JAPAN ASIA INVESTMENTS
Dow Crash?
Schurrly!
September 11, 2005
Nikkei: 12,416.39
*April 2003 low: 7,603.76
*- See March 31 & May 3, 2003 reports, along with April 10, 2003 ROBtv interview (5 min.), on homepage.
JAPAN:
"Japanese domestic stocks are doing poorly against the Nikkei, which has hung on to gains above last year's highs at 12,000. This is very bearish.
This indicates that foreigners are rushing out of New York and buying whatever is most liquid, in the one major world market that offers value. Ironically, value is not where most of the money is presently pouring. This is about fear. This isn't a bona fide Japanese equity move."
The above excerpt from the August 25, 2005 report was quoted in the Barron's August 29, 2005 Asian Trader column. Indeed, Japanese elections tend to correspond to short or intermediate peaks, and this weekend's elections may well prove to be no different. It could correlate to a peak in the Dow…or not.
The pig picture has nothing to do with this. In 2002, before identifying the perfect secular low in the Nikkei in April 2003, SKC reported that foreigners had hit a level of underinvestment in Japan that would sustain foreign buying for years to come; foreigners had hit a level of Japanese equity exposure of only 55% of the Morgan Stanley Capital Index.
SKC further warned that foreigners will move to overinvestment before it's all done, with a Nikkei that will have perhaps tripled. Now that a fortune has been made in Japanese stocks in the post-2000 period, the investment bank "fundamentalists" are now recommending Japanese overweighting versus New York, ever so knowledgeably.
The same folks are joining SKC's three-year old bandwagon that the economy has seen its bottom, that interest rates have seen their lows and that the latter is very bullish for equities. Not only were these not believed by the Johnny-come-lately mavens at the time, but they defied the correlations between markets (rates and equities), even if SKC's analysis that rates had bottomed, was correct.
The upshot is threefold.
Firstly, Japanese domestic value stocks, as defined here, will continue dramatically higher through time.
Secondly, not only has the Nikkei/Dow ratio bottomed, as so often reported since 2002 in these pages, but, as also forecast, we are now on the verge of the bull blown countertrend relationship, whereby the Dow crumbles with lower lows and lower highs, even as the Nikkei makes higher highs and higher lows, for the reasons discussed in the three linked documents on the homepage, thus mirroring the 1990's experience (the come-latelies who do not follow SKC will eventually echo this, as well).
Lastly, the financial world is the last place in the world where "fundamentalism", exclusive of other tools for understanding, still hangs on to a thread of credibility.
NEW YORK:
What has recently occurred to bolster the bullish argument?
Well, on national television with me in this country, some fellow attempted to bamboozle folks with the argument that some short term indicators that no one knows about are still bullish. He confessed that there are major negatives (i.e. - debt, Dollar, etc.) that will crush the market in a secular bear. Do not sell, he said, because short term indicators (mythical?) are still bullish. To not be part of the bamboozling, the reply from this side was simply to not miss the big picture in asset management, because a short term rally would mean nothing and that his "Fed model" would mean even less.
After 23 years in the business, it appeared to me that what he was saying was that Katrina would cause the Fed to keep the spigots open, and thereby support stock prices with liquidity. Rather than engaging in cynical or ignorant argument, we'll report today the tragic obvious.
Katrina may have killed five times as many people as the 9/11 attacks, which, as opposed to demolishing a major city and environs, was contained to two buildings, in terms of area. Their re-building may have been a stimulus economically, as Bulls claim, but those arguing for the same here need their heads examined. Widespread devastation, among other things, means unemployment.
The US government's total debt has rocketed 35% over the past four years, and now Katrina has come along. We must assume that that wasn't in the budget.
It is one thing when you have money and tragedy causes spending (Florida may have been a better example), but devastation from this base and set of economic and financial circumstances may be bell-ringing panic for Wall Streeters. That may be why a Wall Street tout would try to convince investors to not sell their US equities.
The cost of Katrina may approximate that of the invasion and occupation of Iraq and, last Friday, a local paper's headline read: "25,000 Body Bags Await". Then, the Dow rallied almost 90 points. SKC reiterates that the first reaction to terrible news is often the fooler, to set the pros up to be able to get out and go short, while the public's drowsiness comes to include the thought that if the market doesn't really care about all-time high oil prices, despite the lessons of history (the correlation of oil spikes to recessions), then perhaps the loss of 10,000 lives or more, and 400,000 lost jobs, may be okay too.
It must be repeated: Investors haven't sold for any other reason than the markets haven't fallen, yet. One is afraid to sell, as opposed to asking what there is to gain by staying long. That the market has been manipulated for so long and has been able to maintain artificial levels for so long, simply means that once the guys who run the show are all out, this thing will be permitted to plummet to where it would or should be, and with such speed that there will be no chance for anyone to get out, or make use of a lifetime opportunity to achieve great wealth, as a result of the coming calamity. There is no choice but to be even more vocal about this than I was at the peak of the Nikkei almost 16 years ago. Why?
Because this is dramatically worse!
The US' coffers do not enjoy 40% of the world's savings (Japan). Rather, North America is broke, and that will be exposed. How can this not be obvious? The attitude that something that we know will happen could happen later, and may therefore be ignored, is like refusing to by life insurance for your family's sake because your not dead yet.
