The Richland Report
The Short-Term Outlook: Still up, but already showing signs of tiring. The McClellan Oscillator today (9/8) was a puny +15.50, down from Tuesday's somewhat more robust, albeit still modest, +78.28. The September Middle Part rally is now one week plus one day old.
What we said in this space last week still applies. At risk of redundancy, let me remind you of something we mentioned there:
". . . When that (the McClellan Oscillator rising decisively above Zero) occurs, the likelihood is that a Middle Part rally (usually lasting 2-4 weeks, sometimes shorter, sometimes longer) has begun in earnest. When that occurs, we want to be 100% long for as long as the rally lasts. Remember that the McClellan Oscillator usually LEADS the market at tops, but is COINCIDENT with the market at lows, or bottoms."
For that reason, we may choose to stay long even after the McClellan Oscillator tops out and starts working its way back down toward Zero, because popular market averages frequently continue up during that time -- sometimes until the Oscillator actually drops below Zero. Now, that, when it happens, should be a bell-ringer. If you haven't exited your long positions before that time, because popular market averages (in which you are actually invested via these funds) have not yet fallen below your uptrend lines or short-term moving averages, the fall of the McClellan Oscillator down through zero should tell you that is likely to happen very soon, and you would be best served to exit those long positions pronto! Confirming SELL evidence will be provided by other reliable market timing indicators -- stochastics, MAC-D, RSI, momentum (rate of change), etc.
We believe that it may be more important than usual this time not to overstay our leave on the long side. We don't want to play Cassandra here -- wrong gender, if naught else. But if we're correct, and barring a politico-economic Rabbit-Out-of-the-Hat trick on the part of the Administration and/or the Fed, the coming decline into November-December could be a real doozy. One of our favorite Maxims for Investors is, "You never know how deep a puddle is until you step in it." But we feel about this coming decline just like we felt in August of 1987, when we warned subscribers that this was, "... a time to be SELLING, not buying!" We want to be SHORT, Big Time, during this decline once it starts, particularly if, as we believe, we may be at Point 27 on the late George Lindsay's "Three Peaks and a Domed House" pattern -- should that be extant in this case. We believe it could be very, very ugly -- unless you're short. And ALL boats fall when the tide goes out.
On our telephone mutual fund switch Hotlines, on Tuesday (9/6) we recommended increasing 50% long positions in the overall market (25% Nasdaq 100 funds, 25% S&P 500 funds, originally taken on Thursday, 9/1) to 100% fully invested, again divided evenly between 50% Nasdaq 100 funds and S&P 500 funds.
Comments & Updates on Recommended Stocks:
Re Guinor Gold Corporation (GNR-Toronto), last week's comments still apply, as they do also for long-term core holding Nastech Pharmaceutical (NSTK-Nasdaq:NM). Concerning the latter, four events of passing interest occurred.
First, a milestone payment was made by Nastech to Thiakis, a company founded by Dr. Stephen Bloom of Hammersmith Hospital London, from whom Nastech some time ago licensed important patents pertaining to Peptide 3-36 (PYY) for the treatment of obesity. Nastech has an equity interest in Thiakis, and under terms of that licensing agreement with Thiakis, owed the milestone payment to Thiakis upon initiation of Phase II Clinical Studies on PYY. Nastech confirmed to your humble servant that while most of the terms of the Nastech-Merck agreement are redacted, under the terms of that agreement, Merck, and Merck alone, is authorized to initiate and carry out clinical trials of PYY. True, Nastech has not received any milestone payments from Merck (that would be a material event, and as such would have to be publicly acknowledged), but we do NOT know the terms of the agreement with Merck, either -- when or if any milestone payments are triggered, for example. So we must presume that while Merck has indeed begun Phase II PYY clinical trials, Nastech will at some point in the future receive whatever milestone payments are called for under their agreement. We must further presume that it is certainly possible that such a milestone payment could be received this year.
Second, Amlyn's Byetta (formerly known as Exenatide), a refrigerated pen-injectable for the treatment of Type 2 diabetes, received FDA approval for its LAR - a time-release long-term shot that enables patients to inject themselves perhaps only once a week, far less frequently than the once-or-more-per day injections. IF Amlyn is indeed the pharma for whom Nastech has been conducting the previously-announced diabetes feasibility studies, this could be interesting news indeed.
Third, Novartis just purchased 19.9% of Alnylam (pronounced al-NY-lam), who recently granted Nastech some exclusive licenses to ALNY's important TNF-Alpha RNAi patents dealing with inflammatory diseases.. We can only surmise that these were granted to Nastech in recognition of its proprietary peptide delivery technology, vital to utilization of ALNY's own RNAi technology. These intellectual property licenses were necessary prerequisites for Nastech's pursuit and development of its RNAi treatment for rheumatoid arthritis, for which Nastech is in partnership discussions with as-yet-unnamed Big Pharma(s).
Fourth and finally, today (9/8) brought the welcome news of the resignation of Nastech's former CFO "... in order to pursue other opportunities." Fortunately, the very able and experienced Philip Ranker, currently Vice-President for Corporate Finance, will serve as interim Chief Financial Officer and Corporate Secretary, and equally able and experienced Bruce York, formerly Senior Director of Corporate Accounting and Corporate Controller, will become interim Chief Accounting Officer and Assistant Corporate Secretary. In this observer's opinion, these are extremely constructive changes for Nastech, its management and its shareholders.
We continue to be concerned about the possibly very ugly occurrence of that massive two-year Head & Shoulder top on the Nastech chart. That makes it important, in our opinion, that before the current overall September market rally tops out and starts down, we see the price of NSTK closing and trading above that Right Shoulder high of 15.18, and preferably thereafter, closing and trading above the 16.56 Head. That would not only mitigate the bearish H&S formation, and with it the possibility of a drop to 10 or below, but also raise the strong possibility of invoking the very bullish Cup and Handle formation and a challenge of previous all-time highs in the area of the low 20's. Since we're admittedly extremely prejudiced in the company's favor and heavily (for us) long the stock, nothing would please us more, and the fundamental developments cited above were causes for celebration.
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
