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 0.4% Up 6.8%
S&P Up 1.4% Up 10.3%
TSE Dn 0.7% Dn 12.9%
GOLD Dn 2.4% Up 1.3%
TED Spread 100.00 points
This week passed was an important one in terms of quarterly earnings
reports by major public companies. After it was all said and done, the
markets moved sideways for the most part. More importantly, though some
disappointments were reported, there were no earnings disasters to lead
the markets into a downward spiral. As such, investors breathed a sigh
of relief and maintained gains put on last week.
Having said that, investors should not be so quick
to relax. Why? Read our answer in the OUR COMMENTS section below
In addition to the stock markets trading sideways for much of the week,
the TED spread has followed suit and now stands at 100.00 basis points,
only .5 points off the highest level we have seen at any time
since the currency crisis began in August of 1997. 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.)
On the gold front, after hitting and sticking to the important $300 level
last week, gold weakened by 2.4% and closed at $292.70. Much of this can
be attributed to the fact investor confidence rose with every earnings
report this week, thus leading to a decreased need for the security of
gold. We continue to believe that gold represents one of the safest, if
not "the" safest, investment during these turbulent times. Relative to
bonds which are trading at or near all-time highs, gold continues to
trade at a historically low levels. We continue to believe gold now
holds its greatest opportunity to appreciate into the $320 level in the
near term. As such, we reported the addition of Kinross gold to the
AGORA portfolio this week.
OUR COMMENTS
"We have as yet
experienced ONLY the peripheral winds of the Asian
crisis". 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 rates
have been cut twice in three weeks and hedge funds now threaten the
stability of the North American banking system.
SHOULD INVESTORS BE RELIEVED?
Though most companies met earnings expectations, the
expectations themselves had already been lowered - in late August and
through out the quarter - in response to the global economic turmoil
which came to a boil in the late summer. Specifically, as
recently as the last quarter, analysts had set expectations based on
anticipated profit growth on average of 15%. By the time the summer
crisis had worked its way into the system, analysts expectations had been
adjusted to represent a DECLINE in average profit of 2%. Yet, investors
saw it fit to move the Dow within 9% of its all-time highs.
Thus, should investors be happy? We don't think so and we would like to
use the following illustration to show you why. Let's assume you are an
employee at ABC company and, as an employee of ABC company, you are paid
bonuses based on the company's performance. On July 1, you were
anticipating the company would reach its performance targets of +15%,
which would bring you a bonus large enough to afford a downpayment on a
real nice car. Suddenly, the company goes through "unforeseen" turmoil
for the months of August/September and loses 20% of the business it
expected to receive. As such, you are forced to reevaluate your personal
scenario and now believe the company will not be able to pay you any
bonus whatsoever. If the company actually reports meeting your lower
expectations:
1] Would you be relieved?
2] Would you be relieved enough to buy that real nice car anyway?
3] Would you be relieved enough to start planning for that big bonus and
car in the next quarter?
We are not sure how you would answer but given the current set of global
economic facts, we wouldn't be planning for anything more than paying our
debts and saving up cash.
Following this week's gains, the Dow is now only 9.47% 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.
On the balance of economic indicators, there is a wide
disparity between positive and negative news. On the
negative side, one can take into account all those facts mentioned in the
preceding paragraph.
On the positive side, we continue to only see the strength of the US
economy.
Some investors have been encouraged this week by the commencement of its
bank bailout initiative, which officially commenced on Friday. After
taking over the operations of Long Term Credit Bank of Japan Ltd.,
government regulators announced eleven (11) other Japanese banks revealed
huge losses. It will now be up to regulators to take one of three
possible steps:
A] Provide a bank with funding if operations can be turned around:
B] Deny a bank any funding and takeover their operations; and
C] Deny a bank any funding and shut down their operations
Though such action is the exact kind necessary to deal with the Japanese
banking crisis, it is still far too early to translate this as a positive
development. After all, the doctor has announced a cure is available and
patients are only now making appointments. How many patients actually
survive the process is entirely another question.
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
Bull market advocates, which are basically the entire financial
community, are eager to continue the bull market. The rationale is
simple, they make a lot of money when you are investing and markets are
moving upward. Thus, their level of objectivity must be questioned.
You, on the other hand, probably have much more at risk. As such, it is
necessary to take the time and be more objective when weighing the facts.
If you don't agree, just speak to anyone who purchased real estate
during the booming 80's because "most millionaires in North America made
their money in real estate".
At that time, participation by individual speculators in the real estate
market was at an all-time high. Headlines, magazine articles and
infomercials all portrayed images of multi-millionaires who bought and
sold real estate as prices soared to all-time highs. To defy these
impressions and not participate in the real estate market was to forever
toil in the low-middle income bracket. Investors were all told "real
estate will always go up in price...you can't lose."
Unfortunately, the speculative bubble did get too big, real estate prices
did not return and investors did lose. In most cases, investors lost
most or all the savings they had built over the years. In hindsight,
when you consider what your neighbor's house was selling for, that was a
frenzy. The same story can be told for $800 gold and $35 silver of the
late 70's and early 80's.
If you experienced any of these frenzies, then ask yourself "what is
different about today's stock market?" Price to Earnings ratios ("PE
ratios") are considered one of the most fundamental measures of value in
the stock market. The recent PE of the Dow Jones and the S&P 500 are
hovering at 21:1 and 26:1 respectively. They are both down a couple of
points from their July levels but still very far from reasonably valued,
let alone "cheap", on a historical basis.
On the other hand, on a historical basis, small-cap stocks have never
been as oversold and undervalued as they are today. Specifically, the T.
Rowe Price New Horizons Fund - a historical basket of small-cap stocks -
is trading at a PE ratio approximately 15% below that of the S&P 500.
However, it has historically traded between even and twice the S&P 500,
since small-cap stocks tend to grow at a faster rate than large-cap
stocks. On the only other two occasions where the fund has traded at any
discount to the S&P 500, it has gone on to handily outperform the S&P
over 1, 3 and 5 year periods.
Thus, if it is not a question of investing in the stock market, then it
is certainly a question of where to invest in the stock market.
GENERAL STRATEGY
Complete defense. We are only carefully adding any new positions at this
time and we are using the current market movement to raise as much cash
as possible. We continue to believe that December will present many
excellent
tax-loss selling opportunities.
Having said that, earlier this week we announced our intention to add
Kinross Gold (TSE and NYSE) to the portfolio between $3.50 and $3.70.
Similarly, we began watching ATI Technologies at $12.70 on Thursday. On
Friday, it was the most active stock on the TSE.
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.
© COPYRIGHT 1997-1998 by Agora International Enterprises Corp. ALL RIGHTS
RESERVED
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