The Long Forgotten Land Of The Rising Sun.

Scanning the globe for investment destinations can be a daunting task. When it comes to stock markets, however, relative strength analysis (RSI) serves a useful purpose of highlighting under- or outperforming markets (or individual stocks) at a glance. Having perused a bunch of these charts, I find the Japanese situation stands out as being of particular interest. Now here's one fresh lead for all you desperate products managers out there !

Firstly, let’s look at the long-term chart of the Nikkei 225 Average. Japan’s stock market had an extended multi-year rally that started in earnest in the '70s and accelerated sharply in the '80s. The Nikkei peaked on December 29, 1989 at 38,915. During that devastating deflationary period that ensued, the average dropped by a massive 80.5% to 7,607 on April 28, 2003. The Nikkei then staged a recovery from 2003 until 2007 when the sub-prime fallout came into play.

Zeroing in on the shorter term, the Nikkei 225 has underperformed the Dow Jones World Index since the beginning of 2006, underperforming a basket of developed stock markets by 43% until the middle of March this year. But the tables seem to have started turning over the past three months as indicated by the relative strength graph (bottom section) in the graph above.

Being cognizant of the fact that we have seen a number of false starts on the relative chart over the past six years, which factors might result in Japanese stocks maintaining their outperformance? David Fuller ( of Fullermoney) argues that there are at least two:

1) Japan is the most efficient user of oil (although Germany is probably a close second).
2) Japan has the lowest inflation rate of any country, but it is likely to rise.

“These two factors could be significant at a time when everyone is understandably concerned about high oil prices and global inflationary problems. However, Japan has the world’s highest savings rates, partly due to the long deflation, but the prospect of higher inflation should encourage consumer demand. Also, we often hear about Japan’s demographic problems but at least that means fewer poor to feed,” said Fuller.

Furthermore, one of the single most important drivers of Japanese equities over the past few years has been the currency, its strong historical inverse relationship with the Nikkei 225.

The global interest rate outlook is important in trying to assess the outlook for the yen, especially as Japan lays claim to the world’s lowest interest rates. With the Federal Reserve on hold for the moment, and with the European Central Bank’s Trichet becoming obsessively hawkish, the yen has been under pressure against both the U.S. dollar and euro on the back of expectations of widening interest rate differentials. Also, it is highly unlikely that the Bank of Japan (BoJ) will move rates higher – even with a “hawk” such as Kazuhito Ikeo expected to join the BoJ’s rate-setting board.

Japanese stocks will probably not escape the leash effect of Wall Street’s bearish sentiment, but should be in a better position to fend off systemic downside risks. I concur with David Fuller, who regards Japan as “the best industrialized stock market for today’s economic climate.” An equally apt quote comes from a song by In the Groove: “I know that we can make it in the land of the risin’ sun!...”

Perfection Is Impossible.

"Most people acknowledge that losses will happen regardless of the type of business venture. A light bulb manufacturer knows that two out of three hundred bulbs will break. A fruit dealer knows that two out of one hundred apples will rot. Losses per se don’t bother them; unexpected losses and losing on balance does. Acknowledging that losses are part of business is one thing; taking and accepting those losses in the markets is something else entirely. In the markets, people tend to have difficulty actively (as opposed to passively as in the case of the fruit dealer and the bulb manufacturer) taking losses (i.e., accepting and controlling losses so that the business venture itself doesn’t become a loser).

This is because all losses are treated as failure; in every other area of our lives, the word loss has negative connotations. People tend to regard the words loss, wrong, bad, and failure as the same, and win, right, good and success as the same. For instance, we lose points for wrong answers on tests in school. Likewise, when we lose money in the market we think we must have been wrong.” - What I Learned Losing a Million Dollars (Jim Paul and Brendan Moynihan)

Everyone knows how to win; but, few know how to lose! Yet the secret to making money in the market is knowing how to lose, or how to control your losses. Listen to the pros:

“I’m always thinking about losing money as opposed to making money. Don’t focus on making money; focus on protecting what you have.” - Paul Tudor Jones

“The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.” - William O’Neil

“One investor’s two rules of investing: 1) Never lose money. 2) Never forget rule No. 1.” -Warren Buffett

All of those pros have different market philosophies. They have contradictory strategies for making money.

