Lessons from Japan: Feds buying equities ETF [US Japanification 2020(2021)]

by TheCuriousBread

TL;dr: Buy Apple 🍎

  • Background lore: On March 23rd the Feds made history by buying junk bonds ETFs ($LQD, $HYG, $JNK) for the first time in America’s history. Since then the Feds have been injecting liquidity into the financial market through SPVs set up for that specific purpose in order to prop the market up and effectively de-risked the market and in turn obstructed price discovery. 1.3 billion later, the market is trading sideways with dwindling volume in the equities market.
  • Moving Forward: With the Feds exhausting M1 (Open Market Operations), M2 (dropping reserve requirement to 0) and M3 (dropping the discount rate to 0.25%) we are at a stage where QE, interest rate and forward guidance have little effect in pumping up the market any further. If we see another plunge, the only thing that can save the market is providing PPT (plunge protection team) with unlimited firepower. The way to provide PPT with unlimited firepower is to let the Feds start purchasing ETFs directly. This brings us to the beginning of the Japanification of the US equities market.
  • Japanification (Americanization): Japan back in the 1990s walked the very same steps the US is walking today with the implementation of a zero interest rate policy in 1999. QE in 2001. And in 2010, Bank of Japan did the unthinkable and committed to buying TRILLIONS of yens of ETFs that track the Nikkei per year. BoJ currently owns over 75% of the country’s equities market. The first tranche is dedicated to ETFs linked to Nikkei 225, JPX-Nikkei 400, and the Topix Index, while the second tranche is allocated exclusively to ETFs that track the Topix. Now here’s the interesting bit. The Nikkei is a PRICE-WEIGHTED INDEX much like the DOW. Which means unlike the SP500 or TOPIX in this instance, ETFs that tracks the NIKKEI has holdings proportions that correspond to the price per share. Which means the more BoJ buys those ETFs, the more stocks with high prices pumps.
  • The Play (DOW and SP500): Now how can you profit from this? When you look at the DOW and the SP500, it has quite a lot of similar top holdings. AAPL, MSFT. BUT here’s the thing…. since the DOW is PRICE-WEIGHTED, if the Feds start buying ETFs that tracks the DOW and the SP500 the biggest benefactors would be

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Top 4 Components DOW SP500
1 Apple ($389) Microsoft
2 United Health Group ($303) Apple
3 Home Depot($259) Amazon
4 Goldman($211) Facebook

Now you’re gonna say, well fucking-golly-gee man. That’s a lot of fucking words just to say “buy Apple” and you’d be right, though this does put into perspective which are the stocks that stand to gain the most from the Feds moving onto buying equities ETF (which they likely will when wave 2 hits for real and second wave of nationwide shut down is required). Let’s not forget BA, CAT, CVX and a lot of O&G companies that were hit the hardest and haven’t recovered yet. They see to gain quite substantially from this policy. If you got some spare change, might be worth gambling a few bucks on calls to see if they spike. Long-dated, 2021 earliest.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.

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