JAPAN ASIA INVESTMENTS

1001 BOUL. DE MAISONNEUVE O., BUREAU 950, MONTREAL, CANADA H3A 3C8

TEL: (514) 939-2221 FAX: (309) 417-0942

e-mail: sidklein@sidklein.com

www.sidklein.com

PRECIOUS, ISN’T IT?

(THE WAGER: THE YEAR IN REVIEW)

Dec. 10, 2004

Nikkei: 10,543.22

*April low: 7,603.76

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

JAPAN:

From the September 19, 2004 report:

“The Nikkei again topped a week prior to the end of the calendar first half and is now preparing to make a minor top, before the seasonal low that occurs in November-December, due to US tax selling. Once again, substantial double-digit gains await Japanese DDOVS shareholders, during the December-June (inclusive) period.”

The October 2, 2004 SKC report was entitled, “ERUPTION in JAPANESE STOCKS”, forewarning of, and preparing investors for this yearend period.

SKC has written about and forecast Japanese economic, financial and stock market changes at such length and in such detail as to make additional commentary here unnecessary. All the research to-date was not exercises in academia and, as such, reporting, as always, as with all markets, occurs when changes – of whatever nature - are foreseen. Simply, then, as far as Japanese research and commentary are concerned, there is nothing further to add.

NEW YORK…& OIL:

With the US elections out of the way, pent-up buying demand (liquidity) drove in the shorts and the perfect backdrop was the rather unimaginatively foreseeable pullback in oil to the $35 - $40 range. The idea was that the oil bull market would resume after such a pullback and that, quite obviously, the Dow’s bear market would then get going in earnest, after no longer having rallied with oil setbacks, in the preceding completion of the Dow peak.

Well, oil has indeed collapsed to a settlement on the January contract of $40.71, after touching down at $40.25 and the 200-day moving average! The Dow has not been rallying during these recent declines in oil, but has merely been churning at the top, to allow the public and mutual funds the opportunity to get trapped at the peak.

The S & P may move up to 1200, or it may not, but the point is moot. The Dow, SKC’s followed index, is still not forecast to cross the long since forecast February 2004 peak (see online October 2002 commentaries). The backdrop is simple: The US market is in a severe downtrend, when gauged in foreign currencies (charts available on request). Foreigners will not invest, whereas their investment had been a major under-pinning through the 1990’s.

The bears have been destroyed and put premiums are at the lowest levels in a decade. This means that bearish speculators are gone, while this superb contrary indicator (the VIX – the volatility index and principal determinant of put option premiums) is calling for a market debacle. Oil, meanwhile, will provide the media’s talking heads all the excuses they need: The resumption of the oil bull market, which will start now, I believe!

Summary: The Dow's secondary peak occurred in February 2004, as forecast in October 2002 reports, when the bottom was identified. Charts of the Dow Jones are down trending badly in foreign currency terms, which has a variety of negative implications. This recent move up was caused by ample US liquidity and the resultant squeeze on shorts. The Dow has completed five waves up in Elliott Wave terms since the US elections, and has put in place a pattern that is most reminiscent of the 2001 experience, before the Dow was viciously smashed.

Strategy: Due to the above, and the collapse in the VIX to decade old lows, late 2005 puts provide ample and significant leverage, without spreading on this occasion, despite offering longer term exposure. Downdrafts in the market, subsequent to the purchase of the here contemplated puts, will provide opportunities to recoup investment by then selling puts against that position. The income could be used to expand the position size in pursuant rallies, or may simply be used to reduce financial exposure.

To be unsuccessful, SKC’s entire post-2000 paradigm would have to be incorrect (see “selected past comments” within the “previous past comments” folder, as well as the Feb. 12, 2003 report within that same folder, at www.sidklein.com).

NIKKEI – DOW RATIO:

At the peak 15 years ago, the Nikkei traded 14X the price of the Dow. A long- term bear market in this ratio bottomed when it fell slightly and briefly under 1.00, for the first time since the Korean war. At the Japanese stock market's low, foreign investors were only 55% invested, based on the benchmark Morgan Stanley Capital Index.

Since then, hedge funds have poured into Japan in droves, seeking value, geographical diversification (Japan represents over 60% of Asia's market cap and GDP, as well as the sophisticated way of investing in that region) and exposure to the Yen. The hedge funds’ investments have been greater than at any time period since the early 1980’s. Traditionally, after them, follow the institutional investors, who have not yet begun to invest there in earnest. The ratio's bottom has been seen, but the major bull move has yet to begin.

Summary: The position is valuable to speculators, as well as institutions that wish to expediently convert US portfolios to Japanese stock holdings synthetically, while planning to convert to physical positions. By going long Nikkei futures versus short Dow positions, there exists no currency exposure, while putting on the ratio from a very low and easy to manage risk position. Leverage, meanwhile, is outstanding.

Strategy: Buy Nikkei futures against short Dow futures, using 6 and 12-month maturities, to lower trading costs. The six-month position could later be a trading vehicle, but only after the summer of 2003 high is exceeded and 1.40 or so is crossed. The next 18 months could take the Nikkei up to 15000 and the Dow down to 6500 (2.3X). The week closed with the ratio at 1.02. There are a variety of means by which to participate in this analysis, according to the investor’s needs and temperament.

