At times some of these markets will appear to rise while others fall or drift sideways, but at the end of the day, they all need each other and eventually reach the same destination.
At the moment the snake is clearly hungry. The US economy is in a mess and getting worse. The head is rising and searching for something to gluttonously devour. Europe is barely managing to struggle along, and Asia is getting thinner by the day. Australia has started heading into trouble, and recently in New Zealand, the signs of leaner times ahead are becoming more obvious. For example, Tower, Telecom and Baycorp, and there's plenty more to come yet. In addition, most managed funds are invested in global stocks, and are therefore also in a mess and getting worse.
The markets are desperately waiting for (and need) the head to eat soon, or they will all end up going down the same hole together. However, there are several cunning small predators of the snake scattered around the world, all slowly combining and collaborating in a united force, trying to stretch the snake's resources, distract it from its fodder, and ultimately self-destruct.
If you think that's all far fetched and overly pessimistic, then consider the following. The US stockmarket could easily crash in the coming months because it doesn't function in an isolated vacuum. It is not only dependent upon the domestic economy, but also international trade and stability. Equities are influenced by the bond market which is affected by commodities, which in turn depend on the US dollar which is affected by global markets, and the dollar is falling.
The US dollar is in trouble and continues in downtrend despite the aggressive interest rate cuts by the Federal Reserve, and the resultant explosion in credit. The US economic fundamentals have become worse (contrary to media reports) with increasing deficits (government budget and trade), increasing consumer and corporate debt, decreasing business investment and savings, and growing concern by foreigners who are pulling their investments out of the US financial markets. Plus there are moves afoot by the growing force of other countries (predators) to dump the dollar as a trading exchange which will further upset the US economy and financial markets.
However, analysts and the financial media continue to spew out their never ending garbage that all is well, and the stockmarket is great for investing once again. They ignore the deteriorating fundamentals all around them (including the renewed threats of terrorism or pending war) and twist all news (no matter how bad) into good news, in an attempt to stop investors leaving the stockmarket and lure others back again. Some analysts have recently started deliberately lowering company estimates (earnings and profit) so that the actual results when reported will beat their expectations. This then becomes twisted into "surprise" good news and a "must buy" signal.
The latest catch phrase is "Beating Estimates" and the analysts are really just playing a game of poker, but they're dealing the cards out with slight of hand. They know exactly what the public wants to hear and believe. It's called the "ostrich syndrome". In other words the bear market is over, any war will be over in a few days, the terrorists are being defeated, and the stockmarket is about to boom once again, so they deal the cards accordingly. They are quick to emphasise that estimates have been exceeded (boom times ahead) but fail to highlight that earnings are actually down because they haven't accounted for the costs of restructuring, stock options and pension plan shortfalls (dark clouds on the horizon). US company earnings are very suspect at the moment, and overvalued P/E's may be far worse than believed.
The trouble is, many investors believe these analysts, and are ultimately going to lose more than their shirts. Investors are even being encouraged to mortgage their homes (interest rates will never be cheaper) and purchase equities with the proceeds, worsening the debt problem. People have short memories, and have obviously forgotten all about the October 1987 Stockmarket Crash.
Some fund managers proudly announce ("look how clever we are") that they have only lost 15% of their clients' funds for the year, compared to a market index which is down over 20% for the same period, so they must be good and worth having them manage your money. When this sort of nonsense starts to prevail, the warning bells should be ringing loudly. It's time to sell your stocks, withdraw your managed funds, and wait on the sidelines until better times return.
The US stockmarket appears to be rising like a skyscraper once again but it's being built out of a deck of cards. It seems to be getting taller, but slowly and surely, one by one, the bottom cards are being removed, and the falling US dollar may be the final card that wrecks havoc. The USA stockmarket is rising because of the "ostrich syndrome", wishful thinking exuberance, covering short positions, and a deep desire to recover past technology stock losses. The analysts love it, take advantage of it, and guide a blind vulnerable public towards the cliff edge.
The tower of cards becomes even more fragile when you consider that many of the recent key economic factors (consumer confidence, employment statistics and so on) which have caused a temporary "dead-cat" bounce or bear market rally, are then quietly corrected (made worse) during the following month without ever a mention by the analysts or financial media. When the next statistics are published, of course they seem to be better than the previous values, but then they are also quietly corrected and so the deception continues. The tower of cards has a limited life.
There is a growing view amongst economists that the US could lapse back into recession, the double-dip variety. Very few informed sources believe that the Fed recently slashed interest rates by an aggressive 50 basis points (a four-decade low) just because the economy was going through a soft spot. The Fed knows that the economy is in trouble. There's also increasing chatter that a major US bank will go under in the not too distant future. The very real problems growing on the horizon are much greater than have been reported by the media.
