MarketVVizard's Market Thoughts

Top 820. Jan 17, 2004 4:55 PM

» Normxxx - Re: More on Faber's Life Cycle

In response to message posted by MarketVVizard:

Faber's charts and your superposition are very impressive. But even from Faber's charts, we still have a ways to go to reach the top (about 20 - 30% more, as I eyeball it).

My scenerio is a little different. I think we will have one or two 'tests' this year to put the fear of God back into the investor and bring down the inflated prices, then top out in 2005, but not get real bad until 2006.

I chickened out and withdrew my slightly short toe early yesterday. So I am neutral stocks (really looking for a long entry point), bearish on Gold (2 - 4 weeks), bullish on the dollar (2 - 4 weeks), and neutral on Emerging Markets and REITs (looking for exits).

However, we are clearly balanced on some sort of euphoric knife edge and any major 'incident' could drop the market 10 - 15% in a heartbeat.

-- posted by Normxxx

Top 821. Jan 17, 2004 6:49 PM

» Kirk - Re: LifeCycle Applied

In response to message posted by MarketVVizard:

Superimpose your chart over Fabers for the NASDDAQ starting at each bottom and do a visual regression...

I think we can argue there was a bottom in 2001 for phase IV then we got the telecom crush which completed his cycle.

or not. smile

-- posted by Kirk

Top 822. Jan 18, 2004 8:44 AM

» Normxxx - Re: Re: LifeCycle Applied

In response to message posted by Kirk:

Having not read the book yet, I'm guessing Faber's cycle was meant for a shorter time span than the Wiz is trying to span (based on what I've read of what has been reported so far). But cycle theories usually predict a sort of fractal pattern to cycles, i.e., repeating patterns of cycles within cycles in either direction. In any case, Wiz's larger pattern does look compelling, so you could both be right. However, I prefer my variation, above.

I guess I'll have to read the book; I was delaying, believing it was mostly about the China/Asian phenomenon, which I believe, like Japan, will go bust (again) in the near term. (Remember, Emerging Markets, largely Asia, is one of my asset groups). I don't know how it will play out long term. Does anybody? Really? (They still have the problem of developing a market-- other than the U.S./Europe to keep 2,000,000,000 people gainfully employed.)

P.S. Because of the lack of a viable market (except for the U.S.), I was predicting that Japan's growth was capped in the late-1980s-- while everyone else was predicting that the 21st century would belong to Japan.

P.P.S. I do think the Chinese have a better chance; they seem to be able to learn from other people's mistakes-- notably Japan, which still seems unable to learn from its own mistakes. But I really think India is the one to keep an eye on; also some of the lesser tigers.

But corruption, as well as viable markets, is a major limiting factor in the Asiatic countries (it is a major reason they have been so slow to develop their domestic markets).

P.P.P.S. But corruption is not insurmountable; we forget, but corruption was just as much a problem in the U.S. in the 19th century. And we still need to do periodic 'houscleaning.'

-- posted by Normxxx

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Top 823. Jan 18, 2004 6:08 PM

» Austrian - Re: Re: Re: Re: From latest public Trimtabs [Dec 22]

In response to message posted by Normxxx:

Normxxx,
There are several possibilities going forward:
Scenario 1:
Euro corrects substantially, and gold corrects accordingly. This should effect the majors, and mid tier producers, but leave the Canadian stocks relatively unscathed. Same for silver. Heck of a buying opportunity.

Scenario 2:
Euro corrects substantially, and gold and silver have a modest correction, not as large as the euro correction. This to me would be wildly bullish. Indicating global strength in the metals, with huge additional upside. Even bigger buying opportunity.

Scenario 3:
Correction is done, or near done and the gold correction is near complete. This would again be bullish for Gold and silver.

My expectations is more of a correction in the dollar/euro situation. I have not sold my gold and silver positions. This is a bull market, very volatile, but will be huge for several stocks, and great for most. Richard Russell, Marc Faber and many others say when in a bull market ride it, do not time it. This is the approach I am taking.

I think this precious metals is THE opportunity of my investing lifetime. I expect the price on both Gold and Silver to exceed the previous highs. If I am wrong, I still expect Gold to exceed $600 and Silver to exceed $30 at the very least. The upside to equities IMO will be similar to the internet mania, with several going from $.30 to $300 or better.

