THE RICHLAND REPORT 6/16/05
The Short-Term Outlook: Last week, we said the word for this market was 'frustrating'. That's still true, but to that we'll add 'exasperating'. And yes, "These are (still) the times that try men's souls."
Even our trusty short-term market timing indicator, the McClellan Oscillator, has taken to behaving strangely, perhaps going back in time to previous behavior patterns. It had a Minor Change reading of +6 on Thursday (from +82.57 on Wednesday to + 89.10 on Thursday) which did not reflect itself in a Big Move.. In the old days, back in the 1970;s and 1980's the odds of a Minor Change producing a Big Move were only two out of three, but as time went on into the 2000's, it became almost 100%. Also, the Piggy-Back Minor Changes of +5 and -5, on Monday and Tuesday (6/6 and 6/7), have evidently cancelled each other out, as they almost always did back in the 1970's and 1980's. That is interesting because, as you may know, the Minor Changes of plus or minus 5 are usually more reliable in producing Big Moves than any other Minor Change readings --- 7,6,4,3,2,1 or unchanged. I have no idea why, but has been a fact. SO . . . perhaps the McClellan Oscillator is now reverting back to previous norms.
In any event, the market continues to be in a giant topping formation -- the result of the peaking of the up-leg bull phase of the 4-4 1/2 year cycle that began with the bottom of 2002, and is now destined to head down in the down-leg bear portion of that cycle into 2006. All of this, of course, is within the context of a much longer secular primary bear market that began with the major market top of 2000, and probably won't conclude until sometime around 2010 or thereabouts.
Ten-week cycle lows are due, according to our colleague and Hurst Nominal Market Cycles expert 'Frisco Jim, in both the Nasdaq and Big Board stocks during the early part of July, from which the usually seasonally reliable July Fourth Summer Rally should begin. We've been itching for a decent downer to start which would enable us to establish pilot short positions down into those lows, but to date the market has refused to oblige us with a sufficiently decent entry point, but one without the danger of whipsaws. We're trying to await patiently for a shorting opportunity, but it's hard, man -- HARD!
Right now, on our telephone mutual fund switch Hotlines we're OUT of the overall market, awaiting the aforementioned entry point, and we're 50% long, for both Swingin' Riverboat Gamblers and Intermediate-Term Traders, the Rydex Precious Metals Fund (we're ALWAYS long the physical precious metals themselves, which we buy on dips and hoard, in either silver bar, junk bag, silver and gold coin form, or in the form of silver/gold stocks which represent ownership of the metals themselves -- CEF or GTU-UN-Tor.)
Comments and Updates on Recommended Stocks: Investing, like horseracing, and life itself, consists of choices.
We make those choices based on our estimates of what we think will happen, and almost equally important, when we think they will happen.
In horseracing, our bet made at the beginning is fixed throughout the race. However, in investing, and in life itself, we can change our bets in the middle of the race, as our estimates of the odds, and/or our perceptions of circumstances and situations, change.
As investors. we owe it to ourselves to continually monitor our portfolios, and to assess them in light of (1) our expectations for what we think is going to happen when, and (2) how those expectations square with our investment objectives and time frame preferences. In doing this, we have to be willing to continually shift our asset allocations toward and into those vehicles which we think are more likely to MEET those objectives and time frame preferences, and away from and out of those vehicles which we think are less likely to do so.
I hope you will try to be continually doing this. I intend to be doing the same.
Telestone Technologies (TST-Amex) Once the communist Chinese government authorizes introduction of Third-Generation (3G) broadband technology, we believe this stock will likely double. When will that be ? We don't know, but would guess sometime between September and the end of this year. That's just our guess -- meanwhile, although the company is growing its revenues and earnings at a remarkable rate, there is always the risk that the stock could remain stagnant until the advent of 3G -- again, just our guess.
Guinor Gold Corporation (GNR-Toronto) With the major hurdles of a successfully completed Bank Feasibility Study, plus financing and the requisite Indonesian Government permissions for the sale -- disassembly, packing, crating and shipping, and re-assembly in Guinea, West Africa-- of the Kelian plant and mill, the primary danger now to the stock is one of pre-production stagnation -- a well-known and documented phenomenon, as anyone familiar with mining stocks knows all too well. We would like to see some support in the form of analyst reports and buying from Canadian brokerage houses familiar with the company's feasibility-attested ability to turn out 350,000 ounces at very favorable cash costs, once major production begins in 2006. As of this writing, the stock remains trading, albeit thinly, at around C$1.00-C$1.04. Until production begins, other developments are announced, the price of gold rises appreciably or some evidence of support for the stock appears, as a precaution you may wish to set limits below which you do not wish to see GNR trade.
Nastech Pharmaceutical (NSTK-Nasdaq:NM) This stock was just added last week to the Russell 2000, which in itself guarantees a certain indeterminate amount of buying by strong hands representing clone funds of that index between now and June 24th. Presentations and prestigious Conferences since the beginning of May and through the end of this month have been raising, and will continue to raise, institutional and Big Pharma awareness levels regarding this relatively small-cap little company. The chart looks like a technician's dream, and it appears that Wall Street may be gradually waking up to this currently very undervalued opportunity. The stock is currently trading in a band of overhead resistance up to 13.50, and will continue to face moderately heavy overhead supply until about 14.50. We own ourselves, and highly recommend, buying of this stock on any pullbacks, after you have managed to accumulate a core position (see the company web site at www.nastech.com.) Be aware, now -- we're very biased in this company's favor, and intend to follow our own advice. If this disturbs you in any way, ignore these comments.
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
