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

“CRASH”: PART TWO

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ASSET ALLOCATION CHANGE

May 1, 2004

Nikkei: 11,761.79

*April low: 7,603.76

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

*NOTE:

As per compliance, this letter may only be disseminated to clients of Desjardins Securities or direct subscribers (simply click on the “subscription form” link in the “Subscribe” folder, online at www.sidklein.com).

Over the past several weeks, it has been impossible to be in contact with everyone, though the process of transition is nearly complete and may not be extended beyond this month. Therefore, if not returning the linked form, please reply a wish to be contacted regarding a one-on-one discussion pertaining to a Dow related bearish strategy. Though I will attempt to speak with everyone, those with whom I will have not been in contact over the coming month and who have not replied a wish to be contacted will have access to SKC on a three-month lag, as required.

Thank you for your understanding.

JAPAN:

No economy has so consistently surprised the world to the upside and to such a degree over the past two years. Period. SKC was alone, leading up to the April 5 2003 ROBtv interview (see homepage – 5 ½ min.) at the Nikkei’s very low, in identifying each leading indicator’s low, including the economy itself (Jan. 2002). Economy, stocks and currency: SKC has strived to achieve maximal performance in every area pertaining to Japan.

A serious Dow bash in New York could lead to a broader decline in the Nikkei, before its next lift-off. Since SKC claims that we are witnessing the mirror image of the 1990’s, one may anticipate lower Dow lows, while the Nikkei makes higher lows over like (and sufficiently long) periods. Still, accelerating stocks in Japan as the Nikkei heads over 12,000 could well be the final move in this cycle. At 8,000, SKC’s initial cycle target for the Nikkei was a move toward resistance at 14,000. Indeed, as often discussed online since 2001, countless stocks have returned triple and high-triple digit returns.

Conclusion:

A correction in the broader indices could follow a Dow collapse. This would potentially create highly profitable buying opportunities that precede another run-up, before a still broader correction.

NIKKEI – DOW RATIO:

This spread has begun a massive secular bull market (from the 1.0 area), from which there are several ways to profit.

NEW YORK:

The October 2002 letters (see “previous comments” folder) identified the post-2000 lows and forecast a rally to 10,400 for February 2004, before resuming the demolition toward Dow 4000, into the year 2006. The Feb. 11, 2004 letter entitled, “CRASH”, expressed the rest. Actually, the Dow peaking at 10,794.95 in February expressed it best (four reports have been published this year that have not yet been uploaded onto the “Previous Comments” folder; they are available upon request).

If correct about the February 2004 highs, the profit opportunities are staggering.

The calamity may resume at any moment, as the public and its advisors are generally all trapped…again, as forecast, only this time its worse. This time, it may require a long life to recuperate as much of one’s losses from an ensuing bull market, especially if the next secular one only begins in 20 years.

As the Great Secular Bear Market Of the early century may now resume at any moment, “terrorism” may be blamed. We’ll see. The most likely victim is Canada (note the New York section in the linked November 19, 2001 market report, the first online letter http://www.sidklein.com/comments/19-11-2001.doc.

Conclusion:

If a four-year unbroken string of market analyses which identified the key extremes in the US, Japan, gold and the currencies is to remain intact, then the Dow peaked in February en route toward Dow 4000 in the year 2006. Of course, we’ll adapt from month to month, or faster.

GOLD, DOLLAR:

The Feb. 11, 2004 report wrote:

“…….gold may be seen to be basing for its next lift-off to the long stated target of $500 per ounce. The 200-day moving average at $380 represents a meaningless “c-wave” possibility (Elliott Wave).”

Gold stopped its decline this week right where the preceding paragraph forecast However, the decline is no longer seen as meaningless. Through the recent downturn, I had come to view the next move up in gold as perhaps the last for this cycle, taking a cue from how far ahead the gold stocks were, compared to the metal itself.

Considering the price pattern similarities to the Dow Jones that large cap gold stocks have, and given the enormous compounded gains that SKC has enjoyed over the past fifteen months by moving in timely fashions from small caps to mid-caps and then to large caps (which themselves include 50% - 100% returns, over the past year or so), it is wise to use equity strength to liquidate positions (into countertrend rallies).

Gold may even make new cycle highs over $430 per ounce, however it wouldn’t alter SKC’s view that there exists a risk of a trading range bear market in between $350 - $400 for nine months, or so. After such an outstanding fifteen-month performance in every sector of the gold theme (small, mid and large cap stocks, as well as the metal itself), why be greedy in the face of the changes in intermediate term risk/reward analysis. Finally, that famous fellow said that he got rich by tending to leave the last 20% for the other guy. Wise words and they sometimes lead to actually hitting the highs (the latter falls under, “judicious reward”).

So, the rally may well coincide with a strong gold bounce toward $420. Silver is in a far stronger situation, as very long term fair value may more appropriately be around $25 per ounce. Still, a strong rally to over $7 could create quite a trading opportunity, for those so inclined after this week’s break under $6. If gold hits the skids, a lot of related money may get dull, so to speak.

The markets discount and they also pick up on the new trend in market relationships. For instance, it came to be known that Dow weakness would be consistent with gold strength. Well, now, SKC can easily imagine a scenario in which the US Dollar actually rallies temporarily, even as the Dow collapses and gold recedes. Hedge funds, remember, are ahead of pension funds (see Conclusion below).

The same letter wrote:

“Yen: Power, power, power. That sums it up”.

In the currencies too, SKC must take the attitude that there are spectacular gains in what in fact represents the “income and safety” portion of one’s portfolio. Given the asset allocation shuffles that were very occasionally recommended within the hard and fiat currency complex that SKC follows, since January 2002, returns may have been as high as 100% for the reader. Yep, there’s nothing like a 3% - 5% bond!

Conclusion:

A rally into the low 400s in gold should be used to liquidate stocks.

The intermediate term has shaped up in such a way as to suggest that one should use a pullback in the US Dollar to take up to a 30% position in that currency. However, the Yen should not be sold. USD allocations may come from gold and the Euro.

*The next regularly scheduled commentary is set for the first weekend of June.

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

2005-03-13

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