The Short-Term Outlook: Same-old, Same-old.
The adjectives which we have used here over the past several weeks to describe the overall market, still apply -- treacherous, volatile, changing direction every day or so, and often several times within the same trading session. And yet, and yet . . .
Intermediate-term, the bias is definitely downward, within which occur short-term counter-trend upward rally blips lasting 2-5 days. Depending on your time frame preferences and risk/reward tolerances, you may elect to ride through these rally blips, and, as Intermediate-Term Traders, HOLD recommended 50% short positions (split half and half -- 25% NASDAQ 100 short positions and 25% S&P 500 short positions), --- OR --- as Swingin' Riverboat Gamblers, you may prefer to TRADE.
As advised yesterday on our Hotlines, Gamblers could have cut back (or covered entirely) your 50% short positions assumed on Friday, August 5th, and gone to cash, with an eye to RESUMING those short positions tomorrow [Friday (8/12), or whenever our timing tools indicate the time for shorting is propitious.] OR -- as a Swingin' Riverboat Gambler -- you may have elected to HOLD those 50% short positions, as recommended for Intermediate-Term Traders, recognizing that the intermediate-term probabilities indicate additional downside ahead. The cherce is yers -- to trade, or not to trade.
We continue, as of this writing, to recommend 100% long positions in the Rydex Precious Metals Fund.
(Our recommendations, which may change, with the markets, by the time you read this, can be heard @ $2.50/minute on our thrice-daily telephone Mutual Fund Switch Hotlines -- call [858] 459-2611 for ID and PIN numbers.)
Comments and Updates on Recommended Stocks:
What we said last week in this space still applies:
"Regarding businessman's risk speculations Telestone Technologies (TST-Amex) and Guinor Gold Corporation (GNR-Toronto), please observe our previously-expressed concerns and caveats. Fortunately, it is possible that the outlook for the fundamentals in both of these situations between now and the end of the year may improve, hopefully resulting in price appreciation sufficient to break them out of their present doldrums. Keep your fingers crossed."
And this comment from last week applies as well:
"Long-term core holding Nastech Pharmaceutical (NSTK-Nasdaq:NM) remains fundamentally the most potentially exciting company we've ever been this close to, this early in its development, in our forty-some-odd years in this business, We're admittedly sufficiently starry-eyed over this company's prospects to believe it is likely to be a Home Run within the next few years, and we own it in personal and family accounts."
Nevertheless, and by the same token, we are all too painfully aware that this company's stock, with a relatively small amount of shares outstanding (18+ million), is thinly-traded and still lacks significant institutional sponsorship. With a recently increased high short interest, NSTK is subject to disappointingly large and sudden short-term percentage declines in price, against which it becomes incumbent upon traders in these shares, and particularly those who hold positions on margin (as opposed to long-term investors), to protect themselves. Over the past three years, time after time, mismanaged corporate financings by Nastech have universally resulted in sharp declines in shareholder value. Last week's ill-advised announcement of a proposed Public Offering of a million and a half shares, from a previously-announced shelf registration, dropped the price of the stock roughly two points, from 14.50 to a low of 12.50. The prompt and decisive withdrawal of that offering, announced the following Monday (8/8) by Chairman, President and CEO Steven C. Quay, constituted part -- one more part remains to be done -- of what we hopefully called in last week's posting here, "remedial action".
The technical damage done to the stock can only be repaired by a rise above the July 11 price high of 15.18, which constitutes the Right Shoulder of a nasty potential Head & Shoulder top, and following that, a rise above 16.56 price of the November, 2004 Head. A rise above the aforementioned 15.18 would set up the possibility of a "Handle" on the Cup & Handle bottom formation beloved by Bill O'Neil, but a continuation on up to challenge, and then better, the 16.56 would still be required. Until then, a decline to or below the neckline of that larger Head & Shoulder top formation, currently between about 10.20 and 10.80, remains a disturbing possibility.
It is our conviction that this company's stock price will be moved forward primarily by announcements -- 'deals and data', as one friend describes them. We believe that those announcements -- or lack of them -- will determine the short-term course of this company's stock price from here, and for the forseeable future.
One such announcement came to light this morning (Thursday, 8/11) on web site www.thiakis.com (once there, click on "News" at the top). Thiakis is a privately-owned company founded in 2004 in London by its chief scientist, Dr. Steven Bloom, who at Imperial College in London conducted the initial Phase I Clinical studies on PYY 3-36 for the treatment of obesity, and from whom Nastech licensed in September, 2004 critical patents and intellectual property relating to PYY 3-36. Nastech also has an investment in Thiakis. These, plus Nastech's own tight junction and formulation science work, later enabled Nastech to enter into a partnership agreement with Merck for the development of nasally-delivered PYY. Under Nastech's licensing agreement with Thiakis, initiation of Phase II Clinical trials triggers a milestone payment from Nastech to Thiakis, which event is detailed in today's Thiakis web site announcement. No mention of Merck appears in that announcement. However, only Merck is authorized, under its partnership agreement with Nastech, to conduct nasally-delivered PYY clinical trials. So -- even though Merck has yet to acknowledge the initiation of those PYY Phase II clinical trials, and under terms of their partnership agreement Nastech is forbidden to make such announcements unless and until authorized by Merck, it stands to reason that if Nastech is now required to pay a Phase II clinical milestone payment to Thiakis, Merck has indeed begun said Phase II Clinical trials. That is good news indeed, and evidently some Wall Street analysts who follow Nastech have already picked up on this. Let's hope it begins to snowball.
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
