The Richland Report
September 16, 2005
The Short-Term Outlook: This current (or is it now already past ?) puny and fragile little market rally, of dubious parentage, lineage, duration and amplitude, is (was) in our opinion of doubtful worth to us in playing our mutual fund switch game on the long side. So on Tuesday (9/13) we took profirts, exiting our 100% long positions on our telephone mutual fund switch Hotlines, and went to the sidelines in cash. (But not to worry -- see below.)
However, we wanted to continue to live up to our well-earned market-commentary reputation as a Cheerful Little Ray of Optimistic Sunshine (exceeded only by our former colleagues on FNN-CNBC). So we happily speculated that whatever might be left of this little pooky-wooky rally -- pre-Friday Options-Expiration, pre-Fed rate-setting Meeting Tuesday -- poor benighted creature that it is (or was), could still perhaps have (had) some value in setting us up for playing the short side of the market when this so-called rally -- as it inevitably, inexorably must -- pooped out, and the market headed South (if it hasn't already done so). Optimistically Cheerful to a Fault -- that's us!
To continue in that same mindless idiotic vein, let's remember that our favorite market timing tool, the McClellan Oscillator, leads popular market averages down at market tops. It fell below Zero for the fist time in just over a week on Tuesday (9/13) with a reading of -31 and the DJIA down -85. It then followed through yesterday (9/14) with a still lower reading of -79 and the DJIA down 53. But ever cautious, as well as moronically optimistic, we decided to wait for truly definitive evidence today (Thursday, 9/15) from both the McClellan Oscillator as well as popular market averages, before taking pilot positions in the short funds. Does it take a brick wall to fall on us ? Well . . . yes.
So today, on our telephone mutual fund switch Hotlines, we finally took a decisive stand: we recommended 50% positions for both Swingin' Riverboat Gamblers AND Intermediate-Term Traders in the SHORT Nasdaq 100 funds. " WHY NOT 100%?", you ask.
"Because", we calmly answer in a voice of confident sweet reason, "If the Fed leaves interest rates unchanged on Tuesday (9/20), we might have a short-lived little market rally, which will give us a chance to add the other 50% to our short position. However, if the Fed raises rates on Tuesday, and the stock market collapses, we will have at least a 50% short position already committed, and can then add the remaining 50% short position on any reflex rally up out of temporarily oversold levels." See ? Ain't that slick ?
Though the overall market will be trending down, these little 1-3-day rallies will always occur from time to time during a Complex Bottom Formation on the McClellan Oscillator. We have just begun such a formation, which normally can be expected to last from 3 to 6 weeks or more. BATTEN DOWN THE HATCHES. WE MAY BE IN FOR QUITE A BLOW HERE!
Comments & Updates on Recommended Stocks:
We were pleased to receive, on Tuesday, September 13th, the news that businessman's risk-speculation (NOT fer widders 'n orphans) up-and-coming Canadian gold miner Guinor Gold Corporation (GNR-Toronto), with rich producing and highly prospective properties in the Republic of Guinea, West Africa, has received credit committee approvals from two banks for a credit facility of up to US$60 million in the form of US$54 million in project debt, and US$6 million in the form of a convertible instrument (N.B. please see the very important further details and conditions on the web site at www.guinor.com). Having first recommended this as a moonshot-crapshoot speculation at around US$0.45 over three years ago or so, we were very interested to see GNR's price over the past few days breaking out above a many-month trading range on heavier-than-average volume. Furthermore, we noted on Guinor's aforementioned web site that yesterday's (Wednesday, 9/14) volume on the Oslo Exchange was roughly eight times that of the Toronto. We don't know what is going on here, but with the stock breaking out on volume and thus rendering a short-term technical buy signal, and with the bulk of Guinor's shares registered in Canada, it raises the question in our mind -- what does Oslo know that Toronto doesn't ? Risk-oriented speculators may wish to consider adding to (or initiating) positions here, particularly if you see the stock trade above C$1.15 or so.
It is estimated that an additional financing of US$60 million (i.e., an approximately equal amount), will still be needed -- US$20 million required by the banks for contingency and overrun purposes, US$20 million for a pre-existing project capital shortfall, and US$20 million to fund ongoing corporate expenses and the aggressive drilling program to further expand the recently-defined high-grade near pit areas. The company stated that various alternatives for completing the last leg of this financing were being explored, including vendor-based equipment financing, high-yield debt offerings, a convertible instrument, pure equity offering, or a combination of these. With the shipping, from Indonesia to Guinea, of the Kelian plant and mill, and the re-assembly and installation progressing on schedule, this is very constructive news, and should hopefully remove some of what President Trevor Schultz referred to as 'skepticism" regarding Guinor from the marketplace.
