Portfolio Performance : +30.09%

US Dollar Barometer stands at -2

Trade Recommendation : Short USD/CAD

Bottomline : Although the equity market wants to bottom, I think the commodity market might continue to pressure it lower first. I think once the US Congress agrees to buy those illiquid debts, the market will bounce but the ones who will benefit are those outside the US, namely China and perhaps Europe.

In What macro-innovation risks really are priced in Japan? by Chikashi Tsuji, 2007

The author examines the macroeconomic variables priced in japan. Asset prices generally react sensitively to unanticipated changes in the state of the macroeconomy. Standard finance theory concludes that an additional component of long run returns is required and acquired whenever a particular asset is influenced by systematic innovations in a variable and that no compensation can be earned by taking diversifiable risk.

Chen (1986) found that significantly priced factors in the US include industrial production, inflation risk premiums and the slope of the yield curve, which has spurred many other research on the area. However, the japanese stock market has its own unique history and characteristics. Hence priced macro-innovation risks naturally differ from those of the US.

Working from chen's model, the author found that of the five fatcors in Chen's model, only unanticipated changes in risk premium appear to have a significant effect on the Japanese stock market. Second, oil price changes are not priced in Japan although much differently in the US. Third, exchange rate related variables such as variability of trade and unanticipated changes in the exchange rate are not priced in Japan. Last and most significant, innovations in money supply and in gold and foreign exchange reserves are strongly priced in Japan.

In conclusion, the author argues that the domestic macro-innovation risks are not particularly important in Japan. The international factors mentioned above play a more significant role in the Japanese stock market than do domestic factors.