Good evening to you all. Please find enclosed our weekend review of the
markets and the upcoming week.
GENERAL INFORMATION - MARKETS PERFORMANCE
LAST WEEK YEAR-TO-DATE
DOW Up 6.6% Up 6.4%
S&P Up 7.3% Up 8.9%
TSE Up 7.3% Dn 12.2%
GOLD Up 1.3% Up 3.7%
TED Spread 100.5 points
As recently as October 8, global equity markets were trading on the low
level of their recent cycle. The Dow was trading at 7400 and other
markets followed. Not unexpectedly, the markets began their upswing as
bargain hunters began purchasing again. As the Dow traded between
7400-7900 and global markets followed, the routine became predictable.
Most investors were unwilling to break through either barrier until more
information about the global state of affairs was released.
The unexpected interest rate cut on Thursday by the Federal Reserve
changed all that. It is rare for the Fed to change interest rates in
between meetings and this one truly caught the global investment
community off guard. The Fed claimed concern for tighter lending and the
threat of a global economic slowdown as the reason for the
uncharacteristic timing. The result was to break the Dow out of its
upper limit trading range and catapult it to a close of 8416, with global
equity markets following suit.
Whether this rise continues will be discussed below in OUR COMMENTS
section.
In the meantime, it is very worth reporting that gold closed out the week
at exactly $300.00, up 1.3%. This is noteworthy because falling interest
rates, rising stock markets and a slowing global economy are each
negative influences on the price of gold. However, according to Alan
Greenspan, all three of those ingredients are simultaneously present and
yet, <underline>gold bullion was able to rise in value and break the
psychologically important $300 level.
</underline>
In addition, the TED spread has now widened since our last weekend review
and now stands at 100.5 basis points, <underline>the highest level we
have seen at any time since the currency crisis began </underline>in
August of 1997. In our last review, the TED spread stood at 90.5 basis
points. As you all know, the .80 level is considered to be a strong
warning sign of current and future market conditions. It is quite clear
that major global institutions and investors are taking a highly
defensive and cautious approach in this environment.
(Most of you have received our report regarding the TED spread, the
difference between 90-Day T-Bills and 3 month Eurodollars, which serves
as an indicator of market sentiment. For those of you who have not
received this report, kindly
e-mail us and we will send it out to you immediately.)
OUR COMMENTS
<underline><color><param>0000,0000,ffff</param>"We have as yet
experienced ONLY the peripheral winds of the Asian
crisis"</color>.</underline> We have quoted Alan Greenspan since he made
this statement in January and vowed to keep it here until the strong
winds hit, despite opposition from investors who did not agree. Today,
Japan is in recession, Russia can not pay any of its debts, Latin
American and other emerging markets are on the edge of crisis, North
American trade deficits are growing at a record pace, US interest rate
cuts have been cut twice in three weeks and hedge funds now threaten the
stability of the North American banking system.
Following this week's gains, the Dow is now only 9.86% below its all-time
high of 9337. We do not have a crystal ball but it is not a leap in
faith to say that current levels are questionable, if not unwarranted.
<underline>On the balance of economic indicators, there is a wide
disparity between positive and negative news</underline>. On the
negative side, one can take into account those facts mentioned in the
preceding paragraph.
On the positive side, there is nothing more than the US economic engine
to support the global economy but even this can not be guaranteed
following Fed comments related to this week's rate cut. <underline>Of
the remaining G-7 nations</underline>, only England can be seen as
relatively stable. Japan is in need of great assistance; Germany's banks
face huge problems due to lingering Russian debt default; Italy and
France are too small to be leaders and Canada's commodity based economy
faces its own challenges.
This analysis also lends some explanation to the uncharacteristic rise in
the price of bullion this week, as well as, the continued rise in the
value of the TED spread. True, AGORA has been calling for interest rate
cuts since July, when the Fed was still leaning toward inflation fighting
rate increases. However, such cuts were necessary to fight global
deflation and recession and <underline>should not be taken by investors
as a sign of continuing prosperity and rising stock market values.
</underline>
Even if you were to disagree with our negative view of the market, one
has to agree that - at best - current prospects for prosperity are
uncertain. This must be the case because Alan Greenspan told us as much
in his comments this week when the Fed stated:
"Cautious lending and market turmoil are likely to be restraining
aggregate demand in the future".
Under such conditions, our conservative nature prefers to take money off
the table and wait for a clearer global picture to emerge. If we were to
gamble in the markets today, it certainly would not be with the rent
money.
CONCLUSION
The fact of the matter is there are too many fires raging and no single
solution will put out all the flames. Quite simply, the world just does
not have enough resources to bail out every nation, hedge fund,
commercial bank and public company that is facing financial collapse. As
such, somewhere along the line and before conditions improve, there are
going to have be some sacrifices for the greater economic good. Until
such time as those sacrifices become clear, we prefer not to gamble.
GENERAL STRATEGY
Complete defense. We are not adding any new positions at this time and
we are using the current market movement to raise as much cash as
possible. Having said that, we are closely watching gold companies and
some utilities for possible addition to our portfolio.
In the meantime, we repeat our comments of October 4, in which we
stated:
___________________________________________________________________
Beware of any "bear market traps", which are brief rallies during a bear
market. <underline>As of now, we are betting on continued weakness for
1998, followed by heavy
tax-loss selling in December.</underline> Unless something radically
changes between now and then, we do not see any basis for purchases.
Beware of fund managers, brokers and institutions who state "this is a
buying opportunity." They have a vested interest in your continued
involvement in the stock market and can not be objective at this time.
Put more weight on the opinions of those who are experienced market
participants, as opposed to
post-1990 brokers. To that end, Warren Buffet's Berkshire Hathaway now
holds $9 Billion in cash, its largest cash position in history.
___________________________________________________________________
In the meantime, we repeat that patience is vital at this point. We have
said it before and we will say it again, sometimes the best trade is the
one never made.
We hope you all had a great weekend.
Regards,
Agora
The Investor's Investor. Published by Agora International Enterprises Corp.
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