The Richland Report 4/29/2005
The Short-Term Outlook: Unstable, Volatile, Treacherous, Perfidious and quite likely Malign.
If it has not already done so (and we're fairly sure it has, but let's be conservative and give it the benefit of the doubt), the 4-4 1/2 year cyclical bull market, which began in October of 2002, is now at last topping out, and beginning its bear-phase downward slide into its ultimate 4-4 1/2 year cycle trough, due around late 2005 or in 2006.
It is important to keep in mind that this 4-4 1/2 year cyclical bull market (as well as future ones) occurred within the larger context of a primary, secular BEAR market, which began in 2002, and is destined to run for many more years -- our best guess is 2010 or longer.
During the past few weeks, and last week in particular, markets have been marked by cross-currents and volatility, with changes in direction not only inter-day, but intra-day as well -- not only up-one-day-down-the-next, but up-down-up-down within the same day. Hence -- Unstable, volatile, treacherous, and perfidious.
Being able to get into and out of our index clone mutual trading funds (Rydex, ProFunds) to all intents and purposes only on the market close each day, we can't make any money with those constant changes of direction. You need a trend of at least a few days', preferably a few weeks', duration, to be able to make any money trading these funds. On our mutual fund switch telephone Hotlines (If you're interested in these Hotline messages at $1.75/ minute, call us at [858] 459-2611 and we'll mail your Passcode and ID numbers), after being whipsawed twice with pilot positions, long and short -- once late last week and again earlier this week -- we decided discretion was the better part of valor, and retired to the sidelines in cash -- neither long nor short.
But with today's downside action, we believe a trend longer than a day or two may be manifesting itself. On our Thursday (4/28) telephone Hotlines, we suggested 50% short positions for both Swingin' Riverboat Gamblers AND Intermediate-Term Traders, split 25%-25% between the Nasdaq 100 and S&P 500 short clone funds, with an expectation of increasing those positions to 100% tomorrow, if the market validates our positions and continues down.
We're also OUT of the Rydex Precious Metals Fund, and in cash with that pile of money for now. Our charts of the HUI and XAU -- the mining stocks, which are for trading, NOT holding -- look like the Death's Head at the Feast. Charts of the physical precious metals themselves (coins, silver bars or bags) -- which are NOT for trading, but for accumulating on dips and hoarding -- are nothing to write home about themselves, but at least somewhat healthier-looking than the mining stocks, with which there's a disconnect right now.
Comments and Updates on Recommended Stocks:
Telestone Technologies (TESN-OTC:BB) Still awaiting word from the Amex on their listing, the stock of this fast-growing Chinese supplier to that country's exploding telecom industry will become even more interesting should China even partially cut loose its currency from the dollar, as it is being pressured to do by the U.S. and trading partners. Meanwhile, TESN drifts, pending news.
Guinor Gold Corporation (GNR-Toronto, GNR.TO on YAHOO!) Following the successfully completed public offering -- which will enable Guinor to complete the purchase the US$90 million Kelian mill and plant in Indonesia, crate and ship it to Guinea, and reassemble it there -- the Quiet Period mandated in Canada by the TSX lasts through May 11th, the date of the Annual Shareholder Meeting, and through the month of May in the U.S., where the company shares are not registered with the SEC or blue-skied. (They must be purchased by U.S. citizens on an "UNSOL" basis [i.e., orders unsolicited by the broker]). What that means is that Canadian brokerage firms doing business in the United States (namely, Nesbitt-Burns and Haywood Securities, the primary underwriters) are not allowed to promote, discuss, or issue analyst's reports on Guinor until those respective Quiet Periods are over. Therefore, we don't expect any real movement in the stock to occur until after May 11th at the earliest, and probably until after the end of May. Meanwhile, the option owned by the Indonesian Government on the Kelian plant was allowed to expire unexercised, so the crating and shipping process is now under way, to everyone's great relief. Where gummints are concerned, as Fats Waller used to say, "One never knows, do one!" See the web site www.guinor.com.
Comments & Updates on Recommended Stocks:
Both Guinor Gold Corporation (GNR-Toronto, GNR.TO on YAHOO!) and Telestone Technologies (TESN-OTC:BB), in the absence of news (which could come on both literally any day, or any week), continue to drift up and down in price on light volume in a hostile overall market environment. Analyst's reports and the end of the Quiet Period are awaited on Guinor, and word from the Amex is awaited on their listing for Telestone. We, and I'm sure you as well, find it achingly patience-trying.
Equally, if not more, patience-trying is the stock of long-term core holding Nastech Pharmaceutical (NSTK-Nasdaq:NM). There IS extremely exciting good news of a fundamental nature there, regarding breakthrough work with RNAi on the treatment of Rheumatoid Arthritis, but it is either misunderstood or ignored by Wall Street. As we paraphrased H.L. Mencken on the Nastech YAHOO! Message Board, "Nobody ever went broke underestimating the vision and intelligence of Wall Street's Biotech analysts and portfolio managers." Here is a stock selling for an incredibly undervalued $10 per share, which based on its potential -- plus its science, management, pipeline and finances -- should be selling for easily three, to perhaps as much as ten, times that price. PYY with Merck for obesity, Parathyroid Hormone and Calcitonin for osteoporosis, Morphine Gluconate for breakthrough pain in cancer, three collaborations announced and more on the way, and now this RNAi for Rheumatoid Arthritis --how long will it take the Street to catch on ? We would GUESS no later than QIII of this year, but no guarantees -- sometimes those clowns on Wall Street can be dumber than posts, rocks and oysters combined. That's pretty dumb.
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!
(858)-459-2612
Kennedy Gammage
The Richland Report
P.O. Box 222, La Jolla, CA 92038
(858)-459-2611 - FAX
