The Short-Term Outlook: Toppy and choppy, but soon probably Down and Bearish.
Frankly, there's not much more to say at this time. The McClellan Oscillator, and the stock market, are flopping and bouncing up and down like a drunken trampoline player on Speed. Colleague and Hurst Nominal Market Cycles expert 'Frisco Jim expects important cycle lows due around mid-September, but we'd expect the usual Summer Rally before that, around Independence Day. On our telephone mutual fund switch Hotlines, we're recommending -- for both Swingin' Riverboat Gamblers and Intermediate-Term Traders -- 50% SHORT positions, divided equally 25% and 25% between the S&P 500 short clone funds and the Nasdaq 100 short clone funds. For now, we're also recommending 50% LONG positions in the Rydex Precious Metals Fund.
Comments and Updates on Recommended Stocks:
Guinor Gold Corporation (GNR-Toronto) The Bad News: we would not be surprised to see -- in fact, we now expect -- a delay, past the June 4th warrant financing cutoff date and into sometime this Summer, in obtaining the necessary signatures from the two Indonesian Government officials -- the Minister of Mines (who is also the head of OPEC, and out of the country), and the Minister of Finance -- which would release the Indonesian Government option to retain in Indonesia the Kelian plant & mill, currently owned by Rio Tinto Zinc (RTZ) and purchased by Guinor, pending government release of its option. The Good News: since the Indonesian Government definitely does not wish to retain the Kelian plant, it WILL eventually be transferred to Guinor, albeit later than expected and hoped. This delay, if it occurs as we suspect, could trigger a Plan B, whereby the purchasers of the warrants will be given a choice of two alternatives, one of which must be exercised within a time deadline window of five days after the June 4th cutoff date. Warrant holders may elect to either (1) get back in cash 78.53% of the $1.05 they paid for the warrants, with the remainder in Guinor stock; OR (2) continue to hold the warrants until the Kelian plant transaction is completed, and receive a 10% stock bonus for electing to wait. Meanwhile, until this is all settled, the stock will doubtless continue to drift, and may quite possibly drop in price as a result of disappointment with the delay. At present, the stock continues to drift pending news. For our part, we believe any such price drops will likely be temporary, but of course no one can know for sure. Based on excellent reserves and bank feasibility figures. and pending what we believe will be eventual favorable overcoming of these admittedly exasperating but all-too-common delays, unless present circumstances change. we intend to continue holding our own shares.
Telestone Technologies (TST-Amex) This fast-growing supplier (one of four) to the Chinese Broadband Telecom indistry continues to grow at the present rate of 15%, but will expand its growth exponentially with the advent of 3G in China. The stock is currently in a basing pattern, drifting between 4.50 and 5.10.
Long-term core-holding recommendation Nastech Pharmaceutical (NSTK-Nasdaq:NM) continues to sport one of the nicest chart patterns we've seen in ages, as well as the most promising fundamentals we've seen on any stock in our many years of investing. They have so many things in the works, and with such incredible profit potential, that it is hard to conceive that it could all be "fer real". And despite today's price breakout (stock up 80 cents, or 6.93%, to 12.34 on twice-average daily
volume), Wall Street still doesn't 'get it'. But eventually, it will. Dr. Steven C. Quay, Chairman, President, and CEO, and his top scientific associates are currently making, between now and the end of June, a series of presentations at important Conferences and with individual institutional investors and investment groups which we believe will trigger awareness of this extremely undervalued stock -- see the web site at www.nastech.com. You should be aware, however, that we're personally very biased -- we own a lot of it, and expect to see it trading a lot higher in the future.
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!
