The Short-Term Outlook: Up.
In this space last week, we said, "Been down long enough -- time to start covering shorts, and think about going long for a several-week Seasonality Effect-Labor Day-September rally, followed by a drop into October-December lows."
What we said last Thursday still holds as this is written this Thursday. It looks as if that short-term Seasonality Effect-Labor Day rally, despite this week's up-down backing and filling, may finally be materializing. It may require more time to be certain, of course, but as we mentioned earlier, the passage of the McClellan Oscillator readings up from negative territory, above Zero, and decisively into positive territory, will effectively terminate the Complex Bottom Formation (bearish, below Zero) now in its seventh week, and initiate what we call a Middle Part -- a bullish rally above zero, usually lasting 2-4 weeks, sometimes shorter, sometimes longer .
At some indeterminate time thereafter, every Middle Part rally will be inevitably followed by another plunge below the Zero Line. That plunge may be of either short or long duration. If the plunge below zero is of relatively short duration, it usually means that a rally of bullish significance may follow shortly thereafter. We call such a short-lived plunge below Zero a "Buy Spike", because as close to the tip of that spike below zero as possible, you want to BUY for the rally that follows. When we first discovered this often months-long McClellan Oscillator structure back in the mid-1970's, we named it a Bottom Formation, since we found in checking back that it had occurred at EVERY major 4-4 1/2 year low since 1962 (which is as far back as we have records), and likewise at MOST other major cycle lows since then, as well.
Alternatively, if the plunge below zero lasts for several weeks, and consists of a series of jagged, up-and-down spikes, it comprises what old friend Sherman McClellan, its inventor, named a Complex Bottom formation. This implies a bearish correction lasting several weeks or more.
The problem early on, of course, when the Oscillator first falls through zero, is discerning which it is going to be. It may require the passage of time to be certain, but it is here that other valuable market indicators such as Momentum (rate of change), MAC-D, RSI, Stochastics, etc., can be of great help.
In the current situation, at such time as we see the Oscillator rise strongly and decisively above zero, the likelihood is that a Middle Part rally has begun in earnest. When that occurs, we'll want to be 100% long for as long as the rally lasts. Remember that the McClellan Oscillator usually leads the market at tops, turning down before the market tops out, but is coincident with the market at lows, or bottoms.
Today (Thursday, September 1st), on our telephone mutual fund switch Hotlines, we recommended an increase to a 50% long position in the markets, divided evenly 25% and 25% between the long Nasdaq 100 and the long S&P 500 funds, with a continuing 50% long position in the Rydex Precious Metals Fund. With 2003 advancing issues over 1275 decliners and 54% of the volume up versus 43% down, the McClellan Oscillator closed at +36, up from Wednesday's +6. Maybe it's a start . . .
Updates and Comments on Recommended Stocks:
Speculative (i.e., NOT fer Widders 'n Orphans) Guinor Gold Corporation (GNR-Toronto) continues to make fundamental progress -- continuing exploratory and high-yield sampling drilling programs, bolstering its financial position by obtaining requisite bank loans and equity offerings for expansion from a small to a mid-tier 350,000-ounces per year producer, and shipping and re-assembling in Guinea the Kelian Plant and Mill purchased from Tio Tinto Zinc in Indonesia (see their web site at www.guinor.com). While these constructive fundamental developments are slowly evolving -- because in the extractive industries, as in the pharmaceutical industry, such developments always require inordinate amounts of time -- the stock continues to mark time, going sideways in a dull, devoid-of-excitement trading range at around C$.0.95, or US$0.77. As stated herein many times, as we see it the principal risk in this potentially excellent gold mining company speculation -- incidentally, one of the best, if not THE best, of the hundreds of small gold mining speculations we know of -- is stagnant money, due to lack of significant retail and institutional sponsorship. If you don't already own GNR, perhaps the safest way to play it is to buy when the stock breaks out above C$0.99, or thereabouts, and accumulate it as it moves higher.
Long-term core holding Nastech Pharmaceutical (NSTK-Nasdaq) continues to be the most promising situation we've ever been this close to, this early in its development, in our forty years in this business. On their web site, www.nastech.com, we note the following September presentation dates: 14th - World Obesity & Weight Loss Congress. Washington, DC; 20th - Merriman Curhan Ford & Co. Investor Summit, San Francisco; also on the 20th - Washington Biotechnology and Biomedical Association/Delafield Hambrecht Investor Forum, New York; 26th through 28th - Drug Delivery Technologies and Deal Making Summit, New Brunswick, NJ; and on the 29th - UBS Global Life Sciences Conference, New York. It is possible, although by no means certain, that information regarding the current status of elements in Nastech's crowded pipeline may come out during this period, and if so, be discussed in some of these presentations. As we've said many times here, we consider this to be a stock whose price is driven by news and announcements. Last week we mentioned the recent successfully-placed financing with three major institutions of 1,750,000 shares at $13.50, thus providing the company with a comfortable balance sheet. We also mentioned some of the many upcoming announcements of events, possible partnerships and feasibility study collaborations expected to be announced in the next four months, so we won't repeat those here. Because we are admittedly quite prejudiced in favor of Nastech, and own (for us) a considerable position in the stock, we hope and believe that these announcements could serve to propel the stock above the critical 15.18 and 16.56 overhead price levels before the end of this year. We recommend its accumulation.
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