Generally speaking I am investing in exploration companies and small producers. A friend tells me they are frauds, I think this well meaning intensely bright friend is misguided. The argument is relatively straight forward. With depressed prices for PMs over the last 20 years, no real exploration occurred as the price of the metal did not support the activity. With supply demand way out of balance and global demand picking up and supplies of cheap metals close to exhausted, the need for new mines is obvious. These wantabe companies are mostly people plays. Who on the management team has a track record for getting it done. They start with nothing but a couple of drill holes. If they hit, huge gains. Catch one or two big ones, and they may have Cisco like gains. Risky yes, but the big producers do not have the leverage to new pounds like the exploration companies.

How am I finding them? Subscribed to a couple of newsletters, and using web resources. To kick the tires cheap on gold newsletters see
http://www.stockfocus.com

Several good sites exist. Several helpful websites are:

-- posted by Austrian

Top 824. Jan 18, 2004 6:30 PM

» MarketVVizard - Re: Re: Re: LifeCycle Applied

In response to message posted by Normxxx:

Norm -- a couple things. First, Faber didn't really specify (or even intend) "hard and fast" timeframes for the life cycle, but he definitely had many years in mind. In the one "real" example chart in the book he used a 13 year chart of the Seoul composite. Also the life cycle chart is just a basic guideline; in real life the phases are not equal chunks of time. I think more important than the chart is the descriptions of each phase (symptoms and events).

Regarding the book -- I had the SAME EXACT initial impression as you did, which is precisely why it has taken me so long to finally read it. But the reality was a surprise. Despite "Asia's age of discovery" being part of the title, he doesn't really even MENTION Asia until chapter 9 (of 13 chapters) and only 2 chapters in the book are specifically about Asia. I think the book was poorly named (I was also expecting something on gold smile ) Bad title aside, the book is definitely worth reading.

-- posted by MarketVVizard

Top 825. Jan 18, 2004 6:37 PM

» MarketVVizard - Reply from Faber

I really wanted him to respond to my question on the Yuan revaluation but I think I hit my question quota smile

Faber's brief responses are in bold/italic below:

Pls see below

-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
Marc Faber Limited
3308 The Center
Queen's Road Central 99
Hong Kong
Tel: +852 2801 5411
Fax: +852 2845 9192
www.gloomboomdoom.com
Chiangmai Tel: +669 55 99 640
-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-

-----Original Message-----
From: VViz
Sent: Sunday, January 18, 2004 5:32 AM
To: Marc Faber
Subject: Question about Tomorrow's Gold

... I have a couple questions regarding your commentary on the "Life Cycle of Emerging Markets". For "phase five" you say "bond spreads" widen. This is very ambiguous -- there are corporate bonds, government bonds, short or long duration treasuries, foreign vs. domestic, junk vs. AAA rated. What "spreads" are you referring to?

corporate bond spread as the economy deteriorates.

This is particularly relevant in light of your "phase 6" comment that "interest rates decline further and reach their lows for the cycle".

Interest rates can decline while spreads widen (Japan the US in the 1930s).

If this can all be applied to the United States right now -- do you expect rates to continue lower?

near term rates may head still a bit lower, but inflationary monetary policies should lift rates in the long run.

I guess what I don't understand is how massive deficit spending and a rapidly falling dollar can coexist with continuously falling interest rates? Finally, have you written anything recently on the revaluation of the Yuan and what it will mean to the global economy? (some are blaming the recent reversal in gold and the dollar on this)

Thanks!

-- posted by MarketVVizard

Top 826. Jan 19, 2004 8:34 AM

» MarketVVizard - Hussman

January 19, 2004
Spinning Muons

John P. Hussman, Ph.D.
All rights reserved and actively enforced.

Last week physicists at the Brookhaven National Laboratory sent four billion spinning muons down a particle racetrack at nearly the speed of light, in hopes of confirming the existence of new matter. Muons, in case you missed that day in grade school, are tiny spinning particles – heavier cousins of electrons – that emerge from the spray of fragments created by shooting protons at high speed from an Alternating Gradient Synchrotron into a nickel plate.

