The Richland Report
The Short-Term Outlook: Bullish. The question is -- for how long ?
This current rally has lasted for roughly four trading sessions, and appears likely at this writing to last perhaps several more. After a series of spike lows which comprised a several-week-long correction and Complex Bottom formation on the McClellan Oscillator, it moved from a spike low of -261 near the end of last month, up above the Zero line and into positive readings on Wednesday, 4/6/05, thus bringing an end to corrective phase in the market and the Complex Bottom portion.
So far, however, the rally has lacked any real thrust or enthusiasm, and has been marked by a paucity of excitement or leadership. Since the hedge and mutual funds are at extremely low levels of cash, we don't expect more than a few more days of rally before the market peaks, at which time we will look to assume positions in the SHORT clone funds.
On our daily Rydex-ProFund mutual fund switch telephone Hotlines we are currently OUT of the overall market except for adventuresome, nimble Swingin' Riverboat Gamblers, who may be sporting up to 50% LONG positions split 50-50 between the Nasdaq 100 and S&P 500 LONG funds. Because we feel strongly that the next decline in the overall market may be VERY severe, we are personally on the sidelines in cash here, and we suggest that everyone should also be OUT of the Rydex Precious Metals Fund at this time.
Comments & Updates on Recommended Stocks:
Guinor Gold Corporation (GNR - Toronto, symbol GNR.TO on YAHOO!) Completion of an extremely successful "Bought Deal" warrant and private placement stock financing, Guinor now has $72 million in the till and NO DEBT -- all accomplished in a VERY few weeks' time. The 'Quiet Period' is still on due to Toronto Stock Exchange regulations, but will soon be over, after which we expect analysts' reports and publicity to begin to flow. While the stock has not advanced appreciably in price (1%), during the exactly one year since it was first listed on the Toronto, strength of the Canadian dollar versus the US dollar has resulted in a currency translation profit of 17% for US holders of Guinor stock. Beginning in early May, two new drill rigs will be focussed on high-grade ore targeted in earlier exploration efforts, and this is expected to raise the grams-per-ton from an original 1.5 to a more recent 1.7, and we would not be surprised to see 2g/t by the end of this year. Guinor's Annual Report is expected out any day -- copies may be obtained by calling Ms. Judy Webster toll-free at her number listed on the web site www.guinor.com.
Telestone Technologies (TESN-OTC:BB -- still awaiting listing on the Amex) continues to drift upward in price on very light volume. We believe the Amex listing will be important in terms of arousing interest in this little-known but incredibly rapidly-growing equipment supplier and installer servicing the burgeoning Chinese telecom industry.
Long-term core holding Nastech Pharmaceutical (NSTK-Nasdaq:NM) came out with an absolute blockbuster of an announcement and Press Release on Tuesday (4/5) (www.nastech.com). It was not only ignored, but its significance almost totally missed, by Wall Street. (Sigh! Why are we not surprised ?) However, the good news is that Dr. Quay evidently now feels comfortable that Nastech's IP and patents are sufficiently protected to enable him come out of the closet and permit us a peek under Nastech's RNAI-Tight Junction tent.
A few institutional types did just that on the following day, Wednesday (4/6). They caught a glimpse of the elephants dancing with lions and tigers and bears under the Big top. Realizing that what they had seen was merely a Prevue of Coming Attractions, they decided to buy a ticket to the Big Show of the Future, and their heavier-than-average volume took the price up over 7% to 10.54, and in doing so broke out above critical overhead supply and the upper Standard Deviation limit (some call it a Bollinger Band) at 10, thus rendering a technical short-term BUY signal. All of which is technically very, very constructive. We followed the lead of a friend today and bought more shares. (Course, he's landed gentry -- we's jes' po' folks!) Are we biased ? Prejudiced ? You better believe it!
But the RNAi news, dealing with a collaboration with Mayo Clinic for a new method of treatment of rheumatoid arthritis (and, by implication, MANY other diseases -- cancer ? HIV ? Lupus ? MS ?) -- reading between the lines (far beyond the ken and capabilities of most Wall Street analysts) -- is simply staggering, and VERY exciting for this little company.
Listen to this quote from Dr. Quay in the Press Release of 4/5: "Applying our proprietary peptide-based delivery system, we have identified a range of therapeutic formulations that may effectively address the challenge that others have not been able to solve of delivering small interfering RNA (siRNA) sequences into cells." (i.e., "Our little company's dedicated scientific team has found what you've been looking for futilely all these years, Big Pharma!")
Literature tells us that there have been three great breakthroughs in Biotechnology -- the first two, gene splicing and monoclonal antibodies, occurred around ten years ago. The third, ribonucleac acid interference (RNAi), is now in progress. But current literature also always adds this caveat -- 'the problem with RNAi is DELIVERY of drugs to the cells'.
With this announcement and Press Release, Nastech is telling the pharmaceutical industry (and the World, and Wall Street, when it wakes up to the message) -- "Nastech, with its proprietary Formulation Science excipients and Tight Junction Technology, HAS the capability of DELIVERING drugs to the cells -- we have SOLVED the major problem of RNAi -- DELIVERY!"
Nastech is AHEAD of EVERYONE in the field of RNAi -- cutting edge stuff. Look at it this way -- each proprietary excipient is a separate drug in itself, tailored to the needs of the particular tight junction and drug to be delivered. Nastech could be considered a pharmaceutical company!
Exciting ? You bet! Implications for the future ? Breathtaking.
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
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