Market Update: 2008-10-03

Good morning, or is it? With another 159,000 jobs disappearing last month, factory orders and manufacturing activity in decline, and the financial sector in turmoil, at least we can be comforted in the fact that Mr. McCain and Mrs. Palin believe the fundamentals of the U.S. economy are strong. What?  We are in recession? What I meant to say is at least we can be comforted in the fact that Mr. McCain and Mrs. Palin believe the fundamentals of the American workers are strong. I guess they mean that American workers are strong emotionally, which makes perfect sense to me since after our ninth month in a row of losing jobs in this economy, American workers must be strong or else they would be a little upset by now.

On the bright side, it looks like Wells Fargo is now going to actually pay Wachovia shareholders, including yours truly, a whopping $7/share. That is 7 times more than Citigroup had agreed to pay in their government-backed "agreement in principle" on Monday morning. Apparently the Wells Fargo-Wachovia deal doesn't include any government backing from what I am hearing, which is good because 1) it shows that some banks are actually willing to pay a market price for taking on some additional risk and 2) the U.S. government and FDIC can now keep a little money in the their pocket to help cover the next bank that falls into trouble. Since Citigroup was and still is one of the banks that the market has told us is in poor health, the Citi that never sleeps didn't need to take on Wachovia's mess in the first place. Who knows, if the next time FDIC and Citigroup have to get together the topic of discussion might be who is going to take on Citigroup itself rather than who the government wants the sleep-deprived bank to buy.

And speaking of banking slogans, what exactly makes Morgan Stanley so “World Wise?” Maybe the fact that MS is very experienced of late in begging around the world for capital injections from countries as far away as China? Sorry, I just had to go there.

And finally I get to the reason behind today's posting. Last night, 19 years into Japan's secular bear market, the Nikkei 225 closed under 11000 (10938 to be exact). During the past 15 months we have witnessed a brutal cyclical bear market for Japan, as the Nikkei is now down 40% from its cyclical bull market high of 18262 on July 9, 2007. To put that in perspective, none of the three major U.S. stock indexes are down even 30% from their 2007 highs yet! And to really put the 10938 level in perspective, the Nikkei's all-time closing high was made a few years back, uh, on the afternoon of December 29, 1989 when it closed at 38916. WOW! That was almost 19 years ago. As of today, the Nikkei is still down 72% from where it was in 1989! In my humble opinion, the poor Nikkei represents the fallout from one of the world's largest investment and stock market bubbles in history. And the Nasdaq, which also closed yesterday 61% lower than its all-time closing high of 5049 that was made on March 10, 2000, and U.S. markets in general, represent what is likely the middle chapter of a story similar to what has been told in Japan. Bubbles, whether they are in construction, stocks or just a mountain of wonderful American debt, never end well.

The good news is, if the history of America's unwinding in the 1930s and 1940s tells us anything, after nearly 20 years of negative market action in Japan it is probably just about done being down 70-80%. I predict that we are in the final phase of Japan's secular (i.e. long-term) bear market. We are now testing the lows of 2003 when the Nikkei fell below 8000. Sometime in the next year or so once we are done with this test, I expect that Japan will finally begin to come back to life.  And it will be for real this time. They have cleaned up a lot of their corporate problems, and after nearly 20 years of despair, Japan’s stock market will finally see the light at the end of the tunnel. If you don't already have exposure to Japan's market, now is the time of your life to add Japanese shares to your portfolio. I own EWJ which is an ETF comprised of shares of several hundred Japanese companies. Japan is actually my largest holding, as I have more money in Japan than China, gold mining, banks or anything else. I did acquire a lot of these shares around the bottom in 2003, and have been buying more this year as Japan has continued to falter. It is times like this, when negativity runs rampant, that you want to buy. Japan is screaming "I have fallen, and I can't get up!" And I am confident in my decision to make my small contribution, for whatever it is worth, to rescue Japanese shares. If I didn't already own so much, I would buy more EWJ today. However, I want to keep my powder dry to buy more China, Oil & Gas Services, and Technology shares, as their prices are being slashed for this holiday shopping season. Diversity is key as you always want to spread your risk around a bit.

We will know more about when Japan finally decides to wake up later. Until then, Happy Investing!

Gregory