Nikkei 225 rally will be short lived

Nikkei-225 is up 172 pts today to 12,697.99 after a 200+ rise yesterday. This might suggest that the Nikkei has found a bottom. I dare say I think this market is going lower, and that this rally will be exhausted. The 12,000 level is a strong support, but I still think its going to 11,000 pts. The reason will be a deterioration in confidence by Japanese buisness and consumers, and that will be caused by a weaker USD (stronger yen) and other bad news from the USA. So how long is this rally likely to be? I would suggest this rally will peak at around 13,000 pts, as that was a previous support level, and thus it will prove to be a strong resistance.

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Andrew Sheldon www.sheldonthinks.com

Re: Federal Reserve could make substantial rate cuts

Cuts by the Fed might have some temporary 'feel good' impact on markets but it will do nothing. Thats why they are doing it. They know it will be perceived as action, so they are covered, as 'they did all they can'. But think about it, who borrows money when an economy is contracting and asset prices are falling. No one - except banks who can't fund their short term liabilities because of a run on the banks. The Fed surely has deep pockets there since they can always print money, which just erodes the value of the money you have, so hidden increase in tax.
See More: Federal Reserve could make substantial rate cuts
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Andrew Sheldon www.sheldonthinks.com

Nikkei 225 good buy off 11,000 support

People are pretty worried about the current state of equity markets. Those whom are waiting on the side are also worried about whether they will get the right timing. In the case of the Nikkei-225, we are still far away from the best time to start reinvesting. We have seen a number of USA financial institutions fail. We have heard nothing from Japan. Their time will come. It will come in 2 forms:

1. Financial institutions who have exposures as counterparties to foreign institutions
2. Financial institutions which have dodgy investment portfolios, that is they are holding bad positions on their books.

The best time to enter the Nikkei-225 will be when it reaches 11,000 pts. We are still at 12,482 pts, so that suggests a significant fall ahead. The 12,000 level is another important level, and the Nikkei has already rallied from that level, but I think it will be short-lived. I think it will exhaust itself by 12,500 pts. The reason I expect the 11,000 level to be achieved is because it has been a major support/resistance for the last 5 years. If that is broken, then we might be looking at 10,000pts. That is an even stronger support, but I dont see that being achieved. The outlook for Japan does not strike me as too bad relative to other markets.

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Andrew Sheldon www.sheldonthinks.com

The All Ords destined for 4800 pts

I actually think the Australian market is in pretty good shape, but I think its futile telling the market that. I think the market is looking for reasons to touch 4880 level support.
I think there is the possibility the market will touch 4880 pts, but the ASX will finish the week above 5000 pts. Resources will be the biggest source of strength, as well as food & farming-related stocks.

The justification for reaching that level will be the prospect of a number of interest rate increases in future and the impact that will have on domestic spending. Technically the market is just not ready for a move above 5300 pts since last week it was repealed trying to break that level. I would however be particularly interested to see how the market opens in Australia because the market did not close above its previous low. If it opens strongly I take all that back. You will get very early guidance on this one. Just checking the Dow Jones Index. It was up 120 pts earlier, but now I see its just up 21 pts, placing it slightly below 12,000 pts. Thus I see broad weakness with strong resources, particularly gold.
Mining companies are looking at healthy metal prices irrespective of the strong $A. We will be looking at parity between the $A and $US, so dont even think about exporters or companies with a significant portion of their earnings derived from offshore. The best performers will be the gold producers, but with the greatest gains coming from the emerging producers rather than the established miners which have found support in the market already. So check out my Specs blog. This is buying time people in gold, silver, palladium and platinum. Not oil at this point, and selectively with other metals and coal.

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Andrew Sheldon www.sheldonthinks.com

Weaker outlook since Friday

The market reversed back on Friday after Bear Stearns made its announcement of its failure and subsequent rescue by JP Morgan Chase. The Fed has promised to assist with even more market support. Clearly markets will need along of convincing. I can't see markets collapsing at this point. I think more likely that the markets will hang at these levels, and I even suspect that alot of positive sentiment will result from strength in the resources sector, aided by increased merger & acquisition activity. There could be no better time for Chinese companies to mount take overs for foreign companies, particularly of copper, nickel and oil projects in Australia, Canada, Indonesia, the Philippines and Mexico. I would expect them to be a little more aggressive than the Japanese in the 1970s, but I would expect them to seek passive stakes rather than control, or at least keep their local management in place. This is critical in the current skills shortage. More likely these involvements will take the form of direct project interests with the local sponsoring company providing the project management and technical skills, and the Asian partner providing the finance in exchange for captive or equity-defined marketing rights. Full marketing rights will be more likely, and who would argue if its comes with cheap money. Most of these enterprises will be Chinese state-owned enterprises.
There is talk among G7 countries of taking concerted action to force China to lift its currency sooner rather than later. If China was to liberate its exchange rate, we might expect to see Chinese enterprises lift their offshore investments greatly. And who would complain? Certainly not those countries lifted above.
The gold market and of course other precious metals look great. This is indeed the start of a healthy recovery in this sector. I would also expect some measure of recovery in the broader commodity based equities sold down, and ofd course I should not forget the food/agri-product producers like Australian Agriculture Company which is holding well.
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Andrew Sheldon www.sheldonthinks.com