Long-term core holding Nastech Pharmaceutical (NSTK-Nasdaq:NM) has been quiet as the grave this week -- no news, with the stock meandering between a low of 13.75 and a high of 14.50 on (relatively) moderate volume. Two presentations are scheduled on the same day that the Fed meets next week -- Tuesday, 9/20. The Merriman Curhan Ford & Co. Investor Summit presentation, by Dr. Quay in San Francisco, will be be audio webcast live shortly after 11AM Pacific Standard Time over Nastech's web site at www.nastech .com. The second presentation that day by Dr, Gordon Brandt will be given at the Northwest Medical Device and Biotechnology Investor Forum at 9AM EST at the Harvard Club in NYC.
Looking under "Pipeline" on the company's web site, we see that there are four Feasibility Studies which have been in pre-clinical stages for many months, news of one or more of which could be emerging at any time, possibly before year-end: Type II Diabetes, Obesity (unrelated to Merck and PYY 3-36), Alzheimer's Disease and Anemia. We know from the company that it is in partnership discussions with Big Pharma(s) on pre-clinical RNAi for treatment for Rheumatoid Arthritis -- (also listed are Inflammatory Diseases, Metabolic Diseases, Infections and Cancer). Morphine Gluconate for Breakthrough Pain in Cancer is listed in Phase II Clinicals, and while eligible now for partnering, we suspect that fear of possible drug-abuse litigation on the part of potential Big-Pharma partners may delay partnering this one, despite its obvious humanitarian need. Salmon Calcitonin, an ANDA, partnered with generic drug firm Par Pharmaceutical, is now simply awaiting FDA approval, which could come at any time. Parathyroid Hormone (PTH 1-34) is listed as being in Phase I Clinical trials, and we know that having received critical 505 B-2 clinical trial pathway clearance from the FDA, Nastech's present intention is to independently carry this potential multi-billion dollar drug through to final approval and marketing without partnering it. Last but by no means least is the partnership with Merck for Peptide 3-36 for the treatment of Obesity. We know, from an intellectual property licensing milestone payment that was required, and was paid, by Nastech to Thiakis, that although as yet unannounced by them, Merck has begun Phase II clinical trials on PYY. Merck may (or may not) choose to make some sort of progress announcement regarding PYY later this year.
All of which would seem to indicate the strong possibility that one or more announcements -- which are what move this stock's price -- can be logically expected before the end of this year. T'ain't that far away, kiddies! HOWEVER -- if our expectations for the overall market between now and then are correct, then the general environment for buying and holding stocks could be positively PUTRID ! Therefore, our preference would be to see such announcements (and attendant short covering) take the price of NSTK decisively above (first) 15.18, and then (second) above 16.56, thus negating the technically ominous large potential Head & Shoulders formation that overhangs this stock. Since we are unabashedly prejudiced in favor of this company, its science, management, and stock, which we own in both personal and family accounts, it follows that we would very much like to see this happen. Should our obvious bias disturb you in any way, please disregard our optimism for the future of this company and its stock, which we consider to be very bright indeed.
An Investment/Safety Off-Topic Aside:
Back when I was a professional money manager, and later as editor and publisher of an investment advisory letter, my advice was always to surreptitiously accumulate on dips, and not trade, but hold personally, in a safe, secret and hidden place, physical precious metals in their various forms (silver bars, junk silver bags, gold coins), and TRADE the precious metal mining stocks as you would any other stocks -- buy low, sell high.
That advice, which applies to physical gold and silver, should also apply to your personal choice of firearms for self-defense.
As this nation moves ever more inexorably toward a socialistic-fascistic (totalitarian) One-World-New-World Order under the titular auspices of the United Nations, and away from the independent commonwealth Constitutional republic envisioned by our Founding Fathers, the danger and likelihood of confiscation of individual citizens' private property becomes a greater and greater reality. Let us pray that it never becomes necessary, but some point in our lives, or those of our children, possession of both physical precious metals and firearms may become requisite for our own personal safety or survival.
What follows is from Doug Casey's excellent "From What we Now Know" internet commentary. -- Ken
Federal Gold Diggers
Two weeks ago, the Associated Press reported an incident that—in the chaos surrounding Katrina a few days later—didn’t receive a lot of public attention. However, we think it deserves this attention, maybe as much as the recent Supreme Court ruling on eminent domain.
