FWIW.Reasons for some modicum of caution.
Cautious investors, full time bears and even some
long time bulls have got to wonder about the resilency
of this market. The following reasons, in no particular
order, are why I cannot participate further in this rally
through any addition of capital until my uncertainty is
resolved over the next six months.
(1) According to the IMF, Asian financial crisis has reduced 1998 world growth projections to 3.5% from 4.3%. Recent anonymous Fed
statements project '98 US GDP at 2% to 2.5%, down from 3.7%.
I believe this level of growth is incompatible with current earnings
forecasts which will be revised downward across many firms.
(2) A London news service reported that, according to Okiharu Yasuoka
of the Liberal Democratic party, Japanese insurers asked on Dec.4 the
government to consider using public funds to protect policyholders from another insurance company crash. Insurance executives warned a
government committee that tough market conditions could force other
local insurers to follow Nissan Mutual Life, which collapsed last April. Nissan Mutual's failure had triggered a rush of policy cancellations at other insurers, the executives warned. Mr Yasuoka said that his party would "continue to study the use of public funds. But our stance is still neutral."
(3) Korea's main labor unions said their members will go on strike
to protest economic policies that are expected to more than double
the 2.2 percent unemployment rate.(source: Bloomberg) IMF is holding
back some of the bailout funds until new government is place Dec.16.
(4) Despite the KOSPI Index rise of 7.7% Friday the Korean won
dropped 4.9% against the dollar. Moreover, of the 20 most active
stocks, 9 dropped by their daily limit on concern slower growth will
quicken bankruptcies and thus the net rise, while impressive, was artificial to some degree. I want to see more follow through in both
the stock and currency.
(5) Slower growth will occur in So.Korea, Japan, Australia. Most
European nations are already implementing restrictive monetary
policies. Canada recently raised its discount rate by 50 bps.
Today's employment number implies a 7% annual wage inflation
and may provide ammunition for inflation hawks on the Board to
nudge US rates higher, 25 bps up, at next FOMC meeting. If the Fed
does nothing, relying on "the Far East to tighten for them", the
rebound in US equities has negated that factor IMO. Thus, AG and the
Board are still faced with the "irrational exuberance" time bomb.
(6) The US economy does not permanently stand alone or above all
others. Money flows quickly anywhere on the planet as the last
six months have aptly demonstrated. Keep in mind that the Japanese
adopted a similar superior and insular attitude for two years after the 1987 crash. I believe we have yet to see all the fallout over the
significant drops in asset valuations since August, the dislocations
caused by currency devaluations and the resulting competitive and
political responses that will be engendered.
(7) Given the uncertainty of financing Far East deflation and bankruptcy situations, I want to carefully watch the next two
(Feb and May) auctions of US Treasuries for any change in demand by foreign purchasers in particular. I am willing to forego a potential 10% increase in the US stock market to receive more information on the economic outlook and earn a certain 2.5% on 6 Mo. T-bills between now and June '98. The price of my uncertainty is a net "opportunity loss" of 7.5%. Of course, stocks could rally even further than 10% by May. Good...then I will sell my remaining Leaps and core holdings into that rally absent any significant new fundamental information. OTHO stocks could decline by 10 to 20 percent during that period.
(8) The continued rise in the dollar relative to the yen partly reflects the lingering concern over Japanese banking conditions and slow growth prospects. This rise may be limited by MOF or US Fed
jawboning in the near future.
(9) Japanese banks are saddled with an estimated $227 billion in
bad loans (source Bloomberg). Yes that is a US dollar number
not yen. This number does include insurance company withdrawal
concerns. While progress appears to occurring in Japan in regard
to balance sheet transparency I require more confirmation.
BWDIK. |
