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Wilkinson's Edge: Riding on the Edge

Saturday, 10 December 2005 12:00 AM

Dear MoneyNews Reader,

Fifteen years ago I joined London's Fuji Bank, which at the time was the third-largest in the world.

My tenure lasted four years before I moved on to bigger and better career challenges.

Later, like other Japanese banks, they took a major hit during Japan's so-called "Lost Decade," in which a "zero interest rate" policy failed to wake the giant nation's slumbering economy.

In order to survive, the Japanese banking system merged as a matter of necessity. This development hastened the end of Fuji, which later resurfaced as part of the nascent Mizuho Bank.

On Thursday morning, I noticed that the Nikkei had slumped 301 points. I wondered if this wasn't the beginning of a December meltdown, just as global markets were hitting new highs.

As I looked for a reason, I found an interesting story that partially explained the seemingly panicked selling in Tokyo.

As it turns out, a clerk at the Tokyo office of Mizuho Securities – the equity arm of the bank I had joined over a decade ago – made a rather costly error when he sold 600,000 more shares than he had intended.

It will likely cost $224 million to make good on the error, and the mistake could mean that bank's staff will have to forgo annual bonuses.

The poor chap got the order backward. He had intended to sell a single share of stock in newly floated company J:COM at 600,000 yen ($5,000).

When he attempted to sell 600,000 shares at 1 yen each, the order sent panic waves through the market, since the sale was for forty times the outstanding number of shares in the company.

The blunder generated a technical deficit of $2.8 billion.

But the cost to the brokerage company could be as high as $250 million, since the firm was obligated to buy back the stock the clerk had sold.

As traders in Tokyo tried to work out which company might have made the error, they dumped stock across all of the major four brokerage houses, sending shares into freefall and knocking 2% off the value of the Nikkei.

Of course, the securities firm owned up and as the waters calmed over the following day, the Nikkei regained its composure, rising 220 points during Friday's session.

One can only feel sorry for the clerk. 

A recent report from the World Semiconductor Trade Statistics Association showed that revenues from global sales of semiconductors rose to $20.05 billion – or 6.8% higher than October 2004.

That news should be enough to help keep global chip sales on track to meet the forecast of 8% growth for 2005. Demand for electronic gadgets has been accelerating, according to the report. And that has helped to stimulate chip demand.

For example, Germany's Dresdner Bank has lifted its own from 7 to 8% for 2005 and announced a heady 16% growth for next year.

That sort of forecasting is helping to drive shares in semiconductor stocks higher.

Global demand for cell phones – along with a strong American appetite for consumer electronics – is helping to boost sales.

Innovations such as thinner television sets, hard-disk recorders, portable music players and network devices are helping to maintain the momentum behind the burgeoning industry.

U. S. Jobs Growth

The November jobs report showed a gain of 215,000 jobs within the American economy. That leaves the official unemployment rate at 5%.

There is growing evidence that regional labor markets are tightening. In October 2004, just 72 metropolitan areas reported unemployment rates of 4% or lower. This October, that number had risen to 111.

According to Bloomberg data, both Florida and Montana (with their respective unemployment rates of 3.4% and 4.3%) have the lowest unemployment rates since 1976, when records began.

While the fact that regional labor markets are gathering momentum is an encouraging sign of a healthy overall economy, this is likely to provoke yet higher interest rates from the Federal Reserve.

While that's not shocking, it does beg an important question: How much more will the Fed need to bolster rates - especially with signs of weakness in the housing market.

The market is split somewhere between a peak in rates, between 4.5 and 5%.

The bigger question is whether that extra half-percent will be enough to tip the economy into outright recession at the cost of preventing inflationary pressures from emerging.

It's not just the labor data that is illustrating the official trend in jobs growth.

The Fed's Beige Book report recently demonstrated anecdotal survey evidence that there was a modest amount of overall upward pressure on wages and that it was stronger in one-third of the Fed's regional districts - in Atlanta, Boston, Richmond, Virginia, and San Francisco.

While the Dallas Fed reported shortages of energy and trucking workers, the Kansas Fed announced a dearth of rig workers, auto technicians, retail sales workers and nurses.

More concerning was the San Francisco Fed observation that wages for workers in specialized sectors (including financial, construction and healthcare services) were rising as a result of the shortages.

Workforce and skills shortages and rising wages among certain labor groups are all early signs of a tighter labor market that might keep the Fed's finger on the trigger to prevent a rash of inflation.

Several months ago, I urged subscribers to our SectorTrade service to buy into the basic materials sector.

Since that time, shares in the companies that make up the fund slipped to an October low before storming ahead to a nine-month high.

My argument remains the same. At the time, I made the point that the sector was poised to shine since it provided the backbone of support to the economy.

However, investors shunned the sector, fearing that the economy would falter and tip back toward recession.

News that local Chinese governments were artificially slowing the national economy also put the fear of god into investors. They worried about waning demand for those raw materials that Chinese manufacturers seem to endlessly suck into their bloating economy.

But how wrong they were!

Just take a look at the sector chart for yourself. 

This week the price of gold broke $530 per ounce on New York's COMEX for the first time in 25 years.

Aluminum has added 23% in the last six months and traded at a 16-year high. In the meantime copper, which has risen 46% this year, is at an all-time high.

That seems to have taken many speculators by surprise - especially those who predicted that the commodity markets might have peaked.

Shares in one copper producer, Phelps Dodge, had traded in the mid-$20s in 2002 but are today trading at $144.80.

Shares in the world's largest gold-mining company, Newmont Mining (NEM), broke through a 2003 high, reflecting the bullish sentiment surrounding the price of gold.

While these two companies contribute only 8% to the basic-materials ETF, the sentiment surrounding the sector has certainly heated up. But it is not without its warts.

Consider aluminum producer Alcoa, whose shares represent 6.3% of the fund.

While its shares are doing relatively well, it is one of the companies facing skyrocketing costs for the electricity used to produce the metal.

Industry expert Michael Purdy of ABN Amro explains the problem perfectly, although he doesn't necessarily pinpoint Alcoa.

He says that some producers have sold 2006 production at below-production prices. The incremental cost of manufacturing keeps rising due to the increasing cost of aluminum's main ingredient, alumina.

And that doesn't even take into account the soaring electricity costs involved.

Several chemical companies have also been held back by the rising cost of production, which explains the sluggish performance of both Dow Chemical and du Pont within the exchange-traded fund.

The bottom line is that all of a sudden the prospects for global growth are back in focus. The clear ascension of physical demand for many basic materials is feeding a speculative frenzy.

I'd say ride it. For now, at least.

Have a great week! 

Andrew Wilkinson

109-109-109-109

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Dear MoneyNews Reader, Fifteen years ago I joined London's Fuji Bank, which at the time was the third-largest in the world. My tenure lasted four years before I moved on to bigger and better career challenges. Later, like other Japanese banks, they took a major hit...
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Saturday, 10 December 2005 12:00 AM
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