Good evening to you all. At a time when equity markets continue
to shoot further and further into overvalued territory, the fundamentals
continue to tell a much different story. Please find enclosed the
headlines and brief summaries, followed by some analysis.
At 10:24 PM EST, Moody's Investors Services Inc. lowered its rating of
ALL SECURITIES ISSUES OR GUARANTEED BY THE JAPANESE GOVERNMENT. Shortly
after this announcement, Moody's also announced a ratings cut for four of
Japan's leading utilities companies.
At 10:40 PM EST, the Bank of Japan announced that Japan's credit crunch
has begun hurting the country's largest companies and that stagnant
consumption is forcing businesses to cut production.
MOODY'S DOWN GRADE
Moody's is one of the world's premier ratings agencies. This evening,
it downgraded the credit worthiness of the Japanese government due to
uncertainties and increased risks created by economic and political
weakness.
Stock markets cheered Japan's latest $196 Billion stimulus package and
relied on it as a reason to move stock markets higher. Moody's, on the
other hand, expressed serious concern over this economic package, which
only led to deepen the already massive government debt.
This begs the question, who is right? We strongly agree with Moody's and
can base this opinion on strict facts. Specifically, the Japanese
government has spent $820 Billion on similar public works projects since
1990, which has resulted in no economic stimulus and the largest public
debt in the industrial world.
If you need more evidence of this fact, the follow-up statement from the
Bank of Japan says it all.
BANK OF JAPAN REPORT
In its monthly report, the BOJ stated that domestic financial markets
are being hampered by the funding problems of banks and companies.
Specifically, cautious lending by already troubled banks is affecting all
companies from small to large corporations. As a result, companies are
being forced to cut back on capital spending in order to ensure cash flow
and liquidity. The result on the economy is obvious.
OUR COMMENTS
Unequivocally, the state of Japan's economy is a troubled one and it
only appears to be getting worse. This comes as no surprise to us.
Furthermore, we don't believe that throwing more money at the economy is
the solution to the problem. After all, the first $800 Billion has not
worked and every indication points to Japanese consumers keeping their
hands very deep in their pockets. If this plan indeed fails, Japan will
pretty much have to written off. If that is the case, repercussions in
the global economy will be heavy.
What does come as a surprise is investors willingness to move North
American equity markets higher despite these facts. For the last twelve
months, we have been telling our readers that North America can not
continue to prosper if the Asian economies continue to decline. During
his recent speeches to the Senate Banking Committee, Federal Reserve
Chairman, Alan Greenspan, stated as much when he stated the United States
could not continue as an oasis of prosperity. Nonetheless, with the
exception of the period between late July and early October, investors
continue to price the markets as if the US could continue as an oasis of
prosperity.
In the short term, we can admit to eating crow. We did not expect the
markets to rebound back to the 9,000 level on the Dow. Despite the fact
our portfolio has made some nice profits with key acquisitions over the
last few months, we were not fully invested. However, we are sticking to
our guns. From November 1997 to July of 1998, we went to a more
defensive portfolio. Many of our readers disagreed until the markets
corrected by 20% and found themselves in negative territory.
Now the markets are back but we firmly believe the bad days will return,
with the exception of one new twist. The correction will be much worse
and much more prolonged.
Tomorrow, we will be broadcasting a report on the savings, or the lack of
savings, of US households. We believe the numbers are cause for great
concern. You read it and decide for yourself.
Have a great evening.
Regards,
Agora
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