THE YAMAMOTO FORECAST Prepared by Irwin T. Yamamoto
New York Slot Exchange
(May 17, 2000) 75% in stocks; 25% in Rydex Ursa Fund, 9% in cash.
Short-Term Indicators: Bonds--Bearish; Stocks--Bearish; Gold--Bullish
Bonds
Everything the bond market was fearful of is now a part of reality. The economy's on a tear with no signs of any letdown. But a new development entered the picture. For the first time, there are indications of inflationary pressures accompanying the economic growth. Previously, this was not the case. Something has changed. The equation is altered. In this so-called "new economy," we're in uncharted territory. And the financial markets detest uncertainty.
Before this cycle's over, we suspect the yield on the 30-year U.S. Treasury bond will be trading between the 6.50% to 6.75% percent level. From that point, another assessment will be done. But for now, the direction for the bond market remains down. The economy is too strong.
Investors were hoping and praying that the Federal Reserve would merely raise interest rates one more time. Perhaps twice. Now it appears it will be three to four times. And the financial markets have not factored in this scenario yet. When it does, the picture won't be pretty.
Corporate earnings have been vibrant. Yet the earnings reporting period is finished for the majority of companies. Therefore, the focus of market participants returns to the interest rate landscape. For the next few months, the backdrop looks unfriendly. The bad news hasn't been fully discounted. Hence, equity prices should be dropping until the question market about the Fed is resolved.
Federal Reserve Chairman Alan Greenspan may have painted himself in a precarious corner. The man's concerned about a stock market bubble. The wealth effect created by this bubble could be contributing to the uptick in inflationary pressures seen in the latest statistics. Imagine if Greenspan stopped increasing interest rates or if he gave hints of lower rates. The overvalued market would embark on a major rally, thereby making prices even more expensive. Mr. Chairman, you don't have any choices. Monetary policy must continue to be restrictive. The translation, the path for bonds, lower.
Stocks
Without saying, the equity market's on a roller coaster. The near-term outlook, expect more of the same. The troubling aspect, volatility usually portends upcoming problems. Especially in a pricey market and when it's late in the cycle. These conditions exist today.
You might be hearing the collected sighs of the bulls as stocks attempt to first stabilize, and then rally back. On the surface, the worst appears to be behind us. or is it? We might be visualizing a mirage. In our view, the market's not out of the woods yet. On the contrary, the scariest moments could be directly ahead. The bottom line, there's work on the downside left.
Basically, the overpriced situation in the market could've been addressed to a large degree if the market's slide in April had resumed. Unfortunately, it didn't. To make matters worse, equities bounced back. A terrific opportunity to get rid of the excess, namely in the NASDAQ, came and went. That means additional pain remains.
A retest of the NASDAQ's low of 3321.29 in April is in the cards. Furthermore, we believe the level should be pierced. The previous low won't hold. In all probability, the support level will be broken through with ease. In April, the NASDAQ was 34% below its all-time high of 5,048.62 recorded on March 10, 2000. On the next drop, the damage could be much bigger.
The Dow Jones Industrial Average and the rest of the indexes cannot sidestep the forthcoming troubles. Although the fear is going to be more pronounced in the NASDAQ, there will be no place to hide. No bomb shelters. So if you so desire, partake in the rallies. As long as you understand that from here on, it's the New York Slot Exchange, not the New York Stock Exchange. Roll the dice and take your chances.
Gold
I'll give credit to gold for its consistency. The bullion has consistently frustrated the gold bugs with its disappointing trend. Rallies tend to be of short duration and possess no follow-through action. The key psychological level of $300.00 was reached, but not sustained. So why am I positive on the metals?
At the $270.00 to $275.00 price range, the speculators and traders are few in numbers. For the most part, the sellers have already sold. Without sellers, downward pressures are reduced, if not totally eliminated. On the purchase side, any kind of buying--no matter how small, can produce a pop to the upside. This type of illiquidity is positive in nature.
From my technical work, the metal seems to be ready for an advance. The move could range from a small uptick or series of mini rallies. These movements should originate from the shorts who are covering their exposed positions, speculating against the bullion. They would need to purchase gold to protect their strategy. The buying support then lifts the prices.
A significant rally in the gold market cannot be ruled out. I fully anticipate a surge before the end of the year. The rally may be based on the perception of an economic rebound of a major gold player, Japan. Although the recovery process will no doubt be a long one, remember, markets trade on future propsects--not necessarily on current events.
The best way to take advantage of the depressed prices in the industry, try the securities route. Acquire the precious metals stocks. A lot of the risks has been flushed out. Based on a long-term perspective, the risk/reward ratio much be considered favorable. For example, let's take Homestake Mining (HM) and Placer Dome (PDG). At these levels, even if these equities would double in price, they would still need to double again in price merely to achieve their highs in the 1990's.
A note. My 52% stake in the gold/silver shares is very high. For the average person, 5% may be appropriate. Generally speaking, the lower priced securities tend to be riskier than the higher priced stocks.
Oil
We like the technical tape action of oil. After hitting the $33.00 to $34.00 price per barrel zone, the price retraced to the mid-20.00's. A much-needed cleansing process which was required following the sharp run-up from the low-teen price range. Our prognostication called for the correction. We hoped for it. And it was done.
Our subscribers did benefit handsomely from the spike in energy prices. We recommended oil services shares when they were trading at their lows. Why would we wish for a correction? After all, the price of the commodity had skyrocketed. The answer, there was a danger of a blow off. An adjustment, instead of a sell off, would be healthy and constructive.
The necessary technical work has been realized. A strong base at a higher plane is a bullish omen. This development looms promising. The indicators point to higher prices in the future. Additional upside movements seem to be imminent. As far as the charts are concerned, everything's okay.
On the fundamental basis, the picture could not be better. Earnings are literally expected to grow by leaps and bounds. The average increase in net income for oil-related corporations should be 50 to 75% over last year's results. Comparisons will be extremely positive. In terms of earnings growth, the energy sector ranks at or near the top. Wall Street loves that kind of scenario.
Rydex Ursa Fund
The Rydex Ursa Fund appears to be on the verge of a sizable breakout to the upside. The objective of the fund, to provide financial results which will inversely correlate to the performance of the Standard & Poor's Composite Stock index (the S&P 500 index). To put it another way, if the market goes down, Ursa climbs up in price. If equities head higher, the fund declines in value.
With an overvalued stock market and rising interest rates, this backdrop provides a fertile environment for the Rydex Ursa Fund. And it did enjoy intermittent rallies in the past few months. There's a good chance that the next attempt could be a big one. Stay tuned.
Ursa is appropriate for aggressive accounts only. Purchase on days when the equity market exhibits strength if you want a lower entry price. Avoid the fund as equities fall. Recall Ursa's goal, to inversely correlate to the performance of the Standard & Poor's Composite Stock index. For the conservative investor, cash should substituted for the fund.
A Deadly Combination
According to the Labor Department, the nation's unemployment rate dropped in April to 3.9%. A three-decade low. The rate was the lowest since January 1970. Furthermore, the typical American median family income hovers at an all-time high.
The good news may be beneficial for Main Street, but Wall Street holds another interpretation. With the unemployment rate so low and the median family income at a record high, the inflationary concerns are increasing. These two factors make a deadly combination. Like it or not, inflation is knocking at the front door.
May 17, 2000 Irwin T. Yamamoto The Yamamoto Forecast P.O. Box 573, Kahului, Hawaii 808-877-2690
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