7/7/2005
The Short-Term Outlook: Erratic and jerky -- markets appear to be topping one minute, bottoming the next, with interday -- plus (as was the case today) INTRAday -- changes of direction
We once thought - at this point, it appears perhaps mistakenly, but then, perhaps not - that a stronger rally should materialize, in light of the usually bullish Seasonality Effect (per Norman Fosback and Yale Hirsch -- end of June, beginning of July) and July Fourth Holiday marking the beginning of the vaunted Summer Rally, to say nothing of 10-week cycle lows due in here somewhere -- but lo, so far this 'rally' (sic) has been a bit of a party pooper. Or -- has it just begun ? We'll wait and see.
On our Mutual Fund switch Hotlines, we ventured a timid 30% long position, split 15% Nasdaq 100 and 15% S&P 500 on Tuesday (7/5), only to chicken out and exit the position the very next day, yesterday (Wednesday, 7/6.) Now, with today's action, we wonder if we shouldn't have kept it . . . meanwhile, we're nervously maintaining a 25% position in the Rydex Precious Metals Fund, and suggest for those of you so inclined that you may wish to consider a position in one of the Rydex Energy funds ---
Gutless ? You bet. We've been sufficiently whipsawed enough over the past few weeks to have developed a marked distaste for small losses, even when offset by equally small gains. In a market that changes direction every other day or so, and frequently INTRAday, we'd rather be out and on the sidelines in cash -- and accused of being gutless. So be it. We'll await a better entry point on the short side, which may come any day now. Or on the long side. Or we may have to wait awhile -- we'll see. Notice how decisive we are about the market here ? Well, that's because we try to let the market make up our mind for us . . . and if the market can't, we can't either. (Sigh!)
Comments and Updates on Recommended Stocks:
Previous comments in this space about protecting yourself against price vulnerability or stagnation with regard to both Telestone Technologies (TST-Amex) and Guinor Gold Corporation (GNR-Toronto) still apply. However, we feel there is good news concerning potential developments on both of these high-risk, Not Fer Widders-'n-Orphans speculative issues.
The government has decided to break up one of the large Chinese telecom companies, so the advent of Third Generation broadband communications (3G) is now likely be delayed there until that process is completed, probably after the beginning of next year. However, when it happens -- and it is WHEN, not IF -- the ultimate benefit to Telestone, as one of only four suppliers of installation and equipment to that industry , will be much greater -- enormous, in fact -- in terms of revenues and earnings.
You have seen us bemoaning the lack of Canadian analyst coverage of Guinor Gold's good news concerning the Bank Feasibility Study, financing, Kelian mill and plant acquisiton, and and positive initial results on the recommencement of the drilling program. Consequently, we were very pleased to receive on July 4th the following from Judy Webster, North American Investor Relations representative for Guinor -- (888) 771-1453:
"To that point, we have had some very exciting initial results from our IP and resistively surveys which suggest a number of similar trending structures within close proximity to the high grade zones that we intersected late in the 2004 campaign namely, Camp de Base, Bofeko and Lero South so I would expect that news from the drilling program later in 2005 will be as exciting as it was in 2004 and early 2005. At this time Guinor now has coverage from three firms -- BMO (Nesbitt-Burns), Haywood and Wellington West Capital -- and are working hard to increase the awareness of the Street and hope to include other firms to that list. In summary I would think that the later half of 2005 will be one of excellent progress for the LEFAA expansion accompanied by interesting results from our ongoing exploration program, all of which we will continue to communicate to our shareholders."
We hope to see a copy of Craig Miller's (BMO Nesbitt-Burns) Report in the not-too-distant future. Kerry Smith of Haywood Securities rates Guinor as a 'Sector Outperform' (Haywood's highest rating) with a 12-month target of C$1.50. Trevor Turnbull of Wellington West Capital Markets, Inc. issues a New Buy on Guinor with a similar 12-month target of C$1.50, and says, "We expect GNR's (Deep 38%) discount to our C$1.36 NAVPS to shrink with news on further financing, continued reserve growth and advancing construction." We devoutly pray Br'er Turnbull proves prescient!
We hope you'll forgive the repetition, but last week in this space, we said it all, and it all still applies: "We continue to recommend accumulation -- buying on stock pullbacks or dips after accumulating a core position -- of long-term core holding Nastech Pharmaceutical (NSTK-Nasdaq:NM). Technically, the stock recently broke out (a "flagpole", from 13 up to 14.88 on heavy volume) of a rounding saucer-and handle base ... on being added to the Russell 3000 Index, to form a potential right shoulder of a large potential head & shoulder top formation. Currently the stock is consolidating... A bullish resolution to that continuation pattern pennant or flag from here could challenge the prior recent (12-month) high at the "head" of 16.56, thus eliminating the ominous implication of the potential head & shoulder top, but that of course remains to be seen. Fundamentals couldn't be stronger -- multiple Growth Phases in play here -- brilliant management and business plan, cutting age science and innovative and creative scientists, adequate financing, pending announcements of feasibility studies and partnership agreements in the works, and at least two potential blockbusters -- the partnership with Merck for Peptide YY 3-36 treatment for obesity, and nasally-administered Parathyroid Hormone (PTH) for bone growth for osteoporosis. Having gotten the signal from the FDA for the accelerated clinical pathway (505) B-2, the company is contemplating handling this entire operation in-house, without the necessity of giving away the lion's share of this billion-plus-drug away to a Big Pharma partner. Longer-term, Nastech's work with RNAi -- the so-called 'Third Great Breakthrough in Biotechnology' -offers breathtaking potential. Intermediate-term, four current feasibility studies with as-yet-unnamed major pharmaceutical houses include treatments for Alzheimer's, non-PYY obesity, and diabetes, among others, and could result in additional partnership agreement announcements -- any and all of which would, we believe, have a salutary influence on the price of the stock, especially in light of Nastech's many continuing presentations and prestigious industry Conferences, which have within the past few months begun to draw the attention of Wall Street elites -- institutional analysts and portfolio managers. We have done more due diligence and work on this company and its stock than we have ever done on any other. We're admittedly deeply prejudiced in its favor: we own it heavily, so please take that into account in evaluating these remarks. After forty years in this business, in our opinion this company and its stock hold more promise, and are currently more undervalued, than any we've been associated with at this early stage of development.
Take it for whatever you feel it may be worth.
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
