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e-mail: sidklein@sidklein.com




(part two)


July 4, 2004


Nikkei:      11,721.49

*April low:   7,603.76


*- See March 31 & May 3, 2003 reports, along with April 10, 2003 ROBtv interview (5 min.) on homepage.




For two years, Japan’s economic out-performance has consistently broadened out and continually surprised all Western “pundits”. Similarly, profits have consistently been a positive surprise.


Still, there are causes for the consideration of either raising or maintaining liquidity. SKC’s best-case scenario target for this cycle was and remains 14,000. Even if that were to occur, however, a Wave-C (within an Elliott Wave “a-b-c flat”) could still take the Nikkei down to 10,500 again, for those following that index.


Against that backdrop, even a long-term value stock may correct, if an intermediate term cycle’s peak earnings is discounted, even though the company’s stock may be remaining well below long-tern fair value. That under-





valuation is supported by under-investment internationally in the Japanese market, along with the prospects for the subsequent cycle’s earnings. For this reason, last month’s report re-printed the following from the preceding month:


“With this view in mind, it is unlikely that foreign managers will allow Japanese stocks to fall too far, due to the under-investment of US pension funds, who should now follow the foreign investors’ leaders (the hedge funds) into Japan, as prospects wane domestically. The following indicator technically expresses this.”


Conclusion: SKC has claimed that indicators that gauge the performance of the Nikkei versus that of the Dow Jones are lead indicators for the performance of the Dow itself. Well, the Nikkei has decidedly broken out versus the Dow Jones, as US money escapes or diversifies to Japan.





Last month’s letter reiterated the view that the ratio had hit another higher high, within a technical formation and equity supply/demand background that suggested much higher levels. The report continued:


“This assumption carries serious implications. For short-term traders, this indicator may help identify the inflection point at which the Dow recommences rolling over to the downside.”


Well, the Nikkei returned to the area of its year highs, while the Dow has behaved like a wounded animal. Finally, then, came this week’s Dow mini-smash. This is the stuff of a bear investor’s/trader’s dreams.


Technical: Regarding this post 2002-low Dow peak, use of analogies to the Japanese experience of the nineties, continue to be useful. Japan had rallied from the 14,000 level to the 23,000 area, before resuming its debacle that still had a decade left to go. The percent rally, and the time taken for it, very closely approximates the Dow’s countertrend, post-2002 cyclical bull market.

Conclusion: While the Nikkei has virtually returned to its year's highs, the Dow's trading has been heavy, gains have been difficult to sustain and net movement has been nil for months, against the backdrop of a now more than 4-month old peak (February). This is entirely consistent with our thesis of a topping and rolling over period for the Dow Jones, which is exactly what the indicators of that market are strongly indicating, in SKC’s view.







Last month’s comment was entitled: “Moon, Turn The Tides…gently, gently away.” The following is an excerpt:


“Jimi Hendrix’ timeless medley of same title as this report, had a different object in mind but there is a common sentiment: It is time to go and the stars have divined it, just as the tides of the Elliott Wave prepare to wash away the memory of what had to end. Whether it takes more time or less, the fact remains that the Dow peaked in February and, as long as that is the case, the matter is but one of time (simply, we’re rolling over).” 


Due to the fact that the market has since played into the above re-printing, the occasion may be used to respond to a query received that was as much about poetry as the markets. As Hendrix’ lyrical character was one who was fading into the sea ”not to die but to be re-born”, cycles (Elliot Wave B) suggested and suggest that the peak was seen February 19 at Dow 10,753, while so far putting in a lower high on June 23 just under 10,500. Last month’s report forecast the resumption of the crash.


Our interest now as investors is the coming death that precedes the eventual renewal. So, concerned with such matters as timing, bargain basement put prices have come to reflect an ideal contrary indicator (suggesting a Dow peak), while creating risk/reward opportunities that might not have been greater, at any time over the past two decades.


Concerned with superb money making opportunities that would be realized in 2005, the larger understanding includes long cycles. In terms of price level, the worst-case scenario for the coming phase of secular bear market is Dow 4000. The suspicion here, however, is that that level will only be seen in a subsequent cyclical decline, within this massive secular bear market.


Altogether, then, the idealized scenario espoused by SKC is a Dow low of 6200 by 2006, with a greater low at 4000, over the subsequent four years. The economy itself is not likely to bottom out until 2025, or so. This scenario is consistent with the experience of the 1930’s…and this time is worse.


Strategy: The diagnosis, therefore, is unchanged and, as regards any possible prescription, hedgers and speculators have been served up put premiums at historically low valuations and volatilities. As a result, long term, calendar spreads are at crashed-out levels, thereby setting up extremely favourable





risk/reward scenarios, which include opportunities for protecting capital in six months, if desired or necessary. Simultaneously, there exists profit potential in excess of 1000%, should the Dow break the October 2002 lows, by the end of 2005, as forecast.


Conclusion: The fact that bearish courage, volatility and put premiums hit new lows with each new Dow high is yet another trademark of a market teetering on absolute collapse. All market activity to-date has been consistent with the SKC forecast of October 5, 2002 (see “previous comments” folder). The Dow peaked this February above Dow 10,400, with the expectation of collapse to 6200, into 2006. This week’s mini-smash may be the poetic resumption of demise, as Greenspan spoke while window-dressing managers were handcuffed to buy programmes. 





The idea a few months ago was that gold may have an intermediate term, cycle-concluding advance toward $340, before commencing the then contemplated correction. The conclusion was based on the fact that stocks (lead indicators) seemed to be valuing such a move, along with price patterns.


A sharper than expected correction (sooner than thought) ensued and dragged down stock price levels, that was now discounting much of the anticipated intermediate term correction. For this reason, SKC advised lightening up on gold stocks on a move to $400, to reflect the fact that there are crosscurrents, against a backdrop of very substantial returns since January 2002.


Sure enough, gold has rallied into the lower $400s, along with a re-birth in bullish enthusiasm. Perhaps one may be 33%, as opposed to 50% invested, for instance. Seeking to make up some leverage, one may maintain some silver equities, as the metal has itself returned to a very desirable long-term level.





After May weakness, the Yen quickly regained all lost territory. SKC’s view is that while the September Yen futures contract has worst-case downside potential of as much as 250-300 basis points, to around 9100, and the Euro may seem stronger for the nearer term, the longer term fiat currency of choice remains and is expected to remain the Yen. 







A belated Happy Canada Day to all!


A belated Happy Gurupoornima (July 2), to our Indian readers everywhere.


For friends elsewhere as well: Happy US Independence Day.


Finally, congratulations to Greece on an amazing accomplishment. Frankly, this may end up leaving the AFC/NFC indicator in the dust!



*The next regularly scheduled commentary is set for the first weekend of August.







Sid Klein


This newsletter is solely the work of the author for the private information of intended recipients only. Although the author is a registered investment advisor at Desjardins Securities Inc., this is not an official publication of Desjardins Securities Inc. The views (including any recommendations) expressed in this newsletter are those of the author alone and are not those of Desjardins Securities Inc. The information contained in this newsletter is drawn from sources believed to be reliable but the accuracy and completeness of the information is not guaranteed, nor in providing it do the author or Desjardins Securities Inc. assume any liability. No solicitation to buy or sell securities should be inferred from either the contents of this newsletter, nor its dissemination. Each potential investment decision and its appropriateness must be considered within the context of the entirety of the individual investor's circumstances. This information is given as of the date appearing on this newsletter and neither the author nor Desjardins Securities Inc. assume any obligation to update the information or advise on further developments relating to the information provided herein.