JAPAN ASIA INVESTMENTS

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e-mail: sidklein@sidklein.com

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JAPANESE POWER &

THE IDES OF AUGUST

August 9, 2005

Nikkei: 11,000.32

*April 2003 low: 7,603.76

*- See March 31 & May 3, 2003 reports, along with April 10, 2003 ROBtv interview (5 min.), on homepage.

JAPAN:

Japanese stocks are the quiet wonder of the world. While recovery, expansion and resurrection are words that one may freely associate with Japan’s economy, banking system and stock market, as has been the case this decade, the North American media and investment community remain largely out-of-the-loop and behind the information curve (hedge funds excepted), and dramatically so when compared to Europeans.

At the end of 2004, SKC opined that the break over Nikkei 12,000 toward 15,000 should occur on 2005. During the 2nd quarter that just ended, SKC reported that it would be wise to lighten up on even Japanese Domestic Demand Oriented Value Stock (DDOVS) positions on a rally to about 11,600, basis the Nikkei, given seasonal considerations and the view that the Dow’s forecasted collapse could impose an initial negative influence on the Nikkei. While that index is not closely related with most DDOVS, as we saw during the 2000 – 2003 period, the major Japanese index’ performance does set the tone to some extent anyway, insofar as capital flows toward Japanese stocks is concerned.

Crosscurrents are becoming resolved. A couple of months ago, the intermediate term risks in Japan were clear, based on the reasons stated then, when we adopted a greater sense of caution. Simultaneously, though, indicators made it difficult to imagine the Nikkei breaking below the just-tested 10,500 zone, though the possibility of lower prices was respected.

With the Nikkei’s strength, which has taken it all the way back to 12,000, it would now be difficult to imagine any break below 10,500, no matter how bad the Dow gets! The picture in Japan has so brightened on key levels, that the worst-case scenario is not only deemed to be the mid-10,000’s, but the initially forecast upside breakout has again become possible for this year.

CONCLUSION: Apart from the uni-dimensional precious metals theme, Japanese value stocks are the only equity investment class that merits attention, as a value-oriented investment in Asia, which is the world’s largest bourgeoning region, and via that region’s most developed market and exchange.

NEW YORK:

Last month’s letter reported (re-printed excerpts in bold):

VALUATION: “The Dow’s PE multiple is at a premium to forecasted earnings growth rates. Those forecasts are not even being contested here. The reader is merely being reminded that the reason given for the new paradigm that allowed for premium multiples were that interest rates were headed toward zero. With the underpinning of that new paradigm argument gone, the Dow’s fair value is at 7,900, or so, based on a PE that reflects those consensus forecasted growth rates.”

Well, since last month, the same consensus forecast now looks for lower twelve-month forecasted earnings, while reflecting lower trailing twelve-month numbers. “Fair value” was arrived at by multiplying the forecasted growth rate – treated as an appropriate price-earnings multiple – by next year’s earnings. Obviously, by multiplying that PE by the trailing period’s earnings gave us a more discounted level around 6800.

With the very recent IBES downward revisions to both earnings and growth rates the numbers now come in at Dow 6996 and 6303, respectively! Why would SKC revise its Dow 6500 – 6800 target area?

FUNDAMENTALS: Last month’s letter reported: “According to my interpretation of the above referenced Desjardins oil study, the Dow’s coming into line with oil’s activity could take that index down to 8000 fast.”

The divergence between oil and the stock market appears unsustainable. The gap’s divergence will only be narrowed and more speedily by the fact that there is no reasonable point of view that would suggest that any oil-related relief is in sight, based simply on how prices are behaving. If that weren’t enough, investors are heavily invested in energy strategies, making that group susceptible to revaluation shocks that could damage the indices.

TECHNICALS: From last month: “Long term stochastics join other indicators in also supporting the analysis that the Dow’s decline to 8000 could be speedy, taking volatility indicators up, just as fast. The combination would spike put prices in stunning fashion.”

Intra-day, the S & P Volatility Index (VIX) hit 9.97 at the end of July, thereby perfectly re-testing the all-time low, established and re-tested 12 – 13 years ago. This is a contrary indicator that supports the analysis that the stock market has peaked. It also determines the cheapness of option time premiums. As put values are determined by time, price level and volatility, I cannot remember having seen a more positive risk/reward scenario for the Bears in New York.

CONCLUSION: Simply, with the bearish argument so well loaded, it is a further matter of great joy for this long since disenfranchised investment species, that the leverage for profiting from the anticipated stock price collapse could not come at a cheaper price. The Dow has been treading water, but is August again the month of extremes?

GOLD:

The June 28, 2005 issue of “Bullion Buzz” quoted Jimmy Rogers thus:

"Anyone who thinks there will be deflation does not understand twenty-first century central banking. There may well be a deflationary collapse later, but before that happens the government will print money until the world runs out of trees."

“Bullion Buzz” has also quoted Richard Russell as forecasting an eventual complete convergence of prices between gold and the Dow Jones (now wouldn’t that be something?!).

I have no argument with either gentleman. However, for timing, asset allocation and the strategic allocation of precious metals stocks, we consider the following:

CONCLUSION: After gold held the forecasted worst-case scenario of $410 per ounce, the metal maintained higher levels, after rallying sharply. Still, despite recent strength in certain non-big-cap issues, the poor performance of even those stocks vis-à-vis gold is cause for concern. As a result, depending on the names in question, investors are still recommended to be not more that 50% invested in a small basket of diversified gold and silver stocks. As for the metal’s role in the currency complex, one should be fully invested (see below).

DOLLAR:

With the Yen having declined toward – but not quite to – the forecasted worst-case scenario of 115, investors should be fully invested in that currency, according to the allocation. Here, that allocation is recommended to be:

50% gold

25% Yen

25% Swiss Franc

The money has been made in the Euro and there are political problems in Europe now, too. Hence SKC made a full shift to the Swiss Franc, which is also representative of gold, more than any other major currency. The Yen is tomorrow’s next major block currency and with the banking crisis in Japan resolved, greater Asian borrowing and higher Japanese interest rates are a matter of course.

In consideration of the above, one must consider the extent to which one holds Japanese (Yen-denominated) stocks, as they provide currency leverage. Similarly, holding precious metal stocks would call for a lesser exposure to the un- leveraged gold investment which, again, is only being considered in this section in the context of currency allocation.

Sid Klein

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This newsletter is solely the work of the author for the private information of intended recipients only. The views (including any recommendations) expressed in this newsletter are those of the author alone. The information contained in this newsletter is drawn from sources believed to be reliable but the accuracy and completeness of the information is not guaranteed, nor in providing it does the author assume any liability. No solicitation to buy or sell securities should be inferred from either the contents of this newsletter, nor its dissemination. Each potential investment decision and its appropriateness must be considered within the context of the entirety of the individual investor's circumstances. This information is given as of the date appearing on this newsletter and the author assumes no obligation to update the information or advise on further developments relating to the information provided herein.

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2006-02-06

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