Some are traders; some are value players; some are growth-stock advocates; others are emerging-growth seekers; etc., etc. However, the message is clear: Learning how not to lose money is more important than learning how to make money. And in learning how not to lose money you have to evaluate risk.

Verily, most investors don’t want to be wrong and take a loss. They stubbornly seek perfection – a profit in every trade or investment. And, the neurotic pursuit of market perfection is the Achilles' heel of most investors. Perfection is impossible on trading the markets!

As Martin Sosnoff said in his book Silent Investor, Silent Loser: “There is only perfection in the cemetery above Omaha Beach. There no crabgrass grows among the bright green blades cropped three inches above the earth. It is truly as Walt Whitman has said, ‘The hair of the Lord.’ And the crosses stretch out in that echelon of perfect longitude. The only perfection is in death.”

Recipe For A Market Meltdown.

My father taught me many things.., one of which was to always “think positive.” As a professional trader, I’m careful not to confuse that powerful perspective with blind bullishness.

As we edge towards the midpoint of the calendar year, the bovine have reason for optimism. Despite credit contagion, debt unwinds, structural smoke, local political/geopolitical risks and a U.S. housing abyss, mainstay market proxies are only down mid-single digits.

I’ve learned a few things over the course of my career, three of which currently warrant particular attention. First, the reaction to news is more important than the news itself. Second, stay humble or the market will humble you. Third, discipline must always trump conviction.

With those lessons in tow, I wanted to explore another topic, one that few people have a motivation to discuss. It’s the risk of a seismic equity readjustment (Dow to 9700), a possibility that has much higher odds than most people currently foresee.

The market is "fluid and multi-linear"- which is a fancier way of saying that “things can change larh and they often do.” Still, the ingredients for a downside disconnect exist, conditional elements that, when brewed together, could combine for a ultra-toxic ride that will come to define THE 2008.

The Bank Bungee - The BKX (bank index) has been a prescient precursor of the S&P 500 for many years. The fact that so many now expect a decoupling between the two only serves to reinforce the risk inherent in the relationship. Quite simply, the financials must catch a sustainable bid or the S&P will get sloppy in a hurry. This, more than any other juxtaposition, remains front and center as we digest earnings from Lehman Brothers (LEH), Goldman Sachs (GS) and Morgan Stanley.

The Wild China Ride - While the rapid ascent of Chinese stocks garnered a lot of attention last year, but the watershed decline has gone largely unnoticed. Shanghai has been testing a critical technical juncture and that bears watching in the era of globalization. Last week we touched on the importance of Shanghai Composite 3000. It’s where the bubble first broke out in early 2007, a damn 50% retracement since October—fifty Fibo percent!—and that's where China must hold, particularly if it’s gonna light an upside torch into the Olympics as many have expected and prayed hard it will. Now, can it be done?

The Mood - It’s now critical to remember that the stock market crash didn’t cause the Great Depression, the Great Depression caused the stock market to crash. It was an era, not an event. Social mood and risk appetites determine price actions. I offer this in the context of the massive issuance we’ve seen in the financial sector. While they continue to ratchet terms to attract demand, buyers are becoming more selective as evidenced by the absence of Sovereign Wealth Funds in the Lehman Brothers deal. If and when failing firms fail to find capable buyers—and there are precious few players fitting that bill—the wheels on the wagon will wobble anew.

Hut, Hut, Hike! - We’re currently standing at the crossroads of our wishbone world, with inflation on one side and deflation on the other. Given the recent rhetoric from government officials—jawboning the dollar up last week and attempting to quell rate fears yesterday—it seems like that conundrum is coming to bear.

