From PEI by James Smith
OIL
Next week (Wk of 2/28) is indicated for PANIC on OIL. Panic
cycles on the wkly timeframe are less common and are worth
watching. Panic cycles often coincide with turning points for
extended mkts. Suppose inventory figures come in at Record Lows
next week & suppose Iraq were to take advantage of the situation
to simultaneously cut off their supplies to the mkt, could OIL
hit 32.35-35.85 area in short order?--You bet. Would it stay
there?--No.
The administration would likely lean on OPEC to release more
oil to the mkts sooner than the mkts are now expecting. Even today,
probably because of pressure brought to bear by the administration,
Kuwait has suggested it might be in favor of pumping more oil. But how
did the market react---Nymex Crude ignored this news and continued
higher as well it should. Even if they pump more oil, the point is,
"When
is it going to get where its needed?"
As it stands now, OPEC will not even meet to decide until the end of
March...
which is eons away. A spike in OIL could easily take place before the
end
of March. We cannot rule out a move to 35.85. Oil is showing no signs
of
weakness and given next week's panic cycle, it behooves you to pay attn
to this mkt. Of course it could just as easily be panic-selling as
panic buying.
A surprise annoucement by OPEC to increase production before OPEC
meets at the end of March might cause a nice drop in oil prices but
only
if it becomes clear that the oil will arrive soon. Rumor has it that
there is
already a lot of oil on the way, but given today's rally in oil, the
market does
not yet believe it. Perhaps more oil is coming but it won't be enough
or it
won't arrive soon enough.
For now the risk is that Nymex Crude may surge to $35.85 before
dropping
back to $24.75--20.10 area. For you Elliot Wavers, the coming
correction in oil
should be viewed as potentially a sharp Wave II correction setting up a
much larger Wave III. In this context it matters less where oil tops
out
on this leg of the rally. What matters more is how high it will go in
Wave III.
Surfs up!
DOW
>From the Highs on Jan 14th to Feb 28th is 45 calendar
days (a nice Gann cycle). Coincidentally, we have a Panic
cycle Day for the DOW on March 1st. "If" stocks continue
down hard into the end of Feb, that might set up a reaction
rally to begin on March 1st (panic buying). The following wk
(wk of 3/06) is indicated for "Directional Change", which might
be a Momentum move higher from a rally that started on March 1st.
A weekly close below 9700 will confirm a move to test first mthly
supt at 9063...for a nice 23% correction from the Highs. Some have
asked whether the Nasdaq can continue north while the DOW and
S&P head south. This has gone on for a while, but I seriously doubt
that it can continue much longer. Either the S&P and DOW rally back
to New Highs, confirming the Nasdaq, or the Nasdaq does a Mexican
Swan Dive, confirming the S&P and DOW. I believe in Dirty Harry
and OIL. This may not be enough reason for your to short
the market, but it might be enough reason to take some profit on
existing long positions in stocks.
I don't have a crystal ball. All I can say is that "if" the S&P rallies
to
New Highs into March, then a blowoff move could very well take stocks
higher into May, creating a bubble. I would rather see a small
correction now (23% on S&P and DOW, something rather larger on the
Nasdaq) than to see stocks continue higher forming a bubble into
the month of May. Again, a weekly close below 1352.00 basis the
March contract (not cash) of the S&P will signal a test of 1303 or
lower. We cannot rule out a test of 1147 monthly support.
ARBS MAY GET FLATTENED BY THEIR OWN
"CURVE FLATTENING TRADES"
Arbitrageurs who bot 30 yrs and sold 2 yrs, putting on a curve
flattening trade have made out like bandits, making money on
both sides. But are they looking at Japan? DLR/YEN just broke
out above wkly trendline resistance and its 200 day MA at the same
time JGBs just dipped below their 200 Day MA.
Can the credit rating agencies be sued for not downgrading
Japanese debt as they well should do? If JPN debt will hit 130%
of GDP this year, S&P are not doing their job by giving Japan
AAA rating. I would not be at all surprised to see lawsuits by
investors against the credit rating agencies if Japanese Govt
Bonds do crash. Poltics may have gotten in the way, but that will
not be much solace to investors. Perhaps credit rating agencies
are banking on the idea that most JGB investors are Japanese
and Japanese rarely sue. JGBs are also mostly owned
institutionally, and some arrangement might be made to
compensate banks and other institutions holding JGBs for
their upcoming losses. After all there is plenty of money to go
around??? Well, maybe not. Not after all govt has already
spent ($1 Trillion on pork barrel construction etc) and who
knows how much on subsidizing Japanese banks.
Putting more indirect pressure on JGBs is the fact that Ishihara
(Tokyo's Mayor) came up with the brilliant idea to tax banks in
Tokyo. This has caused a political firestorm which is well
covered in the press. Perhaps what is less covered are the
consequences.
Banks and other financial institutions will be forced to get much
more compeititive in Japan, not just because of foreign competition
but because of Reform...and now to be able to pay this tax which
may add up to $1 billion a year or more.
The question is, can they afford to continue to invest huge amounts
of money in JGBs that provide them with uncompetitive returns in a
suddenly competitive domestic market in which more competitive
foreign financial companies are moving into. And now this, politicians
like Ishihara, suddenly want a large slice of the profits, what little
there are.
To make matters worse, Mr. Son of SoftBank is looking to buy NCB.
Mr Son has been called the Bill Gates of Japan. Bill Gates is worth
a measly $76 billion give or take 5 billion depending on the
Microsoft's daily stock movements. And if you remember no one was
especially keen to see Bill Gates move into banking a few years ago.