The Dow will not pause at what would previously have been support levels, except for a day or two. With short covering spikes (i.e. - at Dow 9800?), even the Bears will miss the decline that cuts through previous support levels like butter. When something is held up artificially, it does not change the fact that the market goes to "where it should be". Time replaces price and vice versa, as SKC has always informed. In other words, if the plane doesn't crash at a 45 degree angle, it crashes in a swan dive, if it had glided through the clouds with the engines off, for a very long time. Readers: The Dow will crash, and even at any of the five previous major market turning points (Japan and New York only), was SKC ever more confident.
The media in this country seemed to pander to an apparent tout, after Katrina. However, before CNBC World/Europe and CNBC US had highlighted SKC's past successes the week before, so as to give viewers an idea that they should perhaps lose the Nytol, there was one reporter who had rung the bell for the media itself to awake.
The Financial Times' Stephen Schurr had contacted SKC some months ago for an interview, as a result of past work and, above all, its present day views. Circumstances manifested the interview at what may be the perfect countertrend peak in the Dow.
At first, I was a bit taken aback by the reporter's attitude, since it did not seem to carry the gratuitously argumentative attitude for which reporters can occasionally be known. A still greater education as to the nature of media members during these past three weeks has taught me that the reporter's level of knowledge may have an inverse relationship to the level of gratuitous argument. This is inseparable from a reporter's concern for and commitment to, truthful reporting, while wishing to provide a public service.
Without being too corny, it should be remembered that democracy and a free press are inseparable. The reasons are obvious. Is it obvious when relating that fact to the financial community, however?
These days, political reporters indirectly allow people to die, to ensure that they'll still be able to obtain "valuable" information from government sources. In the financial community, corrupted journalism has manifested as pandering to the perma-Bull investment banks (brokerage firms), who are the bill-paying sponsors.
Stephen Schurr, however, smelled a rat and the Financial Times ran the story - short and sweet - and CNBC World/Europe immediately followed.
It has been a point of curiosity why Greg Palast writes for the BBC. A possibility came quickly, upon noting that Michael Moore wasn't even nominated at the Academy Awards, after winning the big one there a year earlier for a critical (Columbine), but still lesser story (only due to the enormity of the post-9/11 period). Still, before heralding the BBC and CBC as leaders in truthful and non-editorial news reporting, due to a culture for same, it should be noted, to be equally truthful, that Mr. Schurr is a New Yorker (who interviewed a Montrealer about New York and Japan for publication in the international press…damned be the provincial!).
So, a free-thinking financial writer who saw the lemmings perhaps heading toward financial demise, without a proper representation from the minimized "other side", decided to call and say, "Hey, I really want to talk to you."
It doesn't really take muck for the press to be free. It just takes free minds.
Bravo to the guys with the yellow paper.
GOLD:
The special GOLD-EAGLE.com report forecast that gold should not really break the $335 per ounce zone. On a closing basis, the metal closed below that price for only a day and is now within a few dollars of the $460 - $465 area. SKC reported that this zone could temporarily act as resistance, before accelerating beyond $500. Still, $500 is a pittance compared to where gold is ultimately heading and the metal should close above that seemingly magic number by yearend.
The greater interest in this potentially resistant zone is the effect on gold and silver stock prices. The performance of the equities relative to the precious metals has not been inspiring in recent months. This runs counter to the relationship that the markets saw during the post-January 2002 period. SKC has argued that this change in relationship is likely due to the general stock market itself. In this context, SKC has drawn a parallel to the 1929 - 1932 period, when gold stocks followed the Dow, until divorcing in 1931. The precious metal stocks then (1931) accelerated dramatically higher, even as the Dow disintegrated.
After nice run-ups recently, several stocks pulled back and have returned toward the highs of the past few months. So, the relative performance has been weak over the period as a whole. So far, this has vindicated SKC's stance that one should be 50% invested in the equities, even while being fully invested in gold and silver. The recommendation remains to see what happens when the $460 - $465 area is achieved. While it will be noteworthy what the metals themselves do, it is the relationship to gold and silver that the stocks enjoy that will be of greatest interest, for stock investors.
I suspect that SKC's reporting and timing of the gold equity classes (large, mid and small cap) was at the top of the heap during the January 2002 - January 2004 period. However, one must be humble and confess that the stocks:metals relationship has dramatically changed. That relationship had been at the centre of correct timing. One must note that this time period, is clearly different.
DOLLAR:
There is little to add. Currency asset allocation should remain 50% gold, 25% Yen and 25% Swiss Franc. Gold is in a major secular bull market versus all currencies. When this is done, people will be quoting scriptures and Nostradamus, much more than market letter writers.
As far as recent fundamental changes that affect gold and the Dollar are concerned, please see the New York section above.
For new subscribers, please note that these reports do not focus on near term trading opportunities but, rather, asset allocation shifts and the timing for same. The management of currency relates to wealth management, preservation and enhancement. The post-January 2002 period has been most profitable (see Feb. 12, 2003 Special Report, "previous comments" folder) and the period ahead will be more of the same, versus the Dollar.
Compared to January 2002, the Yen has replaced the Euro as the most favoured fiat currency, while gold has become the cream that has risen to the top.
Sid Klein
This newsletter is solely the work of the author for the private information of intended recipients only. The views (including any recommendations) expressed in this newsletter are those of the author alone. 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 does the author 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 the author assumes no obligation to update the information or advise on further developments relating to the information provided herein.
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