Birchtree's Account Talk

[Soldat]

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No offense taken sir.
I entered service in Oct 2003 and have spent 209 days in Iraq so far. I think that the next presidential elections may disrupt the economic growth of this nation. And the temporary boost of a war economy lasts only as long as the war. Of any other matters I have little opinion of any significance except that I am very conservative when it comes to politics. But then again, I am sitting in the I fund.

Warm Regards,
-West

 

[Birchtree]

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Looking at a graph of the Nikkei Stock Average-Japan and the Dow Jones Stoxx 600-Europe, in comparison to the Dow Jones Industrial Average-U.S., the Dow would have to gain at least 20% to catch up with the positive momentum. I think this is where the future is headed - we will play catch up.

From the WSJ: A year ago, money managers agonozed over whether Japan - home to the world's second-biggest economy after the U.S. - could pull itself out of a decade long funk. This summer, the big debate was over whether the rally in Japan's stock market - about to overtake London as the world's No2 by value behind Wall Street - had staying power. Now, the leading question for global investors is whether it makes sense to jump on a bullet train that has left the station.

The answer, say many investment managers and strategists, is yes. Last week, First Global Ltd, a British brokerage house that has been positive on Japan for months, told clients to "Buy,Buy, Buy Japan". It predicted the 225-share Nikkei, which closed at 14170.87 yesterday, would soar 48% to 69% to as high as 24,000 by the end of 2006.

But be warned. The Japanese stock market won't likely be a one-way express trip to riches. Sure, the Nikkei is up 23% this year, and it is 86% above its lows of April 2003. Some investors fear Japanese shares have climbed too far, too fast. Even so, many investors remain optimistic. At the start of the year, the $440 million Driehaus International Discovery Fund had 16% of its assets invested in Japan. Now it has 33%. Noting that rising earnings beget rising share prices. Japanese stocks, especially in the small and midcapitalization ranges, have been revising their earnings forecasts upward and then meeting or beating those revised forecasts.

Investors are impressed by Japan's strengthening domestic demand, the fading deflation in the country's property market and rising machine-tool orders, which reflect the replacement of Japan's aging capital stock and demand from fast-growing economies such as Russia and China. The rally will continue and USA is next.

 

[Birchtree]

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A little more on the I fund.

Japan is one market that appears to be in a secular upswing. I'll be darned glad when someone finally states that the good old USA is in another secular upswing. The country's (Japan) economic recovery seems to have taken hold, the price pendulum is swinging away from deflation, and political and corporate reforms appear to be gaining momentum. If those trends remain favorable, the Nikkei index could have considerable further to go on the upside. Yey.

 

[Birchtree]

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This is a post to myself as a reminder of my contrarian nature that I can review later as we ease into 2006.

A number of participants are experiencing optimism and excitement on the emotional market roller coaster. I have just made it past hope and am looking for relief -it will be a long time yet before I reach optimism, but I'm patient. As a matter of fact I'd sacrifice excitement, thrill, and euphoria for a quiet prolonged 60 degree elevation phase of market activity like 1995 or 2003, leading to another plateau.

Currently there is a potential formation of a negative divergence between NYSE breadth and the S&P 500 priceindex high which if not confirmed would start the clock for the end of the bull run from the 2002-03 price lows. Watch NYSE cumulative composite and NYSE cumulative common for establishment of new highs of AD lines to confirm the S&P 500 price index high.

The NYSE breadth MCO continued to move higher Friday and has broken the declining tops line. With this particular sequence the MCSUM is more important tool of the two (MCO). The NYSE volume MCO reached new highs 11/18. SPX volume MCO at new recovery highs on 11/18, SPX volume MCSUM went above zero line 11/18.