Federal Fund Futures are now pricing in a 60% chance of an autumn rate hike aimed at combating the devil we know (inflation) while turning a deaf ear towards the devil we don’t (deflation). It has always beed the market sense that this necessary evil has foreign fingerprints all over it.

Perception is reality in the financial markets. If the collective mindset shifts from “the worst is behind us” to “we’re between a rock and a hard place,” the comeuppance will be swift.

Reversal of Fortune - Conventional wisdom dictates that lower crude and a higher dollar will offer an equity panacea. Allowing some room for a Pavlov-style upside response, my take is that this is the biggest misperception in the marketplace. Since the back of the tech bubble—and contrary to stated public policy— the lower greenback has been the rising tide that lifted all asset class boats. It stands to reason that when this dynamic reverses, equities will not be immune from the swoon.

As always, our ultimate destination pales in comparison to the path that we take to get there. Therein lies the risk and by extension, potential reward in trading the market as we find our way through.

Pundits are pointing to last week’s “higher low” versus the March abyss. That, coupled with retreating input prices, could pave the way for higher prices as fund managers chase performance into a very tenuous quarter-end. How wrong they were when last Friday came!

Be that as it may—and it may well prove true—the greatest trick the devil ever pulled was convincing the world he didn’t exist. I’m here to tell you that the imbalances not only remain, they’re cumulative in both cause and effect. Everything has a karmic dimension to it.

If a downside dislocations are by definition a low probability affair. An outright bet that one will happen is a risky proposition but assimilating the probability that it could is proactively prudent.
What we know is this—regardless of which way the next ten percent manifests, the move will be obvious with the benefit of hindsight. The key—and the tenet that continues to be tested in this market—is the ability to manage risk rather than chase reward blindly.

The wheel of fortune is spinning no matter what. The market is like a casino—it has the staying power—so remember that the mechanics of the swing will always trump the results. Capital preservation, debt reduction and financial intelligence remain staunch allies as we wade our way through these unchartered waters.

Pop! Goes Iowa Corn..

By now we’ve all seen the horrific pictures of flooding in Iowa on CNN. Countless homes and businesses have been destroyed and families uprooted. It's a tragedy in every sense of the word.

And, because of what the state's famous for -- its corn -- the impact of the floods reaches far beyond Iowa’s borders. Iowa corn is used in a variety of products, ranging from the sweeteners we use in our soft drinks to cereal to packing materials. Needless to say, with all of the rain and damage the price of the commodity has soared.

Just how bad have things gotten? The price per bushel has gone from about $4 last year to around $7 now - and traders are talking about the possibility of it hitting $10. If you think you're paying a lot at the supermarket now, just wait. The longer farmers are kept out of their fields, the worse the pricing situation could become and the higher the likelihood of earnings being affected.

Don’t forget that ethanol is a corn-based fuel. The Associated Press quoted Citigroup analyst David C. Driscoll as saying, “As a result of this unprecedented weather event which has happened only twice in the last 25 years, ethanol margins have plummeted over the same ten-day time span with small and mid-size ethanol producers now running at substantial losses against cash costs."

Finally, a lot of chickens and pigs and other farm animals eat corn-based food. To the point, the cost of raising those animals could go up as well, which probably means higher prices for that Ori KFC you so enjoy or the bacon you're given to wolfing down at breakfast.

So stay tuned. However things shake out over the next few days will have a big impact on your wallet.

Here's How To Profit From Subsidy Scheme.

Joe Singh : Can't believe that the people advising our premier could have thought about a RM625 annual subsidy for every private car owner (2000 cc and below)in lieu of govt subsidised fuel at the pump!

Oh, this is so beautiful, if not downright scary. You see, I have a car (30 year-old Toyota Corona) which at market value would be probably 800 to 1,500 ringgit max. Now, I have just got the wildest, most brainy idea that only a Bayi can think of...I go out tomorrow and buy another 10 cars (each maybe about 500 to 800 ringgit) being sold off by desperate owners because nobody wants them.

