Zeev's Ideas

[Koikaze]

ZEEV, ROAD MAP for 2005 - up to ZEEV:338424, 12/27/04


12/26: (338045) (*COMMENT*)

A little early, but following is my "traditional" annual layout for the market, take it for what it is worth, about two pence. Apologies for the length of this disertation....Mauldin and Roach will be proud of me (g).

The turnips apologize for a bad call of a minor retrench prior to Christmas, though the Naz really has gone essentially nowhere (it is becoming a tradition to apologize for misreading December!).

In the following, they are going to try and layout their thoughts on the market for 2005. There are a number of parameters going into building the "scenario" including the political environment, international markets, were is the economy going and what will be the public perception of where the economy is going, liquidity and market psychology (TA) as well as valuation metrics. In the following, I will muse about these and then "design" what I believe might be a likely scenario for the market in 2005. Others are invited to layout their maps, of course.


Politics

The three major political events early in the year are the state of the union, the election in Palestine and the election in Iraq. Later in the year we will have issues of taxation and particularly debates on the pharmaceutical industry and the privatization of social security. Random terror events will also be in the background, but I believe by now we are getting accustomed to that background noise, so I expect no major problems from that quarter, short of a really bad event such a dirty bomb going off in a major city. (HEPH is a play on current counter measures to handle the consequences of such an event). Additionally, there are still some wild cards in Pakistan and in Russia.

I have no idea how the elections in Iraq will play out, they have less than a month to get the country pacified. If it was up to me, I would spread the election over a week, and concentrate troop each day in the area were the elections are carried out, thus obviating the need to increase force concentration. I don't see any move in that direction, so I guess the election will be of the 60% fair representation type. Not conducive for post election quiescence. As a result, terror premium on crude will probably stay in place despite the very mild winter in the northern hemisphere. My model assumes that crude premium will be slightly reduced, but China demand continue to increase thus keeping crude prices in the $38 to $48 range for most of the year.

Elections in Palestine will probably be a resounding success, and there will be a general feeling of "peace in our times". However, the current local elections indicates that Hammas is getting some very serious support, and that will prevent pacification for some time, probably until the population understands that Israel will not be destroyed and a modus vivandi will have to be found. That is a long time out, and I expect post election terror to increase again, and as a result no immediate peace agreement there. I expect no major impact on markets from whatever happens there.

The State of the Union will set up the stage for tax and social security reform, which I think might have a serious positive, though temporary effect on the market (thus my first top in the 1/19 to 1/25 window).

The problems in Russia (de-democratization and insecurity of foreign investments) and Pakistan (possible murder or coup against Musharef) should not have a major impact on our markets (we have our own problems as Roach has been elaborating on for four years now). I think that Israeli defense outfits will benefit from both situations (MAGS a possible play on that). A major question is if a Government owned oil industry can indeed be vibrant and raise current Russian production levels. I doubt it, one reason I don't think that crude will get much under $40/barrel (increased Russian supply could put pressure on prices).

There are other areas of flare up such as Venezuela that might impact crude pricing, but not outside the band I expect.


Economy

With crude staying above $38 for most of the year, a real tax is imposed on US consumers (not the European and Asian, because of their strong currencies) and slight inflationary pressures might appear. The Feds will probably keep raising rates until it becomes clear that economic growth is stalling. That may not happen till the end of the year. I think that the dollar vs the Euro got most of its punishment (I had a max for the year of $1.40 to one Euro, so far we got close to $1.35). At $1.60 to the Euro, the dollar will be halved from its peak, I doubt we go that far. As for the Yen, the worst I expect is an excursion under 100 yen to the dollar, maybe 90 to 95. Since I still do not expect major inflation to appear this year, that puts a cap on gold in the $480/$490 for 2005. (recent divergence between the miners and the metal should worry gold bugs, IMTO).

Short term though, we must take into account that there is very little additional stimulus that can be applied to the economy, the spigots have been fully opened for too long. I read many people forecasting GDP growth in the 3.5% to 4% range for 2005, but I think that most of the advance will be in the first half. The consumer has done its share and is more or less tapped out. Unless we see major advances in employment (like 250,000 new jobs per month for a good six months or so), I just do not see the consumer increasing spending at a rate of 3 to 4% per year. With rising interest rates, one should assume that the rate of refinancing of housing will decline, and we might even get a slight decline in new housing. If that happens, that could tip the scale into a consumer led recession (two main engines of growth in the last two years have been housing and automotive and both seems to go into "stall mode") starting late in 2005.