For the first time since March 2003 bottoms, the S&P 500 price index made new recovery highs on Friday (1248.27) without the benefit of either the NYSE composite or NYSE common stocks only advance/decline lines in providing the proper foundation to do so. So unless the A/D lines start playing catch up in the next few weeks, and make new highs of their own, this type of divergence suggests that not only will broader market participation continue to narrow, but in a bigger sense, any further price rallies will be technically within the context of a bear market just as was seen back un the 1998-2000 topping period.

Both NYSE common-only and composite AD lines are lagging price, breadth in the common stocks is exhibiting better relative strength than the NYSE composite breadth. The relative strength disparity is due to the weakness in the uncommon issues. The NYSE composite AD MCO is at +33, the NYSE common-only AD MCO is at +50, thus the 1600 Uncommon issues are tempering the magnitude potential of the NYSE composite AD MCO.

The common only cumulative AD line 4620 net, raw advances to exceed its August 2005 high (NYSE composite AD line needs 8511 net, raw advances), thus with continued participation by the common stocks in tandem with further price appreciation, a new high in the common-only cumulative AD line, as well as the composite, is certainly possible.

Based on history, failure of the AD lines to confirm price recovery highs would result in the final price highs being several months to more than a year away from the cumulative AD line highs. There have been exceptions in the past, but since the mid-1950s, prices declines greater than 10% do not begin at cumulative AD line recovery highs. I don't want to be blindsided by this divergence.

 

[Birchtree]

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From TWSJ regarding ECB plans.

The European Central Bank signaled that it is poised to raise interest rates earlier than some traders had expected - stirring up currency markets and raising questions about when the dollar's surprisingly strong rise might start losing steam.

Year-to-date, the dollar is up 15.3% against the euro and 16.3% against the yen. Jean-Claude Trichet, president of the ECB, indicated the bank will raise its key interest rate on Dec. 1 for the first time in five years, a sign that the global inflation trend has now reached slow growth Europe.

The move, an attempt to maintain the bank's inflation-fighting credentials, is likely to anger European governments who fear any action that could endanger a delicate recovery in the 12-nation euro zone. But most economists say that the ECB isn't about to embark on a series of swift increases like the U.S. Federal Reserve. The ECB's current key rate of 2% is the lowest level in some euro-zone countries in more than a century. The higher interest rates in the U.S.-where the key federal funds rate is at 4% and expected to climb- have helped boost the dollar this year bt attracting foreign capital to higher yielding U.S. debt securities.

By Friday afternoon, many traders had decided that even if the ECB plans to act sooner rather than later, the Federal Reserve is still generally expected to raise U.S. interest rates at least another half percentage point. So interest-rate differentials will still widen, and favor the U.S.

Some analyst suggest that the dollar's powerful rise against the euro this year may be coming to an end. However, traders may be reluctant to sell dollars right now when many U.S. companies appear to be repatriating overseas profits in order to take advantage of a limited tax break that ends for most companies in 2005. Some incestors may also be skeptical about how much the ECB will tughten.

Inflation is currently 2.5%, well above the bank's aim of keeping inflation just under 2%. The ECB will miss its inflation target for a sixth consecutive year this year, a bad track record for a bank that has only been in operation seven years. Euro-zone finance ministers have said after recent meetings with Mr. Trichet that they don't share his concerns about inflation. Higher rates mean that they will have to pay more to finance their burgeoning budget deficits.

Generally, economists believe the ECB's move won't derail growth. Gross domestic product in the euro zone grew 0.6% from July to September, or an annualized rate of 2.4%. That was better than the sluggish 0.3% in the previous quarter. With this very mild and moderate increase, the ECB is probably not jeopardizing the recovery.

 

[Birchtree]

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Since the bull market began in 2003, the up-down volume MCO (McClellan Oscillator) for common stocks has telegraphed an initiation thrust when the MCO did not violate its -85 level prior to rallying above +75. In mid October 2005, this indicator bottomed at -74 and closed at +79 on 11/22/05. Higher price highs have followed any near term price weakness over the past four of these patterns. When UD MCO momentum lows are below -85 level, then rally above +74, prior advances typically terminate at the MCO's peak and lower price lows follow over the next few months. The criteria for lower price lows going forward have not been met on this most recent UD MCO pattern. The higher the MCO low prior to exceeding the +75 level, the stronger the ensuing price move.

