1001 BOUL. DE MAISONNEUVE O.,
TEL: (514) 939-2221 FAX: (309) 417-0942
Revisions, Revisions, Revisions!
(Shock & Awe Revisited)
*April low: 7,603.76
*- See March 31 &
The attachment that joins this letter contains a form that is to be completed and returned, so that receipt of this monthly commentary, along with any special and timely up-dates, continue uninterrupted.
The specialized, quality compilation of data, analyses, commentary and prognoses that is offered by this service with respect to the Japanese market and economy, is unique and distinct.
Additionally, this service with respect to Japan, has been accompanied by a quality of timing with respect to New York, gold and the Dollar that has been no less proficient. It is hoped that this will continue to be the case. Finally, the excellence toward which SKC strives, has been with respect to secular, cyclical and intermediate term trends in each of these markets, since going online, identifying near ideal price, and/or time points. Since identifying the peak in New
York within a day in 2000 and since going online, SKC has spared no amount of time and energy in providing the premiere all-around service in North America (four distinct and diverse markets, all in one). As with the 2000 – 2003 period, I look forward to continuing to help you preserve and perhaps greatly enhance your wealth through the difficult years that lie directly ahead.
The consensus among economists is that there can be no consensus – and for the same reasons that they were all wrong to begin with – namely, that the speed with which Japan has become the world’s premiere economy is even more startling than the results themselves. This, of course, was the very point and forecast (regarding how the Japanese do business) in SKC’s March 31, 2003 forecast, sub-titled “Shock & Awe”. The following partial quote illustrates (the link to that historic (?) report follows):
“Typical of the Japanese psychology that creates shock and awe by timing dramatic measures and events to coincide with one another…”
July’s current account surged nearly 35% to almost 1˝ trillion Yen, while the basic balance achieved the whopping 2 trillion Yen plateau, remaining above the extremely impressive 1 trillion Yen level for over a quarter now (see Yen below).
As for the August trade balance, it was up just over 23%, year-over-year. As always, it is the breakdown that interests us more, particularly as we analyze whether or not we still have the correct investment theme (Asia focused); so, let’s take a look:
Growth in the volume of exports to Asia was 6%, while declining over 12% to the US. Meanwhile, exports to China were up over 30%, in Yen terms.
It would appear that the answer is an unequivocal “yes”…as it has been for over
three years. Amazingly, foreigners (investment banks, not hedge funds) have still not caught on (see Yen). As regards the resumption of growth itself in the trade balance, it would appear that the economists’ panic was ill founded, again.
Further to the breakdown of the 23% increase, SKC had forecast that the up-trend in trade balance growth would resume, based on imports weakening more than any net decline in exports. This too was correct analysis of the economic indicators. So, for now, we remain on track on all counts (his latter point is important re: long term Yen trend reversal signals).
Meanwhile, economists are panicking in revising their real growth estimates for 2003 ever higher. Last month’s report clearly updated the situation in Japan and within the context of prior reporting that was offered in these pages. Apart from leading many investors to triple digit stock gains on a mere move to 10,000+ on the Nikkei, the contents also explained why economists are now consistently and dramatically increasing estimates every month, in fear for their jobs.
All of a sudden (for non-SKC readers), Japan is being recognized as the foremost economy among the major industrialized nations for 2003. No on had believed it but, even more stunning than the fact that the opposite to widespread expectations has occurred, is the fact that this reversal in analyst awareness has occurred with such stunning speed. Last month, SKC reported that some have reversed real GDP estimates by anywhere from 2-4 points for 2003.
As of September, stock investment trusts have enjoyed 17/18 months of fund in-flows. Why didn’t the mavens note such an obvious statistic (and note that it as a sure-fire stock market leading indicator)? Simply, valuation losses were masking the in-flows, as the values of investment trust funds were decreasing. Justice being what it is, the newly arrived bulls are now dealing with statistics that offer up a double whammy. Funds continue to flow into the stock investment trusts and the valuations are mounting. Good stuff, eh (see first quarter SKC issues)?
As for foreigners, they finally were net sellers for a week, after almost six full months of uninterrupted buying.