Usually, with so much money sloshing in the economy (M3 is about 5.4% higher than a year ago, growth greater than economic growth), one would expect inflation to become a major problem, however, capacity (except in some commodities like oil, copper, aluminum and even steel) is still excessive, keeping price pressure subdued. The growth in money aggregates over the last year, however is not sufficient to create major inflationary pressures.


Liquidity

Right now there are no real liquidity constraints, if at all both the Feds and the government are working very hard to stimulate the economy and even directly, the market (the "dividend" exemption is nothing but a ploy to support equity markets, it has no economic justification as I have harped about for quite some time, this year they will add to that social security privatization, another "harping" point for me <g>). Note that MZM is now well above $6.6 Trillions, but it has stalled there for almost half a year now, and YOY it is just some 3.5% ahead, like the GDP growth, possibly indicating the start of a mild liquidity crunch.

In the market, however, there was a big injection of liquidity from MSFT, which by now should have been absorbed, and the rush of IPO and the excessive insider selling in recent months is, probably, soaking liquidity from the markets on balance, IMTO. Some dollars repatriation by foreigners, just as the dollar bottoms could put additional pressure on liquidity. On balance, I believe liquidity is at best neutral, if not slightly bearish for the equity markets.


Valuation/technical analysis/road map

The basic thesis from early 2000, namely, that we have entered a lengthy period of a secular bear market holding the indices in a wide range still holds. Until we get unusual and uncommon valuations to start the next major secular Bull market, I am staying with this thesis. Namely, give me PE's under 10 or so and then a rebalancing would have occurred. Talking about rebalancing, Roach has made a religion out of it, so I will not repeat this here.

It is quite clear that valuation models on the Naz are going to keep a ceiling on that market over the next 12 months. However, if one looks at the DOW with an earnings estimate of $600 for the current fiscal year, the PE is only 18, in an environment where the 10 years treasuries are yielding 4.18% (Equivalent PE of 24) , however, the long terms rates are climbing and may be above 5% (5.4%?) before the year is out making this measure just fair value. (Remember that secular bear markets create "uncommon values").

As for the technical picture, we are getting very close to some major top like behavior in volatility indices. The EPC 21 days moving average has stayed under .58 for more than a month. Many of the BP are flattening out (BPTRAN at 100%, and for quite some time, it cannot go higher!.). Advisors bullish are above 62%, an area from which a major bear could start. New highs on the NYSE have also reached levels approaching excesses, but not so, so far on the Naz. VIX and VXN keep hitting new lows. While these are all figures that are commensurate with a major peak, these can stay that way for quite some time, and the bears amongst us, should not, IMTO, anticipate a top and go short before a downtrend is actually established.

My roadmap has included, at least since early August of this year, a top in the January-February period above 2275 on the Naz, and for now I am staying with that target. Tentatively, I have the top, or I should say a first top, in the Jan 19 to 25 window. I have also mentioned that I expect a sizeable nassacre early in the year, post that late January early February top. Thus I have a low in the 1700/1750 before July 4th. That is the broad map for the first half. Before I actually get back zipped in my bear suit, however, I would be waiting to see the white in the eyes of the MM's. I do not see that top yet, and we could easily have a double top with the second one marginally higher in some indices, while other market measures (NH, BP etc.) not confirming that second top. Thus for now, the map will have the high at 2275, a dip of about three weeks to 2040/2150 area (depending how high we get late in January), ending, nominally on 2/09. Then I'll decide if a last hurrah to the neighborhood of 2350 plus minus 50 is possible, on the Naz. My next turn date is 3/25, that is supposed to be a minor local bottom, possibly as low as 1820 on the Naz. Note this could be a real nasty move of 500 Naz points in about six weeks. The details of the map have two forks, the first is that late January is the ultimate high, and we go into a grinding but relatively "orderly" decline to 1820 late in March, and the second fork, the one I favor now, is a more volatile market with a sharp retrench from the late January top to and interim bottom in February and another sharp advance attempting to better the January highs in February and then a fast and devastating decline into 3/25. A lot depends on how the VIX and VXN behave on the beginning of the first leg down and whether or not early January yields EPC under .40 or not.

The 3/25 bottom should be followed by a sharp advance, most of it ending before the beginning of May (nominal top is 5/9). Note that it is quite possible the Dow bottoms about a week before the Naz did (as it did in 2001), if that happens, the Naz may not bottom till the window of 4/6 to 4/13). If we indeed reach the low 1800' in late March, the April run could get the Naz to the 2040/2150 window. That should be enough to turn recent "late to the party" bears to turn bullish again, while covering their shorts into massive street and insiders selling. The next leg down should be from 5/9 to 6/22-29, ending in the 1700 to 1725 area on the Naz. From here I expect a labored run (mind you, this low could involve a double bottom stretching to Wednesday post July expiry, or 7/20) to 1940 or so. If 1940 showed no latent bounces in the decline from the January/February top, I will then have to add another 100 Naz points to that summer rally to around 2040, we will know in the "Fullness of time" as Jim so succinctly put it.

