Nikkei rises to over 20,000

As you are reading this column, I probably will be back east watching the Daytona 500 race. Because this is such an All-American event in a rapidly growing sport, I thought it only appropriate to discuss the Japanese Nikkei 225 index recent rise above 20,000.

I would like to address this historical milestone in the Japanese stock market to encourage U.S. investors to realize what has happened to a developed country's stock market.

The rise to 20,008 on Thursday Feb. 9 marked the first time the Nikkei 225 index had been above the 20,000 mark in 10 years. I say this because as you may be aware, the roller coaster Nikkei index had been as high as 39,000 on Dec. 31, 1989, only to make a significant decline to test the 12,000 range three times in 1992, 1995 and again in 1997. However, it has since made a turnaround to cross 20,000 last week and drift back to close on Wednesday, Feb. 16, at 19,791.

That is a ride most U.S. investors feel could never happen to the Dow Jones Industrial Average. Year to date, the Nikkei 225 is up 4.53 percent but because the yen has been going against the dollar (currently exchange rate is at 110) on a U.S. dollar basis, it is still actually down 2.92 percent.

A Nikkei 225 rise above 20,000 is psychologically important and serves as a free advertisement for stock investment owing to the massive media blitz the event generates.

Technically, a move above 20,000 also places the index above its 10-year average (19,700) for the first time in eight years.

However, the TOPIX broke above its 10-year average (1,530) back in November, and its 58 percent gain last year already confirmed that the stock market had turned around.

More importantly now, the TOPIX rally to 1,722, its post-1991 high, is inviting additional rounds of selling - both long-term liquidation and short-term profit taking.

The first question to ask is what is the source of the rally?

The Nikkei rally to 20,000 has been fueled by foreigners, margin traders and securities investment trusts (SITs). Thus, stock selection has become enormously momentum driven, perpetuating the top 50 stock price "bubble." Like the U.S. market, the market has been very narrow and does not appear to be broadening - yet!

Again, similar to the U.S. market, the cyclical companies, along with bank stocks, have restarted sharp descents. It may be comforting to attribute this to last quarter's likely GDP dip.

But I think that would be odd considering how backward looking the discounting would be, especially as leading economic indicators; e.g., machinery orders, confirm recovery prospects during 2000.

More likely, the declines of the cyclicals and banks are due to upcoming accounting changes that not only make book value suspect but encourage heavy institutional selling of cross shareholdings.

I also think the salivating over potential buying of equities and stock funds by individuals during 2000 and 2001 should also not blur the watch for a possible offsetting increase in their selling.

Specifically, this selling could be in reaction to a long-delayed revision of capital gain taxation. I have been reading for years how the Finance Ministry is trying to abolish the implied capital gains tax. It finally received cabinet support on Jan. 12, 1999, and the tax revision was legislated by the Diet on March 24. There is no going back. For the next 13 months, higher stock prices will generate exponentially greater tax savings for individuals if they sell promptly. Individuals own about 18 percent of the market equal to around 88 trillion yen.

I would like to end on two predictions. Last year Jeff Gordon beat Dale Earnhardt in the Daytona 500 by two car lengths. I think that Earnhardt is still bitter and will get sweet revenge on Jeff Gordon by winning the Daytona 500.

And secondly, I think the Japanese economy still looks to an even stronger recovery overall and the Nikkei index will ascend to 22,500 by the end of 2000. Earnhardt and Japan, can you think of a more winning combination?

William Creekbaum, MBA, CFP, a Carson City resident, is vice president-investments of Salomon Smith Barney, a financial services firm serving Northern Nevada.