Equity Markets Look A Bad Buy – Except Japan

The long-term trading range for the Dow Jones Industrial Average continues. We expect that an end to this range will be a major indicator for the future direction of stock markets almost everywhere in the world. If it is a break to the upside above 11000 then not only will that be a positive signal for the American stock market but it will also be an absolute green light for most Asian markets, especially Japan. Below 9,700 then markets throughout the world will be threatened. Currently, to keep the guessing as hard as possible, the price is situated pretty much in the middle.

A global economic slowdown would probably trigger the next decisive leg of the primary bear market that started in 2000. One might choose to ignore the risk and instead be re-assured by the IMF who this week said that the world economy is on track in spite of rising oil prices. But we think that's like the doctor attending a sick 90-year old and saying, He should be alright, the old boy is still alive in spite of his current bout of pneumonia'.

The oil price factor is very real and unlikely to end any time soon. Global economic growth depends upon Americans continuing to irrationally consume. Their disposable income however is under siege from high gasoline (petrol) prices, impending sky-high winter heating bills and rising interest rates.

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American consumers justify their self-destructive financial behaviour, because of their increased wealth from inflated house prices. They seem to think they can indefinitely live beyond their means, which is what the global economy needs them to do.

There has been a sharp decline in the Philadelphia Exchange Housing Index, which is an index of US house builders. One key reason has been substantial insider selling. The senior management of these house building companies don't like what they can see, which we presume is a strong possibility of a deterioration in their business. Housing starts have declined for the last two consecutive months and unsold house inventory has been growing each month all of this year.

We would consider the breakdown of this housing index to be a clear signal of the "beginning of the end" of the US housing bubble. A weak US property market would lead to an about-turn by US consumers going from borrowing and spending to saving and paying down debt; a knife into the heart of global growth and a killer blow for most major equity markets.

Alan Greenspan recently brought the word conundrum' into the financial language when trying to explain why long-term interest rates were falling on the back of rising short-term interest rates. The very longest end of the government bond market is performing with virulent strength, which can only mean those very savvy bond people see something unpleasant just ahead, shrouded in mist but ugly as hell.

But we have recently added this caveat to our ongoing warning about major stock markets "we now consider Japan as the possible exception". The Japanese market is sharply higher as Prime Minister Koizumi's landslide election victory has met with considerable investor enthusiasm. Japanese GDP has surprised to the upside, growing twice as fast expected in the second quarter. The IMF has revised upwards its growth estimate and recently, the trading volumes of the Japanese stock market have hit a number of all-time record highs.

We believe Japanese equities could potentially be at the start of the next 20-year major bull market. It is not unreasonable that after a 15-year bear market that such an opportunity should arise and so far, the signs are very positive.

By R H Asset Management, in the Onassis newsletter, a fortnightly newsletter that gives insight into the investment markets.

For more from RHAM, visit https://www.rhasset.co.uk/