GOLD:

Last week, a simple note was emailed to readers, to alert that this month’s commentary would be delayed by one week. The opportunity was used to slip in the following comment:

“The next transmission will probably contain a comment identifying a turning point in the precious metals, as SKC's two-year old targets are being achieved.

“After all, didn't "smart money" bail early, and isn't sentiment finally getting frothy out there?”

Summary:

Gold took a bath this week, falling $15.00 in a single day. More importantly, gold stocks lead the way – again – by falling in advance of the metal, and then doing relatively little on the day that gold spiked lower. In fact, several gold stocks appear to have put in spike lows on that very day!

The story is similar with silver, where the story is still more extreme.

After trading around $8.00 per ounce, cash silver at 8:05 p.m. this evening traded at $6.66. Having touched the 200-day moving average, SKC would treat this as a serious buying opportunity for committed, forward-looking, long term investors, who should perhaps not leave the occasion to be profited from, by only those who worship the dark forces.

Strategy:

Gold traded at $430.90 at 8:05 p.m. this evening, within $5.00 of meaningful support. Given that gold stocks lead, and that several have already put in reversal lows this week, selected situations already call for timely attention.

Here too, silver stocks were well out in front of the metal, getting badly hit before silver had done a thing! Certain stocks, then, have served up some really interesting longer and shorter-term investment and trading opportunities.

DOLLAR:

According to SKC’s asset allocation model - along with gold - the Yen, Euro and Swiss Franc, have remained the sole currencies held in any investment portfolio, apart from those required for the cash needs that a business or individual may have. Recent new US Dollar lows illustrate why SKC’s view regarding the new secular trend, the low of which was identified in January 2002 has not been modified.

Still, given recent price changes, alterations must be considered. First, let us examine previous months’ recommended allocations, by looking at a re-print from last month’s report:

“The following represents SKC’s currency allocation model. Gold’s allocation has been increased from 25% to 35%, at the expense of the 10% allocation that had existed for the US Dollar. Again, among the fiat currencies, SKC only covers the Yen, Euro and Swiss Franc, while gold, of course, is the hard currency.

40% Yen

35% gold

15% Swissy

10% Euro”

Summary:

In considering the following revision, bear in mind the incredible out-performance of the Euro, a currency that the crowd did not believe could go as low as it did, before the same crowd had become too disillusioned to believe in these very high return possibilities, when SKC gave its early 2002 buy signal.

In analyzing the new mix, bear in mind too that the Swiss Franc is a partial proxy for gold, as well as the Euro.

Strategy:

As of this moment, SKC’s preferred weighting would shift the 10% Euro holding to gold and the Swiss Franc. Therefore, recommended currency weightings are now as follows:

40% gold

40% Yen

20% Swiss Franc

THE WAGER:

This time last year, a man of unknown origin and background walked into a London bookie shoppe and said that he wanted to bet on a particular parlay, on condition that the odds were mathematically fair, while being competitive with US houses in Las Vegas, as well. For those of us not sophisticated to know as much, a parlay is a wager wherein each component of that wager must be correct in order to win; in other words, while the odds paid are much higher if successful, the wager loses, if even a single component of the bet fails.

Posting cash, a numbered bank account, and offering no social insurance number therefore, the gentleman laid out the parlay on which he wished to wager:

“I would wager that the Greeks are going to win the soccer championship, sending the French, Czechs and all great comers packing; that Argentina, a country better known for soccer, would defeat the US “Dream Team” at the Olympics for the basketball gold medal, and that the Boston Red Sox would win the World Series, after trailing the New York Yankees 3 – 0 in games, during the American League championships. I would wager that all three of these events would occur, on condition that the odds are sufficient.”

The manager of the bookie house responded that, due to fact that the odds were so long, he could not risk taking a bet of any exorbitant size, due to capital posting regulations and requirements.

Moreover, there was an element of rarely found compassion in such establishments: Due to the lack of social insurance number, along with other “speaks-for-themselves” factors, the manager assumed that the “gambler” was merely someone who had simply been allowed out for the weekend.

It is believed that the gambler received over 1,000,000-to-one odds, before proceeding to wager $1.00.

No one has seen or heard of the stranger since, though he is rumoured to have returned home to the year 2104, where he has (will?) exchange his “collector’s items” (cash) for the currency du jour.

On a final note: While visiting, “the traveler” never read any market letters.

HAPPY HOLIDAYS:

We presently find ourselves within the Chanukah holiday period, which Kabbalists remind us is a time for “Ness”, which is Hebrew for miracles. That would explain Mr. Future above and, perhaps, it will also lend itself to a happy, healthy and joyous Christmas and New Year’s period for all of you and, perhaps, by some miracle, for the world at large.

Happy Holidays,

Sid Klein

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This newsletter is solely the work of the author for the private information of intended recipients only. Although the author is a registered investment advisor at Desjardins Securities Inc., this is not an official publication of Desjardins Securities Inc. The views (including any recommendations) expressed in this newsletter are those of the author alone and are not those of Desjardins Securities Inc. 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 do the author or Desjardins Securities Inc. 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 neither the author nor Desjardins Securities Inc. assume any obligation to update the information or advise on further developments relating to the information provided herein.

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JAPAN ASIA INVESTMENTS

Sid Klein

2005-05-09

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