The Short-Term Outlook: Herky-jerky, but with a seemingly upward bias which may last well into August, or perhaps even beyond.
Colleague Tim W. Wood (www.cyclesman.com) tells me the one-year Seasonal Cycle low occurred last April, which (given a left translation) we would think argues for a top later in the August/September time frame. Colleague and Hurst Nominal Market Cycles expert 'Frisco Jim called, as we know, the occurrence of a Big Board ten-week cycle low roughly three weeks ago, with the next 20-week low due to occur between September 9-14. A top, obviously, is due prior to those lows, which again would point to the second half of August or early September.
The problem is that every day -- or every other day -- has been seeing a change in market direction, and often these changes of direction occur once, twice or even three times within the trading session itself. We can't make any money during times like that. For all practical purposes, we can only get in or out of the Rydex-ProFund clone funds once a day, at the close. Therefore, until some sort of lasting intermediate-term trend asserts itself, the better part of valor is to be OUT of the market entirely, and out of whipsaw's way, during trendless, up-down periods such as we've been going through for the past few weeks. That said, however, with the bias to the upside between now and sometime in August, we may venture some pilot long positions on our telephone mutual fund switch Hotlines -- perhaps even as early as today. Stay tuned.
Many years ago our friend Fred in Goleta, California, who knows about such arcane matters (whom we affectionately dub our "Goleta Guru"), pointed out the fact that when Mercury goes Retrograde, the McClellan Oscillator has a tendency to go up or down through Zero -- often not just once, but several times. Why this should be I have no idea, but over the years it has certainly proven eerily true. Old friend and colleague Richard Russell tells us his Primary Trend Indicator (PTI) has recently shown a tendency to change direction up and down, as well. Interesting -- I wonder if the two are related. Although the sudden changes of Oscillator and PTI direction have been going on for some time, for the current period Mercury went Retrograde on July 22, and will go direct again after the close on August 15th, so these changes of market direction may continue for some time.
Comments and Updates on Recommended Stocks:
Regarding businessman's-risk speculations Guinor Gold Corporation (GNR-Toronto) and Telestone Technologies (TST-Amex), we have nothing to add to the previous caveats and cautionary commentaries of the past many weeks. We are pleased to see a pickup in the price of TST recently, which is not surprising at the 15% annual rate of earnings growth, but the really BIG news for the company will come with the introduction of 3G telecommunications in China.
Nastech Pharmaceutical (NSTK-Nasdaq:NM). Two items of current interest regarding this long-term core holding:
(1) A Conference Call and webcast for investors and analysts detailing QII financial results (frankly, we don't expect anything of real interest here), and providing an update on its clinical pipeline (which, conversely, we think MAY be VERY interesting!) this coming Monday, August 1st, at 4:30PM EST, 1:30PM PST. US residents dial (800) 659-1942. The access code for the live conference call is 27993972. AND
(2) Short interest in NSTK was reported at 1,133,476, up roughly 75% from about 646,903 shares the previous reporting period. No wonder the stock broke down out of that short-term top at 15.18 earlier this month -- shorts broke it down from there below the 14 support level. The silver lining to that dark cloud -- and it IS a short-term cloud, no question -- is that those shorts will have to be covered on any future rally, adding to its impetus. However, there is no question but what the break below the 14 support was a disappointment, and demonstrated a lack of desirable institutional support for the stock.
Many weeks ago in this space, I pointed out a possibly ominous -- (though still to this date as yet unrealized) -- massive potential Head & Shoulder top formation in this stock, as seen on a weekly chart, or a longer-term daily chart. The Left Shoulder occurred back in April '04 at 14.95; the Head at 16.56 in November '04; and the possible Right Shoulder, should it prove to be that, just recently on July 11, '05 at 15.18. Depending on how one draws it, the neckline is estimated currently to be somewhere between 9.60 and 10.80. A return to those levels would not be pleasant, and a break of that neckline even less pleasant.
HOWEVER . . . as we wrote to a fellow-shareholder earlier this week . . . this being a 'deal & data'-driven stock, I would not be surprised to see NSTK held down this week between today's low of 13.36 and, say, 14.20 (which indeed, as this is written, it HAS BEEN), while the smart money picks up shares here. Longer-term, weekly and monthly uptrends are still intact.
We'll be extremely interested to see what comes (if anything new) of the 'pipeline' discussion in this coming Monday's call. Although admittedly biased (in the interest of full disclosure, we own this stock in personal and family accounts), it appears to us that there are already enough potential announcements in the works between now and the end of the year (some doubtless sooner) -- that based on the odds, the culmination of the huge H&S top is far less likely, it seems to this prejudiced observer, than a successful assault and overcoming of first the recent high at 15.18, and then 16.56. Of course anything CAN happen, as we all know. However, I'm excited about the TNF-Alpha exclusive license on RNAi for Rheumatoid Arthritis, which Nastech will surely partner with somebody, and the potential partnership with either Amgen (Epogen, Aranesp) or J&J (Procrit), or some as-yet-unknown big pharma for anemia, to say nothing of possibly Amlyn and their Simlyn and Byetta for diabetes. Then there's the feasibility study for obesity (NOT having to do with PYY or Merck) and for Alzheimers, to say nothing of the Merck-PYY obesity partnership milestone payment possibility, and an update of the Parathyroid Hormone clinical situation.
We'd think one or more of these could happen before the end of this year. Am I being over-optimistic ? Perhaps -- I'm prejudiced. You be the judge. Fred, the Goleta Guru, reminds me that stock bought here at these levels will be eligible for long-term gain tax treatment in one year, and a buy here now may look awfully smart by this time next year.
I was an idiot -- I know better, heaven knows -- but I let the MM's pick me off on an ENTERED intraday stop at 13.40 . . . they used last Friday's 10-point drop in AFFX, the downgrades of Dendreon, and the drop in the BTX to "gun the stops" below 14 on NSTK. We used to call it "cleaning the books" -- an old Specialist-MM trick -- drop the stock, hit all the stops, buy cheap stock near the bottom, run it back up for a profit and cash out the next day -- such as happened Monday and Tuesday of this week. MMs and Specialists are all thieves -- always have been -- it's as old as the hills. Of course, all TRADING stops on NSTK should be MENTAL only, and on a closing basis, never entered. Oh, well -- a fool and his money are always welcome on the Nasdaq.
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
