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Stalling in Crosswinds

My thoughts are focusing on Japan’s GDP of 3.3 this early Monday morning. Some economists predicted a drop to 1.5 or below, with a upper limit of 3. A reading of 3.3 might spur another “yen carry trade” panic, though traders seem to have gotten more comfortable with their risks appetites with regards to the yen carry trade after the scare earlier in the year. However, I believe the potential damage caused by any unwinding of the yen carry trade would hurt more than the bond rates vs. Fed cutting rates scare we had this week.Checking over our shoulders for dangers in blind spots, you’ll see the mortgage problems are still as bad as ever and the sudden rise of the 10-yr treasuries this past week halted on Friday because if they go any higher, more of the mortgage lenders as well as the average joe who needs loans, will be crying for mommy. So, as I’ve said before, I don’t believe the Fed can raise rates and, if the 10-yr keeps rising, the Fed might have to cut…I guess the Fed is waiting for the market to make the first move.

Thus, potential for Japan to raise rates and the unwinding of the carry trade – even partially – would be BAD. Treasuries continue to rise – BAD – forcing the Fed to cut – OK, but not so great because of the damage the treasuries would have done by that time. So overall picture? Bad outweighing good, but not very very bad. Still, OVERALL negative bias seems to be looming. My overall strategy? Maybe bailing on Toyota Motors (TM) if it rallies on the good Japanese GDP numbers, because TM’s sales growth would be offset by the rising yen to some degree and, given that the U.S. is Toyota’s biggest market and interest rates aren’t exactly helping consumers buy cars, TM’s upside looks limited from here.

On the long side, after raising some cash, maybe dodging a bit of a correction or sideways trading in this uncertain market, blue chips/DOW-ish stocks look good for the remainder of the year. Also looking good are the secular growth stories like infrastructure – basically anything that’s not interest rate sensitive or trading at a premium due to the “M&A put.” If the yen carry trade is pulled out from under investors, M&A activity might slow down mighty quickly, so I wouldn’t want to be in the not-so-great stocks trading with the same multiple as the best-of-breed. The blue chip/DOW-ish stocks are too big to be taken over or have much M&A activity for them, which is why they fit this model. Maybe get some Coke (KO) or McDonalds (MCD), safe blue chips (yes, even blue chips have a variety of species) with international exposure and a good China presence.

Disclosure: Author is long TM

** Article also published on SeekingAlpha.com**

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