October 2, 2005
Nikkei: 13,574.30
*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 re-print from the September 11, 2005 report rings most-true today. While the Nikkei has advanced, Japanese Domestic Demand Oriented Value Stocks (DDOVS), a group coined and defined by SKC according to specific criteria in 2000, has done poorly. While having advanced appreciably through the 2000-2002 period even as the Nikkei was collapsing with the Dow, the DDOVS have not done well, in the face of a rallying Nikkei, for two reasons. The main reason is that the move into the Nikkei reflects foreign fear and the dumping of US equities.
We know the old adage that before selling stocks, investors move to "hold", from "buy". Stretch this out a bit. Before selling US equities, dramatically under-weight-in-Japan foreign investors are buying liquid Nikkei issues, before the Dow's collapse.
The second reason relates to the Yen's recent corrective weakness, as DDOVS benefit from the same fundamentals that benefit the Yen, while the exporters, on the other hand, benefit from the weaker Yen.
Fundamentals are extremely bullish in Japan longer term, but there are difficulties on the horizon for the coming quarters. Again, this is consistent with a variety of views and conclusions held here. SKC will explore those Japan fundamentals more closely, as this quarter's great buying opportunities approach.
Remember too, 2006 is another massive cycle low for Japanese stocks. The reason this next cycle low will be so exciting is that all key elements will be hitting on all cylinders. The economy (with a typically-Asian 16-year cycle), banking and capital flows, will ALL be hitting cycle lows at the same time. Moreover, they are all making higher lows. The preceding is the recipe for explosion!
CONCLUSION: Non-Nikkei Japanese stocks (DDOVS, in particular), follow their own cycles, and yearend is again lining up to be a beautiful and exciting buying opportunity. Also, this lines up with the correction that we foresee from here for the too-stretched Nikkei, whose decline would coincide well with the New York Crash that SKC sees coming up just ahead.
NEW YORK:
George Bush's speech about New Orleans' eventual reconstruction was followed by a 135-point intra-day rally in the Dow that was as cynically ridiculous as anything could possibly be. Such news may be the cause of a cyclical bull market from 6500, but not from here. At that point, the reconstruction event itself will be closer to actually happening, in terms of time.
From today's farther away point in time, and from these Dow levels, it was merely a cynical short covering rally that was used by the powers-that-be to sell and go short, whether we're talking about the market manipulators (Fed), the families who manage the figureheads, or the brokerage firms.
A good CNBC interview that I heard in the background in my office included a gentleman who had made the case for a coming economic shock that will be created by higher natural gas prices. I couldn't catch his name, but while aware that prices are dramatically higher as compared to last year, I hadn't considered the effect to come as winter approaches for the many people whose heating bills will be seriously affected, along with the subsequent spillover effect on consumer confidence. In other words, while higher oil prices are nailing the economy and disposable income, a problem that has gotten press, this story was being under-covered, he explained.
So, while Bulls tell you not to sell, even though there's no reason to hold - other than the spurious and unspoken logic that the market hasn't fallen yet (so why not wait to panic with everyone else?) - what has indeed gone on recently for sane investors to consider?
Well, the reality is that:
Go figure…and go worry.
While the latter represent serious detonators in the minefield, we must consider another major minefield element that we've already discussed: Fannie Mae (FNM) and Freddie Mac (FRE).
The former lost about a third of its value over the past quarter, and while window dressing may have rallied the markets into this past Friday, bad news rocked Fannie Mae's world near week's end. Just before the news (which may have caused a short term panic low in that stock), I received an email from an investor who pointed out that these quasi-government agencies have made for successful short sales for him, knowing that the powers-that-be will not manipulate those equities.
SKC's own reason for agreeing with that latter statement is that there isn't the same vested interest on the part of the greedy manipulators in holding up those stocks, as there is in maintaining the level of the Dow Jones, which is the index that reflects and manipulates investor psychology worldwide, more than any other index or investment vehicle (thank-you Robert Prechter, for having taught me that 23 years ago). For now, at least, that also includes gold, and so, a couple of quasi-government stocks are also included. However, these companies remain, as they already have for some time, major factors among the several and frightening financial and economic triggers in the minefield for disaster, today.
There's an old adage that advises to not sell short a dull market. This is based on the idea that once a market can go no lower, the buyers will create a new bull phase. So, what's the prevailing wisdom regarding a market that hits its head over and over again against a roof that's just inches above, and trading at 18X earnings? Opinions, anyone?
