THE YAMAMOTO FORECAST
Irwin T. Yamamoto
(January 14, 2004) 0% in Stocks; 100% in Cash
Short-Term Indicators: Bonds-Bullish; Stocks-Bearish; Gold-Bullish
Long-Term Stock Market Indicators: Bearish
Gold
The bulls and bears have arguments for the bullion in the next twelve months. Both camps are able to state their cases. With that in mind, the year 2004 should translate to an intriguing time for the followers of the metal. It will be a challenge as positive and negative elements interact with one another.
Gold did surge in price during the past year. And the spike might encourage additional interest. Still, realistically speaking, the startling move may mean the best action is already behind the bullion. It would be asking a lot from the metal to top 2003's advance. Further progress to a higher level's possible. Yet to anticipate a substantial breakout similar to what
happened in the past twelve months won't be reasonable.
Bonds
As the new year appears on the horizon, bonds might be on the verge of something important. Unfortunately, it's not good.
As far as we are concerned, a major bear cycle begins. Furthermore, the duration will be measured in years, not months.
The debt market has had its days. Sadly, the past is going to be replaced by the future.
Still, the road to the end won't be a straight one. A rally of some sort could develop in the first quarter of 2004. At the latest, by mid-year. The advance would be based on the premise that the vigorous pace of the recovery cannot be sustained. The growth declines to a slower speed. This interpretation might work for a while, but not much longer.
In the second half of the year, the question of higher interest rates enters the scene. Hence, the finale for the debt market. Rising interest rates equal the kiss of death for bonds. Actually, rates don't need to increase. A perception of an uptick does the trick. The fear of a long-trend of higher rates brings calamity to this market. And the end.
Traders should utilize the approaching rally to unload all their inventory of securities. If not, they might forfeit the opportunity to receive the best price available for the foreseeable future. Avoid waiting for a better offer. Use the spike to sell your bonds. Or you'll be left holding the bag.
Investors who plan to hold on to their bonds until maturity, you have nothing to worry about. But for the others, it's another story. Totally. The chance for a loss of capital's possible. To be a bit more specific, highly likely. In the past, the bond market was seen as safe and secure. Not anymore.
Stocks
Fundamental
I'm not able to put my finger on it. Something's troubling me. Perhaps, the word is complacency. Even after a three-year bruising bear market and the September 11, 2001 tragedy, people appear to be too comfortable with life. When that feeling permeates society, the unanticipated tends to occur.
In regards to stocks, the bursting of the bubble of 2000 has been all but forgotten. A mini-bubble seems to be in the process of becoming another full-fledged bubble. At the current rate, it seems like a repeat of the dreadful consequences of the mania may very well be reenacted. Will people ever learn from the past? Don't count on it.
Complacency holds a price. And it's a high-cost item. After the meaningful run-up in 2003, a minor adjustment in the market wouldn't be shocking to anybody, including the bulls. In fact, many participants will welcome the chance to purchase at a lower level. Then the move up can continue to work itself higher.
The surprise could be equities suffering a larger setback. Instead of a 5 percent consolidation, what if equities dropped further? Maybe 15 percent. In the decline, a lot of the individual shares might fall as much as 50 percent, especially the high-tech securities. Are investors prepared for the unexpected? And remember, it takes a 100-percent gain just to break even on a 50-percent loss.
A classic textbook example of a bull market would be a 15-percent to 20-percent advance. Then a brief rest with a 5-percent drop. Following the short pause, the rally ensues. This scenario surely sounds realistic and logical. If the market could be so precise and convenient to investors, life would be easy.
Well, it isn't. And I suspect it may not be too accommodating in 2004. When the consolidation makes an appearance, and it will, the unforeseen could be the magnitude of the retracement. For many, the dip allows them a chance to get into stocks or to add to positions. Instead, the opportunity could turn to a trap of seemingly endless proportions.
The downturn in the market can be caused by anything, or everything. However, odds are the culprit will be the state of the domestic economy. Currently, things appear to be firing on all cylinders. Well, they better be because the market has already priced in a vibrant business landscape, if not a perfect environment.
There's no doubt the economy did improve. Still, an encore performance of the third quarter's 8.2-percent growth rate in GDP (Gross Domestic Product) won't materialize. Yet the market has factored in it. Anything short of the mark makes equities vulnerable. In a sense, the market is its own worst enemy. The significant rally brought the expectation level to an
impossible height. The situation sets up stocks for an inevitable fall.
Any hint of a slower pace in growth might create cracks in the foundation of the current bullish phase. Most analysts argue the economy's too powerful. Maybe they should recheck the statistics. Granted, the majority of the news has been extremely positive. Yet certain figures portend problems in the future and it only takes a little doubt here and there to derail the advance.
