Currency uncertainty, geopolitical uncertainty and the relationship between confidence and economic performance all have to be weighed against expected market performance.
Perhaps a useful approach for the year, certainly the one that we are going to attempt to follow, is "Fly the instruments. " Pilots can appreciate the full implications of this concept. No matter how difficult the visibility, no matter where you think you may be -- observe what the directional, speed, height and location instruments are saying -- and act accordingly. This is not to say that technical instruments have all the answers in forecasting, but they become very useful when there are considerable risks as now. Good, rational, analysis on technical and value prospects can be turned upside down very quickly.
To put it another way, while the medium term trend is up -- stay invested -- but if the indicators say a turn is underway - ignore them -- and like an airplane, the investment can crash.
From a global perspective, our analysis of the technicals relative to the fundamentals and cycles, still confirms that the US$ will be heading weaker, much weaker. Behind the scenes, this must be aggressive economic policy by the US Fed. Their gargantuan efforts to get the US economy going using interest rate and tax cuts have been fairly successful up to now -- but when it became clear that these methods of stimulation were not to effective enough, they shifted to allowing an "orderly" depreciation of the US$ to stimulate exports, so reducing the trade deficit.
Problem is that Japan and increasingly, Europe don't like this. They are also fighting growth issues and there own confidence problems. Add to the pot, pressure from worker America to protect jobs and go trade protectionist -- add unabated government spending and prospects of higher oil prices -- the US is on a fine line between successfully orchestrating global recovery and having the international community become resistant and decide to accelerate disinvestment.
The US$ and global investment patterns are already showing that emerging markets are becoming more attractive, that resources have a revived status relative to the last two decades. The investment community is becoming more and more concerned about the levels of the US budget deficit and trade deficit and asset prices.
Those investors have substantial stakes in US Treasury Bonds and Wall Street. They will be hurt if the US applecart tumbles.
Japan's aggressive but ineffective attempts to prevent or slow the yen from strengthening show how critical the behaviour of the US$ is to Japan's [and global] financial stability. A weaker US$ puts pressure on growth in the major economic regions outside of the US and reduces the real value of holdings in US Treasury Bonds and other US assets.
This is an important driver behind the Gold price. Also explains renewed interest in emerging markets as investors look for long-term growth prospects, not primarily dependent on US policies.
I was too early last year in anticipating a pop of the US debt bubble and a collapsing Wall Street. Let's take our hats off to the US for their success in spending more, increasing their debt and hey presto improving confidence -- justified or unjustified. Just goes to show that economic problems have rational and irrational solutions -- at least temporarily.
Don't underestimate the degree of vulnerability of Wall Street and US Treasury Bonds. Of course, this is another way of saying -- don't underestimate the domino effect of any tumble on global markets, especially smaller ones - where investors will be anxious to protect the handsome profits of 2003. Election year in the US or not - realities sometimes hit home when least expected.
So what scenarios are momentum counts and cycles suggesting for 2004 for the US$? A US$ rally underway, perhaps continuing or holding during Q1, then more weakness later in the year. In US$ Index terms, with the index having come down from 99.49 in August 2003 to 84.80 this week, now at 86.56 -- illustrates that the media may be overenthusiastic about the extent of the "rebounding stronger, strengthening " US$.
A relief rally could go all the way to its 50 week moving average, now at 94.64 and do little to disturb the technical trend profile of the US$ to weaker. Counts are still persistently showing scope for the US$ Index to 77.50, or in a more intense scenario to 72.45 during the next 12 to 18 months. Remember John Templeton's warning last year of a 40% weaker US$ in the next two or three years? That warning was when the US$ Index was at about 92.00.
This discussion on US$ potential is important for JSE investors -- because it will have so much impact on the Rand. The Rand has sold off strongly since the $ZAR 6.07area of early December, now at about 7.30.
Importers have been running for cover and overseas investors have been protecting profits. South African Treasury Bonds in a declining interest rate environment were a low risk "sure thing" for the informed investor.
The Rand being relatively illiquid in a small market is also an easy target for the currency traders, now smelling that they can push the Rand weaker beyond usual technical balance points for a while as the US$ rallies. Another factor is that as South African elections get closer, enthusiastic politicians may make rash promises to win voter support -- at the expense of international investment confidence.
Some of government also does not seem to understand the benefits of a stronger Rand for the long-term. To the extent that the Reserve Bank began to intervene in the currency markets last year, reversing previous policy.
In any event, the Rand could easily be under pressure for a few months -- -- some evidence on sine cycles not beyond April - support at about 7.50 and again between 7.90 and 8.20. Good for resources and other exporters in the short-term. A breather for JSE sectors that benefited from Rand strength last year.
Not enough space here to get into a discussion on which JSE sectors will perform best and on a comparative basis -- but taking a view on the Rand for this year -- will enable a rational approach to finding JSE value and will be critical to market strategy success.
Very briefly, our research suggests Rand weakness will be temporary and that Rand strength will resume later in 2004. I am calling the Rand below $ZAR 6.00 by the end of the year although this view would probably need to change if the Rand shows sustained weakness above 8.20 for a month or two.
Interest rates are still in medium term downtrend on a one- year view, perhaps longer. This view on interest rates is partly influenced by technical momentum evidence on the US 30 Year Treasury Bond and the practicality that the Fed is going to do all it can to prevent interest rates going higher and asset value collapse that would follow. The global recovery of 2003 still depends largely on US maintaining its Houdini recovery. Without the US fuelling the consumption engine, the major risk is a slip back to deflation. The first signal of that could be a US$ selloff.
Technically the Rand and the South African R153 long dated Treasury Bond are still showing convincing medium term technical trend profile for resumption of last year's trend after a typical two to three-month breather.
If that scenario is right, resources and Rand weakness beneficiaries will be a place to be for the next month or three at least -- but then look to buy the beneficiaries of a stronger Rand (weaker US$ again ) and lower interest rates later in the year once the Rand has finished its corrective dip and the market again becomes convinced that lower interest rates are on the horizon. Higher resources prices in a basket of currencies will also be important fuel.
The $Gold price? Again largely a function of the US$. I'm calling for $500 by the end of 2004, although this call may have to be moderated slightly to $482 resistance if the Gold price does not manage to maintain its 1- year trend profile above $382 in coming weeks. There is a lot of technical support between $382 and $404 and we will be watching the medium term momentum profile at $389 particularly carefully if the $400 area fails.
Those who want a strong US$ [most of the world] will be doing all they can to persuade the world that gold is merely an anachronism, merely a useless yellow metal with no intrinsic value. Watch them eat their words once the current US$ rally and $Gold price pullback and consolidation finish. Any new trend development above $416 could really light the candle for $452 and $520.
Last year in January we said it would be a year of intensity. Now we say 2004 could be a year of surprising swings. Even though it is election year in the US, confidence and lack of confidence are not necessarily as rational as investors would like. Terrorism and the intense reactions that follow are also a risk. Complacency as indicated by markets - is often followed by surprise.
More on sectors and shares, levels, trends, timing and targets in Turning Point newsletter and Traders Call bulletins.
Best regards
Victor Hugo
www.HugoCapital.com
www.SAgolds.com
www.GoldSignals.com
16 January 2004