The background for all of the above includes falling earnings growth rate estimates, and prices that are out of whack with reality, all else notwithstanding, anyway. In 2002, for example, oil was at $30, gold was at $330 and the Dow was under 8000. So, let's keep this simple: if one holds stocks, one should perhaps take the attitude that it is no different than buying stocks. SKC's view is that buying at these levels is moronic.
CONCLUSION: In Elliott Wave Terms, a short term wave-c rally is completing (only technical analysis refers to price timing, hence the need for, and wisdom in processing and using all four key tools at hand - fundamental, value, quantitative and technical analysis). This means that the Dow once again has but pennies above and hell below.
NIKKEI/DOW RATIO:
The Nikkei has commenced a massive secular bull market versus the Dow Jones, as so often forecast and reported in these pages. Friday's close just under 1.29 indicates a clear reversal on charts of various time periods. The new trend underscores how silly the ratio of one (1) was, at which point SKC had harped on the opportunity that had been created by the revisit to that level which had last been seen around the time of the Korean War.
The February 12, 2003 report (see "previous comments" folder) summarized SKC's world-leading asset allocation model over the preceding and most difficult three-year period. Today's analysis regarding Japan's relative performance versus New York will have been at the centre of our coming and significant out-performance.
Simply, and as so often forecast - but now unfolding before everyone's eyes - Japan will make higher highs and higher lows, while New York makes lower highs and lower lows, thus reflecting the mirror image of the 1990's experience. SKC was first to make this forecast, as far as we're aware, and we wish to remind of the significance of all aspects of asset allocation, which far precedes the knowledge of which stocks to pick.
CONCLUSION: While we don't see 14 anytime soon (the 1990 peak), SKC sees 2.0 during this cycle of crash in New York. To reiterate, the ramifications of this coming move to 2.0 is huge, as regards asset allocation.
GOLD:
Breaking through the $460 - $465 area to above $470, represents the kind of strength that is consistent with SKC's view that $500 by yearend has a great chance, en route to much higher numbers, anyway. While the point is moot, therefore, shorter term support can be found around $455.
Similarly, silver's strength to $7.50, coupled with the technical interpretation of its trading pattern, which is different than gold's, suggests that power to $8.50 and beyond could be closer at-hand, than many might suspect. A tip-off to this may be found in the superior performance in certain silver mid-cap stocks, as compared to that of favoured gold mid-caps.
In any event, following-up on the relationship of gold and silver stocks to that of the underlying metals, may be of greatest interest, as their relationship to the metals is clearly different to what it was through the 2002-2004 period.
While gold's secular bull market versus the currencies may be evidenced by the world's panicked new interest rates' bull market, along with the developing resilience of the precious metals to those rate hikes, equity markets suffer from the effects of those rate increases, as well as all that which ails the West's fundamentals.
CONCLUSION: All taken together, one alternative would be to continue to remain 50% invested in the equities, to see how they behave through a significant Dow decline, or use a short term correction in gold to be fully invested, on condition that one's psychology and portfolio asset allocation allows for the unusual stance of augmenting one's stock holdings to 150% invested, in the case where there really were a major downdraft caused by the general stock market. Now, SKC leans toward to this latter scenario, for those for whom such a strategy is appropriate. As always, consultation with investment counsel is advised. Regarding the metals themselves, 100% investment continues to be advised, of course.
DOLLAR:
The Yen's revisit of the 113 area is another investment opportunity, partly created by the Fed's quarter-point hike. Of course, Japanese interest rates are in a new bull market as well, and for all the right reasons (see Japan section above). US rate hikes are due to calamitous difficulties.
The Swiss Franc is, predictably, the best of the lot and its behaviour suggests as much. Not in the European Union and the closest fiat currency to gold, our strategic favourite remains untouched.
The Yen is the world's next block currency and, so, is recommended due to its Asian positioning, as well as the fundamentals for that region. Meanwhile, the Swiss Franc represents fiat value. Gold is in a major secular bull market versus all-comers. SKC's mix seems ideal, then, and it is therefore doubtful that it will be tampered with anytime soon.
CONCLUSION: Currency asset allocation remains 50% gold, 25% Yen and 25% Swiss Franc.
Sid Klein
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