I should mention that this map assumes some expectations in some indicators behavior, such as sub .40 EPC before the end of January, failure of a possible February top to generate volume above the January volume at the highs, and few others, so as we get close to these events, I will reexamine this map.

As for the second half of the year, my most probable model has continuation of the bear into a broad double bottom in October and then early December a retest, with a low around 1400 on the Naz (a nasty 500 to 600 Naz points decline). One fork has a low just under 1000 on the Naz in December, but for now, it is just an outside possibility.

As usual, the turnips absolutely reserve the right to be wrong, change their mind and change it often.




12/26: (338079) (*COMMENT*)

Hello Zeev: Thank you for the detailed "road map" for 2005. I know your stance has been for some time that consumers are just about sated and that a consumer led recession may evolve next year.

A factor in the macro picture I have been pondering is capital spending. I'm not optimistic. We have the end of bonus depreciation in 2004 and a tightening of the expensing rules for heavy SUV's. And, given that our economy was never allowed to fully wring out the overcapacity and excesses of the 1990's, isn't it at least possible that at a time when the consumer gives up, business spending does as well? If so, we may be in for a fairly deep double-whammy recession.

Thanks again for your insight and the courage to go on record.

Bob McP
(*END*)

It is a possibility (that cap ex by business will not keep growing), but that will take at least a good six months before it starts its impact. The reasons are quite simple, business is awash with cash, and the current mood is that there is going to be economic growth, to capitalize on such growth investment maybe required. Until there is clear visibility of consumer retrenchment, business may not retrench that fast. Remeber, however that consumer spending is in the 65% to 67% of the end demand, so the balance, business and government got to spend at twice the rate consumer do to compensate for consumer retrenchment.




12/26: (338083) (*COMMENT*)

Zeev, thanks for the hard work you put in coming up with your forecasts. If you would, could you comment on the BTK vs the SOX during the down periods next year. I assume you think the SOX will get nailed, do you also think the BTK will be hit as hard? I am going to get either the SMH short or RYVNX, for 2X down the QQQQ. TIA.

Best 2005 wishes to you. Belgie
(*END*)

Don't rush with shorts on the SMH, the current pricing already assumes a very bad 2005, worse than I think it will really be. The BTK on the other hand is putting in a triple top, and unless that triple top is taken out soon, it may get hit hard. The weak link, IMTO, will continue to be the pharmaceuticals, many are facing patent expiration and short term problems, including the fact that consumer spending on health care is already extremely heavy (in the 16 to 17% of toto), not much growth from such high levels to be expected. The traditional safety issue in a bear market will probably move to specialty or niche health care companies, like specialty drugs, smaller size companies, and specialty devices the like of GIVN, LCAV and ISRG.




12/27: (338158) (*COMMENT*)

(Part 1)
Best get the WHOLE story then depend on crawler.

Here is the actual story in full.

http://www.bloomberg.com/apps/news?pid=10000103&sid=aJIYgNLR2zis&refer=us

<<"Dow Theory" Sends Signal for Further U.S. Gains: Taking Stock

Dec. 23 (Bloomberg) -- Two days ago, the Dow Jones Industrial Average reached a three-year high and the Dow transportation average set a record. To Kenneth Tower, the combination suggests the U.S. stock market's 21-month rally will last into next year.

"As part of putting together a forecast or an outlook for the next few months, it's a very encouraging and positive sign," said Tower, chief market strategist at Charles Schwab Corp.'s Cybertrader Inc. in Princeton, New Jersey.

The conclusion reflects a signal sent by "Dow Theory," named for the developer of Dow Jones & Co.'s averages, Charles H. Dow. According to the indicator, U.S. stocks may rise further because the industrials' new high coincided with a similar move in the measure of airlines, railroads, shippers and truckers.

The Dow industrials closed on Dec. 21 at 10,759.43, the highest since June 2001. The transportation average climbed on the same day to 3792.09, exceeding a record set in May 1999. Yesterday, the industrials added 0.5 percent and the transportation-stock gauge slipped less than 0.1 percent.

Stocks started to rally in March 2003 as the economy and corporate profits accelerated and U.S. forces invaded Iraq to oust Saddam Hussein. The Dow industrials have risen 37 percent since then and the transportation average has jumped 66 percent.

The Dow Theory signaled the beginning of a bull market in June 2003, when the averages surpassed their peaks in the fourth quarter of 2002, said Charles Carlson, a fund manager at Horizon Investment Services in Hammond, Indiana. His firm publishes the Dow Theory Forecasts newsletter.