The elusive new matter is predicted by an unconfirmed theory called supersymmetry. The New York Times offered this report: “According to the theory, every known particle in the universe from the electron to the neutrino has a counterpart that has eluded detection. Seemingly empty space is populated by a kind of fizz of particles that flit into and out of existence. If not for the background fizz of other particles, the frequency with which the muons zip around the track would be the same as their wobble frequency. But a set of 24 detectors found that they were different. The findings seem to agree with the group's earlier examination of positive muons, suggesting to some scientists that the shadow universe of supersymmetry may have been dimly sighted.”

There are a lot of reasons this story is important. From the standpoint of physics, the idea of supersymmetry is really a notion of everything having been created from nothing; taking zero and splitting it apart into one and negative one; and yet that if we were to take everything in the universe and crush it back together, it would all add up to nothing again. From the standpoint of philosophy, there is a Buddhist teaching that everything we call self is composed of non-self elements, just like a sheet of paper is made of the sun and the rain and the earth; that there is no truth to the belief that we are entities separate from others, even from our enemies; that the essence of compassion is to understand that “this is because that is, and this is not because that is not.”

Information is in the divergences

From the standpoint of finance, the best part of the article was a sentence explaining why this experiment was the path to new information. Essentially, the muons seemed to be bumping into that “fizz” of particles, which slightly changed their wobble. The Times wrote “Only through differences between the expected and observed behavior of the muons could the existence of new matter be inferred.”

Long-time readers of these comments should recognize that concept, because it is exactly the approach we use to learn information from the markets. Information is never in the news itself, but rather in the deviation between the actual news and the news that would be expected given the surrounding context. The information is always in the divergences – the surprises – that we see in market action. A market that produces uniformly good performance across a wide range of securities, indices, and industries is a market where investors are comfortable taking risk. A market that produces unusual or subtle breakdowns in its internal action is a market where investors are quietly becoming skittish. As a highly ranked U.S. chess champion recently told me, “when your opponent makes a very peculiar move, there's something wrong.”

Market Climate

Which brings us to the current Market Climate for stocks. There is faintly an end to the criticisms that we could heap on the current status of the stock market: it is steeply overvalued on the measures that we've found most reliable; sentiment is extreme, with just 10.1% of individual investors bearish (AAII) and 18.8% of investment advisors bearish (Investors Intelligence), while corporate insiders are selling stock at nearly the highest rates on record; the CBOE volatility index has plunged to just 15%, exhibiting a sleepy complacency about risk; and the major indices are clearly stretched, with 1027 issues on the NYSE hitting new highs last week and over 90% of industry groups technically overbought. Over the long-term, it is difficult to see how the poor fundamentals of the market and the economy will end well for investors.

Yet despite these conditions, we still do not observe the sort of internal divergences that would lead us to take anything but moderate precautions here. There is currently very little in market action that suggests the sort of investor skittishness that typically emerges prior to or early into major market declines, or that has been associated with a poor return/risk profile for stocks. In the Strategic Growth Fund, we've hedged about 50% of our exposure to market fluctuations, with a small contingent put option position (a fraction of 1% of assets) sufficient to hedge another 25% of the portfolio in the event of a decline of more than 4% or so.

In short, we still don't observe the creeping aversion to risk that would move us to a fully defensive position. The current Market Climate is sufficient to hold us to a moderately hedged position, but we would expect to benefit from further market advances if they occur.

In the bond market, the Market Climate remains characterized by modestly unfavorable valuations and modestly unfavorable market action. The Strategic Total Return Fund continues to maintain an overall portfolio duration of about 2 years (meaning that a 100 basis point move in interest rates would be expected to impact the Fund by about 2% on the basis of bond price fluctuations). As I noted last week, there was some potential for strength in the U.S. dollar, which we in fact observed. That sent gold stock prices down sharply; much more than the metal in fact, and that created a very small opportunity to place a few percent of the Fund's assets into precious metals shares.

Where might the returns come from?

