Wednesday, August 17, 2011

Japan 2.NO

I came upon this chart on my travels through the interwebs this afternoon.  It shows the Japanese market(red line) and US Market(green line) gyrations over an approximate 30 year period...Japan from 1980 until now and the US from 1990 until now.  The first spike up in prices for the Japanese market was caused by their real estate bubble in the early 90s and the spike up in prices for the US was caused by the dot com boom.  The US markets have followed a similar trajectory as Japan for the past 20 years which has led many pundits to argue we are in a Japan 2.0 scenario of little to no growth and deflationary pressure.  This will lead to large gyrations in market valuations and a market that goes nowhere. For long term buy and hold investors, this type of scenario would be disastrous.  If the pattern holds true we are in for another collapse in stock prices over the next few years as deflation takes hold potentially catalyzed by government austerity.

I don't believe we are in for a Japan 2.0 scenario however.  There are many differences between the US and Japan which will help us to avoid a similar fate.  First off, we have the ability to look at their policy errors and learn from them.  Secondly, our demographics are much better.  They have an aging, shrinking population while the US has a younger, growing population.  Third, the magnitude of the problems are not similar.  Japanese real estate prices crashed 90% after their bubble, while US real estate has only dropped 25% or so.  Japan's banks are still hobbled by those bad loans while most of the biggest losses for US banks are behind them.  Fourthly, US corporations are much more shareholder friendly than Japanese corporations which like to hoard cash rather than pay it out to shareholders.  We can count on US corporations to try to maximize profits and try to increase dividends to pay to shareholders which helps to keep a bid in the market for stocks.  In short, I don't see how the US markets will become zombified like the Japanese markets for the past 20 years.   Japan's stock market is still down 75% from its peak in 1990.  If that were to happen in the US, the SNP 500 would be at 400 at some point over the next 10 years and I don't think there's any way thats going to happen.

It was quite a battle going on in the markets today between the bulls and the bears.  For the past two days actually.  We opened higher this morning and quickly rose 130 points on the DOW on good corporate earnings from retailers.  Sellers soon came in and the markets tanked 200 points in a couple of hours to the lows of the day down 80 pts.  At that point buyers stepped in and we made it back up to even by the end of the day.  I found it positive that we didn't end on the lows of the day.  That would have signaled a reversal to me and would have changed my opinion about the short term direction of the market.  As it is however, I am still constructive and believe we rally to 1250-1270 area on the SNP.  To me, stocks are cheap right now and I want to buy more but at the same time, there is a lot of fear and uncertainty in the markets.  I could just as easily see the SNP give back 100 pts as I could a rally up to 1250.  So at this point, I will just observe.  I am looking to get into some more AAPL but I am looking for it to rally a bit more.  My NLY is looking good as well but I would not use the same strategy as AAPL.  NLY is a stock to be bought on dips rather than chased higher on a momentum based strategy.  Gold is looking strong here but I am not going to chase it way up here at 1800.  I guess the buying opportunity was when CME raised margins and it dropped about 60 bucks in a short period of time.  That window of opportunity was so brief that it was not even worth trying to catch.  And so I patiently wishes. 

Disclosure:  Long AAPL and NLY

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