The McClellan Oscillator leads at market tops. As a consequence, after the MCO peaks and starts down toward zero, the stock market averages often continue to rise for several trading sessions, or at times, even a week or more.

I plan to update my oceanic account next Monday - 11/28. It's still growing.

 

[Birchtree]

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From TWSJ

The dollar is experiencing some of its biggest gains in years against the yen and other Asian currencies, lowering prices for Americans on many imports while threatening U.S. economic growth and reviving legislation aimed at protecting domestic manufacturers. A prolonged weak yen would have significant implications and perhaps even rekindle U.S.-Japanese trade tensions.

The weak yen could boost Japan's economy by making its products more competitive at the expense of U.S. companies, particularly the struggling auto industry, which is shedding assets and workers to cut costs. Toyota Motor is expected to see a boost of 5% to 10% to its profit just from the dollar's strength during the year ending in March. Recently the dollar hit a 25-month high versus the yen and is now up 14% this year against the Japanese currency. That is the dollar's biggest rise since it gained 16% versus the yen in 2001. In addition, the dollar has risen 12% this year against the euro, and has chalked up advances against other European currencies.

The dollar's gains mark a reversal for the U.S. currency, which fell against most major currencies from 2002 to 2004 and lost nearly half its value against the euro during that period. Analyst had widely expected the dollar to continue its selloff in 2005. Perhaps the biggest surprise is its strength against the yen. Those gains have come even as Japan's economy appears to be at the start of a significant turnaround - potentially ending more than a decade of sluggishness - and the Tokyo stock market is hitting multiyear highs.

At the start of the year, the investment community was very bullish on Asia. The currencies performance is clearly surprising. One piece of the puzzle: In Japan, interest rates have stayed low to jump-start the economy, while in the U.S. the Federal Reserve's interest rate increases have continued for longer than many observers expected. With the last boost to 4%, this has produced an unexpectedly wide gap between rates, which helps the dollar by luring in foreign money in pursuit of higher returns.

Indeed, a significant chunk of money is coming to the U.S. from Japan. The strengthening economy there is making the Japanese feel richer and more eager to invest. But investing at home is relatively unattractive with long-term interest rates still around 1.5%. So Japan's newly confident investors are sending more money overseas, buying up U.S. Treasury bonds, mutual funds that invest in foreign bonds and even real estate, like hotels in Guam. They are buying everything from NewYork real estate to American securities to corporations to their hard assets. That's what's driving the currency market.

During the first eight months of this year, Japanese investors poured a net 14.5 trillion yen, or $126 billion, into foreign stocks and bonds, up 19% from the same period the previous year. If the current pace continues, such investments for 2005 will be the highest since 1989, when the government started compiling the current data, surpassing last year's $174 billion. (And finally we get the answer) To buy dollar-based assets, investors first have to sell their yen to buy the U.S. currency, which makes the weaker against the dollar.

With the dollar gaining strength and making foreign goods less costly, imports have been rising. Over the first eight months of this year, U.S. imports totaled $1.1 trillion up 15% from $950 billion in the year earlier period.

Despite the dollar's recent strength, most foreign-exchange analyst remain undeterred that an Asian currency rally simply has been delayed - not derailed. They will rally when the Fed stops tightening.

Also, keep in mind that the Chinese yuan is still undervalued against the dollar by 30% to 40%. A sustained period of dollar appreciation will hurt some exporters and could cause the trade deficit to widen further, but the impact will be minimal because the real action on our trade balance is with the yuan.

 

[Birchtree]

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Japan's shares powered ahead for the seventh straight session and hit a near-five-year high Friday, while other Asia indexes put in a mixed performance. European stocks rose as resource stocks provided support. Ovrerall, the Dow Jones World Stock Index rose 0.03%, or 0.08, to 230.15.