It never happened. But who is standing in the way of Mr. Son's move
into the Japanese banking world?
Mr Son is reportedly worth$60 billion and owns a much greater percentage
of his respective company (38% for Son; 15% for Gates) and is quite
likely to overtake Billy in net worth in the next year or two.
So if Mr Son is the guy I think he is, he will stand the Japanese
banking
world on its head. The cozy world of Japanese finance is disappearing.
They might actually now have to worry about shareholders concerns,
like return on investment, profits...you know what I mean, things that
really
never concerned the Japanese banking industry.
Are they going to be able to maintain huge portfolios in an investment
like JGBs that provides such meager returns even if they have been
safe returns "so far"?
And how long can the govt hold rates at Zero while
the FED continues to raise rates. If DLR/YEN
begins to surge too fast US politicians will no doubt
put pressure on Japan to raise rates to stop or at least
slow down the next leg of the longerterm bull mkt in the USD.
(US exporters will be hurt by a strong USD)
Remember our target is JY 278 by 2003.
THE DISAPPEARING SPREAD
Japanese banks make profit on the spread. They borrow money at near
Zero cost and invest it in JGBs for 1.6% return. Its a zero risk means
of making
money so long as the BOJ keeps short rates near zero. But again, if the
USD surges too fast, the game is up. BOJ will be forced to raise
rates.
if not because of foreign pressure as the USD moves aggressively higher,
because of domestic pressure by Life companies and Pension funds that
are not meeting their liabilities.
As short rates move higher, will banks continue to hold JGBs as the
spread
narrows?
Again, what about those Japanese Life Insurance companies. As their
unfunded
liabilities come to light thru Reform, won't they demand higher rates to
meet those liabilities? By law they are forced to invest huge
percentages
of their capital in potentially worthless Japanese govt paper. How
much longer
can they do it and still meet their liabilities???
And how about the Japanese Post Office which is technically insolvent.
Can they count on investors to renew their savings account at such rich
returns of 0.28%???
What these institutions have in common is that they will all be forced
to look for investments that provide richer returns than JGBs. Either
that, or JGBs will have to offer higher yields. Something has got to
give.
Who is going to be last to get out of JGBs before the Crash?
If Japan spent $1 Trillion on govt pork barrel trying to support the
economy and the stock market from 1992 to 1999, can they really
afford to bail out institutions that lose huge amounts in the coming
JGB crash?
Early this year the Japanese govt announced that they would begin
borrowing directly from private banks. Partly this is an admission that
if they borrow too much thru the JGB markets, they risk a crash. It is
also a way of providing yet another subsidy to banks. It actually
costs the govt more to borrow directly from the banks than via the JGB
mkt, but that's the point. They want it to cost more, to help the
troubled
Japanese banking industry. So you can see why the central govt is
not thrilled by Ishihara's money grab (the Tokyo city tax on banks).
While the Central govt is trying to shore up the Japanese banks,
Ishihara is trying to tear them down.
In any case, this plan to borrow directly from private banks may
backfire..
because it shows just how bad the situation really is. We have a Panic
Cycle due for March 1st on JGBs, which may or may not be a real
break-down.
A panic cycle week, which usually is more important, is due the
week of April 17th. So if nothing happens before April 17th, I will be
watching JGBs more closely that week. More importantly traders
should be following JGB price action.
A monthly close below 128.19 basis the March contract will confirm
a Free Fall in JGBs. Yields on JGBs could easily double
if we see a monthly close below 128.19.
You know "the fit is going to hit the shan"......
and when it does those boys who think they were so clever in putting
on curve flattening trades may find themselves flattened as Murphy's Law
strikes with a vengence. Not only will the 2 years rally (which ain't
good
if you are an arb short the 2yrs, but the 30 yr bond will crash, moving
above
7%, which ain't good if you are the same arb who is also long the
30 year bond).
The arbitrage from heaven could easily become the arbitrage from hell.
Suppose US stocks continue down at the same time JGBs
fall off a cliff. Quite the opposite of what many are expecting, the
USD
might continue higher against the Yen. Repatriation is not the big
issue.
Rather than a flight to quality scenario of the Nikkei
selling off and money moving into JGBs, it might very well be that
JGBs crash first, causing the Nikkei to crash too. (Even if the Nikkei
sells off first and a momentary rally in JGBs takes place, I don't see
a move to New Highs in JGBs. It aint gonna happen.) In any case
if both JGBs and the Nikkei sell off, where's the capital going to go?
Probably Cash...US cash.
Because our man Greenspan might wind up lowering rates ala Asian
Currency Crisis '97 instead of raising rates as most now expect.
A JGB crash might be a replay of Asian Currency Crisis, 1997 vintage.
You remember...three quick rate cuts, which we are only now
compesating for with 4 rate hikes (since last June).
Do you still want to know why most commodities are starting
have either already started a longerterm bull market or are
about to start one? As and when JGBs crash, it will force the FED to
react. Japan represents 40% of the world's savings. Greenspan
will not be able to ignore the chaos in Japan.
Incidentally, this may also explain why this "correction" will not
end the bull market in stocks. If all that extra monetary stimulus
from Greenspan lowering rates 3 times in 1997 is at least partly
responsible for this huge rally of the last two years, what do you
suppose another round of rate cuts will do? Granted he may
not want to lower rates til stocks are well down from current frothy
levels, but the markets may indeed accomodate Mr. Greenspan
possibly even before JGBs tank.
Garcon, another bottle of your finest, "Irrational Exuberance '96"
And if you have any "Asian FX Crisis '97" give me a bottle of
that too.
And I hear 2000 will be another "good" year. |
