....maybe you are right..but you really should read this issue of barron's--two great bearish articles on japan.
........summary: wait till next summer and it could be a helluva ride up once it REALLY bottoms.
What If Tokyo Supports
Japanese Stocks
By Trashing the U.S. Bond Market?
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By Jay Palmer
The abyss loomed and the Japanese government blinked. That was the rumor that swept the Chicago futures pits late Friday, sharply driving up Nikkei index futures amid talk of an impending bailout of dysfunctional Japanese banks by the Japanese government.
After a week that saw the Nikkei index trade down a further 750 points to a level more than 60% below its eight-year-old high, Tokyo is gasping for solutions. The unconfirmed reports suggested that the Japanese equivalent of the U.S. Social Security system (perhaps aided by the government-controlled postal pension system) would invest eight trillion yen (about $60 billion) in new preferred shares to be issued by ailing banks. On the face of it, the plan goes a long way toward restoring much-needed strength to bank balance sheets, most of which are in dire distress following the plunge in equity prices.
Yet there are snags. "My first question is to doubt whether or not eight trillion yen would really make enough difference," says Carl Weinberg, chief economist at High Frequency Economics, a daily newsletter published out of Valhalla, New York. "But even if you assume it would, I don't see where the money comes from. No government institution has that kind of spare cash. They can't go to the bond market and they certainly can't use deficit spending."
That leaves one option: the liquidation of foreign assets, especially U.S. Treasuries. "That's possible," says Weinberg. "but it just makes Japan's problems our problem. I just don't see how such a huge holding could be liquidated smoothly without trashing our bond market."
The short term doesn't count. When investing in world emerging stock markets, it's the long run that matters. That at least is the view of New York University professor Jianping Mei, co-author of the soon-to-be-released Global Bargain Hunting: The Investor's Guide to Profits in Emerging Markets.
"The events of the last few weeks only make me much more enthusiastic," he says. "In the short run, of course, you can get hurt. But in the long run, rapid economic growth and low-priced stocks continue to make the emerging markets attractive. The current selloff should be viewed as the buying opportunity of the decade. After all, the best time to buy a mink coat is in the middle of a recession when there is a lot of talk about global warming."
Writing with Burton Malkeil, author of A Random Walk Down Wall Street, Mei is the first to admit that emerging markets carry tons of risk. But that risk, he argues, is more than offset by a combination of rapid economic growth and low-priced securities which make emerging markets the best investment bargains in the world.
The key to international investing, he urges, is to diversify. Avoid the "hot funds" of the moment, since you'll only end up with last year's top-performing funds and there is "no evidence that past winners will be future winners." Diversify across regions, countries and industries. Above all, look for bargains in international funds with especially low expenses and closed-end funds selling at a discount to net asset value. And, he insists, be prepared to buy and hold. "There is no evidence that a trading strategy involving a high turnover beats a simple strategy of buying and holding."
You can't call events in Tokyo last week a rout. By the standards of what has been happening of late in Asian and Latin markets, the five-day, 754-point slide in the Nikkei, from 15,836 to 15,082, added up to a relatively modest 4.8% selloff, hardly enough to get the adrenaline flowing.
Yet, just as it remains difficult to be anything but bearish on the fundamentals of the Japanese market (see cover story), so too the almost inexorable Nipponese selloff hoists danger flags for chartists. The point is that even as traders in Tokyo are worrying whether and when the market will pass on down through the psychologically important 15,000 barrier, technicians have already written off such a move as inevitable.
"I see absolutely no support for the market at 15,000," says Ron Daino, a senior technical strategist with Smith Barney. "It's just a nice round number. From a technical point of view, the next support point is just above 14,000. That was the level the Japanese market tested and rebounded up from in both 1992 and '95."
For both Daino and his fellow chartist, John Roque, an international technical analyst at Lehman Brothers, it was more or less inevitable that the market would ultimately test 14,000 the moment trading violated the last intermediate support level at just over 17,000 some weeks ago. "In September, we were looking at the 18,000 level," says Roque. "In October, 17,000. Now it's a question of whether or not the market can hold at around 14,000. We'll know pretty soon, but there is probably no better than a 50% chance that 14,000 will be the bottom this time around.
"Though the market is weak now for many of the same reasons as it was in 1995, things are much more negative now-and we've got all this currency contagion going on." Daino doesn't quarrel with that bearish thesis. "For the past half decade, the market has traded in a range where 14,000 was the bottom. We think this time will be different, that the market is now headed further down. One reason is that back in '92 and '95, even as the market tested those lows, our technical models were diverging positively. Back then, they were not confirming the bear trend. That's not happening this time. As of yet, we have no evidence of positive divergence. We have no real hope that 14,000 will see the bottom."
For Roque, the crucial indicator in coming days will be the performance of the Japanese bank stocks. "If that sector over-performs relative to the market as a whole, then I reckon we have a good chance of seeing the market bottom close to the 14,000. But if banks continue to underperform, as they have been doing lately, then the market will go on down. We should assume the market will hold, since after all 14,000 is a really strong support level.
"But if it doesn't, it's a really bearish indicator." So where, if you are pessimistic, is the bottom? After 14,000, both Daino and Roque see some support at 13,000, but nothing very strong and certainly nothing strong enough to give any real hope that it could provide a bottom for a market in freefall. No, the next real support level after 14,000 is 11,000, a near 30% drop below current levels. "If 14 is taken out," says Daino, "the market could be testing 13 by April 1998 and 11 by the summer."
He then pauses: "If the market heads on down through 11,000, the next target after that is down around 5000." And that -- assuming, of course, that the U.S. market has not tanked at the same time -- would mean that the famous Nikkei-Dow cross finally occurs, with the DJIA in absolute numbers again trading higher than its Japanese counterpart. Only those with very long memories can recall the last such cross, when the three-year-old Nikkei passed the Dow back in early 1952. The level of the indexes: about 300.
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