In Tokyo, the 225-share Nikkei Stock Average rose 41.71 points, or 0.3%, to 14784.29. Mitsubishi UFJ Financial, the world's biggest bank by assets, had record earnings, rising 4.7% and leading the banking sector higher. Second ranked Mizuho Financial Group jumped 5.2% and third-place Sumitomo Mitsui Financial Group rose 5.5%. Haseko soared 9.4% after the condominium builder posted a 37% on-year rise in group net profit. Folks, just follow the rising sun - they are leading the way to prosperity.

 

[Birchtree]

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Looking back on 10/31 the oceanic was at $876K which was down $65K for the month. Today the account sits at $924K which is a come back of $48K so far for the month of November. I feel confident I'll test the $1M mark before the end of December. When that happens I'm going on a stock buying binge - before the rally gets too high and special stocks get overly expensive. As of COB today I've made a gain of $1.02 in my tugboat account and I am content with that gain - but I suspect there will be more to go. Dollar cost averaging does pay off.

I notice the dollar is at a 27 month high against the yen. I personally don't worry too much about the currency movements - they are all cyclical in a trading range. The yen was the main loser overnight, after Japan reported its nationwide core consumer price index for October was flat on the year as expected. However, Tokyo CPI for November slipped 0.3%, compared with forecasts for a 0.2% fall. While the Bank of Japan uses nation-wide core CPI as a benchmark for its ultraeasy monetary policy, Tokyo CPI is considered a leading indicator of price trends, so the results suggested the end of the bank's ultraeasy monetary policy remains some way off. The data come as the Japanese government ratches up the pressure on the bank not to tighten policy in the near term. Officials have warned the economy remains too fragile for the bank to be looking to tighten its stance. The domestic economy remains in a state of mild deflation, and the government and central bank must continue to work to get prices rising.

 

[Birchtree]

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Both the Nikkei at 15,324 +193.74 and the Hang Sang at 15,068 +130.97 are rocking. Market futures are also up. It's time to pay up to play, if not you will be forced to pay up even more later to play. Why wait?

New all time highs on the Dow (better than 11,722.98) by the end of this year still looks very doable.

The NYSE composite and common only A/D lines have still yet to confirm the recent price highs, but they made good progress today at 3 to 1 ratios.

We still need a bit more of a push as it applies to the NYSE and NASDAQ MCSUM's to actually feel comfortable that we have more than the end of the year to enjoy this current advance. NYSE composite most likely will make a new all time high tomorrow. I believe the Wilshire 5000 did do a new all time high today at 12,702.41.

 

[Birchtree]

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For the I fund lover in you. Remember Japan comprises 22.6% of the I fund.

The growing strength in Japan's economy sent the Nikkei Stock Average to a five-year high, zooming past the 15,000 mark. Sustaining those gains will depend in part on whether Japan can keep moving toward U.S. style practices for how companies and markets are run. The Nikkei hadn't closed above 15000 since December 2000. Yesterday, the 225-stock Nikkei rose 291.10 to 15,421.60, leaving it up 33% for the year. The rally is supported by the notion that Japan's economy is finally escaping a stubborn spell of deflation - a general fall in prices - that had haunted the nation for years, and consumers and companies alike are regaining the confidence needed to keep the economy growing.

Beneath the economic indicators, a raft of deep, structural changes have taken place in Japan's financial market over the past few years, from improvements in corporate governance to tougher market rules. While few international fund managers believe financial disclosure and minority shareholder treatment in Japan are on par with the U.S., many say the situation is much improved. A lot of walls between investors and Japanese companies are being torn down. That removes some of the risk from the market. The changes are making Japanese companies a more attractive investment for a broader audience, including foreigners and individual investors, and could increase the likelihood that the market will continue to rise over the long term.

