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THE REAPER
P.O. Box 84901, Phoenix, Arizona
(November 25, 1997) CURRENCIES: The U.S. Dollar has rallied into what are now technical and psychological overbought conditions into resistance at 97.5. The December U.S. Index began its rally November 11. If the European currencies particularly are going to re-exert their strength, they should do so by early December, right in our turning point time frame. The Hong Kong Dollar is targeted and will probably be the next currency to hit the skids. On November 21, the Malaysian Ringgit hit a new all-time low against the U.S. Dollar. If China decides to devalue, we'll have another round of currency devaluations and panic in Asia. Of course, the latest collapse has been in the Japanese Yen and the South Korean Won. The financial crisis leading close to a deflationary depression in Japan came with the collapse of one of Japan's Big Four security houses, Yamaichi Securities, which shut down leaving $24 billion in debt. Five out of eight major Japanese banks are expected to post huge losses in the current year. In Tokyo, land prices continue to fall. This is a big negative for the Japanese banking system. We should not dismiss the possibility of another panic decline in the Japanese Yen. Asian companies have borrowed $700 billion since 1992–with loans from the Japanese to the Asians totaling $263 billion, loans from Europeans of $155 billion, and loans from the U.S. of $55 billion. In Korea, a number of major corporations have filed for bankruptcy, and so a $20 billion bailout may be necessary. Foreign exchange reserves are only $30 billion. South Korea is the world's sixth largest trading nation. The South Korean Won just hit a new record low against the U.S. Dollar. Internationally, Russian banks are in trouble. About $5 billion recently left the Russian bond market as Russians are fleeing into U.S. Dollars. We are carefully monitoring both the Australian Dollar and the Canadian Dollar for confirmation of a bottom. The British Pound is undergoing a correction. The Swiss Franc and German D-mark, Norway Krone and Spanish Peseta remain our favorite European currencies. Speaking of the Norway Krone, which I've sung the praises of for many years, Norway's population is only 4.5 million. It has North Sea oil, is the second largest exporter of oil in the world, has no national debt, an unemployment rate of only 3.4%, cheap education, free health care, great pension plans, a national balanced budget, a surplus over $10 billion, economic growth of 5.3% a year, and an average household disposable income of $47,000. Norway sounds like “the” place to live. Meanwhile, Brazil's Real is under pressure, as deflation and devaluation is being exported from Asia to South America. Particularly dangerous to the U.S. is the fact that Brazilian banks are overinvested in Brady Bonds, the bonds that bailed out Mexico. Brazil's stock and bond markets lost over a third of their value, interest rates in Brazil rose to 43.3%. The income tax was increased, federal spending was cut 15%, and 35,000 civil service jobs were eliminated.
RECOMMENDATIONS–Futures investors may sell March U.S. Dollar Index short, preferably on strength, with 98.1 open protective stops looking for a retest of 95 and possibly 92-93. Futures investors may purchase March Australian Dollar on a strong close above .70 with .687 open protective stops, holding for a test of .73-.75. Futures investors may purchase March Canadian Dollar on a strong close above .715 with .7079 open protective stops, holding for a test of .73-.75. Highly speculative investor's may lightly buy March call options in the Japanese Yen. Futures investors may purchase March Swiss Franc, buying on a stop at .7250 with a .713 open protective stop, holding for .75.
R.E. McMaster, Jr.
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