Despite the still-benign Market Climate in stocks, the over-broad consensus that stocks will advance until at least election day is slightly unnerving. We don't take positions based on scenarios, but I would not be at all surprised to see the market clear the current overbought condition with a potentially sharp pullback, but one that is met with fresh speculative interest. Advancing markets seldom shift gears to outright plunges (though we don't rule out the possibility). Instead, they tend to roll over gradually. And it's during that extended period of rolling over – declines met by fresh advances and marginal new highs, followed by declines met by fresh advances and marginal new highs – that cracks often begin to appear in the foundation of market action.

My opinion, which we don't trade on and neither should you, is that we probably won't see the market adhering to the very popular pre-election rally theme. Instead, I wouldn't be surprised to see a wide sideways path in the months ahead, with marginal new highs sufficient to maintain bullish hopes, but not much for buy-and-hold investors to show in the end.

In a wide sideways market, stock selection and convexity (a property of options that allows the capture of returns when market volatility exceeds the volatility implied by the options) would likely be the primary sources of potential return, while market risk would not be worth much at all. Again, we aren't positioned on the basis of scenarios like this, but we would easily welcome this sort of outcome.

In a bond market that is not priced to deliver strong long-term returns, the sources of potential return must be something other than passive holding. This is precisely why we designed Strategic Total Return Fund to allow flexibility in the overall portfolio duration taken by the Fund depending on market conditions, as well the ability to invest limited amounts of Fund assets in alternatives such as Treasury Inflation Protected Securities, precious metals shares, utility stocks, foreign currencies, and foreign government bonds. While there is no assurance that this approach will outperform a passive investment in bonds, it is difficult to see how bond market strategies lacking this flexibility will maneuver through a low yielding environment with very thin credit spreads and an extraordinary overhang of debt. That's probably why at least one famous bond fund manager has liquidated his personal investments the fund he manages … and is certainly why I haven't had any such impulse.

-- posted by MarketVVizard

Top 827. Jan 19, 2004 8:43 AM

» MarketVVizard - Re: Re: Re: Re: Re: From latest public Trimtabs [Dec 22]

In response to message posted by Austrian:

"Generally speaking I am investing in exploration companies and small producers. A friend tells me they are frauds, "

The frauds are usually pretty easy to spot (well at least the warning signs). If the gold or silver mining/exploration/whatever company puts out more than 100 press releases a year you can pretty much bank on it being a scam. If they have multiple unrelated businesses (i.e. they look for gold AND they are a biotech company) you can pretty much assume its a scam. If they are partnered with off-shore promoters or paid stock promotion shills, you can pretty much assume its a scam. If there is a pattern of insider "buying" while the float keeps growing, you can assume its probably a scam.

You get the point. Bulletin board (as well as SOME foreign market) companies are NOT well regulated (if regulated at all) and have little accountability, nor are they required to even submit SEC standard GAPP quarterly reports.

While you can certainly get rich playing BB stocks, I'd just as soon buy a lottery ticket. Odds are probably a little better with the loto. When the government taxes those that are bad at math at least they properly disclose everything smile

These "dollar and a dream" companies are a dime a dozen. In the past I even posted about a BB company that makes flying cars. I love their technology and the story. Its a stock that could go up 100x, but even I won't buy it. Because I know that most of these companies are on the brink of bankruptcy at all time and they hype to stay alive. You also have to wonder -- if any of these companies truely had so much promise, why wouldn't they have been bought out by a "real" player in the field?

-- posted by MarketVVizard

Top 828. Jan 19, 2004 9:20 AM

» MarketVVizard - Asia Pacific: Exports Have Peaked

If Andy is right, look for:

1. falling raw industrial prices

2. rising US dollar

3. falling gold prices

4. falling cyclical-industrial stocks

5. rising consumer staple stocks

6. bond market - ??????

7. US stock market correction

Asia Pacific: Exports Have Peaked

Andy Xie (Hong Kong-based managing director at Morgan Stanley)

Asian exports peaked in this cycle in the fourth quarter of 2003, in my view, and will likely grow by half as much or less in 2004, about one-fourth below trend. The slower growth rate should allow raw materials industries to catch up in supply capacity and, hence, make further expansion affordable to low-income economies in Asia.

We believe Asian exports could decelerate by 70% by end-2004. China probably frontloaded its exports in 4Q03 due to an expected reduction of VAT rebates in 2004, which we estimate exaggerated its export growth rate by one-tenth last year. The strong euro accounted for one-fourth of China's export strength. Both one-time factors will disappear this year. Regional trade should decelerate sharply with China slowing its investment growth rate.