"Favorable Condition"

Having both the benchmarks reach new highs is a sign of strength in the U.S. economy, according to the Theory, because industrial companies produce goods and transportation companies ship them to consumers.

"As long as they are in gear, as they are now, it says everything looks okay," said Richard McCabe, chief market analyst at Merrill Lynch & Co. in New York. "It indicates a favorable market condition." McCabe was the No. 3 technical analyst in Institutional Investor magazine's 2004 survey.

The Dow transportation average, made up of 20 companies, has rallied 26 percent this year. J.B. Hunt Transport Services Inc., the second-biggest U.S. trucker, and Yellow Roadway Corp., the largest, led the advance.

J.B. Hunt's shares have surged 64 percent this year and Yellow Roadway's have risen 54 percent. Both truckers said they increased prices because demand rose faster than their ability to deliver cargo.

Drug Stocks' Slide

The Dow industrials, whose 30 members include financial and retail companies as well as manufacturers, has added 3.5 percent in 2004. McDonald's Corp., the world's largest restaurant chain, has the largest gain. The company's shares have risen 31 percent as a streak of monthly sales increases reached 18 months.

Declines in two drugmakers limited the average's advance. Merck & Co., which pulled the Vioxx pain medication in September after a study showed it increased the risk of heart attacks, has dropped 30 percent. Pfizer Inc., whose Celebrex painkiller was linked to similar risks in another study, has lost 27 percent.

Having the Dow industrials reach a new high this week eliminated a source of concern for followers of the Dow Theory, including Horizon's Carlson.

"When one is doing well and the other one isn't, that type of divergence can dictate there is a problem or dislocation in the economy that will ultimately result in unfavorable stock prices," he said. "The divergence has been resolved."

"It's Reconfirmation"

Economic reports this week suggested growth can be sustained. The Commerce Department increased its estimate of third-quarter U.S. economic expansion to a 4 percent annual rate as consumer spending reached the fastest pace in three years. A gauge of leading economic indicators rose in November for the first time in six months, according to the Conference Board.

This week's moves in the Dow averages bolster optimism triggered by last year's "buy" indication and suggest that stocks can extend their gains, Carlson said.

"New highs in the industrials and the transports happening on the same day sends a stronger signal," he said. "It's not a new bull market; it's reconfirmation."

To contact the reporter on this story: Danielle Sessa in New York at [e-mail].

To contact the editor responsible for this story: Scarlet Fu in New York at [e-mail].>>


(Part 2)
Welles, Thanks for the info. I think the following for next year 2005:

Big Negatives:
Rising Dollar in the second half of next year with some what reduction in twin deficit syndrome.

The refinance scam with rising housing prices most likely peaking.

Top that with rising long term rates with 10 year Bonds going to at least 4.5 %.

Short term rates also on the rise with Mr. Greenspan screaming about it from the top of Mount Everest.

A jobless recovery.


Big Positives:
Corporate America flush with cash could translate into capex spending.

A few reputed investment firms including British Petroleum (BP) forecasting oil prices in the mid to high US $ 30 for year 2005.

The above makes it difficult for me to be in the bullish camp after at the most Q1 of 2005.

Inputs are most welcome whether you agree or disagree with me. As Jim says after all we shall know in the fullness of time.


(Part 3)
Zeev, in case you miss it.

http://www.investorshub.com/boards/read_msg.asp?message_id=4929913
(*END*)


Thanks, and I did miss it....




12/27: (338241) (*COMMENT*)
Annual roadmap question

Zeev, thank you for the time you put into your annual roadmap. One thing I didn't notice was any mention of China, where there is sure to be further rumblings about floating the currency, but also where there is still the spectre of the hangover from the mega-growth of recent years. Some believe that hangover will be mild or barely noticeable. But others think we are still on course for a much rougher "morning after".

Jim Rogers has made a "hard landing" call. In this week's Forbes magazine he says he expects the Chinese economy "is due for a hard landing within the next 12 months."

In warning of the hard landing he says: "It will definitely happen, and when it does, I hope I'm brave enough, smart enough, and alert enough to pick up the phone and buy a lot more China."

I don't know what you think of Jim Rogers, but when he uses the words "It definitely will happen ..." I find it very hard to be betting the opposite. And if he is right, and China has a hard landing, then it seems impossible to believe there won't be shock waves reaching our shores (although that would probably result in falling commodities prices, particularly oil).
(*END*)

I have mentioned for some time that China is an accident waiting to happen, I don't think it is that imminent, however. For the time being, they are still a pressure element on various commodities like crude, aluminum and steel.