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THE YAMAMOTO FORECAST
Prepared by
Irwin T. Yamamoto
Could It Happen Again?
52% in Stocks; 25% in Rydex Ursa Fund; 23% in Cash.
Indicators:Fundamental - Negative; Technical - Negative; Monetary - Neutral; Sentiment - Negative.
What The Experts Won't Tell You
October 1997 was the 10th anniversary of the 1987 stock market crash. Could it happen again? This question has been asked by the media. Generally speaking, the answer has been the same. It's not impossible, but not probable. Well, consider the source.
The heads of the various stock exchanges might be wary of a repeat of the 1987 debacle, but remember, a big part of their jobs is to encourage investing. To talk about a crash will discourage the general public, even alarm them.
The chief executive officers of brokerage firms and mutual funds may privately feel that a crash is a possibility, but it's bad for business to say it publicly. Your friendly stockbroker won't tell you. He or she lives on trading commissions.
The average investor has never experienced a bear market. Many investors were not in the market in 1987. A lot of the new participants don't even know what a correction is. As for a crash, that was something which occurred in the past.
Can a crash happen again? In our opinion, sure. As long as people are involved, the rational can become irrational. What I'm referring to is the factor of emotion. When people act emotionally, anything is possible. Yes, a crash, too.
A Lot Of People, A Lot Of Dollars
Prior to the 1987 crash, there were 812 mutual funds with $241.9 billion in assets. Today, there are 2,855 funds with $2.13 trillion. It's “t” for trillion. That's not a typographical error. If this kind of money is able to take the Dow Jones Industrial Average from 776.92 to 8,259.31 in the period from 1982 to 1997, imagine what it could do to the market on the downside.
Every investment professional will tell you that it is far easier for the market to go down than up. Remember, the “herd” mentality prevails on Wall Street. In an instant, the crowd can push stocks in either direction. The herd has taken equities to numerous record highs. In the midst of this unprecedented rise, traders have forgotten how the action of the mass could make securities tumble too. Recall 1929 and 1987.
A High-Priced Entity
Whether you think a crash is imminent or not, one must admit 1997 surely looks like 1987. Back in 1987, the price-earnings ratio for the Standard & Poor Index stood at 23. Currently, the ratio is at 24. Another price measurement, the dividend yield of 1.6 percent is at its lowest level ever. An excessively-priced market doesn't necessarily indicate a market top. However, it could very well be an ominous sign.
Debt
A high-priced market is a concern, while a high-priced market built on high debt is a bomb waiting to explode. There are two types of debts this stock market must eventually contend with in the future. You haven't heard much about them because as long as equities stay up, there won't be any problems. But when stocks fall, all hell will break loose.
On the institutional level, there's derivative debt. A massive amount. These debts are carried by financial companies such as the banks and insurance firms.
At the consumer level, people are buying securities with their credit cards and home equity loans. It sounds crazy. Unfortunately, I'm not making these stories up.
Euphoria
One way to spot a peak in the market is when you notice the brokers are in play. The Travelers Group announced a $9 billion deal to take over Salomon Inc. Previously, it was the Morgan Stanley-Dean Witter union. These transactions are just two of many involving brokerage houses.
In a bull cycle, the brokers become darlings of Wall Street as they are the direct beneficiaries of increased trading. In another word, commissions. Therefore, companies are more than willing to pay 3 times to 4 times book value to acquire them. And that's exactly what is happening today. Naturally, on a value basis, it's the worst time to purchase these brokerage firms. For the alert investor, he or she sees the phenomenon as a contrary indicator.
The popularity of the brokerage firms acts as a gauge of the present euphoria concerning stocks and bonds. And they have never been as beloved as they are today. Profits are surging. The year-end bonuses will be huge. New branch offices have been opened. Job advertisements for brokers can be spotted in the newspapers. Everybody wants to be a stockbroker nowadays.
I was recently talking to a doctor. His practice is so successful that he's not accepting any new patients. But this medical professional told me how he was thinking about becoming a full-time day trader. I thought he was joking. However, I noticed no smile as he spoke. Euphoria's everywhere.
Too Much Business
The infatuation of the public with investments continues to be so strong that the world's largest mutual fund, Fidelity Magellan Fund, has closed its doors to new customers. I've heard of businesses shutting down due to lack of customers. But in this case, Fidelity locked its doors because there was too much business. If this predicament doesn't exhibit the love affair people have with equities, then I don't know what does.
New Toys And Games
The money is gushing into stocks and bonds at such a frantic pace that Wall Street feels it must invent more toys and games for all the grown-up children. The latest contraption reflects the current frenzy. Speculators can now speculate in an index of 50 of the fastest growing U.S. companies. Do you think the appearance of this “toy” would make its initial debut at a market low? Of course not. So, is this a market top?
Long-Term Investing
We've noticed how many of our colleagues in the financial publications industry are now offering services such as hot lines, fax and internet. Another indication of a mania. Investing for the long term may soon become a relic from the past. Day traders might replace long-term stockholders. Long- term investing is now measured in terms of hours instead of years.
Irving And The Shoeshine Boy
Recall the crash of 1929. Prior to the downfall, the mood was widely exuberant. The talk centered about a new era, a new industrialization. People were enamored with securities. The euphoria was so intense that Irving Fisher, a renowned economist of Yale, proclaimed how “stock prices have reached what looks like a permanently high plateau.” Not long after, the market collapsed.
In 1929, a shoeshine operator gave Joe Kennedy, the father of President-to-be John Kennedy, a tip. Buy equities. That was the last straw. Mr. Kennedy took his money out of the market, thereby sidestepping the crash.
For 1997, it would be a good idea to avoid talking to anyone named Irving and don't take tips from shoeshine boys. Polish your own shoes.
The Market
Despite all the media hype regarding Dow 10,000 or the possible repeat of the 1987 crash, the market seems to be stuck in a relatively narrow trading range between 7,600 and 8,200.
On one hand, there's a lot of cash on the sidelines waiting to come in if and when the market resumes its upward climb. Yet on the other side of the coin, the financial markets suffered a major psychological setback on October 27.
Hong Kong Blues
The financial upheaval in Hong Kong caused a sell-off in the Dow Jones Industrial Average. The Dow suffered a one-day decline of 554.26 points. Investors are concerned that an economic slowdown in Southeast Asia could have a negative effect on the U.S. business landscape and on profits of American corporations.
Due to the troubles of Southeast Asia, Fed Chairman Alan Greenspan might delay his plan of raising interest rates. Therefore, bonds soared. The good news sent the yield on the 30-year Treasury bond below the 6.20 percent level. On the surface, for bond traders, it was a favorable development. Yet the lower interest rate will further stimulate an already strong domestic economy. Hence, Greenspan might need to increase rates much higher later on.
Gold
Gold enjoyed a rally. Likewise, the precious metals equities. Some of them surged 30 to 45 percent from their lows in a matter of a few short trading sessions. However, as I've wrote in my newsletter, the central banks would be selling into any rally. They did. Note the single- day drop of $16.10 an ounce in the futures market.
In the long run, the unloading of the bullion by the central banks will deplete their inventories. Sooner or later, the selling should come to an end. But for the near term, I anticipate additional selling by those banks.
November 4, 1997 Irwin T. Yamamoto
The Yamamoto Forecast
P.O. Box 573, Kahului, Hawaii
Copyright 1997, by Consensus Inc. All American and Pan American rights Reserved. editor@consensus-inc.com
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