Strongest Export Performance since 1987 In 2003, East Asia experienced the strongest export performance since 1987; the combined exports of China, Taiwan and Korea grew by 25.6%. The region's export performance in 1995 and 2000 showed similar strength. The peaks of the four export cycles related to the US Fed policy cycles are 1987, 1995, 2000 and 2003, in my view.

Exhibit 1

East Asia Exports (YoY % Change, US$)

China Korea Taiwan 1980s 13.1 14.0 13.1

1990s 14.9 10.3 8.2

2001 6.8 - 12.7 -17.2

2002 22.4 8.0 6.3

2003 34.6 19.6 10.4

Source: CEIC.

US stimulus and China's investment were the driving forces in the massive global trade recovery. The former led to strong US consumption and a weak US dollar, triggering massive export performance among the dollar-linked economies in East Asia. In particular, the strong appreciation of the euro made a major difference; one quarter of China's export growth last year was due to Europe, even though it accounted for 18% of China's 2002 exports.

In addition, Japan managed to keep its currency low enough to achieve an export increase of 4.3%, which funded a 13.2% increase in its imports in dollar terms. Japan's import demand mainly benefited Asia, which accounted for 44% of Japan's imports in 2002 but 62% of its 2003 import increase.

The weak dollar restrained US imports while its economy experienced a strong recovery. However, it redistributed demand to Asia with its linked currencies, mainly via China's rising market share.

The strong euro, in the face of a loose Fed, was really the factor in the global redistribution of trade in 2003. In the first three quarters of 2003, euro-zone exports fell by 3.5% from the year before but increased by 16% in dollar terms. Europe's willingness to accept a strong euro at the expense of growth was a key factor in the strong trade performance last year, in my view.

But Sharp Slowdown Ahead I believe that Asian exports will grow by half as much in 2004 as in 2003 for three reasons: First, export frontloading ahead of a reduction in VAT rebates may have accounted for 10% of China's export increase last year. Ceteris paribus, that could decrease China's export growth rate by 3 percentage points. Second, China's investment growth rate will likely decrease by half, which could halve its import growth rate. Third, the euro is unlikely to appreciate to the same degree as in 2003. The euro's strength directly and indirectly accounted for one-fourth of China's export growth last year, in my view. The euro appreciated by 16% against dollar last year. Its appreciation is likely to slow significantly in 2004.

The year-on-year comparison will likely show a sharper deceleration in Asian exports in 2H04, in my view. The combined exports of China, Taiwan and Korea showed 32.2% annual growth rate in the last quarter of 2003 but could decelerate to 10% annual growth in the last quarter of 2004, or a 70% deceleration in external demand.

China: Trade Multiplier Works Both Ways Outsourcing has made trade more sensitive to global GDP change. China and communications technology are allowing multinational companies to optimize global production instantaneously for the first time. Thus, whenever demand stimulus is instituted in rich economies, China's exports should grow rapidly. Last year, for example, China's exports grew by $113 billion, the equivalent of 8.7% of 2002 GDP.

How China channels its export income into imports creates winners and losers in this era of outsourcing-led globalization. China has a very high saving rate for three reasons: (1) the one-child policy for a high-income urban population; (2) the dismantling of the state enterprise-funded social safety net; and (3) a lack of capital appreciation due to a dysfunctional financial system. The high saving rate channels export income into investment. Hence, equipment and raw materials dominate China's imports.

China substantially redistributed income to primary resource and equipment producers last year through its investment boom. The sharp increase in commodity prices reflated many depressed commodity economies that had recently experienced financial crisis, which appeared to have a high multiplier effect. China's equipment demand also helped Japan to benefit from the current global recovery.

When global trade slows down, its impact on commodity and equipment producers should be greater than in the past. Although markets are wildly optimistic about commodities, I am afraid that commodity prices could drop significantly in 2004. China's central role in outsourcing-led globalization has basically increased the volatility in the cyclical commodity and equipment sectors, in my view. The current euphoria about these sectors, though justified by China's secular story, is mostly cyclical, in my view.

-- posted by MarketVVizard