The cars are ready-for-the-scrapyard kind but just barely good enough for a Puspakom inspection and a transfer of ownership effected to me. Then I just find a place to store all of these cars (or I could even scrap them and have cash in hand from the besi buruk man) and then armed with only the registration cards of each car, I proceed to take a 3rd party insurance (about 60 ringgit without any NCB per car) and pop in to my friendly Pos Malaysia or JPJ office and spend about 70 ringgit to 100 ringgit for each car for a one year road tax disc.

I spend about roughly 150 ringgit for this procedure and now I hold my breath as the man or lady behind the counter proceed to issue a RM625 ringgit postal order in my name for every card presented at the counter...

My yearly cost is RM 150 and I get RM 625 in return. A whopping RM 475 profit that is equivalent to a 12,000 ringgit in fixed deposit for a year. I rest my case... I think I may be on to something. Give me a little credit though... I also wants to be an adviser to the PM like everyone else in this country ;-)

http://www.youtube.com/v/IEuz7bOO5_U&hl=en&rel=0">

It Ain't Over Till It's Over.

Since topping out in October 2007, global stock markets have been characterized by two distinct phases: a decline through January/March this year, and then a rebound until mid-May. The predominantly weak undertone of the past few weeks has naturally again raised the question of whether the strength from January/March until three weeks ago has simply been a bear market rally, or whether it in fact was a longer-term upturn in stock markets’ fortunes.

The Dow still has a date with destiny on the downside, and I went on record last year calling a primary bear trend for the U.S. (and most other developed) stock markets, and more recently described the most likely medium-term scenario as a “muddle-through” type of pattern . And this view still makes sense.

First up is a long-term chart of the S&P 500 Index together with a simple 12-month rate of change (or momentum) indicator. Although monthly indicators are of little help when it comes to market timing, they do come in handy for defining the primary trend. An ROC line below zero depicts bear trends as experienced in 1991, 1994, 2000 to 2003, and again since December 2007.

Next up is a monthly graph of the Dow Jones Industrial Index and its MACD oscillator. The fact that it has been in negative territory since December 2007 serves as confirmation of a primary bear trend.

Primary bear trends, however, are not non-stop declining trends and are made up of secondary up and down wiggles. In order to determine where in the bear phase we find ourselves at this point in time, let’s look at a number of shorter-term indicators.

The next chart is the CBOE Volatility Index ("THE FEAR INDEX" or VIX- shown above and on the left side of the page), an indicator that moves in the opposite direction to stock prices and shows the level of complacency (lower values) or nervousness (higher values) of market participants. The present level of 21 still has a way to go before reaching the 30 plus levels of August and October 2007 and January and March this year, but may not necessarily reach those levels in this movement as various oscillators are starting to approach overbought conditions.

Although banks are looking oversold on short-term considerations, they would need a longer convalescence period in order to rebuild their balance sheets. And until this key sector shows clear signs of a reversal, I have difficulty seeing the primary bear trend turning around in a hurry. Furthermore, the market is still dangerous, and Monday and Tuesday will be 90 degrees in time from the March low... These are potent reversal dates! I am not in the “end of the world” school, but also have little reason to see a more optimistic scenario than “muddle-through” action, typified by sub-optimal returns.

Do Not Be Divided.

"You shall hold fast to the bond with God, all of you, and do not be divided. Recall God's

blessings upon you - you used to be enemies and He reconciled your hearts. By His grace, you

became brethren. You were at the brink of a pit of fire, and He saved you there from."

- (3:103) The Quran.

This beautiful message in verse 103 of chapter 3 of the Quran is simple: Do not be divided!

Bernanke's Nose Is Growing Longer..

I've been staring in amusement at Ben Bernanke's latest proclamation: "Danger of downturn appears to have faded":

"Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned, Federal Reserve Chairman Ben Bernanke said Monday.

