THE YAMAMOTO FORECAST Prepared by Irwin T. Yamamoto
Yamamoto's Outlook For 2001
75% in stocks; 25% in Rydex Ursa Fund; 0% in cash.
Short-Term Indicators: Bonds - Bullish; Stocks - Bullish; Gold - Bullish.
Question And Answer
(January 17, 2001) Irwin Yamamoto was interviewed in December 2000 by The Hawaii Herald newspaper for his outlook for the year 2001.
Question: How are you doing?
Irwin T. Yamamoto: I am doing fine. Thank you. Unfortunately, I cannot say the same thing about the American stock market. It was not a good year for investors.
Question: How bad was it?
Yamamoto: Well, the NASDAQ index plunged more than 50 percent from its record high set earlier in the year. It was definitely a year most people would love to forget.
Question: Did they lose money?
Yamamoto: Novice investors and seasoned veterans alike lost their money. A lot of money. For the first time in many, many years, market participants experienced how it felt to see their portfolios drop in value. If that's not bad enough, the declines were significant.
Question: You mentioned the damages on the NASDAQ. Explain.
Yamamoto: People were enamored with the high technology stocks. As usual, history repeated itself. The "darlings" of the market became the "despised." Hopefully, they will learn from the experience. Sad to say, it was a bitter pill to swallow.
Question: Since you're always looking for bargains, are you buying the high-tech securities?
Yamamoto: There are no two ways about it, I'm indeed a bargain hunter. But yours truly did not buy those shares. And I don't plan to purchase them either. Not a single share.
Question: Why not?
Yamamoto: Despite the sharp sell-off in the high technology industry, the sector still remains expensive. In terms of earnings and assets, the high-tech group doesn't offer any value. That's not to imply that these equities won't be able to embark on a rally from here. On the contrary, an advance to the upside seems likely. After a steep drop, a bounce of some degree should be anticipated.
Question: How long will it last?
Yamamoto: Yes, there are going to be rallies. Yet they must be sustainable if the bull market is to resume. To be sure, the question regarding the presidential election has been answered. A big help. Then again, other questions persist.
Question: Can you identify them?
Yamamoto: I am referring to the economic aspect. The combination of a slowdown in business activities and the concerns about lower corporate profits, especially in the high technology industry, present a problem for the market. It might be difficult for stocks to make any headway in this type of environment.
Question: So the outlook appears dim.
Yamamoto: The picture could be better. Still, all's not lost. Due to the upcoming economic slowdown, the Federal Reserve Board should be making its presence known. In other words, interest rates will be coming down. And lower rates do provide support for the financial markets.
Question: Which scenario will have the biggest impact?
Yamamoto: The jury's out. The bad news of a decline in business activities and the good news of falling interest rates might nullify each other. The final result could translate to an uncertain backdrop for equities. One thing Wall Street hates is uncertainty. For the foreseeable future, that's precisely what the market will be encountering.
Question: What are you recommending to your clients?
Yamamoto: I am advising my clients to remain cautious. Do not invest in securities which are unreasonably priced. These stocks are richly priced because of earnings expectations. If they don't reach those numbers, they'll be vulnerable to meaningful setbacks.
Question: What does an investor do?
Yamamoto: Avoid overpriced securities. Search for undervalued situations. These shares possess lower risks than their counterparts. And the prices are much more reasonable. In a soft business setting, never overpay for your investments.
Question: Could you name specifics?
Yamamoto: For example, the gold and silver shares. They have been stuck in their own recession. And the depressed prices reflect the scenario. They sure appear cheap to me. I'm not only watching them. I am buying the sector. The deals are too good to pass up.
Question: There was an uptick in the price of the bullion. Is this the beginning of something big for the metal?
Yamamoto: Recently, gold did stage a rally. Furthermore, the landscape seems to be improving. Although the backdrop's not perfect for the bullion, it does look more promising than it has been for a while.
Question: Please expound.
Yamamoto: If the direction of interest rates is down, an inexpensive way to position yourself may be through the precious metals equities. The lower rate environment should be beneficial for the metals stocks. A less restrictive monetary policy indicates that the fight against inflation will be priority number two for the Federal Reserve. It's no longer the main concern. In our books and in economic theory, lower interest rates are inflationary in nature.
Question: So gold is the way to play the interest rate scenario?
Yamamoto: Investors won't turn to gold as their first choice to exploit the changing trend in interest rates. Yet it will likely be included in the selection process. And any degree of attention should propel the precious metals shares up. At these extremely depressed levels, a minor pop to the upside could translate to a sizable gain on a percentage basis.
Question: What else do you like about gold?
Yamamoto: I believe the U.S. currency will be exhibiting weakness. The bullion is a method to take advantage of this situation. As the American economy slows down, doubts enter the picture. Traders, domestic and foreign, are going to sell the currency. A decrease in the dollar is inflationary in scope. Also, a soft dollar brings uncertainty to the financial market. These elements all add up to a fertile scenario for gold.