 

[Birchtree]

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For decades, Japanese companies and banks held each other's shares to cement business ties, a practice known as cross-shareholding. During the economic slump of the 1990s, they started to sell off these shares - one factor that kept share prices falling for years. Stocks held as cross-shareholdings have dropped to below 20% of all shares on Japan's three main exchanges in term of market capitalization, from more than 50% in the early 1990s.

As banks and business partners unloaded their shares, foreign investors picked them up and now own about a quarter of all listed stocks in Japan. After shying away from the market for years, many domestic individual investors have come back to the market in recent months, either through online discount brokers, mutual funds or the country's fledgling retirement-savings system, which is similar to 401(K) plans in the U.S.

The Nikkei has enjoyed periodic rallies since falling from its peak of 38915.87 in December 1989. Those rallies always fizzled out, and eventually the index reached a low of 7660.62 in April 2003, down 80% from its peak. The Birchtree purchased his initial position in July 2002 and has been dollar cost averaging ever since. I confess it's actually my wifes' position and her retirement money that is growing.

 

[Birchtree]

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Despite global investors growing enthusiasm for the Tokyo market, Japan's institutional investors, even after this year's rally, remain big sellers of Japanese stocks. Unable to shake off their deep skepticism after the prolonged bear market, many corporate pension funds and insurance companies keep their domestic-stock allocations at historically low levels and unload shares as soon as the market rises. In October, for example, Japanese financial institutions, including insurers and custodian banks for pension assets, sold 1.1 trillion yen ($9.18 billion) of stock, roughly equal to the combined net purchases by foreign investors and Japanese individuals. In my opioion, smart money looks out of touch.

Even without Japanese institutional investors, experts say a broader investor base will likely reduce the huge volatility in the Japanese stock market, which is often compared with an emerging market rather than a mature market in a developed economy. What's more, these new investors, along with newly aggressive Japanese pension funds, are beginning to speak up and demand more from companies. The unwinding of cross-shareholdings has ked to the creation of "shareholder capitalism" in Japan, where corporate management must respond to shareholders' demand for things like higher dividends and share buybacks. Some expect Japanese stock prices to rise an additional 15% next year. I'm staying through the end of 2006 at least.

 

[Sr]

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Birchtree wrote:

For the I fund lover in you. Remember Japan comprises 22.6% of the I fund.

Indeed. However, it is the other 77.4% with lots of old europe. Wishthere wasmore Latin America to make it more "international"

 

[Birchtree]

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The NYSE breadth MCO is just below last weeks levels.

The NYSE breadth MCSUM is above its zero line.

The NASDAQ breadth MCSUM is now finally at the zero line.

If breadth does infact lead price - we may have further to go with this current momentum, perhaps into January'06. Looking for a 4 to 1 ratio day real soon, similar to the run in 2003. My friends at Merrill have turned decidedly cautious - which is actually a very good contrarian sign. Gotta track down some Elliott Wave people and see if they're still bearish - hope so.

 

[Birchtree]

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Found a EWP guy - At present on shorter swings the DOW is moving up well above its Bull Control line. Thus short term until the line is broken, EWP short term is bullish and looking for a top or reversal due to the Bearish pattern. Long term they are still bearish - I'm so grateful.

Perhaps recently the strength in the Nikkei 225 has been discounting the future in anticipation of the easy monetary policy ending in April'06. See what you think.

Bank of Japan Gov. Toshihiko Fukui said that core consumer prices not only mauy turn up soon, but also may stay higher once they do, suggesting he believes an end to the central bank's ultra-easy monetary policy is drawing near. In a speech to business leaders, Mr Fukui repeated the central bank's view thay year-to-year changes in the core consumer-price index will likely turn up toward the end of the year as special factors weighing on prices taper off, bringing an end to deflation.

