Markets Are Still Vulnerable
Victor Hugo
Maybe you've heard that most investors are waiting for the outcome of the US election before deciding strategy for the next three and six months. Maybe you also think that the election is crucial.
Yet the markets are not waiting around for such mundane matters as who will be the next president in the hot seat. Big buy and sell decisions are already being made.
The US$ is about the loudest signaler around. It says what the markets are doing and thinking. The press has been muted about the seriousness and aggression of US$ selling in the last two weeks. The penny has not yet dropped: disinvestment from the US is accelerating. Investors have decided their money will do better elsewhere or that risks are too high.
This has massive consequences for the whole global financial system, not only for those still heavily invested in years of bullish US property and in memories of the years of stock market gains -- and in Treasury Bonds that the whole world used to buy.
Oh yes, remember that the media has been telling us that the stock market bull is about to run? Yes. That's just how it works. The media focuses on what is expected. Markets do what is expected only for a while, then they do the opposite.
Look at the Euro. Trading at 1.2830 as I write. Up nearly 5% in a month. Lots of technical evidence from momentum, range, patterns and cycles that it could be on the way to probe the 1.375 area in coming months, only another 7.2% away! ...but an earthquake in financial terms. We were one of the first to forecast that the Euro would be going to the 1.40+ area this year.
Next year the picture is for more US$ weakness, Euro strength. Behavioural counts suggest scope for 1.5691 within eighteen months.
Not that Euroland is a haven of peace and growth either. In fact it is boring and stagnant. The fact that Asian and even Opec loyalty to the US$ is turning to the Euro as better than the US$ -- is a reflection of how seriously the US have dug themselves into a hole of debt and trade deficit and disgrowth (my word - for growth prospects becoming recession prospects).
Is this too dramatic a statement? Well have a look at General Motors who have been selling cars interest- free or on delayed payment or through their own finance schemes to help income. The share price has meandered 60% down from $94.63 in April 2000 to $37.13 today, showing no indications of being near a base. A one-year count scenario is showing still 34% lower.
Or have a look at the Dow Jones Industrial Average. Again the patterns, ranges and momentum warn of big vulnerability and an aggressive sell-off. We saw and published the early sell signal in May already, corroborating now. Not just risk of some softness to the 7197 support of October 2002 from the current 9757, but there is evidence for a sell-off to the 5000's (e.g. 5490 support that is 43% lower. Long term swings suggest some robust support there).
Plenty of precedent for big sell- offs from history. It's just that at the brink of them, few want to accept it can happen again. Even the evidence of failing upward momentum from the Nikkei and European markets elicits a "Don't- worry- it- will- come- right" response.
The oil price adds to brew. In a few years from now, investors may well be shaking their heads in amazement why so few could bring themselves to accept that higher oil prices would speed up a global market sell-off and a US$ crash. My models show NYMEX Crude Oil futures to the $85 area in the next two years as the US$ weakens and demand exceeds supply. Newspapers can bluster as much as they like that current oil prices are overdone - driven by nasty hedge funds. Sorry - the market is seldom as wrong about supply and demand as being suggested. Even if 5%- 10% of current oil prices are hedge fund and reserves accumulation driven - so what? Hedge funds and governments accumulating reserves -- are also part of the market.
US Treasury Bonds are actually stronger as some money shifts to perceived safety. When the rest of the world starts asking itself more carefully where its money may do better and just how safe that US (or London) property is or how safe US Treasury paper is - that is when a too awful to contemplate crunch accelerates as debt and other bubbles burst.
Meanwhile the $Gold price hit $430.50 today -- and gold believers have started thinking how long before $448 or $464. Some work next -- before the $432 resistance area of March's highs are penetrated. Pity the Rand spoils some of the fun for JSE holders of gold shares. So investors in JSE Gold Mining companies had better be nimble and catch the Rand and $Gold price in phases when they help each other. I would get worried about non-performance or falling prices if there should be any trend development below 1960 on the JSE All Gold Index.
It's difficult for JSE investors to sell golds when elsewhere gold companies smile with the stronger $Gold price and even EuroGold price. Early this year I called a Gold price above $500 this year, based on strong two- year and three- month cycle sequences relative to momentum counts and relative to US$ prospects and technicals.
Well maybe gold only gets to $464 this year instead of my $512, but the long term gold bull I have been calling since 2001 is clearly still intact. The behavioral price counts relative to time sequences, don't waver from their conviction that $610 is coming in the next two years.
The whingers and whiners about how the gold price is manipulated fail to appreciate that the manipulation of gold prices is old news. Centuries old. Paper money vs. "real" money. Yet the manipulators are part of the market as well -- and will burn or glitter with the market -- when they fail to hold back the next Tsunami that can happen when confidence shifts. Economic history shows many examples. Most people prefer not to remember history or they expect immunity 'this time' to economic forces.
Behavioral counts on the US$ and Rand call the Rand to $ZAR5.45 next year. Disaster for SA ? No. Short- term pain. Long- term gain and good news. Interest rates will be cut again as oil prices slow growth and when the SA government does the right thing for the wrong reason -- as it tries to save jobs.
So what about the JSE in these amazingly interesting times? As I have said before - 25% of strongly bought share prices can adjust to "fair value" within a few weeks in any global turbulence. The bigger dynamics I have focused on this year are still there. SA is going into a lower interest rate environment with the Rand stronger -- as the US$ weakens. Some of the money that was in North America will be looking for growth in awakening Africa.
Accordingly one wants to be overweight in Rand and interest rate beneficiaries, not Rand and inflation hedges. One wants to be overweight in cash or in protected, at least resilient investments --- for now.
So we are still sitting on hands. Not waiting for the US election, but yes -- waiting for the markets to show some more reliability than they do now. When the bigger buys come - the signals will develop over several days - so no need to be too quick on pulling that trigger.
If global markets sell hard -- or crash - the JSE will fall hard as well. Difference is JSE investors can be looking for dip buys for a coming bull market -- while they rest of the world are looking for rally sells to soften a long bear. So much is set up for Southern Africa to do well in the next few years -- provided politicians don't get too greedy or too unwise...
25 October 2004
Best regards
Victor Hugo
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Victor Hugo is an independent market strategist and asset manager. His information is published in South Africa and in global media. Janet Hugo is a Certified Financial Planner with specialist knowledge in life assurance, estate planning, retirement and long- term investing and offshore products. Please see www.HugoCapital.com/disclaimer for disclosures,disclaimer and indemnity applicable in respect of those reading or utilising our information, advice or recommendations or that of Intent Marketing (Pty) Ltd t/a Hugo Capital.com. Contact us at analysis@HugoCapital.com or at Tel +27-11-802-7282 Fax: +27-11-802-4586 P.O. Box 87282 Houghton 2041 SOUTH AFRICA.
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