A double-dip recession could also be triggered by external events, such as further terrorist attacks on the USA, or a protracted escalating Middle East war driving crude oil prices higher. These events could occur sooner than later. Soaring energy costs have caused many past US recessions.
The USA has less than 5% of the world's population but voraciously devours around 25% of the world's oil. Its insatiable gluttonous demand has made them highly dependent upon an abundant secure supply of readily available cheap oil. The USA is the world's largest consumer of energy.
But wait, there's more. The US consumes around 20 million barrels of oil a day, of which nearly 15% is imported from the Middle-East Gulf States which hold around 70% of the world's proven oil reserves. The USA on the other hand has less than 5% of the worlds oil reserves. The Middle-East Gulf States clearly are very important to the US economy and its long term fuel needs.
China is rapidly developing quietly in the background, and with a stated policy to become a world superpower, also has an increasing appetite for imported oil. Likewise, India's oil needs are growing. Both China and India have huge populations, and as they industrialise, their oil needs will eventually exceed all of the currently known oil reserves.
In the Middle-East Gulf States, Iraq has about 10% of the world's oil reserves, second only behind the largest reserves of Saudi Arabia. The USA is very angry with Iraq and seems determined to declare war. Some observers speculate that the real agenda of the United States is to seize the oil, initially from Iraq, and then later seize full control of the reserves contained in the Middle-East Gulf States.
Unsettling debate and comments have started recently between the US and Saudi Arabia regarding the funding of terrorists. Saudi is the home of Osama Bin Laden and numerous other alleged terrorists. Saudi refuses to allow the US to use its land or air space to attack Iraq, and also has threatened to pull its funds and securities out of the USA should war eventuate.
The terrorist networks have vowed to attack the Western economy of which oil is the lifeblood. Recently, a drunken hunter shot a hole in the Alaskan pipeline, shutting it down for two days. Imagine what terrorists could do with the Western oil infrastructure such as pipelines, storage facilities, tankers, terminals, rigs, pumping stations, and even the oil fields. Osama Bin Laden is on record as stating that the cost of oil should be increased to over $150 a barrel.
Al-Qaeda have threatened further "spectacular" terrorist attacks against the United States and her Allies. FBI intelligence sources state that these attacks will probably be designed to achieve mass casualties, severe damage to the economy, and maximum trauma for people. The attacks will also be extended to any supporters and friends of the USA, such as the UK, Australia and NZ. Recent threats of cyanide gas poisoning in the London underground rail stations and the Bali tourist club bombing in Indonesia are such examples.
Due to the seriousness of these threats, the Australian Government has closed its embassy in the Philippines, placed 24-hour security on certain national landmarks and sporting venues (Sydney Opera House, Harbour Bridge, and Melbourne Cricket Ground) issued travel warnings, and also advised its citizens to maintain a vigilant alert at all times. No Western country is safe.
Even in New Zealand the risk of a terrorist attack could be high. NZ plays a very active role alongside the United States in the war against terrorism (Operation Enduring Freedom) which is being waged by American and a coalition of international forces. Top US diplomat, Secretary of State Colin L Powell stated publicly on 26 March 2002, that the USA government viewed NZ as "very, very, very good friends" citing NZ's support in the war against terrorism, including their direct assistance in Afghanistan.
Very recently the NZ warship Te Kaha sailed for the Gulf of Oman to join US forces in the search for members of the terrorist organisation al-Qaeda. The NZ Security Intelligence Service also actively supports the UN gathering information about Iraq's weapons of mass destruction. It does not take much intelligence to deduce that only a fool, or someone with ulterior motives, would dare suggest that NZ was a low risk target, especially in light of the latest threats.
The threat to New Zealand could be very high during February 2003 when the America's Cup sailing regatta is held in Auckland, especially if an American yacht reaches the finals. With the Sky Tower, Harbour Bridge, Hotels, Night Clubs, Restaurants, Rich Tourists and hundreds of spectators all compacted around the sailing course, plus several international TV stations transmitting the event all over the world, the terrorists could inflict enormous damage (structural, casualties, trauma) and there's very little NZ could do about it.
For example, there are many crop dusting planes and hundreds of small runabout boats in the area which could be hired or stolen and used to conceal bombs, or even a larger plane could be hi-jacked. Coastline and port security are insignificant compared to the measures implemented in the United States and Great Britain. New Zealand has a decimated and ineffective air force which would be totally unable to defend the skies, and to make matters worse, there's also a ban on any US nuclear powered or nuclear armed vessels (air, land or sea) visiting the country. Who would defend NZ against such an attack - pleasure boat sailors with sticks and empty rum bottles?
Terrorists are not idiots (in the simple sense), they're meticulous dangerous fanatics with deeply ingrained beliefs, who have an extreme hatred of the Western culture and are prepared to die for their cause. They may have planned an attack months ago, and could practically walk in and perform their barbaric acts unrestricted. With NZ's open high volume immigration policies, terrorists may already be permanently resident in the country. They rarely give advance notice of their plans and intentions, or take into consideration innocent values, and should such devastation occur, the economic ramifications for New Zealand would be horrendous.