On August 25, the U.S. Mint seized ten 1933 Double Eagle gold coins that had been turned in by a jeweler who wanted to check their authenticity. These particular coins are so rare that “their value is almost beyond calculation,” reported AP. Which may be why David Lebryk, director of the Mint, claims that they are the rightful property of his agency, allegedly having been stolen from the Mint in the mid-‘30s and now “recovered.”
We say “allegedly” because it’s not at all proven that the coins ever have been stolen or are subject to forfeiture. Until they were confiscated by the government, the rarities had been in the possession of the late Israel Switt, a long-time Philadelphia jeweler, whose daughter is now taking the Mint to court… with excellent prospects, as her lawyer claims.
The more than 400,000 Double Eagles minted in 1933 were never put into circulation because the U.S. went off the gold standard, and all the coins were ordered to be melted down. However, a handful survived, and two of them can now be seen at the Smithsonian. In 2002, another 1933 Double Eagle brought $7.59 million at a Sotheby’s auction—“the highest price ever paid for a coin,” states AP.
Currently, the ten coins are being held at Fort Knox, while the U.S. Mint contemplates what to do with them. Officials said they would not be auctioned off but most likely used for public exhibits. However, it is known that other seized Double Eagles have been melted down.
***
Long-Term Outlook
As we look at the investment and economic “Big Picture”, we see what we consider to be three significant major changes that, with relatively little fanfare, are currently taking place, or have taken place over the past two years. We believe these changes are so important that they will, to a greater or lesser extent, affect the financial well-being of every American, as well as millions of others throughout the world. As such, we want to again call your attention to them, despite some redundancies and repetitions from prior issues which that may entail, and for which we apologise. The three are --
(1) The transition from primary secular bull market to primary secular bear market :
(2) The transition in investor preference from one asset class (paper financial instruments) to tangibles; and
(3) The transition from the Plateau Period of the fourth U.S. Kondratieff Wave, to stock market and economic decline, recession/depression, and war.
Let’s briefly address these three changes by the numbers.
(1) After 16 years of arguably the longest and strongest secular primary bull stock market in U.S. history, which at its peak saw record over-valuation measurements, in 2000 we began a primary secular bear market.
Beginning in 1982, within the context of a secular bull market uptrend channel, we saw every 3-5 years (averaging 4-4 1/2 years) a cyclical bear market correction low (1982, 1987, 1990, 1994, and 1998). Now, the primary secular bear market downtrend channel will see volatile cyclical bear market rallies, each of which will doubtless be proclaimed as the “beginning of a new bull market” by Wall Street and the financial media. However, the longer-term trend is now down. Down is faster. It’s a traders’, as opposed to long-term buy-and-hold investors’, market. A “Buy The Dips” mentality must be replaced by a “Sell the Rallies” mantra. Market timing, once scorned, is now all-important, while stock selection remains more vital than ever.
This primary secular bear market is likely destined to end no earlier than 2006, with a regression to historic fundamental bear market average valuation norms (10P/Es) in popular market indices probably roughly two-thirds lower than present ones -- i.e., 3650 DJIA, 365 S&P 500. Interestingly enough, from a technical standpoint, measured move objectives on the large head & shoulder tops of both the S&P 500 and the DJIA yield very close to the same downside objectives technically, as do the fundamental historic average bear market norm P/E’s.
(2) Recently, approximately every twenty years has seen a gradual but tectonic shift in asset class preference by investors, from the class they perceive as overvalued, to the one they consider undervalued.
In the early 1940’s, with the DJIA at 100, stocks were seen as being on the bargain table. There was a shift out of tangible assets and cash into paper financial assets. But in the early 1960’s with the Dow at 1000, the shift was back out of paper and into tangibles -- commodities, real estate and collectibles - old autos, coins and stamps, rare books, jewelry, objects d’art, paintings, sculpture - BARRON’S contained a section each week on antiques.
But by 1982, real estate and many collectibles were viewed as overpriced by investors, whereas stocks were considered cheap -- we recall seeing the S&P 500 price/earnings ratio briefly at 7 that year. (Incidental-ly, colleague Peter Eliades [Stockmarket Cycles, (800) 888-4351] reminds us that there appears to be a 20-year cycle in stock lows which, logically enough, coincides with those years, with one theoretically due this year, 2002.)
Today, however, with the S&P 500 P/E still well above 30, and despite a 76% decline in the Nasdaq Index and Wall Street analyst’s propaganda to the contrary, stocks are not perceived as “cheap”, nor are bonds with their miniscule yields. And while certain types of real estate -- housing, for example -- are looked upon as overpriced in many parts of the country, several commodities during the past few years were selling at price levels last seen during the Great Depression.
