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Japan: The Pivot Point Between The U.S. And China.
Oil: The $64 Question.
Stocks: Inflation And Post Katrina Damage.
by Dr. Joe Duarte,
Dallas, TX, September 12, 2005, 08:00 EST * excerpts from daily reports
Traders will be looking at oil infrastructure reports in the Gulf of Mexico, while keeping an eye on inflation figures and the situation in Asia, as Japan and China continue to size each other up.
Today’s Analysis: Japan: The Pivot Point Between The U.S. And China.
Japan is the new axis around which relations between the U.S. and China will revolve. And the U.S. will be dancing on a very volatile and uneasy tight rope for years to come.
Japan’s Nikkei 225 made a four year high on 9-12, rallying after Prime Minister Koyzumi cruised to a major win in a snap election seen as giving him a mandate to reform Japan’s economy. The situation is once again ratcheting up the rivalry between China and Japan for the dominant position in Asia.
Foreign money has been flowing back into Japan in expectation of a Koizumi win, and the expected landmark changes that could ensue. Among the biggest changes expected is the reform of Japan Post, a huge source of capital for the Japanese economy, whose funds are used mostly to subsidize traditional, farm related, economic programs with little positive influence on the overall Japanese economy. Most sources peg the Japan Post asset base at $3 trillion.
What makes this whole dynamic interesting, is that Koizumi’s election could change the scope of how wealth and resources are distributed in Japan. According to Reuters: “Koizumi has long promised to change the hidebound LDP (Liberal Democratic Party), which has governed Japan for most of the last 50 years, or destroy it in the attempt. The victory will strengthen his hand over remaining old-guard rivals who consider their main job to be distributing benefits to the hinterlands and interest groups.”
Signs Of Economic Strength
The Japanese economy is also experiencing a growth spurt, at least by recent Japanese standards. According to Reuters: “Revised data on Monday showed gross domestic product (GDP) rose 0.8 percent in April-June in real price-adjusted terms, beating both the initial reading for a 0.3 percent increase and economists' consensus forecast of a 0.4 percent rise.”
A different look at the numbers, though , shows an even brighter picture, according to Reuters : “On an annualised basis, GDP expanded 3.3 percent, much stronger than an initial estimate of a 1.1 percent rise and economists' median forecast of a 1.5 percent gain and putting Japan on a par with U.S. economic growth during the same period.
The Wall Street Journal reports an increase in bank lending in Japan: “After nearly a decade of consistent declines, lending by Japanese banks, excluding special factors, rose 0.2% in August, the Bank of Japan said, marking the first increase from a year earlier since the central bank started publishing this data in the current form in October 1998. The lending data, which are adjusted for write-offs of bad loans and currency fluctuations, have been improving steadily since 2002, shrinking at a slower rate from before. In July, bank lending contracted just 0.1% from a year earlier.”
Political Consequences
Around the world, thing are likely to get interesting. According to Stratfor: “The underlying tone of Koizumi's leadership thus far -- something likely to intensify if his party wins a substantial victory -- has been a renewed sense of nationalism in which Japan begins to act globally not only through economic assistance, but with its political influence and even its defense forces. This could lead to a rise in rhetorical, and potentially physical, confrontation with China.”
Energy Sector
Oil Market Summary And Outlook: The $64 Question
Oil, oil service, and natural gas stocks made new all time highs last week, setting up the potential for another run at $70 by crude oil futures. The trend in oil stocks, unless it changes drastically, is toward higher prices.
So far, the new key support level is $64, as crude oil futures held above the key level in pre-U.S. trading. A fall below $64 could take prices toward the $50 area, as there is little support below $64.
The latest round of post Katrina information shows that much of the Gulf infrastructure remains off line, with some 120 platforms still not functional, while a good portion of the refinery capacity is still not operational. Gasoline prices averaged $3.01 last week according to the Lundberg survey, a wide divergence from the less than $2.00 price now commonly seen in the futures market, and something that if continued will give some reasons to claim price gouging at the pump.
Hurricane Ophelia seems to be heading for the Atlantic and does not seem like a major factor on oil prices at the current time.
From a trading standpoint, this market remains a technical affair, a news driven market, and a weather market. Active traders should stick with exchange traded funds, such as the Oil Service HOLDRS trust which offer a good way to participate in the overall trend, but still offering liquidity and allowing for the consolidation of the trade into one position that can be liquidated and sold short when the market turns.
Our very long term opinion on oil has not changed. We are still in a very long term bull market in oil, until proven otherwise. The long term line in the sand, for us, remains $40 per barrel. That means that prices can correct to $40 and we could still be in a long term, secular bull market. If prices were to fall below $40, then the very long term trend will have likely reversed.
Technical Summary
Inflation Data And Options Expiration
Stocks will be looking at consumer and producer prices this week, as traders start to handicap what the Federal Reserve will do next. Options expire this week, also raising the specter of volatility. Oil prices, and the news from the Gulf, regarding infrastructure are also going to be a factor.
Stocks have had a nice run since the sentiment bottom in late August. The S & P 500 is challenging the 1250 area, while the Nasdaq is above 2150. The NYSE advance decline line made daily and weekly highs last week, suggesting that higher prices are possible.
Leadership remains with the biotech and medical sectors, as well as energy. Technology stocks have shown improvement, and cyclical stocks are groping from a bottom.
This remains a decent trading opportunity in some sectors of the market to go long, with some caution still warranted. As we noted on 8-31, things were getting so bad that “from a contrarian standpoint, though, it is important to keep an eye on the action in this market, as the level of devastation in New Orleans may lead to surge of pessimism and could create a buying opportunity. We would wait to see it, though, before buying aggressively. This situation is not fully factored into the markets by any means. “
Active traders should now be looking for stocks to go long on. Our trading sections have been updated, and we will continue to add stocks over the next few days, barring a trend reversal.
What To Do Now
It’s time to be slightly more aggressive, as long as you pick your spots well. As always stick with strength. See our health, technology, and biotech areas for short selling ideas.
Bonds and currencies should not be far down the list of alternatives to stocks.
About Dr. Joe Duarte
