by Steven Jon Kaplan
Updated @ 8:00 p.m. EDT, Monday, August 31, 1998.
IN CASE YOU MISSED THE BULL MARKET, don't worry, one of these days it will come out on video.
KEEP BUYING THOSE YEN!--A great number of exclamation points have been used on this site when recommending the ultimate contrarian play, the purchase of the Japanese yen, but in retrospect, probably more should have been continually inserted, since this has been one of the most profitable foreign exchange trades (other than shorting the ruble, of course) in recent weeks, with the yen already in a two-week bull market against the dollar and accelerating rapidly. The traders' commitments for the yen remain extraordinarily bullish, with commercials long 126,513, short 66,601, and speculators long 4,686, short 46,368. These commitments are even more bullish than those for gold. The speculators are running for cover and with the U.S. stock market falling, the U.S. trade imbalance will be absolutely decisive. Regardless of whatever problems Japan and the other Asian countries have, they are still exporting a lot more than they are importing, which keeps their economies fundamentally sound. Japan has had a recession for almost nine years and yet they have had no major political, social, or economic unrest or crises. Admittedly their equity and real estate asset deflation has been tough on those who borrowed to obtain those assets, but as long as their budget is in surplus anything can be handled. The U.S. is importing a lot more than it is exporting and although a country can get away with such an imbalance when the economy is being artificially inflated through a hypereuphoric stock market, take away the stimulus and you have real trouble. The inevitable commodity price inflation from a weaker dollar will help the U.S. heartland, with its farming, mining, and energy production, and thus partly offset the enormous pending loss of wealth in the financial sector. Unfortunately, so much money has been dumped into the stock market by such a wide sector of the population that this huge loss of paper asset valuations will create a very long term drag on the economy just as the ratio of employed workers to retired workers reaches critical levels. Expect the dividend yield on the S&P 500 to exceed 9% someday; it will be the great half-price sale on U.S. equities. (That's not half price from today's valuations, but half price from the average historic dividend yield of 4.5%--in other words, the Dow will probably bottom out slightly below 1500.)
COKE ADDS LIFE, BY COLLAPSING--The traditional stages of any down leg in the stock market usually proceed as follows: 1) Small stocks begin to decline as market internals turn weak (late 1997 through spring 1998); 2) mid-cap stocks fall as only a few large-cap brand names remain strong (May 1998 through July 1998); 3) large-cap stocks also begin to decline (August 1998); 4) the biggest and supposedly foolproof large-cap stocks decline the most in percentage terms (August 31, 1998). With Monday's collapse of this market's Nifty Fifty, including all of the so-called best and brightest, while small stocks fell only moderately, this should be setting the stage for a short-term bounce. Of course, I have been expecting a short-term rally for several days and, alas, no bounce, as the market's absurdly overvalued fundamentals have reigned absolutely supreme, and my long-term targets such as Dow 7000 by November 23 and Dow 2000 by the year 2008 are looking wildly overoptimistic.
GOLD; IS IT ALREADY IN A RALLY?--Intraday indicators of gold futures trading are actually quite bullish following the market's bottoming at $270.50 at 3:24:20 a.m. on Friday, August 28, 1998, with a series of higher low and higher highs, and strong on-balance volume, although the duration of so few trading days is obviously insufficient for most chartists. As is typical of a financial market in panic, gold mining shares have been dumped along with everything else. As they remain one of the few liquid investments with the potential for double-digit appreciation (and double-digit loss, of course!), these shares will be among the very few ports in the storm. Much more importantly, the U.S. dollar has been in an accelerating decline since late Wednesday, August 26, 1998. A lower dollar means a higher price for gold. Period.
AND, FINALLY, THANK YOU FOR YOUR LETTERS--A record amount of e-mail has been received in recent days, which is always appreciated. I have responded to all who wrote, though a few had e-mail addresses which rejected the replies.
COMMENTS OF THE DAY: Commodities rallied slightly on Monday, while precious metals were also mostly higher. Gold gained $1.00, silver fell 1.4 cents, platinum rose $3.90, and palladium rallied $4.50. While South African gold mining shares rallied, U.S.-traded gold mining stocks generally fell along with the rest of the market in a typical panic reaction, especially since the greatest part of the stock market's collapse occurred after gold had finished trading on the COMEX (it closes at 2:30 p.m.), giving gold no chance to positively react to the news. Gold is now trading about two percent above its bottom of $270.50 on Friday morning, and is establishing a strong, though admittedly short-term, intraday trading pattern. Investors are becoming desperate for alternative investments and there are few others that have the liquidity, potential for double-digit gain, and non-correlating behavior of gold mining shares.
As U.S. Treasuries rallied, with the yield on the 30-year bond touching an historic low of 5.289%, corporate bonds declined, stocks collapsed, and the U.S. dollar fell.
On the New York Stock Exchange there were 17 new highs and 1161 new lows, with 400 stocks advancing and 2869 stocks declining. The index put-call ratio was a very strongly pessimistic 0.83, while the equity put-call ratio was a significantly pessimistic 1.67.
The volatility index or VIX, a measure of implied volatilities for U.S. stock index options which demonstrates complacency vs. fear in the market, closed up 7.38 at 48.33. Its intraday high was 50.66 and its intraday low was 38.70. These high values indicate that investors and portfolio managers are willing to pay outrageously for portfolio insurance, such as put options; values above 35 often signify a short-term bottom in the stock market, though the VIX did reach a peak of 55.48 on October 28, 1997 when the Dow briefly plunged to 7000. Any level below 25 indicates that investors are complacent about the possibility of a stock market decline; each intraday drop below 20 in the VIX shows exaggerated lack of fear, and is a strong buy signal for index put options. On Monday, July 20, 1998, the VIX hit an intraday low of 16.73, its lowest level since November 25, 1996, with most stock market indices at all-time highs. This demonstrated a shocking level of investor complacency typical of a major market top.
Monday's COMEX gold estimated volume was a moderately light 23,000 lots. Total COMEX gold open interest on Friday rose 1,163 to 207,058, while silver open interest climbed 2,373 to 85,900 lots. COMEX gold warehouse stocks were unchanged at 912,517 ounces, while COMEX silver warehouse stocks dipped 5,220 to 78,681,414 ounces, slightly above their lowest level since 1982. The Johannesburg gold index closed Monday morning at 783.6, up 34.4 rand, with the U.S. dollar plunging to 6.4135 rand (the dollar is collapsing even against the rand!!!) On Friday, August 28, 1998, the dollar touched a new all-time high of 6.8600 rand. This confirms a very bearish key reversal for the U.S. dollar; if it can't rally against the rand, truly a weak third-world currency, then it is finished. Kaput. |