"The Fed's powerful doses of interest rate cuts, the government's $168 billion stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump and still solid demand from abroad for U.S. exports should help the economy over the remainder of this year", he said.

Wishful Thinking or Blatant Lie? Bernanke’s statements are like standing in front of a tsunami proclaiming "The Worst Is Over" before the wave even hits the shore.

Here's my take: Before we can say the worst is over or the danger has passed, the storm has to reach shore first. With that in mind I thought it might be interesting to look at a few headlines of things that are going to happen but have not happened yet.

The economic picture is worsening across the board. And not just in the US but in the UK and Europe as well. A housing bust is now underway in the UK. Inquiring minds may wish to consider UK Housing Market Seizes Up. In the meantime, Until Things That Have Not Happened Yet Do Happen, it defies credibility to suggest that danger has faded.

Micheal W. Masters' Testimony.

http://hsgac.senate.gov/public/_files/052008Masters.pdf

Sharp Default Spike in Prime Mortgages.

Economic data in the past two days supports the view that the American consumer may finally be rolling over.

Last night's non-farm payroll data showed the biggest jump in unemployment since 1986, from 5.1% to 5.5%. While job losses were in line with analysts' expectations, the increase in joblessness caught investors off guard. The data was worse than expected.

As for mounting evidence the economic malaise is spreading up the socio-economic ladder, data released yesterday from the Mortgage Bankers Association shows prime mortgages are following their subprime brethren into the abyss.

According to The Wall Street Journal, 39% of subprime borrowers with adjustable rate mortgages are at least one month past due, while 10% of prime adjustable rate mortgages, or prime ARMs, are late on their payments. Prime defaults, however, are rising more rapidly. Things are getting worst off than better.

The prime market dwarfs that of subprime loans. While many are looking at Alt-A -- the market between prime and subprime -- as the next shoe, prime is far and away the bigger risk.

Prime mortgage-backed securities, especially those backed by Fannie Mae (FNM) and Freddie Mac (FRE), are structured to handle very few losses. Even though prime default rates are still much lower than subprime on an abslute basis, deviations from historical trends blow up securities, no just high delinquency rates.

Mathematical models used to create mortgage-backed securities analyze historical data to predict default rates and movements in the prices of homes. Property values have already fallen more than expected, reducing the worth of mortgage-backed bonds. As delinquencies rise relative to historic norms, prime securities will face the same cash shortfalls that have destroyed the value of subprime bonds.

Money center banks like JPMorgan Chase (JPM) and Bank of America (BAC) have thus far skirted many of the same subprime-related losses that ensnared Citigroup (C) and Merrill Lynch (MER). Their focus on borrowers with better credit has helped keep them out of the mire.
As economic conditions worsen and home prices continue to fall, prime securities will become increasingly toxic. The fallout is likely to materialze in 2008 or early 2009, but its a very long train, running down a very steep hill. Investors would be wise to step aside and let it pass...

Itu Batu Je !

Cows Are Flying.

There's one commodity group down year-to-date: Livestock. Among the few items I haven't seen picked apart on the much debated CPI report about runaway inflation was the fact that nine different meat indexes were down in price year-over-year. Yes, the U.S. government officially tracks“Chuck Roast” and all its cousins. But you were told everything is going up?

Here’s the deal, ranchers were liquidating their herds not because they wanted to, at lower and lower prices, but because they had to. Their costs were going higher and higher.

Pressure on crops of cattle feed had supply so low that there was yet another clue hidden inside the widely discussed USDA planting report in March. Pasture land (for grazing herds) was turned into crop rows.

So what happens if tons of supply of cattle are taken off the market at the same time that, and this part might be the safest prediction I’ve made in my career, Americans decide they still like to eat? A look at the April 2009 Live Cattle futures contract, predicting a much different story than 2008’s falling prices. Cows are flying now!