The Summer Lull
Trade in Whisky;
Consumers are feeling the pinch, and with another bout of political uncertainty, parts of the stockmarket are starting to feel the pressure. Either that, or it’s just the summer, which is the weakest part of the year for stockmarkets. Yet this summer, the economic surprise indices are pointing down in both Europe and the USA at the same time.
Negative Surprise
The surprise indices observe the economic data as it comes in, such as employment, tax receipts, inflation, trade and so on. It then decides whether it’s positive or negative, according to what was expected. Finally, it adds or subtracts from the index to give the result. Rising is deemed to be positive, and falling, negative. While early 2023 saw a strong USA and a weak Europe, late 2023 saw a strong Europe and a softer US. This time, they are falling simultaneously.
That has translated into a dip in the leading technology stocks (red), which has been countered by an upturn in the yen (black inverted). The nature of the close inverse correlation demonstrates how it is reasonable to expect the yen to continue to perform should stockmarkets get into trouble. Furthermore, the Bank of Japan meets on Thursday, and 14 out of 48 economists polled by Bloomberg think the first interest rate hike in many years is coming. If Japan is increasing rates, and the US is cutting, the yen will soar. High time.
The NASDAQ and the Yen
If things are cooling, then why not just own the long gilt? I have considered that, but there is political risk attached, as I am sure you have read in the papers. More importantly, the yen is much less volatile than the long gilt yet has so much more potential to rally when the economy cools, with far less downside in a rate hiking cycle. See 2008 for more oomph and 2022 for less risk.
The Yen and Long Gilts
I am not suggesting I am pleased with how the yen trade has turned out, but the case remains strong, and none of the reasons have changed to keep on holding it.
There were other notable moves in things like Pershing Square (PSH) which sold off sharply last week. PSH was impacted by weakness in consumer stocks. Their largest holding, Universal Music (UMG Netherlands) fell 29%, and their second holding, Chipotle Mexican Grill (CMG) fell by 26%. The strange thing is that PSH shares are only down by 15%, which is why the discount appears to have tightened. The next NAV will be released tomorrow, and that will reflect the price drop.
Pershing Square
We bought PSH on 14 November 2023 at 3,048p and sold it on 2 July 2024 at 4,150p. It worked out well, but most of the gain came from the narrowing of the discount.
I have another sale today, and despite having several options for reinvestment, I am happy to stand back until the markets offer a more compelling set-up.
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