These, plus the activities at Sotheby’s, Tiffany’s, and the recent popularity of “Antiques Road Show” on television, indicate to us that another shift in investor preference is now under way, out of overvalued paper financial instruments, the symbols of “things”, and into the tangible “things” themselves, probably including gold and silver in their various forms. These are likely to become future “investments of choice”.
(3) Kondratieff is alive and well. The obscure Russian agricultural economist, who authored “Long Wave” theory during the Stalinist era, was sent to the Gulag because his theory of a long (54-70 year) economic cycle in the United States conflicted with Communist dogma, which held that the capitalistic system was inherently self-destructive. But his theory, despite detractors, has proved remarkable prescient.
We are now in the fourth Kondratieff Wave cycle in the United States. Just as occurred in the third cycle in 1929, we have seen the simultaneous collapse (albeit largely unrecognized and unacknowledged as yet) of both the stock market and the economy in the year 2000.
That involved a consequent “falling off the back edge” of the “Plateau Period”, when everything seemed on the surface to be doing well, but beneath the surface things were rotten and deteriorating. What an apt description of recent conditions, and remarkably, those of each of the three prior Plateau Periods, in this country!
If events follow the three previous Kondratieff Waves, a deflationary recession, which we feel we are currently headed into, will be followed by an inflationary depression. Politicians, pressed during a recession with no jobs to be had, and people out of work clamoring the government to “do something”, know nothing else to do but urge the Fed to open the money spigots and flood the banks with money. Fruitless, because there are no credit-worthy borrowers! But all that currency, money and credit finds its way inexorably and inevitably into the system, and you have the classic definition of inflation -- too much money chasing too few goods and services. The dollar becomes toilet paper, and gold and silver, and mining stocks, rise in price.
It’s happened before -- remember “wheelbarrow inflation” in Weimar Germany ? Students of our own history will acknowledge the American Revolution and the Continental Dollar, which was eventually redeemed in gold at two cents on the dollar, leading to the expression, “Not worth a Continental”, still heard today (the post-Plateau Period of the first Long Wave in this country.) Those of us from the South recall stories of our aunts, uncles and grandparents of the bitter days of Reconstruction (the second Long Wave in the U.S.) I still have framed on my office wall Confederate dollars and bonds, once valuable as are our own today, then worthless as a result of the Lost Cause. Southern women.who lost their sons and husbands during that war survived by selling their heirlooms of gold and silver - rings, jewelry, etc. Think similar adversity can’t strike again ? It may be different, but if it has happened before, it could happen again. Pray not.
If history follows suit, the depression will be followed in turn by a war -- a strongly-felt, very patriotic Trough War, so-called because it ocurs at the trough, or bottom, of the Kondratieff economic cycle.
Books could be, and some have been, written on each of these three changes. These Reports to you afford us neither the time nor space to devote to them the in-depth discussions they deserve. Rather, our purpose is simply to alert you to these major underlying investment and economic trend shifts, so that you will recognize and understand them as you see evidence that they are occurring.
What is some of that evidence that you and I are currently hearing and observing?
Layoffs -- for example, Schwab laying off 10% of its workforce. If that’s happening to one of the largest discount brokers, what does it mean for the brokerage industry? Alcatel announces a mammoth layoff . . .
General Electric announces it is combining its appliance and lighting divisions to reduce costs and over- head. What does that tell you? They have no aggregate pricing power -- their ability to raise prices is non-existent. They have to combine divisions, close facilities, fire people. Same with Boeing and the fuselage facility in Renton, Washington -- will it be mothballed? How many other factory closures have we seen?
Banner front-page right 2-column headline in the “Personal Journal” section in the Tuesday September 10 Wall Street Journal -- “FORECLOSURES HIT RECORD LEVELS”. Subheads read, Trouble on the Home Front” and “More Homeowners Fall Behind On Mortgages, Stoking Concerns About Housing Market”.
Wal-Mart and others issuing earnings warnings, or failing to make their numbers - EDS, IBM, Morgan Stanley, Emerson Electric, Illinois Tool Works, Charlotte Russe - and Enron, Worldcom, Global Crossing.
It is in this environment that we must not only, as the Bible says, “...live, move, and have our being”, but also buy and sell, trade and invest, very, very carefully -- and hopefully, profitably.
Good luck, and may God bless you and yours!
Kennedy Gammage
The Richland Report
P.O. Box 222, La Jolla, CA 92038
(858)-459-2611 - FAX (858)-459-2612
