The Yamamoto Forecast

Lingering Questions

• 100% in stocks
• 0% in cash

Indicators

Short-Term Indicators--Bonds - bullish; Stocks - bullish; Gold - bearish.

Gold

The bullion has resumed its rally. And what an advance! The metal hovers at the $310.00 mark. Gold easily surpassed the psychological $300 level. Furthermore, it remained above the price. I am not hearing jokes about gold anymore.

The metal had a very favorable environment. There was the oversold condition. The spike in oil prices created inflationary concerns. As did a weak U.S. Dollar. The unrest in the Middle East gave a lift. The Japanese were buying gold. Don't forget, the declining American stock market made investors search for an alternative choice.

I like the bullion for the long-term. But after the sharp run up in such a short time span, a breather would be healthy. I have spotted a bit of speculation and some froth entering the market. A pause at the current level is welcomed by all, including the gold bugs.

The consolidation should materialize when the equities market begins to move up again. Usually, the metal and stocks tend to travel in opposite directions. Hence, the bullion could receive the needed rest at that time. The retracement can prepared gold for another leg up down the road.

My 52-percent position in the precious metals securities is extremely high. A 5-percent stake in the sector would be appropriate for the conservative person. Generally speaking, the lower priced equities are riskier than the higher priced stocks.

Bonds

(May 15, 2002) I don't long-term prospects for the bond market. But I would not bet against bonds in the near term. Not yet, anyway. Bonds are trying to make their last stand. And they should be able to achieve a degree of success.

Did the domestic economy experience a rebound or merely an inventory adjustment? It's my estimation that the latter was the case. If that's the situation, then the bond market can enjoy another rally. In all likelihood, it will be a brief one. Nevertheless, a measurable advance.

The question marks regarding the business landscape continue to be a positive element for the market. Until the doubts about the economy become a part of the past, bonds benefit. Nobody is certain on the subject, including Federal Reserve Chairman Alan Greenspan and President George W. Bush. Hence, the bond market still has a role in the investing community.

A cloud lurks over the horizon. The problem in the Middle East. The possibilities of war will provide underlying support for the debt market. When there's uncertainty, bonds are the next closet thing to certainty for a lot of investors. Essentially, bad news is good news for the market.

Don't get me wrong. The long-term trend for bonds appears bleak. At this stage, investors should stay away from the bond market. Speculative traders may go in and out. But to remain in for an extended period looks like a dangerous proposition.

Eventually, the effects of low interest rates are going to kick in. No, the evidence won't be seen for a while. Regardless, the anticipation of a pickup in business activities will arrive much sooner than the actual event. That perception should be the start of a meaningful bearish cycle for the debt market.

Stocks

The stock market was overbought. And it remains so. But at least, a part of the excess is being worked off. What's really needed is a major correction. Whether we get it or not is another matter. If the downside adjustment turns out to be a shallow one, the move on the upside will be limited by nearby resistance levels.

A retest of the September 2001 lows will eliminate the speculation from the market. The action could set up a terrific rally. However, if equities avoid the second test, then further advances won't be anything to write home about. Future gains could be good, but not great. The amount of pain now determines the fun later.

There's too much complacency. People still smirk at the average annual return of 8 percent to 12 percent in the equity market. Until unrealistic expectations are replaced by feelings of disgust and hopelessness, a brand new bull market is out of range. Sad to say, something bad must occur for a different mindset.

In spite of the current weakness of the market, stocks continue to be overpriced. The condition does not necessarily mean equities cannot rebound. They will. However, the upside's limited at this juncture. The risk/reward ratio doesn't excite us. We believe there will be better opportunities to enter the market in the future.

The fundamental backdrop is nothing to brag about. A skirmish may develop in the Middle East region at any given moment. And the confidence in accounting practices has been shaken. If investors feel that these problems are not enough to hold down the market for long, then they better be concerned about something which can derail stocks. What's that?

For equities to move onward, an issue must be resolved. It ranks higher than the troubles in the Middle East and the corporate accounting shenanigans. It's the economy. Is it in a recovery mode or not? And if there's a business turnaround, how strong or weak will it be? Oh, those lingering questions. Without definite answers, the best we can hope for is an indecisive market. We don't envision a vibrant stock market for now.

But in a weird way, the recent slide of equities is preparing a short-term bounce for the market. Nothing goes straight down. Yes, even a market with lots of unanswered questions. Barring an unforeseen happening such as a flare up in the Middle East, a decent advance should be in the offing.

Will the approaching change be sustainable? No, we highly doubt it. It's going to feel and taste like the bull market has returned. Stop and smell the roses. Yet, in our book, we see it as merely a tradable rally. Nothing more.

Oil

Oil has jumped to the higher end of the trading range. Furthermore, the sky's the limit for the commodity if problems escalate in the Middle East. A brand new trading band will evolve in the crisis. The present upper trading range would become the bottom.

However, the absence of an all-out battle and the cooling off of tensions in the Middle East may knock the air out of the latest spike in energy prices. Yet the action will be temporary. At that juncture, a global recovery in the economy increases the demand of the commodity. No matter how you view it, the outlook looms bright for oil.

NASDAQ

People who participated in the high technology securities are hoping for a quick rebound to the 5000 level. In the past, when a boom and bust occurred, just like the high tech industry, a recovery was nowhere to be seen. Undoubtedly, fierce rallies will develop. But don't hold your breath for NASDAQ 5000.

When the others were throwing their money at the high-tech flyers, we resisted the temptations. Fortunately, the damages were avoided.

Update

The following equities aren't for the typical investor. They should be considered for only aggressive accounts.

Coeur d'Alene Mines (CDE)

The company possesses a massive silver-production profile. It has survived with available cash, but the debt load remains excessive. High risk.

Echo Bay Mines (ECO)

An old favorite of the gold bugs. This producer needs a much higher metal price. Debt is a concern.

Halliburton (HAL)

A major oil services firm with strong financials. Unfortunately, asbestos claims have depressed the price of the stock.

Hecla Mining (HL)

An important silver producer. The weak balance sheet has improved due to sales of assets.

Vista Gold (VGZ)

A financial deal saved this gold mining company. The cash infusion gave it time.

Yamamoto's Precious Metals Picks

N--New York;  A--American;  NAS--NASDAQ.