at all. It couldn't
make us more kind. And if Jesus were just the great teacher, that would be
no good either. There had been plenty of teachers and prophets sent from
God: Moses, Isaiah, Jeremiah, right down to John the Baptist. And some would
like to add Plato and Aristotle too. We didn't take any notice of the great
teachers, why should one more great teacher be any different?

But Jesus came into the world to do something quite different, to do what
the great teachers and prophets couldn't do. Jesus came into the world to do
for us what we cannot – not even with all our exquisite manners – do for
ourselves. He came to save us from our sins. To die on the Cross and to rise
again for us.
Believe that – or else I advise you don't waste your time on the edges of
the Christian Faith or with the church at all.

We are called to acknowledge Jesus as Peter did: Thou art the Christ, the
Son of the living God. Or as Thomas did when he saw where the nails had
pierced his hands and feet: My Lord and my God. Jesus wants us to draw close
to him. He wants our love. Just think about him for a minute. Does your
heart not go out to a man who knew from the beginning that the whole purpose
of his life was to be tortured and murdered for our sake – and we only
misrepresent him?

He prophesied his own failure remember: They have Moses and the prophets –
let them hear them.

Nay Master, but if one should return to them from the dead, they will
believe.

Verily I say unto you, if they hear not Moses and the prophets neither will
they be persuaded though one rose from the dead.

That is what he did for us. Will you use this Lent and Holy Week to draw
closer to Our Lord who did all this for you – and who wants your love? Does
not your heart go out to him as you see this young man striding about
Galilee, constantly embattled, always misunderstood?
Even by his closest disciples. Think of him besieged in the uncomprehending
crowds who merely wanted him to do something for them. Think of him when he
was alone in the wilderness or on the mountain with the consciousness of the
Crucifixion drawing daily closer.
Father forgive them, for they know not what they do.

And in the garden secretly and on the Cross on high.

If you concentrate and meditate on the Person of Jesus as he is actually
given to us in the gospels, you will find that you begin to get real
glimpses of him. You will find that you are truly drawing closer to him,
starting to know him as he is. And with knowledge of him comes love for him
– if we pray for him to send his love into our hearts.

It's not very English. It's not stiff upper lip. It's wholehearted and full
of the most tender emotion. But it's true. And I can promise you that to
begin to draw nearer to Jesus as he is, is to experience a certain
joy: for it is the joy that comes from what is certain.
And your joy no man taketh from you.

The Reverend Dr Peter Mullen
For The Daily Reckoning