The image of politicians and the games they play are already bad enough, without putting the lives of innocent people at risk in the devious pursuit of money and votes. Some policies are nice in a clean green ideal world, but this is not an ideal world, and defence against terrorism is far more important than vote electioneering or debating the merits of allowing knitting in Parliament by senior ministers. Presumably the NZ government will also put its citizens on vigilant alert in the near future, and enhance its defence capabilities.
Further afield, Russian officials have previously announced that "suitcase" nuclear weapons are missing, and very recently have stated that small amounts of weapons-grade and reactor-grade nuclear materials have also disappeared from their facilities. Russian nuclear installations are well known for their slack security and lack of ongoing maintenance. The USA continually highlights the dangers of "dirty bombs" and nuclear bombs being acquired, assembled, and ultimately used by terrorists and hostile countries like Iraq against Western interests. One of Russia's largest trading partners is Iraq.
The timing of North Korea's recent voluntary announcement that it's actively pursuing a nuclear weapons development programme has very sinister undertones. North Korea supplies missiles to Iraq, and its "big friend" China supplies various air-defence communication systems, all of which are then utilised to fire on USA and UK warplanes patrolling the no-fly zones over Iraq. These issues compound and stretch the US defence resources, like predators waiting to pounce.
Some observers believe that Iraq does have access to concealed nuclear weapons, and the real objective of the terrorists (and their supporting nations) is to entice the West (mainly the USA) into a nuclear conflict. One of the reasons put forward for the UK's overly staunch support of the USA against Iraq, is that these two Allies in conjunction with each other, provide a much more powerful nuclear deterrent and strategic offensive force, than the USA on its own.
And then there's Kenya, Israel, Palestine, India, Pakistan, Kashmir, more terrorists, more nuclear bombs, more unrest, and will it ever end, or get better, or get worse?
There's stockmarket technical analysis, fundamental analysis, and geopolitical analysis. Just like a snake, they don't move in isolation to each other. They are interrelated and connected by trade, finance, politics, peace and war. At times these techniques appear to work while others appear to fail or seem uncertain, but at the end of the day, they all need each other and eventually reach the same destination. If one goes down a hole, the rest will surely follow.
But every cloud has a silver lining, or gold lining. You may feel that this month's commentary is overly pessimistic, but unfortunately, it's a sad and real reflection of the troubled world we currently live in. It's important that you at least understand some of the factors that analysts forget to mention when predicting how wonderful the stockmarket is once again, and that times ahead are looking good - that's just not correct. They are simply taking advantage of people's emotions in order to feed their own insatiable greedy appetite for more and more money, regardless of the consequences - but it's your money, and they should be held accountable.
However, a weak US dollar and/or war is good for rising gold prices. If economic problems and global instability persist and become more widespread, investors will tend to seek safer havens (like gold) until peace and normality return. Such action would create additional demand for gold and subsequently push its price up even further.
Other factors that will compound the effect of a falling US dollar and increasing gold price are the recent retaliatory actions by North Korea (dumping the dollar) against the USA for ceasing heavy fuel oil shipments, China opening a gold market exchange for personal investment and possibly introducing a gold-backed currency, and the Islamic world dumping the US dollar and introducing a Gold Dinar for trading purposes in the very near future. Year 2003 may prove to be very nerve wracking, economically sick, and the year of the gold stocks.
We still strongly recommend that you should sell most of your traditional stocks (if not all of them) and withdraw your managed funds. Invest your money for the time being in safe Government Bonds, and stay well clear from any adviser who attempts to play cards with your life savings. This is not the time to believe in (or follow) the long-term long-haul culture brigade, who rarely consider the geopolitical situation. This is the time to get out of traditional stocks and shares, and sit on the sidelines for a while.
We also recommend that you should consider investing a small sum in selected gold stocks. This is simply a strategy to protect your financial interests in troubled times - and that's what we have. When the situation reverses and the stockmarkets head upward bound for the right reasons in the right environment (which hopefully will be sooner rather than later) then our strategy will change, and an abundance of good first buys in traditional investment stocks will occur once again.
Our free monthly publication has been designed to assist stockmarket investors improve their profit performance in terms of dividend yield and capital gain, while being mindful of the risks involved. The geopolitical situation is one of those risks to be considered, but the subject is obviously open to diverse opinion and speculation.
Finally, we take this opportunity to wish you, your family, and your friends, all the very best for Christmas and the New Year. Don't overindulge - well, not every day!
FairShare Investments
Email Addr: hannigan@fairshare.co.nz
HomePage: http://www.fairshare.co.nz
2 December 2002