The first excerpt below is from the March 31st report, while the one that follows it is from the May 3rd commentary. In each case, the link to the report in question follows:
“With each passing month, the marketplace in Japan experiences yet another major bullish event as per SKC forecasts and analyses. These events have driven Domestic Demand Oriented Value Stocks higher, while the rest of the world, including the Nikkei, has languished (thus far). We suspect strongly that the strength of recent months in DDOVS will have paled in comparison next to the power their performances will yet illustrate forthwith.”
“Since our last report, the Nikkei touched down at the 7600 level and, consistent with the New York forecast here, feels to me to have now put in its secular low, notwithstanding the fact that the Nikkei is to be shunned, given the alternatives. The macro view and how to benefit with the least risk and greatest potential, more specifically, is reviewed and summarized below, due to this historic point in investment history…”
NIKKEI/DOW RATIO UPDATED:
The initial purchase level recommended in these pages was 1.03. This number has spiked to 1.12 and, in the years to come, this number too will have been seen as cheap.
To underscore how well investors may do by investing in the appropriate theme(s) in Japan, one may not realize how advantageous it is to even shift focus from the West (Dow) to Japan, in even the most elementary form (Nikkei), at least for out-performance sake (remember, at the peak, this ratio was 14!).
SKC recommended purchase of this spread for a variety of reasons (different means for doing so exist). A principal purpose for large institutional investors was the facilitation of the initial phase of the switching or shifting of weightings from the US to Japan. SKC saw it as an efficient and good first step in a process that, ideally, would resolve in ultimate Japanese investment that is still superior to US equities, than Nikkei shares. It is easier to switch from Nikkei stocks to other Japanese shares, than to begin the entire process of selling US stocks and purchasing Japanese shares from scratch right away (that commentary was geared to large and under-invested in Japan US institutions). As reported at the time, the ratio investment could also be used as a superb, levered, position trade for institutions or retailers. Nothing has changed. Again, different means by which to achieve the ratio position exists.
NEW YORK, GOLD, DOLLAR:
From the September 15, 2003 edition of Business Week:
“Millionaires aren’t immune to financial insecurity. A recent Phoenix Wealth Management/Harris interactive survey of 1,500 individuals with a net worth (excluding debt and primary residence) of $1 million or more reveals:
· 53% lost 25% or more of their portfolio value over the past 3 years; 24% peg their losses at 40% or greater, while 4% posted gains.
· 31% feel they need to save more for retirement to make up for what they lost.
· 40% donated less than $2,500 to charity in 2002, with 10% giving away $500 or less. Only 5% gave $25,000 or more.”
The following link shows how the appropriate asset allocation, so precisely provided by SKC, would have spared such fate of the now broken-spirited and ever-whipsawed investors, who mistakenly related their bank accounts to their knowledge and who could have actually profited greatly from the very same market events that deflated their wealth.
What is knowledge worth (see Yen commentary re: asset allocation)?
Since SKC forecasted and identified the week of the October 2002 bottom (forecasting a cyclical bull market that could take the Dow up toward 10,400 into February – March 2004), and since identifying the day of this year’s low (see March 13 report in “previous comments” folder), the Dow has been a virtual one-way ticket up.
This summer SKC looked for a possible correction, which never occurred. Interestingly, analysis at this time suggests that we indeed saw an orthodox top (Elliott Wave), if not a price peak. The difference is more than philosophic, though very short-term traders may not care. This interpretation suggests a few points. Firstly, a correction now, according to this analysis, would have a Dow correction from here hold at 9000, rather than 8500.
Secondly, and more importantly, consistent with SKC’s overwhelmingly bearish long term views on New York, this cyclical bull market cannot sustain corrections, as only persistent up-trending that consistently kills short term bears, could ever bring such retailers back into the market, after they swore it off forever, following the 2000 – 2003 debacle (see three bullet points on the previous page). Besides, there was no shortage of folks who looked for a correction at this summer’s peak, which supports this view.
Therefore, a persistent up-trend is required to lull investors and have them stagger back into stocks in a state of somnolence. SKC will remain alert and attempt to identify another major peak, as well as the appropriate strategies (speculative as well) for the ensuing move to Dow 4000. The background, as stated so often, will include the collapse in property values, something that investors and homeowners don’t want to hear about or react to, much as “the ignorance is bliss” attitude was adopted in early 2000. I assure you, ignorance is, ultimately, never bliss.
