The Short-Term Outlook: Stubbornly resilient, the markets just don't seem to want to go down here.
Yesterday, (Wednesday, 7/20), despite less-than inspired earnings from Intel and YAHOO!, and positively putrid ones from GM, after a negative opening and a few hours below flat, the market shrugged off its malaise and perked up with almost a 2-to-1 ratio of advances over declining issues on the close. That, together with today's action, took the McClellan Oscillator up sharply from Monday's -38, leading us to wonder ---- could that -38 have been a Buy Spike, and the forerunner to a substantial intermediate-term rally ?
Well -- just MAYBE -- and of course, maybe NOT, as well -- only time will tell. But the possibility was enough to cause dyspepsia as a result of another whipsaw, since we were forced to yesterday to cover the 30% short positions (15% short S&P 500, 15% short Nasdaq 100 clone funds) which we had advised on our Monday telephone mutual fund switch Hotlines for Swingin' Riverboat Gamblers (and those Intermediate-Term Traders who didn't mind what we warned might be a short-term trade, as it certainly turned out to be.) With the drop of the XAU below 90, we also exited (perhaps prematurely -- we'll see) our remaining 25% long position in the Rydex Precious Metals Fund, as well. Colleague and Hurst Nominal Market Cycles expert 'Frisco Jim tells us we had an 11-week cycle low in the Dow (and possibly a 10-week low in the Nasdaq, as well) on July 8, so we have a few weeks of leeway for a rally off of those lows, unlike the XAU, where Jim thinks it is possible to see that perhaps trade somewhat lower. There, as with the overall market, we prefer to get a definite BUY or SELL signal before moving off the sidelines.
As regards whipsaws, we should know better by now. Fred, our Goleta Guru, always warns us about Mercury going retrograde. That usually means that the McClellan Oscillator during those periods whips wildly up and down, back and forth through the Zero Line like one of those lie-detector drums of a serial axe--murderer being questioned by the police. It's enough, like Greenspan's Delphic utterances, to cause one to seek the assistance of strong waters.
Comments & Updates on Recommended Stocks:
The late Arnold Bernhard, founder of VALUE LINE, once said something to the effect that (and I paraphrase): "The future must always remain cloudy and unknown. However, as investors, it is our duty to attempt to peer into it as best we can, no matter how imperfect our vision." Along those same lines, Dr. Peter Drucker, one of the foremost business consultants of our time, said (and again, I paraphrase): "It is impossible to predict the future. The best we can do is look at events which have already irrevocably happened, and estimate what their impact may be."
Every successful investor knows, and acts upon, the fact that stocks move in advance, and in anticipation, of events.
HOWEVER . . . investing, like life itself, is a business of odds and probabilities. Assessment of those odds and probabilities, and of the risks and rewards they entail, depend very much on the preferences of the individuals making the assessment, and (believe me!) they differ widely and wildly from individual to individual, as do investment time frame preferences. Think day-traders versus long-term investors, over many years or decades.
Many professional money managers and individual investors, mindful of the risk entailed in putting an investment into a seemingly promising, but as yet unproven, entity, without sales or revenues or earnings, prefer to wait to take positions in the stock of that entity until those sales or revenues or earnings are a present reality, even though the price of the stock may be significantly higher by the time they are achieved. For those cautious investors, that increase in the price of the stock between when they COULD have bought it earlier, and the much higher price when the investment is considered "safe" enough to make, is the cost of an 'insurance policy' against the possibility that premature investing 'on the come' in the unseasoned company might not work out.
Other, more adventuresome investors -- sometimes with their courage bolstered by exhaustive due diligence, and sometimes not -- may decide to 'take a chance' that an investment in this seemingly promising but as yet unproven entity without sales, revenues or earnings reality, offers a sufficiently attractive risk/reward ratio, and that at the present stock price level, their perception of the odds and probabilities favor success.
Two preference levels -- cautious, and adventuresome -- each exist, of course, in varying degrees. .And that, gentle readers, is why we have chocolate and vanilla ice cream. To say nothing of the aforementioned strong waters. Ya pays yer money and ya takes yer cherce. Each of the three stocks mentioned below represent those preference levels -- in different degrees.
Guinor Gold Corporation (GNR-Toronto), despite a nice updated recommendation from Wellington West with a one-year target price of C$1.50, remains in the doldrums price-wise. We were frankly disappointed in the luke-warm, half-hearted paragraph update by principal Nesbitt-Burns underwriter analyst Craig Miller, which was not exactly a ringing endorsement. While the future may hopefully see an improvement with good exploration drill results, which we DO think MAY be forthcoming later this year or early next . . . we must be candid in warning that in the interim wait, the absence of new buying and excitement, may prove hurtful to the stock price.
Price upticks and the possibility -- although by no means assured -- of some big contract orders, keep our hopes up for Telestone Technologies (TST-Amex). The advent of 3G in China will result in a HUGE jump in revenues and earnings for this company.
I am virtually certain that there are a number of institutional money managers who will be willing to invest in long-term core holding recommendation Nastech Pharmaceutical (NSTK-Nasdaq:NM), once the stock has what they consider to be suitable sales, revenues and earnings -- and by that time, the price could be in the forties, sixties, or eighties.
Me, though, rakehell daredevil that I am, white scarf flying over my shoulder, dirk in my teeth -- I look at Merck and PYY, Calcitonin and Par, PTH, and three collaborations with as-yet-unknown Big Pharmas -- obesity (non-PYY/Merck), Alzheimer's (and Dr. Quay's Patents-Applied-For last week), and diabetes (Amlyn-Lilly's Symlin and/or Exenatide come to mind), together with a fourth collaboration later this year, plus yesterdays licensing agreement with Alnylam and partnership discussions on RNAI-treatment for rheumatoid arthritis -- and I say to myself, "Hey, Dude." (I sometimes call myself that when I'm feeling rambunctious), "I'll add to my position here in the 14-15 range, comfortable and confident that this stock is going a LOT higher later this year (or early next) WITHOUT much in the way of sales, revenues or earnings -- YET. But I believe the odds and probabilities are that THOSE WILL COME LATER, with all those pipeline balls in the air, and even if one or two of those pipeline balls fall -- there are plenty enough left to STILL take this stock a LOT higher!" That's what I say to MYself. What YOU say to YOURself is up to you.
But remember -- we're already up to our eyeballs in this stock in personal and family accounts, so we're admittedly biased and greedy.
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
