Editor’s Note: With shares of WisdomTree (WETF) down -5% today, below is an excerpt from an institutional research note written by Hedgeye Financials analyst Jonathan Casteleyn last week. Since Casteleyn's original short call on WETF in December, shares are down -45%. To access our Financials research ping firstname.lastname@example.org.
WisdomTree assets-under-management (AUM) balances are closing on their quarterly lows for 3Q and are back to near year-to-date lows from June. The factors that have driven investor interest from currency hedged products remain intact including a continued sharp rally in the Japanese Yen and also a marginally positive Euro return.
The plight in Japan is most pertinent as an +18% rally in the Yen continues to be perpetuated by ongoing risk aversion with a failing monetary experiment by the BoJ. Margin balances across all three Japanese equity exchanges continue to deflate, and the -20% decline in leverage year-to-date has almost overlayed exactly with the +18% rise of the country's currency.
That said, margin balances are still nowhere near levels which historically have corresponded to a reversal of current trends and the current margin reading of ¥2.0 trillion Yen is still over a trillion Yen higher than levels which marked major currency reversals in 1998, 2002, 2008, and 2011.
Simply put Japanese leverage can fall by another -50% before reaching levels which have historically been a solid level for a reversal of current Yen strength.