THE SPECULATOR
Prepared by Berkeley Futures, Ltd.
A Question Of Confidence
The collapse of two Japanese institutions (Yamaichi Securities and Tokuyo Bank) in the past week does not constitute a systemic collapse but it does underline the problems that Japan's financial system is now facing.
The bankruptcy of Yamaichi marked a sea change in the Asian market turbulence. Up until this point, there had been a number of financial shocks as share prices plummeted down but, while these were individually disastrous for the companies concerned, they did not pose a serious global economic threat. What is happening in Japan will have an impact on economic activity–unless it is counteracted by decisive action from the government.
Japanese financial institutions are locked in a vicious circle. As banks include a proportion of their equity holdings in their capital base, the fall in the Nikkei index has stretched their capital adequacy ratios severely. They are therefore having to cut back their lines of credit which in turn will accelerate company failures. This is not a sudden turn of events. It tends to be overlooked that Japanese share prices have not been party to the global bull market–since June 1996 the Nikkei has lost 30 percent of its value. Loan write-offs have been rising steadily on the back of business failures. In the month of September there was a 15.5 percent increase in the number of corporate bankruptcies.
Given this gloomy background, it is not surprising that consumer confidence is also at a very low ebb.
Furthermore plans to scale back public sector pensions by 20 percent and the collapse of Nissan Mutual Life are likely to mean consumers channel an even greater percentage of their disposable income into savings rather than consumption.
Japan therefore has very real economic problems. But what are the risks of these spreading, given Japan's position as the world's largest capital exporter?
On the economic front, depressed domestic demand and the devaluation of the yen against the other major currencies is likely to result in a rise in Japanese exports and a fall in imports–which will have a knock-on effect on Japan's trading partners.
Direct investment in the form of factories already up and running will not be affected. Although any plans for expansion or new plants will now be put on hold. Hyundai, the South Korean company, has already announced that it will have to delay its $3bn investment in two semi-conductor plants in Scotland. There is also the risk that Japanese investors will repatriate their investment capital in order to help shore up domestic institutions. Japan is the largest overseas holder of U.S. Treasury notes–HSBC puts the figure at $250bn. It is extremely unlikely that there will be any immediate fire sale of these holdings, the Bank of Japan will initially fund any bail outs from domestic resources. However, if the situation were to deteriorate and the Nikkei dropped to 14,500, nothing could be ruled out.
Japan's problem is a wholesale loss of confidence in the financial system. The extent to which this is contagious will depend of how quickly and effectively the authorities can shore up confidence.
Deborah Owen
Divining The Dow
Predicting the future direction of the stock market has never been an easy task and the extreme volatility experienced even in the major markets over the past few months has made this task even more difficult. Conventional analysis techniques do not seem to work and you need to find an alternative method to be successful.
The legendary stock trader W.D. Gann always claimed that time was the most important factor in forecasting the major moves and sudden changes in the stock market. He stressed the importance of knowing when the major cycles are due to occur as these will be the times to expect extreme price fluctuations in the market, thus providing the best investment opportunities.
The cycles that he referred to were planetary cycles. In fact, Gann actually named the sixty-year triple cycle of the key business planets, Jupiter and Saturn, as his “Master Time Cycle” because its effects on the stock market are so powerful.
Gann also stated that a trend reversal could be expected when price and time are squared. The chart shows that, by using Fibonnaci `Golden Sections,' a perfect square was completed by the Dow in August 1997.
One of the best methods I have discovered for forecasting the future direction and changing trends in the stock market is based on the Indian Time Cycles which are known to date back over 5000 years.
The most important features of the Hindu system are the planetary periods or dasas which can time significant events in the stock market to the exact date years in advance, providing that you have accurate information on the date and time of the first trade. A dasa is a period of time which is governed by a particular planet and the cycles progress in a fixed sequence totalling 120 years before they repeat and begin again.
The order of progression and periods of the major cycles are as follows:
Ketu (Moon's south node): 7 years; Venus: 20 years; Sun: 6 years; Moon: 10 years; Mars: 7 years; Rahu (north node): 18 years; Jupiter: 16 years; Saturn: 19 years; Mercury: 17 years.
The commencement of the cycle depends on what constellation or nakshatra the moon occupies at the time of the first trade date. When the New York Exchange commenced trading at 8.52 am on 17th May 1792, the moon was in the nakshatra of Revati, which is ruled by the planet Mercury. The number of degrees by which the moon has moved through the constellation will determine how much time is left in this initial cycle before progressing to the next planet in the series. Computer software is available for calculation of these cycles.
It will probably come as no surprise to learn that the super bull market in the Dow began in 1982, with the commencement of a sixteen-year major Jupiter period. Jupiter is the planet of growth, expansion, optimism and success and it has certainly lived up to its reputation during this cycle which will not end until mid-1998. The rises and falls within the cycle are explained by the sub-cycles which can either enhance or reduce the strength of the major period.
From August 1998, the Dow will move into a nineteen-year Saturn period. Saturn is the planet of restrictions, pessimism and contraction, so you can draw your own conclusions as to what can be expected.
The peak in the Dow may well be past as the Jupiter cycle enters its final phase. However, while the Dow remains under the influence of this bullish planet, investors must decide for themselves whether it is too soon to go short or too late to go long.
John Arter MSTA, Dealing Manager
Old Mutual Fund Managers Ltd.
December 1, 1997Berkeley Futures, Ltd.
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