The Zacks Analyst Blog Highlights:CurrencyShare Japanese Yen Trust, iPath Exchange Traded Notes, iShares MSCI Japanese, Teva Pharmaceutical and AbbVie

Sep 24, 2013, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, Sept. 24, 2013 /PRNewswire/ -- announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the CurrencyShare Japanese Yen Trust (AMEX: FXY-Free Report), iPath Exchange Traded Notes JPY/USD Exchange Rate ETN (AMEX: JYN-Free Report), iShares MSCI Japanese Index (AMEX: EWJ-Free Report), Teva Pharmaceutical Industries Ltd. (NYSE: TEVA-Free Report) and AbbVie's (NYSE: ABBV-Free Report).


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Here are highlights from Monday's Analyst Blog:

The Short Yen Trade

Every Friday afternoon, the Commodity Futures Trading Commission (CFTC) releases positioning data for futures contracts called the Commitment of Traders Report.  The data breaks out the number of long, short, and spread positions in a futures contract by investor (trader) type.  The most general category of break out highlights holdings by reportable and non-reportable position holders.  Reportable positions encompass holdings above specific reporting levels as specified by the CFTC and are broken down by large speculators and commercial traders.

The recent data on the Chicago Mercantile Exchange's (CME) Yen Futures contract caught attention and is getting focus among traders.  The Yen Futures contract is a derivative play on the USD/JPY exchange change rate.  

A few definitions:

Reportable traders represent the "big" money in futures market and include large hedge funds, big speculative investors such as commodity trading advisors, and the major commercial buyers and sellers.   Non-reportable positions are traders involved in the market which hold contracts below the reporting threshold. The commercial or speculative status of these traders is unknown and most of these traders are traditionally viewed as smaller sized players.  

The Commitment of Traders Report can be used to determine the positioning of the trade and provide insight into whether the market may be oversold or overbought.   One way to focus on positioning is to look at the non-commercial reportable position as a percentage of the total number of contracts outstanding.  This ratio will highlight the degree in which large speculators are long or short.  

A large speculative short base:

Being short the yen is easy to defend from a fundamental perspective.  The Japanese government has enacted policies to weaken the yen and push inflation toward a 2% target level. At the same time, the interest rate differential between the U.S. 10 year treasury yield and 10 year JGB yield has widened in favor of the dollar.   Since May, the 10 JGB yield has declined from over 90 bps to around 70 bps, while the US 10 year treasury has risen from just above 200 bps to as much as 300 bps.  In recent days, however, the 10 year treasury yield has shown signs of decline.

The negatives for the USD/JPY rest in the Fed delaying tapering and the fact that the Japanese economy has displayed relative strength in recent months.   Furthermore, there is great uncertainty over the political landscape in Washington D.C. with a potential battle over funding the U.S. government and the raising of the debt ceiling.

Playing the contrarian:

Playing the contrarian, the heavy short base in yen futures could suggest the USD/JPY is on course for a meaningful set back or correction – the yen could be ripe to material rally.  The graphic displays a number of periods where the net large fund position was 40% or more of total positions. Notice in most of these periods there was a decline in the net short and the dollar fell against the yen in the following period.  If history repeats, the yen should strengthen as large specs unwind their positions.

Note that in playing for a stronger yen, you are working against the desire of Japanese officials and Abenomics.   The Japanese are also poised to raise the sales tax in 2014 and this may work to slow the Japanese economy despite Japanese officials suggesting otherwise.


Positioning in the yen suggests the path of least resistance may be a flat to higher yen or lower USD/JPY exchange rate, while the short base is removed or worked off.   Two non-leveraged products for playing yen strength include the CurrencyShare Japanese Yen Trust (AMEX: FXY-Free Report) or iPath Exchange Traded Notes JPY/USD Exchange Rate ETN (AMEX: JYN-Free Report).

The correlation between the USD/JPY and the Japanese stock market is strong.  Specifically, the correlation between the USD/JPY and iShares MSCI Japanese Index (AMEX: EWJ-Free Report) is 0.95 over the last year.  Thus, a strengthening of the yen could be a negative for Japanese equities. It may be time for investors to rethink or test their Japanese holdings.

Over the last year, the correlation between the USD/JPY and the 10 year U.S. treasury yield has been +0.62.   The correlation is not overly strong, but certainly meaningful.  The correlation suggests that drop in the USD/JPY could occur with a decline in the 10 year treasury yield.  It may be a chicken and an egg game, but lower treasury yields would make the dollar less attractive relative to the yen assuming no material change in the JGB yield.   Players may be short the yen and short the treasury market.

The correlation between the S&P 500 and the USD/JPY is 0.89 over the last year.   Historically, the relationship between the stock market and the USD/JPY has been transitory, and shown plenty of instability, but the recent relationship suggests the equity market could see a correction on yen strength.


The CME's Yen Futures contract is a small slice of the foreign exchange market, but is it is a good sampling of positioning in the USD/JPY exchange rate.  It suggests that speculators are an extremely large yen short, and as time progresses lack of a decline in the yen could force some short covering and repositioning.  Those short the yen could be under pressure to book profits.   Contrarian players may want to look for a rally in the yen against the U.S. dollar.  The FXY ETF or JYN ETN can be used to capture a potential rally in the yen.

Below the surface, there has been a strong positive correlation between the USD/JPY and the U.S. 10 year treasury yield, the U.S. stock market, and Japanese stock market.  If there is a meaningful appreciation in the yen, it could coincide with lower treasury yields, weaker U.S. shares prices, and a decline in Japanese stocks based on the correlation over the past year.  Of these three correlated markets, the Japanese stock market has the largest correlation to the yen and would likely be most impacted by currency movement. 

Teva Exclusively Launching Generic Niacin

Teva Pharmaceutical Industries Ltd. (NYSE: TEVA-Free Report) reported that it has launched its generic version of AbbVie's (NYSE: ABBV-Free Report) cholesterol management treatment, Niaspan (niacin extended-release) tablets (500, 750, and 1000 mg) in the U.S.

The launch of generic Niaspan is one of the most important generic product launches at Teva this year and should boost the performance of the generics business. With Teva being the first to file, the company will enjoy 180 days of marketing exclusivity. As per IMS data, as of Jun 30, 2013, Niaspan annual sales were approximately $1.12 billion in the U.S.

We note that the performance of Teva's U.S. generics business was soft in the second quarter of 2013 with revenues declining 8% to $970 million. Lower sales of generic Lexapro, no royalties on generic Lipitor and lower sales of generic Avapro led to the decline in revenues. However, Teva expects the generics business to pick up in the second half of the year. 20-25 generic product launches are slated for 2013.

Teva currently carries a Zacks Rank #3 (Hold). The company is going through a tough transition period given fewer large generic opportunities, potential new competition for branded products (especially Copaxone) and a higher cost base.

However, we are encouraged by Teva's plans to improve its position. Teva said that it intends to accelerate growth platforms, protect and expand core franchises, expand its global presence, pursue strategic deals and reduce the cost base. We expect investor focus to remain on the execution of the company's new strategy.

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