Market closes above 12,000 pts as expected

On Monday night I made a forecast that the Dow would fall to the 11680 pt support, and then you rally to 12,000 pts by the end of the week. That is what has happened. Yesterday the Dow fell to around 11680 pts (?) - I dont know exactly the level because my charts have yet to be updated (I manually did it). Overnight the Dow Jones rallied 416 pts to 12,156 pts. The rally was caused by the Fed injecting $200 billion in liquidity into the US economy. Great for asset markets for a short while, though ultimately debasing the USD even more. Fluff is what keeps cakes rising of course, and economies as well. Of course that will be inflationary, but then inflation is a long range concern for the US government. They are more concerned with getting elected. The chart above shows the resistance levels looking forward. This was an important support level, and the message overnight is important, in terms of affirming Fed chair Bernacke's intent to throw money from helicopters to at least keep the equity markets afloat. That is afloat. But dont expect them to rally too far. This is not a market that is going to rally to new highs. I see 12,750 pts as a realistic resistance level for now. The news is good for the broad equity market, but commodities will do particularly well. Of course you should have bought commodity stocks yesterday given the Dow was near support.

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Andrew Sheldon www.sheldonthinks.com

Dow Jones to re-test 11680 level

The Dow Jones I suggest is going to have a very volatile week. Why? It is likely that the Dow Jones will re-test its recent low of 11,680 points. Whilst I think it will sink to this level I think the index will close the week above 12,000 points, and thus maintain its uptrend.
The rationale for this is that the US is pushing the globe towards a new monetary standard. By debasing the USD, they will actually be increasing taxes through 'bracket creep' and giving people the perception of rising markets. Oh you say - What about inflation. Not our fault! Its just because of China's insatiable demand for commodities, which is forcing up prices. Well you could be forgiven for believing it, if you read newspapers. I do when I run out of tissue paper.
You might ask why the US would want to debase its currency? I think the rationale is that it holds real assets whilst Japan and China are holding paper (treasury bonds) which are payable in debased US dollars. But aren't wars fought over such things? Well I suggest not, given that the USA didn't force the issue of currency manipulation in the Asian Bloc. No one cares though as long as there is growth on the table. The positive side is that the these economies are opening up. There are now 4.5 billion free traders when a decade ago there was more like 1 billion fully- fledged free traders and 3.5 billion traders with constrained access.
The next policy issue is to start thinking about the quality of thinking by these 3-4 billion free traders, and not just in the developing world. Evolution seems to have taken the slow democratic path to progress. Not that a consciousness can be forced to think, but they could do with some positive education.
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Andrew Sheldon www.sheldonthinks.com

The world's top 2000 companies

Forbes has published its Top 2000 companies around the world. Its a useful survey since you can search the list by their ranking, country, industry, sales, profits, assets and market value. I suspect a lot of people would look at such a list and think they should buy the most profitable company, particularly if it has a history of performance. My logic is the opposite. I want to go to the bottom of the 'profit ranking' to see the stock offering the greatest upside. You can be sure that if there is a company making 30-40% growth in sales or profits, its going to be trading at a huge premium in the market. My belief is that things eventually tend to go wrong with these companies, whether success breeds mistakes, or builds strength in the competition. They are destined to make a mistake. Everyone is impressed by Google - as they should be - but I'm waiting for them to fail because they are 'too successful', such that bloggers can't upload photos because their service is so popular. Maybe the age of outsourcing will avoid this issue. I'd be more inclined to invest in Yahoo - though I choose to use Google's services.
Typically stocks that are have been making losses are trading at huge discounts. Shareholders have abandoned the stock, and will be looking for signs of improvement. Typical signs are:
1. Changes in senior management & the board
2. Asset sales
3. Restructuring of debt

Unfortunately the information provided by Forbes is not really in a useful state. We really need to import this data into a spreadsheet. I am assuming that Forbes has applied a consistent format for calculating this data, but since its a new service and not a market advisor, it would be worthwhile to check the figures. By doing that we can perform some simple analysis of financial ratios:
1. Profits as a fraction of sales: This will provide an indication of which companies have low profit margins. Certain industries have better profit margins than others, so its worth comparing the companies with industry peers. Bear in mind that two insurance companies need not be the same. One might be insuring buildings, the other is offering house insurance. We are looking for patterns at first, then we need to explain the discrepancies.
2. Earnings as a fraction of market capitalisation: This will tell you which companies are valued at a discount or premium in the market. Its like a price-earnings ratio (PER). You need to consider why the stock is trading at a premium. These are major stocks, so they tend to be high profile. So you need to know the reason for the under- or over-rating. eg. Oil companies 5 years ago were trading at a discount because because whilst oil prices were historically high, the market thought they would collapse back to $9/barrel. That perception has since changed and oil companies are amongst the largest in the world, with oil at $105/barrel up from $44/barrel at the time.
3. Profits as a fraction of assets: This will provide an indication of which companies have under-performing assets. Assets can be under-performing for a variety of reasons. The profits might be low because those assets have huge liabilities against them. Given the outlook for higher inflation, we would need to consider the risk of higher interest charges. This might be considered a negative, but steps to reduce debt would be a positive if done sooner rather than when its forced.

