From 7/14/2005:
The Short-Term Outlook: Failing rally, perhaps lasting into options expiration Friday, perhaps topping before then, but in either event highly likely to crump out next week and head South.
The question is -- AFTER THAT, will we have one final (and in all probability failing) last-gasp hurrah into August ? OR -- is this rally IT, and the sound we're listening to today is this little (failing) rally's death-rattle, prior to the market's greased chute slide down into the October-November lows ?
Now, look-a here, Chile! If you expect answers to sophisticated questions lak' dat, don' come sniffin' roun' here -- we ain' t got no Crystal Ball, Taro Cards or Mojo, No-How, and we don't Say no Sooth! So There! Consult a fortune-teller -- maybe take a trip to Delphi and look up that Oracle -- forget the cat's name, but he's rich as Croesus, so lak' 'Ol' Man River, he mus' know 'Sumpin' ! Fer our answers, we look to dat ol' Market itself, and it's messenger, the McClellan Oscillator. And here's what it's
telling us here . . .
At market TOPS (unlike market bottoms, where it is a simultaneous indicator), the McClellan Oscillator LEADS popular market averages, by anywhere from several days, to several weeks or more, depending. AND Minor Change Readings (unchanged to + or - 7 from one day to the next) in the Oscillator can sometimes give us a clue as to when what we call "Big Moves" (3/4 of 1% or greater) are going to take place in popular market averages. F'r instance, a +2 Minor Change in the Oscillator last Thursday (+10 to +12, rounded) led to a Big Move the following day, Friday. Then, on Monday, the McClellan Oscillator reached a high of +127, followed by ANOTHER -7 Minor Change reading on Tuesday, which has yet to result in a Big Move. BUT -- we believe IT WILL OCCUR, in all likelihood, within the next 3 trading sessions. Look for that BIG MOVE!
HOWEVER -- the +127 proved to be at least an interim PEAK or TOP, from which the Oscillator curled over, and is working its way down toward Zero, while popular market averages are grudgingly struggling a bit higher towards options expiration Friday. Today, Thursday, while all indices were UP a bit, the McCelllan Oscillator continued DOWN to a reading of +32. Based on past history, soon popular market averages, too, will follow the Oscillator, and curl over and start down. They will begin to go down hard, in earnest, only after the McClellan Oscillator finally works its way down to -- and then decisively (after the usual hesitation), through -- Zero.
That may, or may NOT, happen. Nominal 10-week cycle lows are now running long (11-12 weeks or so), and are probably due in here sometime soon, according to colleague and Hurst Nominal Market Cycle expert 'Frisco Jim, which means that we could see a NEW rally begin off those lows which would take us into an August top --- see Paragraph Two above.
Then see Paragraph Three, below Paragraph Two.
On our mutual fund switch telephone Hotlines, we took profits on our 50% long positions (25% long S&P 500, 25% long Nasdaq 100 clone funds) taken Friday (7/8), a few days earlier, and ran for cover and cash on Tuesday (7/12), day before yesterday. Now, we're awaiting a good entry point to go short the overall market -- this week, or early next. MAYBE. Depends on whether we get that 10-week cycle low rally mentioned above. Meanwhile, we continue to hold a 25% long position in the Rydex Precious Metals Fund, as long as the XAU remains above 90.
Comments and Updates on Recommended Stocks:
Last week's remarks regarding both Telestone Technologies (TST (AMEX) and Guinor Gold Corporation (GNR-Toronto) still apply, so heed them as before. As we see it, the danger in both is still stagnant money -- or worse, a dropoff in price -- due to lack of buying interest, pending some sort of positive news, hopefully later this year, or perhaps next. We were heartened to see some buying interest evidenced this past week in Telestone, as well as in Guinor, and hope it can be maintained and enhanced.
We were likewise heartened to see this past week a continuation of the technically constructive consolidation, on better-than-average volume and despite the absence of any major news, in the upwardly mobile chart pattern of the stock of long-term core holding Nastech Pharmaceutical (NSTK-Nasdaq:NM). To us, this registers without question testimony to the effectiveness of Nastech's almost weekly two-month round of presentations at prestigious industry Conferences, and culminating with its recent successful hosting two weeks ago, for approximately eighty of Wall Street's most influential institutional biotech analysts and portfolio managers, an Analyst's Day luncheon presentation. The brainchild of Matthew Haines, formerly Nastech's Director of Corporate Communications and now Vice-President of the Noonan & Russo Division of Euro RSCG Life, IR consultants to Nastech, it was held at New York's University Club and featured four outstanding authorities as speakers in their respective fields of biotechnology, including obesity, RNAi, etc.
In our considered opinion -- and remember, we're prejudiced,. because we own, in both personal and family accounts, a considerable position for us in this stock, and are adding to our position in it as this is written -- the recent "Buy" analyst coverage from Bert Hazlett at Suntrust/Robinson-Humphrey and Jose J. Haresco at Merriman Curhan & Co., as well as the larger-than-average buying which has caused the technician's-delight constructive chart pattern in Nastech's stock, must be largely attributed to Dr. Quay's and his management team's persistent efforts in bringing Nastech Pharmaceutical, it's science and pipeline, to the attention of Wall Street, the biotech and pharmaceutical industries. We will be interested to see, in the days to come, the additional institutions who have now newly assumed positions in NSTK, as well as any additional new analyst coverage. With the promise of 'deals and data' to come, we look for similar progress to continue in the foreseeable 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!
Kennedy Gammage
The Richland Report
P.O. Box 222, La Jolla, CA 92038
(858)-459-2611 - FAX (858)-459-2612
