E-mail this article Printer-Friendly

Tough love from the star of the market crash of 2008

This notably bearish investor ventured into the market to buy some stocks recently, but he still doesn’t see a bull market in the future.

Call him what you want. The Maui Contrarian. Frugal, or even cheap. He doesn’t care, as long as his methods succeed.

We’re talking about one of America’s most prominent bears, Mr. Irwin T. Yamamoto. We have visited him once a month for over two years and not once has he beguiled his readers with any cheerful optimism about the markets. Quite the opposite.

But he has made money. And he has gained the approval, grudging or otherwise, of many market observers. He cites one example in the latest issue of The Yamamoto Forecast.

Recently, Mr. Peter Brimelow of MarketWatch wrote: “Irwin T. Yamamoto is one of the stars of the Crash of 2008, and his strong record extends much further back.”

The figures tend to back up this bear’s approach as well.

Hulbert Financial Digest is the independent rating service that serves as the ultimate benchmark for investment advisories. Hulbert has published figures showing Mr. Yamamoto’s portfolio topping the massive Wilshire 5000 index by some 50 per cent last year.

Having gracefully acknowledged these signs of confirmation, he proceeds to scan the market.

He doesn’t like what he sees.

A flurry of activity

Mr. Yamamoto begins by reporting on his unusual flurry of activity in the market.

“As stocks nosedived to new lows, we put a significant portion of our excess cash position to work. In a matter of a few short trading sessions, our portfolio went quickly from a no-equity stake (not a single share) to 30 per cent. It could have gone even higher if our other target prices were reached.”

His pre-set target prices led him to five equity investments. They are: Hawaiian transportation, agribusiness and real estate firm Alexander & Baldwin (NYSE-AXB); discount broker Charles Schwab (NASDQ-SCHW); oilfield services giant Schlumberger (TSX-SLB); oil and gas well driller Helmerich & Payne (NYSE-HP); and iShares FTSE/Xinhua China 25 Index (NYSE-FXI), which represents the 25 largest companies in China.

Alexander & Baldwin takes up 10 per cent of his portfolio, the other four 5 per cent each. The other 70 per cent is in cash (and for much of the past two years, the cash portion has been a towering 90 per cent).

Now target prices are a dead letter. The call has gone out to Mr. Yamamoto’s subscribers — all open buy orders are cancelled. Here’s why.

The duck quacks

The editor traces the recent swings in the market and does not come up with a sunny forecast.

Bulls want to believe recent market rallies point to better days ahead, he says. And Wall Street doesn’t even want to call the debacle of 2008 a crash. But if it quacks, it’s a duck, says Mr. Yamamoto. And he is of the opinion that this duck has quacked very loudly.

Look at history, he cautions. In the worst crash of the past century, the market devastation of 1929 to 1932, there were eight double-digit percentage gains on the Dow Jones. In the 1990s, when Japan sank into a long economic slump, the Nikkei index nonetheless had five gains of over 35 per cent, two of those greater than 60 per cent.

But in none of those cases could the market hold its gains. There are plenty of bear market rallies, the editor insists, and they do not lead to bull markets.

No way out

The trouble, as Mr. Yamamoto sees it, is that the economic recovery everyone is wishing for will bring new problems.

More to the point, it will bring one big problem. Inflation. Supply, having been cut back during recession, will suddenly face enormous demand.

Furthermore, money from governments is pouring into the financial system. “Visualize all the monies sloshing here and overseas,” says Mr. Yamamoto. And remember that interest rates are at historic lows.

Restrictive monetary policy and higher interest rates will have to be applied. That could slow things right back down again. In short, the only solution to inflation could be another recession — back to back blows.

“We could be staring into an abyss,” says this editor. We may be facing multi-year bear cycles in both the business landscape and the financial system. “There’s no way out,” he concludes grimly.

You may think that just because Mr. Yamamoto has been right for the past two years doesn’t mean he’s right about the prospects ahead of us.

Or you may believe that an uncompromising look at reality is the only way to make a living in the market today.