Orders for durable goods suffered a decline. Interesting. Consumer sentiment tapered off. A revealing eye-opener. Unbelievably, the money supply continues to drop. A worrisome trend. The stubborn high oil prices reduce the benefits of the tax cuts to the buying public. The effects of mad cow are difficult to measure.
After September 11, 2001, consumers have carried the economy through thick and thin. My concern is how much longer can they keep up the spending. For the second straight year, median income fell in the United States. It decreased by 1.1 percent. Sooner or later, something's got to give.
The income angle doesn't bode well for the consumer. In addition, many are deep in debt. According to BillSaver.com, median household debt hovers at $38,800, excluding home mortgages. The average person possesses over 38 percent more debt than they have in their retirement account.
Economists and forecasters see the refinancing of house mortgages as a stimulus to the economy. In theory and on paper, it should be. In practice and in reality, the jury's out. Yes, monthly payments came down due to lower interest rates. Or has the debt been merely reconstructed and transferred? Did the consumer go out on a buying binge with his or her credit cards? Was a new automobile purchased? Perhaps, the monetary obligations of Mr. and Mrs. Public have increased--regardless of the refinancing craze.
The savings part of the picture isn't encouraging either. The typical American household puts away only 7 percent of its income for a rainy day. This paltry rate ranks among the lowest of the industrialized nations. A wonderful backdrop for the number one economic country in the world.
The economy could also be encountering something which it had not in recent years. Rising interest rates. Whether it will be a perception or a reality of higher rates, the prospects won't be favorable for equities. The bond market or the Federal Reserve might increase rates. Or the fear of a change in the direction of interest rates can damage the outlook for stocks.
The combination of lower income, debt, decreased savings and rising interest rates may delay the good times. The full impact of the consequences will not develop overnight. It doesn't have to. Just hints of possible problems don't coincide with the high expectation of the market.
Technical
In 2003, the Dow Jones Industrial Average scored a 25-percent gain. The NASDAQ composite turned in a better performance, doubling the Dow's increase with an advance of 50 percent. These improvements were accomplished essentially with no corrections. Hence, at least on a short-term basis, the market's way overbought.
At the very least, it would be prudent to wait for a consolidation. The chart shows a sharp trajectory. The momentum won't be sustainable. After last year's significant rally, a repeat of the gains cannot be expected. A 10-percent performance on the upside from current levels, maybe. If you were to get caught in a 5 to 10 percent adjustment on the downside, you'll be
hard-pressed to come up on top by year's end. Therefore, timing's crucial in the brand new year.
Oil
Petroleum prices remain stubbornly high. Energy-related shares rallied recently. However, the overall performance of these securities indicates lower prices for the commodity. The market seems to believe supply is going to exceed demand, especially when Iraq returns to production.
Others point to the potential demand as the global economy rebounds, namely China. In a worldwide recovery, the requirements for oil go up. Will the present supply of energy be adequate to fulfill the need, even in a strong business environment? The oil bulls don't think so.
We feel the surprise will be how oil prices continue to stay elevated. The discrepancy between the depressed prices of the oil shares and the high mark-up of the commodity could bring an opportunity for the astute investor. We're closely monitoring the scenario. If things fall into place, we'll pull this trigger.
NASDAQ
After the 50-percent rise in the NASDAQ in 2003, would it be reasonable to anticipate another sizable surge in the new year? I assume not.
The Dollar
The stock market's booming. But the U.S. Dollar is heading south. If everybody's bullish on America, then why's the greenback being sold by domestic and international investors alike? Some of the reasons might be attributed to trading technicalities. However, the underlying causes of a weak currency could be telegraphing problems ahead.
The trouble with a soft dollar is that it's inflationary in nature. So a weak dollar may not stop the equity market dead in its tracks today. Still, the deeper ramifications of inflationary pressures within the system can derail the economy, and stocks eventually.
Inflation
In an election year, as we're in, excess always becomes part of the landscape. Politicians desire to keep their jobs. Hence, they fully realize the best way to receive votes from their constituents is through a healthy economy. People vote with their wallets. If you affect them financially in a negative manner, the bums are kicked out of office.
Interest rates have been reduced drastically. And the tax cuts are in place. Anything else to further stimulate business activities, be rest assured, will be done. Near-term results are going to look good. Yet they will also produce long-term consequences--such as inflation. Excess does that.
Interest Rates
Short-term interest rates rest at a 45-year low. Enjoy them while you're able to. The cycle of lower rates could be close to
an end. As the year progresses, the likelihood of a shift in monetary policy by the Federal Reserve Board increases.
However, the initial indication won't come from the Fed, but from bonds.
January 14, 2004
Irwin T. Yamamoto
The Yamamoto Forecast
P.O. Box 573, Kahului, Hawaii
808-877-2690
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