wmeubank@ocp.kcmo.com
THE YAMAMOTO FORECAST
Prepared by
Irwin T. Yamamoto
The Asian Flu
52% in Stocks; 25% in Rydex Ursa Fund; 23% in Cash.
Indicators: Fundamental - Negative; Technical - Negative; Monetary - Neutral; Sentiment - Negative.
Japan Inc.
Recently, I told the listeners of 2 nationally syndicated personal finance radio programs, The Dolans (Ken and Daria) and the Bill Bresnan show, on why I am very worried about the international markets, namely Japan.
Japan is the second largest economy in the world. Only the United States ranks above Japan. The Japanese economy is worth $5 trillion. When the second biggest economy suffers a business slowdown, be rest assured the rest of the globe will be affected. There is no way around that fact. We all live in a global economy.
Japan is not the only place with troubles. There are also major financial problems in Hong Kong, South Korea, Thailand, Indonesia, Brazil and the Philippines. And it is going to take a long time to work out these difficulties. I am talking about years, not months. if anybody thinks otherwise, then that person is not facing reality. Wishing it won't make it go away.
The U.S. And Japan
Economically speaking, the world sees the United States as the number one player. And rightfully so. Yet the U.S. is also the largest debtor nation. Therein lies the problem. And our neighbor in the Far East, Japan, holds $291 billion in U.S. Treasury bonds. More than a pretty penny. Like it or not, we depend on Japan. Unfortunately, the United States may not control its own fate.
The situation in Tokyo scares me. It's a mess, a financial mess. If the erosion continues, there could be an international crisis. This spooky scenario could begin in Japan.
In a sense, you can forget the Dow Jones Industrial Average. Keep your eyes closely focused on the Nikkei average, the Japan equity market. At this point in time, the Nikkei hovers slightly above 16,000. If the index were to drop to the level between 14,000 and 15,000, watch out! At that level, Japanese banks could be forced to raise cash to meet their reserves requirements. Remember, they possess $291 billion in U.S. Treasury bonds. If the banks start to sell those securities, interest rates in the United States will spike up. The direction of rates would shoot up regardless of the economic landscape in America.
Back in 1989, I was fortunate enough to predict the 63-percent crash of the Japanese stock market. The Nikkei plunged from a record high of 38,915.87 to 14,309.41. A loss of 24,606.46 points. Now I'm saying that if Japan resumes its downward spiral, the potential of a global credit crunch could be something to truly worry about. A shot heard around the world.
It has been 8 years since the Tokyo market reached its peak. The average has never recovered since. And the Nikkei might be on the verge of retesting its previous low. Analysts have been touting the idea of a new paradigm. They may be correct. However, this new paradigm could be about what happens after the debacle of Japan–and not the endless possibilities of the new world.
How bad is the situation in Tokyo? The frightening thing is that the officials and authorities don't really know how deep the troubles are and to what extent. But the cracks are appearing everywhere. Bad loans have jumped 18 percent. The number of bankruptcies is climbing at a rapid pace. A stock brokerage company, Sanyo Securities, failed. A first in Tokyo's history. There will be additional casualties before the carnage is over. But no one knows how many more.
With the Dow Jones Industrial Average trading at 7,600, the American market is not discounting the worst case scenario in the Far East. Even if the Dow remains 600 points below its record high, another moment of reckoning could be in the cards if the crisis increases in Southeast Asia.
What If Japan Survives?
By no means am I implying the fall of Japan. No way. Nonetheless, there's no easy fix. The Japanese must endure a period of pain to clean out the excess out of their financial system.
The bulls won't deny that there are problems which need to be addressed. Still, they contend the troubled regions in Southeast Asia and northern Asia, while important, account for less than one quarter of U.S. exports. Not a major impact.
The bulls are looking through rose-colored glasses. We feel they are missing a point. The point being, there will be a domino effect. The economic slowdown should have a negative effect on growth in the U.S. and Europe.
The American high-technology industry is the most visible sector in the financial markets. It will clearly be hurt by the troubles in the Far East. For example, roughly 40 percent of sales by U.S. manufacturers of semiconductors end up in Asia. If the high-tech industry, a market leader, in the U.S. bogs down, the equity market could have a tough time making any headway. A psychological blow.
The chaos in Asia will also have a detrimental effect on other sectors of our domestic economy. And with the dividend yield at 1.6 percent (a record low), the price-earnings ratio at 20 times next year's earnings and the market selling at 5 times book value–the negative ramifications of slower growth in Southeast Asia have not been discounted. They are not factored in yet. Not even close.
Prior to the Asian flu, earnings of American corporations were expected to grow in 1998 by 10 percent to 12 percent. With the developments in the Far East, the revised figure could be reduced to 5 percent to 6 percent. Today, the market trades at a higher level than when the problems in Asia became apparent. In essence, stocks are not yet reflecting any kind of decline in earnings. If equities have not priced in a drop in earnings, then when will they? Perhaps, next year.
Gold
The bullion has been under enormous selling pressures. More can be expected. For months, I felt gold wouldn't fare well because of the selling by the central banks. If the metal doesn't dip below the $300.00 price level by the close of the year, then it should do it sometime in 1998. Until the central banks complete their selling, the bullion won't be able to embark on a meaningful rally.
If I'm so negative on the metal, why do I put the gold stocks on my recommended list? Good question. I consider them the best bargains around–maybe the only ones. Although I don't anticipate a whole lot from this group in the near term, I feel there will be a pickup in merger activities in the industry within the next 6 to 9 months. Hopefully, these consolidations will benefit some of my selections.
Strategy
Seasonal factors could push equities higher in the short run. Also, Wall Street might place the international crisis on the back burner for the time being. So for a while, things may seem to be going smoothly with the U.S. economy and the financial markets. Nevertheless, underneath the mirage, we are in a dangerous period. Perhaps, the most dangerous one in history.
Accordingly, our investment posture continues to be defensive in nature. Stocks and bonds might have survived 1997, however, there are no guarantees for the new year. with so many questions unanswered, our strategy is to be 23 percent in cash, 25 percent in the Rydex Ursa Fund and the rest, 52 percent, in gold/silver equities.
For the conservative investor, cash should be substituted in place of Rydex. The 52-percent stake in the precious metals must be considered high. For the average person, 5 percent would be appropriate.
December 2, 1997Irwin T. Yamamoto
The Yamamoto Forecast
P.O. Box 573, Kahului, Hawaii
Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com