Stocks are trading at session lows with the major averages all down over 1% in afternoon trading. Weak economic data has come front and center starting with the ADP report showing 135,000 private sector jobs added last month, well below the consensus estimate of 165,000. Further, first-quarter productivity was revised down to 0.5% from 0.7% and hourly compensation for U.S. workers saw its biggest decline since 1947.
The market was already under pressure from overseas after Japan's Nikkei 225 (^N225) closed down 3.8% on Wednesday, bringing the benchmark index's losses to a whopping 18% in only 10 trading days.
For the most part, Japan has seemed largely contained, at least in terms of U.S. stocks. The S&P 500 has fallen less than 5% since the Nikkei collapse. If Japanese economic policy is going to destroy markets around the world, it hasn't happened just yet. The Nikkei is still up more than 25% in 2013 and more 50% for the last twelve months. Even when the Nikkei's losses exceed the 20% decline that defines a bear market most investors would trade some volatility for a 50% gain.
But today's slide certainly brings forth questions of contagion.
It's all a function of Abenomics, the suspiciously familiar economic policy being pushed by Shinzo Abe, the current Prime Minister of Japan. Think quantitative easing only 3-times as big relative to the Japanese economy.
Westwood Capital founder and managing partner Dan Alpert says Japan has "pulled out literally every stop possible" in terms of stimulus. "Anything different (in Japan) is good but unfortunately this isn't going to work either."
The world has managed to survive the zombified nature of the third largest economy in the world since the early '90s. In a sense the rest of the planet got used to Japan being out of the game, with exception of a few of its larger corporations. It's those companies, particularly the automakers that present the greatest risk to the U.S.
A weak yen works to the benefit of Toyota (TM) and other Japanese exporters the same way a soft dollar worked for U.S. multinationals. A weak currency allows exporters to price out domestic competition by creating an artificial profit cushion. Alpert thinks the recovery in auto sales at the heart of the U.S. recovery will come under the gun when Toyota and Honda (HMC) start taking share.
"At the end of the day we are in a competitive game with all the other countries in the world, specifically the major industrial countries," Alpert warns, "there has been a lot of neglect over the level of competition we actually are facing."
The dual threats are thus defined. Either the currency chaos unleashed by Abenomics doesn't work and hobbles the rest of the globe or the U.S. will fall back to where it was for the decade ending in Japan's crash. Specifically we'll be getting boot-stomped to the detriment of companies and ultimately financial markets.
Suddenly it seems like there's an upside to Japan staying right where it's been since the early '90s.
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Source: http://finance.yahoo.com/blogs/breakout/abenomics-crash-hitting-u-stocks-151548685.html
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