Question: You are really positive on the bullion.
Yamamoto: Yes, I like the metal. In spite of the decline of the equity market last year, stock prices remain excessive. Whereas, gold must be considered one of the cheapest investments today. There's value in it.
Question: Mr. Yamamoto, you were bullish on bonds in the year 2000. How about this year?
Yamamoto: Bonds had a solid run-up last year. More upside movements should be in the cards early in the year as the Federal Reserve starts to lower interest rates.
Question: Then the bond market is a buy.
Yamamoto: Bonds have come a long way. Hence, corrections are bound to occur from time to time. As long as the weakness prevails in the economy, the market should do well. The slower the business activities, the better it is for bonds. Furthermore, if the equity market continues to falter, people will turn to bonds for a safety net.
Question: What other investment are you looking at?
Yamamoto: Questions about the economy won't be answered until later in the year. Even at that point in time, convictions may not be all that strong. Therefore, liquidity sounds like a good idea. I'm referring to cash.
Question: Specifics, please.
Yamamoto: Cash or cash equivalents. In other words, money market funds and certificates of deposit (CDs). With the current economy, various industries could be bottoming out at different times. To take advantage of upcoming bargains, keep a high-cash position. Without liquidity, opportunities will be lost.
Question: You had nice gains with the oil sector.
Yamamoto: Yes, I did get my subscribers in on the oil rally, namely the oil service shares. Those stocks surged to 52-week highs. Additional profits should be forthcoming.
Question: Is it straight up?
Yamamoto: The energy market had a superb advance. In my previous newsletter, I predicted that a consolidation would take the price back down to the mid-$20.00 range, which it did. More back-and-filling action cannot be ruled out. Still, the positive long-term outlook remains intact.
Question: Let's talk about another recommendation of yours, the Rydex Ursa Fund.
Yamamoto: The objective of the Rydex Ursa Fund is to seek financial results which will inversely correlate to the performance of the Standard & Poor's 500 Composite Stock Price Index. Simply put, if the S&P index heads down, Ursa increases in value. The fund decreases in price when stocks go up.
Question: Did the fund benefit from last year's bad news?
Yamamoto: Equities lost ground in the year 2000. The first time in years. It was a good year for shareholders of the Ursa fund. This trend will resume in the new year if the confusion about the U.S. economy lingers.
Question: What's the worst case scenario?
Yamamoto: The declining stock market reflects the slowing economy. But as tough as the financial markets were in 2000, an economic recession has not been factored in. If a recession develops, lower lows for equities must be anticipated.
Question: Give me the best case.
Yamamoto: Alan Greenspan and Company reduce interest rates. A recession's averted. Then the longest business expansion in this country's history continues. If this scenario happens, great. However, the timing of the Federal Reserve would need to be almost perfect.
Question: Which one will occur?
Yamamoto: The new year, 2001, won't mark the end of the world. Nor will a quick return to a bull cycle become a reality. It should be a mixture of the two. There are going to be moments when the bottom seems bottomless. Also, a sharp climb will be realized. Yet these trends could take turns with each other, making it a difficult market for investors.
Question: Tell us how to play this market.
Yamamoto: The best way to benefit in this type of environment is to possess options. Do not overcommit. Enter the market on price dips. But always leave some funds on the sidelines for other opportunities. Investing without emotions helps in this kind of market.
Question: What would make you extremely bullish?
Yamamoto: In a weird way, if the equity market resumes its downward trend in a significant manner, a major buying opportunity would evolve. At that juncture, I would become very positive on the stock market.
Question: What if the market rallied from here?
Yamamoto: A sizable spike from the current level may cause excitement. However, a final downside move would still be required to clean out the remaining excess.
Question: Can the NASDAQ recover?
Yamamoto: The NASDAQ plummeted more than 50 percent from its high. On a technical basis, a rebound of some kind is possible. Not only that, it's overdue. This is not to say a return to the former highs will be possible. Hardly. The critical question, "Will it last?"
Question: Who will win, the bulls or bears?
Yamamoto: I think the new year should bring good times for both the bulls and bears. A wild journey for investors. Moments of exhilarations and fear. There are going to be chances for profits. But the dangers exist, too. To say the least, an interesting year. An up-and-down twelve months.
Question: Are we now in a bull or bear market?
Yamamoto: Well, the NASDAQ index has been in its own bearish phase. As for the other indices, the financial markets will appear to have a split personality in the year 2001. Just when the bears seem to be taking over, the bulls should show up again. And vice versa.
Question: Do you expect a wide trading range for stocks?
Yamamoto: Let me put it this way. By the end of the new year, it will feel like a hectic ride for equities. But the peaks and the valleys within the trading range should create that illusion instead of the actual movements.
January17, 2001 Irwin T. Yamamoto The Yamamoto Forecast P.O. Box 573, Kahului, Hawaii 808-877-2690
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