OIL & the DOW:
SKC reported last October that oil could bottom with the Dow’s 2004 peak, thereby becoming the market “hook”. SKC had also reported that higher oil prices might be required for a time so as to help Iraq pay for its own reconstruction. Finally, it was reported in these pages that oil below $25 would be required to stimulate the US economy. In fact, $20 per barrel would be much welcomed. Let’s update:
Oil seems to be peaking in the $31 area, imminently. This should present an excellent trade to $25. Of course, this will present multiple strategic stock opportunities, as well. It could also mean a rally in the US Dollar, which would aid and abet the Dow peak that, relatively speaking, is not that far off. Bear in mind, as friends and relations prepare to be hooked, that the US economy requires oil prices below $25, anyway
A big deal is being made about last week’s decline in gold. However, it isn’t a big deal. Readers who called were reminded that I had been remarking that junior and mid-sized gold stocks had gotten too far ahead of the metal to fit within the risk/reward paradigm for investing that is traditionally sought here (though the response to callers never pondered the silliness of potentially out-smarting
oneself and selling the metal itself, as one could lose sight of the bigger picture and, with it, the greater move anticipated by SKC to $500). The decline in the metal itself is merely consistent with such a technical background, of the aforementioned equities’ overvaluation.
When gold collapsed to $330, SKC immediately reminded that $330 was the forecasted support area (see March 13) and this was followed up with the analysis that the worst-case scenario was $320, anyway. This was correct and, this time around, as the tree shakes common stocks loose from the nervous ninnies’ hands, look for a worst case of $362in the metal.
As for stocks, among the biggest performers were the two that had been cited in SKC, above all, Golden Star. There, investors enjoyed a 100% return and the opportunity to re-invest after the stock got chopped, before a 500% explosion (SKC commented more than once). “Recommendations” were referred to as totally technical (unofficial, as a result), and that one should therefore check with one’s own investment advisor. SKC does not discuss individual equities, due to constraints by which these reports must abide (those two gold stocks were too cheap to not discuss, in some appropriate manner, insofar as readers’ interests were concerned).
The future demands that China guarantees for the metal is both extraordinary and consistent with SKC’s long held view that dominance is shifting from West to East, for hundreds of years. Of course, the process will have been too slow for a single generation of our species to notice, without historical perspective and specialized “technical” analysis (this term is not being used in any conventional sense here). SKC will save for another issue, some of the numbers that pertain to future Chinese demand. They are mind-boggling. For now, SKC reiterates the analyses of previous reports: powerful Eastern stock markets and economies are consistent with strong precious metals prices. This grasp should assist in the formulation of asset allocation.
At the beginning of 2002, SKC turned bullish on the Euro, Swiss Franc and Yen, at major the lows. The first two currencies provided all the return that one could have ever hoped for since, whether from the stock or bond portions of one’s
portfolio. Make no mistake about it now, though. The Yen will lay all major currencies to waste (see Japan economy section above).
From the time that SKC recommended the Euro or Swiss Franc as its favourite currencies (followed by the Yen), the former advanced 36% from bottom to top (see Feb. 16, 2003 Special Report). Then, on July 3, 2003, SKC wrote:
“The Yen’s correction may already be over, while the Euro and Swiss Franc may have another minor down-leg to go. As SKC has stated, the Yen is now our currency of choice, deemed to be the strongest fiat currency, from today’s levels going forward.”
From that point, the Yen has advanced 7%, while the Euro has done nothing. Simple asset allocation over these recent few years (since Jan. 2000) would have offered any investor capital preservation and outstanding returns, without even considering the performances in the equity analyses offered by SKC.
As for the Yen, SKC reported more than once that Japanese purchases of foreign bonds, only occur at Yen bottoms and are quickly reversed. Well, the Japanese have been selling their foreign bond holdings as currency losses mount, against a backdrop of superior domestic real rates. Was this really such a difficult analysis? OK. We beat up on the economists enough, last week.
NB: To date, SKC has been published and transmitted the first weekend of every month. Going forward, SKC may be transmitted up to the Tuesday morning following that first weekend, though the report will still be completed on or by that weekend.
As well, reports will be uploaded onto www.sidklein.com in the "previous comments" folder, with a two-month lag, as opposed one.
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 MCA Securities Inc., this is not an official publication of MCA Securities Inc. The views (including any recommendations) expressed in this newsletter are those of the author alone and are not those of MCA 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 MCA 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 MCA Securities Inc. assume any obligation to update the information or advise on further developments relating to the information provided herein.