After identifying anomalies, comparing them with peers, and attempting to explain the anomaly in the market rating, the next step is to look at the stock chart, and to take a closer look at the company. Then I would be trying to find a CFD provider who trades that stock.
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Andrew Sheldon www.sheldonthinks.com

How serious is the US economic slump

I was recently referred to the following article . The sponsors of this report are selling reports, which are likely compelling their readers to buy gold or silver. On that point they I agree. Well better still, buy stocks since they will from this point perform even better. But I also think we are familiar with the tactics of sales people. They like to appeal to either fear or greed. Well this article is doing both. The implication of this article is that the USA is in serious strife.

Its true that in the last few months there was little good news. But then those few months follow over a decade of economic prosperity. There is no question that there was significant expansion in money supply in that period that will result in higher cost-price inflation as a consequence of asset price deflation. Falling asset prices and rising interest rates will cause the liquidation of those marginal home loans that should not have been financed. That will be part of the adjustment process. Economic activity will slow in the USA, and I have no question it will cause a recession. The next question is how long? This is not the 1920s. There is not the same level of over-capacity as there was at that time, nor is that likely to occur given the cost-price advantages of developing countries have yet to work there was fully through the market. We thus can expect any high-cost manufacturing capacity to close if there is any surplus, first in the EU because of its high EUR currency, followed by the USD. Its paradoxical but the ills of the US are what is going to save it – a low USD. It will take time, just as it will take time for the US credit bubble to deflate. The bigger issue in the short term will be the crisis of confidence.

There does remain a threat posed to the market, and that’s the existence of the derivatives market. The derivatives market is a instrument for spreading risk, but with little regulation, it is also an instrument for concentrating risk. Those hedging instruments that offer security of revenues can only be achieved if the counter-party is covering the ‘unlimited’ downside risk. These counter-parties have offsetting exposures which are supposed to protect them, but not all underwriters are the same. Some have strict operating procedures, others do not. Some take higher risk bets, others are more conservative.

We cannot forget the other engine of growth in this market, the plummeting costs of offshore outsourcing. Would you outsource if there is excess labour caused by slower economic activity? Certainly because you are competing with others facing the same cost pressures. Wages have always been rather sticky on the downside. The issue is whether this will prove to be the case in a global economy that is less rigid. Certainly inflation provides the capacity for ‘stealing’ purchasing power from wage earners. The unions have been broken globally so I don’t see tremendous wage growth. The tight labour markets worldwide is also reason for confidence. Wages are of course just another cost for services rendered which are driven by inflation, but this time I don’t see a lot of upside. The West has had the benefit of computers for decades now, however outsourcing of services to Asia and elsewhere will add another ‘productivity’ dynamic to the equation. These positives will take time to flow through to the market but they are all part of what makes this a super-cycle. It was only in 2007 that ASEAN countries have removed tariffs on 80% of their exports. That will significantly enhance the competitive dynamism in the East Asian market. A great many developing countries are benefiting from higher commodity prices. In some cases not all the benefits are following through to the people (eg. Nigeria), but in places like Ghana and Botswana, the benefits are readily apparent. Some citizens of these countries are gaining an education in the Philippines or India rather than Australia & Canada, thus adding a new dynamic to globalisation that will help fuel trade between these regions.

These trends will take time to feed through to the market so you can expect an economic slowdown, but unless there are significant signs of a deterioration in credit quality or failed derivatives brokers or investment banks, I think there is little likelihood of more severe pain. But what of the inflation that we talked about. Yes that is an issue for a deterioration in personal worth. A lot of people’s standards of living will fall back to where they were 4 years ago. Two-thirds will be stolen by falling asset prices and debt liquidation, the other third will be stolen by inflation. A great would have already been stolen by the inflation you were not even aware of. Just look at what is excluded from the CPI and you will get my point. But the other point is that we are looking at recession – and likely a short term one – because of this ‘technological & services revolution’. The other reason is that the increases in wealth have to date been fairly widespread. It will be the inflationary step which will concentrate wealth in the hands of the few.

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Andrew Sheldon www.sheldonthinks.com

Is this the end of a commodity bull run?

Is this the end of a bull run - a 366 point drop on the Dow Jones on Friday? I think it was just a correction. The drop did not break below a previous low, and it actually settled at uptrend support. But dont think that the nominal value of the Dow Jones means anything since its occurring at the same time as the USD is being debased. That is afterall what is supporting commodities, and why this commodities rally remains in place and commodity stocks are going to benefit from it. This therefore provides us with an opportunity to buy commodity based equities in the Australian market ahead of the US market opening tonight.
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Andrew Sheldon www.sheldonthinks.com