Busting by the Seams!

PaulRen's picture
Submitted by PaulRen on Thu, 01/10/1998 - 12:00am
Category: 
Non Thai Article

Busting by the Seams!

Seattle, WA April 23, '98

I am very concerned about the US Stock market. While overvaluation is always a relative term, I think it's horribly overdone here. One should short this market and double up on my favorites.

For some time now I have been traveling around the US so to keep my global perspective and contacts. I see the US is truly "busting by the seams". It reminds me of SE Asia in the early to mid 1990's! While it is impossible to call a top, I notice dangerous warning signals, among them:

  • Professionals in many endeavors often do not call back. Business of all sorts is starting to be taken for granted. There are too many "success’stories abound.
  • Real estate agents do not have time to show you around. One Lady told me how frustrated she was as every time her client makes an offer on a property it gets sold to another one who offered more. Every city I visited is having an outright real estate boom.
  • Hotels are full, (in Phoenix it was 95$ a day, when the official posted room rate on the inside door was 45$), in Tucson, AZ it was $125 vs. the posted rate of $49.
  • I bought a car on credit (instead of renting one) but the finance company won't even send me the monthly payment book. Truly, I never heard from them again even while I called, even while they have my current address.
  • Stockbrokers do often not call back nor send you the new account forms and just about every one (my old connections included) seem to think the market is going forever higher. Money managers are overall excessively bullish and nobody seems interested in investing outside the USA. Call it the autriche effect. (Also, "internet stocks frenzy", see below).
  • The fastest growing consulting business here (according to CNN) is "life style" brokers/consultants, they "teach" you how to "live happy" once you are making all that money. Their business is booming.
  • Conversations are abound (in and out of locker rooms) on how much "money they made on paper", yet they will not sell due to the "capital gain taxes to pay". It is just an excuse! They seem to all forget that they still keep most it, even after the taxes.
  • Record low un-employment, close to 30 year low interest rates, record highest P/E' of average 28 for the S & P 500 and few seem concerned. These mania mergers which prevail are often a sign of a market top.
  • Most US investors have limit-sell orders in place should things go wrong. They place these orders and answer my cautiousness confidently "it's all taken care of". I hate to think about what will happen when all those limit orders get executed once the market downfall is in motion.

While the new market and capital mania can continue for a while it is starting to be frightening.The problem of capitalizing on this, of course, is one of timing. The drop could come now or from 10,000 or more on the Dow. Nobody knows when, but it's coming. Watch and see.

Meanwhile around the world….

As I see it, Japan represents some threat to world economic stability. The bottom line is that for the past 7 years they have continued to use larger and larger Band-Aids to fix their ailing economy and have still failed to reform their financial sector in any meaningful way. This is of course because politics in Japan, as all over Asia, is dictated by big business and business does not want anything to do that would hurt themselves. Unless changes come in a fairly short time, I do not wonder if the market is going to tolerate this much longer.

The result could well be The Yen sinking to 145-160 vs. the US Dollar, the Nikkei falling to perhaps 12,000? Because of the cozy relationship between companies in Japan (holding each others stock), there would be a lot of insolvent companies at this level. Too much regulation and lack of steep tax cuts are the big problem. The result is potential financial implosion. Of course they are trying to export their way out of the problem. We all wonder if this will work this time. The only countries in the world with strong domestic demand at the moment are U.S, Canada, and the U.K., the U.S. being larger than the other two others combined.

On Japan's effect on the US and EU, it does not look like a Japanese crash will affect much either, consider:


  • Japan's economy accounts for only 13% of global GDP
  • America's export to Japan accounts for 1% of its GDP
  • EU's export to Japan accounts for 0.5% of its GDP
  • Imports from Japan by the States and the EU account only 1-2% of GDP in each case
  • The U.S. economy is forecasted to grow 2.7% this year taking into account a 0.3% drop in Japan's GDP

But a Japanese crash would have a significant impact on mostly the big capitalized shares in Thailand economy and similar to the rest of SE Asia. Japanese investors and bankers will need to sell oversea properties or call back their loans to shore up their home base. This is another reason why in Thailand I not yet advocate buying the general market and why we are negative on most big capitalized "macro’stocks. Our selection remain specialized smaller cap's which are far more insulated, which do allot of exports of low "luxury products" and yet who still sell at ridiculous lowest valuations. We do not need a massive SET rally for those to slowly move higher.

Paul A. Renaud.

www.thaistocks.com