The Short-Term Outlook: In a word, frustrating. "These are the times that try men's souls . . . "
For weeks now we've been seeing a giant topping action in the overall market, with frequent air-pocket corrections followed by explosive little rallies. None of that may seem to make any sense in light of the big overall picture, but it nevertheless makes this market, like a snake, hydra, or nine-lived cat, hard to put down as yet with any finality. Long-term, we're in a secular primary bear market, within whose context we are now seeing the demise of a cyclical bull market up-leg that began off of the 2002 bottom, and is now in the process of topping out.
On our telephone mutual fund switch Hotlines, we've been 50% long the Rydex Precious Metals Fund since May 20th, and have been successively short the Nasdaq 100 and S&P 500 clone funds -- first 25% each, then 15% each -- and getting occasionally uncomfortably whipsawed -- but by and large barely breaking even, with either a small loss or gain to show for it. Finally, on Wednesday (6/8), we decided the risk/reward ratio was simply not sufficiently unattractive to warrant exposure, either short OR long. So . . . we are currently OUT of the overall market, and on the sidelines in cash, awaiting a good shorting entry point. Which may come any day now. Because, you see --
-- colleague and Hurst Nominal Market Cycles expert 'Frisco Jim is looking for a possible 10-week cycle low, on both the Nasdaq and the Big Board issues, around the early part of July, followed by the usual Fourth of July "Summer Rally". We'd like to be short down into those lows, and then long as close to those cycle low bottoms as possible, for the resultant short-term rally. After that, though, there's the possibility that the wheels may come off down into November. Up-down, up-down -- a TRADER's market. Remember (and do have some Madiera, m' dear), I never promised you a Rose Garden.
Comments and Updates on Recommended Stocks:
Telestone Technologies (TST-Amex) No change -- continues to plug along at around 4.40, awaiting 3G (Third Generation) telecom approval from the Chinese Government, which will mean a huge increase in this supplier's revenues and business. WHEN ? No one really knows . . . the danger here is stagnant money, so don't hesitate to set a stop below which you do not wish to allow the price to fall.
Guinor Gold Corporation (GNR-Toronto) Here again, the risk is stagnant money for an indeterminate period of time. The good news is that a vitally important hurdle was cleared last week -- (frankly, we were scared to death) -- when Guinor's top management, working behind the scenes in Indonesia, obtained, on time and before the financing deadline, the necessary clearances and signatures to revoke Indonesia's option to buy the Kelian plant and mill owned by Rio Tinto (RTZ), thus enabling the negotiated sale to Guinor to proceed on schedule without disrupting the previous financing arrangements. That was a major triumph, for which Guinor management deserves great credit. This past week, several major blocks of stock were crossed on behalf of parties unknown. The price currently fluctuates between C$0.95 and C$1.05. We'd like to see some institutional support by the principal underwriter, Nesbitt-Burns, which appears to have been a seller on balance over the past few months. We're told by our trader friends that they believe there's an 'iceberg' -- (i.e., a large overhanging indeterminate-sized block of stock for sale, ' beneath the surface') -- which will need to be cleared out before GNR can appreciate significantly. Unfortunately, we don't see any likelihood of that happening until and unless the company announces some sort of plan of action which would encourage accumulation and buying of GNR between now and the time the Kelian mill and plant comes on stream and begins production months from now. Hence our comment at the outset regarding our concern about the risk of stagnant money. See the company web site at www.guinor.com/
Nastech Pharmaceutical (NSTK-Nasdaq:NM) This long-term core-holding recommendation, which we own in personal and family accounts and in whose favor we are admittedly unabashedly biased, we believe should be bought on any price dips, and accumulated for significant future gains, once Wall Street tumbles to the company's deliriously exciting and promising science, good balance sheet, and outstanding management. Many important Conferences and presentations between now and the end of June should help in this regard, but a catalyst -- some important event or announcement during the third or fourth quarter -- may be needed to trigger the strong-hands institutional buying that we believe will likely eventually occur. No one-trick pony, this little company has many promising irons in the fire, any one of which could take the value of the stock to multiples of its present price. Watch the web site at www.nastech.com/
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