But he went one step further, adding: "I believe the CPI will not fall into negative territory once the index rises above zero", as the improving economy leads to a smaller gap between supply and demand. Mr Fukui's bullish view on prices, coming despite signs in other data of persistant deflation, underscores his confidence that conditions to allow the central bank to exit the quantitative easing policy will soon fall into place.

 

[Birchtree]

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The central bank has vowed to keep its quantitative-easing framework, under which the Bank of Japan floods the market with extra cash and keeps short-term rates anchored near zero, until the core consumer-price index stabilizes above zero, and central-bank board members agree that deflation won't return.

Earlier, gross-domestic-product data released by the government showed that while Japan's economy posted annualized growth of 1.7% for the July-September quarter, the GDP deflator - a measure of price changes - fell 1.1% from the previous quarter, worse than 0.9% drop in the April-June quarter. The GDP deflator is watched closely by the government as a gauge of deflation. Some analyst said the deterioration in the indicator could make it harder for the central bank to end its ultra-easy policy any time soon.

It would be an uphill battle for the BOJ if it hopes to end its quantitative easing policy by spring. But Mr. Fukui said that the chances of the central bank ending its current quantitative-easing policy will increase next fiscal year, which starts in April. How high will the Nikkei 225 be by then? Then will it be ready for a multi-month correction? Have to set a strategy - never mind how the dollar trades - not important to the trend.

 

[Birchtree]

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Baby I love your way everyday.

Productivity of the U.S. nonfarm business sector surged at a 4.7% annual rate in the third quarter, revised up from 4.1%. Unit labor costs-a gauge of wage-push inflationary pressures-fell at a 1% annual rate in the quarter, revised down from a 0.5% decrease. This is great news on the inflation front. It will be very difficult for the economy to generate any sustained rise in core inflation with unit labor costs showing such a high degree of restraint.

As measured by the Russell 2000, small stocks are up 5.9% this year, versus a gain of 4.4% for the S&P 500. Last year the R2K gained 17%, almost twice what the S&P gained. And over the five years between 2000 and 2004, the R2K gained 44% versus a decline of 8% for the S&P 500. The R2K hit an all time high in August'05, but the rally seemed to topo out in the third quarter of this year and could be on hold for next year. Of course today is another new high I presume. Some are looking for a sideways market for R2K in 2006 and 2997, earnings need to catch up with the huge run the stocks have had. My wife will hold her position a while longer.

The euro was around 142.52 yen, its highest since the European single currency was launched in 1999. Move over Simca, here comes Lexus.

 

[Soldat]

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I just love throwing wood on the fire. Dennis, what do you think of the S&P outperforming the small/mid caps today at several points? Could this be something we see more of, and why?

 

[Birchtree]

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It all comes down to valuation. In many ways we're at the inverse of where we were in late 1999. In the late 1990s' everyone loved large-cap, high-visibility growth, technology-oriented funds and stocks and no one wanted to buy things like REITs or small-cap value or commodities. Yet those were exactly what you needed to add to your portfolio if you wanted to survive the next five years.

Today we're at the opposite position. Real estate has had a great run, small-cap value has done phenomenally well and if there is a discount in the market, it's in the larger-cap, higher-quality names. It seems to me that there is a real opportunity to perhaps tilt a portfolio that way. If nothing else, it makes sense to be looking at your portfolio and making sure that market appreciation hasn't tilted you very heavily towards things like real estate and small-cap value and make sure that you've got some balance in the portfolio.

Sometimes it pays to be contrarian - that's why I'm 100% C fund. If the Fed does stop increasing rates (and they will eventually) this would further stimulate business in financial companies, whose costs go up faster than their income when rates are rising. Because financial stocks are the biggest group in the S&P 500, representing more than 20% of the index, their fortunes have a big impact on the index's performance. There is also a nice technology compliment in there that has been lagging so far, not to mention some of the energy plays.

I plan to be lightening my small-cap load over the next 6 months - easing into some of the energy related mid-caps. And holding my large-cap positions.