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INSIIDE TRACK
P.O. Box 2252, Naperville, IL 60567.
Monthly, 1 year, $179.
2006-2008 Upswings & downswings
Eric Hadik: "The year of 2006 is expected to be very decisive. Among the possible events - in the market and in the world - are:
1 - A final upswing in Stock Indices (into April 2006) followed by a multi-year downswing.
2 - A Major 'event' related to Syria.
3 - An 'event(s)' in Turkey that will lead into a more momentous 'event' in 2007-2008.
4 - The initial upswing in the 11-year Sunspot Cycle.
5 - An initial downswing in global warming surprise cooling in key global regions).
6 - Another (potentially final) upswing in Bonds and downswing in longer-term interest rates during the first 6-9 months of 2006.
7 - The potential for other climate extremes, like hurricanes AND drought.
Last month - and periodically throughout the past 2-3 years - I have discussed cycles in Syria that converge in 2006. In this month's installment of Focus 5768 in my newsletter, I also mention another key event (climate-related) with cyclic implications for Syria.
There is also the potential for a major confrontation with Iran (and Russia). I will elaborate on all of these in my newsletter in the coming months. For now, however, consider the irony that January 2006 is 60 years since the first session of the United Nations began in 1946. It is also 60 years since the UN Security Council heard its first complaint. This complaint came from Iran and targeted the Soviet Union for interfering in its government and for not removing troops (from WW II).
My, how things have changed in one 60-year cycle!
Overview for long-term investors, traders
Stock Indices - Stock indices are signaling the next phase of a 3+-year uptrend. An advance into April 2006 is possible.
Interest Rates (opposite of Bond direction) - Long-term neutral-to-down consolidating. However, a final low in long-term rates could stretch into June - or even September - 2006.
Gold & Silver - Long-term uptrends in Gold & Silver remain intact. A continued advance is likely.
Dollar - Long-term trend down & projected to continue into 2008/2009. An intervening 12-18 month rebound is intact and could stretch into September 2006.
Crude Oil - Long-term trend up and could extend into Feb. or April 2006. Multi-month consolidation intact.
Commodities - Long-term trend up. The CRB is poised to break above Sept. 2005 highs and could extend this rally into March 2006."
SUPERSTOCK INVESTOR,
925 S. Federal Hwy., Ste. 500, Boca Raton, FL 33432.
Monthly, 1 year, $395.
Jeff Manera: "I think there's a good chance we'll see a modest correction in the financial markets early in the first quarter of 2006. A weakening dollar and cooling housing market are also good bets in the coming year. I also expect a continuation of the bull market in commodities, as China and other developing countries continue to suck up resources at an amazing pace.
During the same period, we should see the new Fed Chief Bernanke bump interest rates a couple of more times for three reasons: First and second, as a continuing attempt to cool the still too warm housing market and snuff out any risk of inflation.
Third, I believe we will see a reduction in foreign direct investment (FDI) going forward. Our country's deficit spending is for the most part financed by foreigners buying U.S. bonds and securities. FDI hit $38.8 billion in the third quarter, higher than we've seen since 1999. There are a number of factors in the wings, including a potentially slowing US economy, relative strength of other economies, domestic inflation, and higher interest rates elsewhere. Together, these could conspire to discourage foreign investment in the US. This would in turn result in a weaker dollar and push interest rates higher since we'll have to offer higher returns to entice foreigners to invest in our bonds (in order to continue to fund our deficit).
The fed funds rate (now 4.25) should end up in the 4.75 to 5.25% range when all is said and done. When the Fed signals its done hiking all bets are off - and the markets should rally, at least in the short-term.
So will the stock market go up or will it go down next year? Where will the Dow or S&P 500 be this time next year? I believe those are topics for cocktail parties and chat rooms. We don't invest in the stock indexes in Superstock Investor.
Looking forward, its important to keep in mind that no matter what the macro picture looks like; there will always be mini bull and bear markets within the larger markets. I won't ignore what the economy is doing or what's happening in various industries, because that "big picture" can often provide the insights needed to pick market-beating stocks. I also won't let a less than bullish outlook for the overall economy keep me from finding picks with the potential to defy the odds.
Companies which sport good management, innovation and a solid business model can overcome a slew of negative macro-economic figures. Even more so when you focus - as we do - on key players in consolidating industries or those exhibiting the sometimes subtle signals we dig for to uncover takeover potential or other special situations."
The Peter Dag PORTFOLIO STRATEGY & MANAGEMENT
65 Lakefront Dr., Akron, OH 44319.
1 year, 24 issues, $389.
George Dagnino: "This is the time when we need to have a scenario to set up our investment strategy. The relationships discussed in my books Profiting in Bull or Bear Markets and Investment Strategies using Stock Market Sectors offer the most reliable way to assess the risk of the various markets.
Market risk rises when short-term interest rates move higher. It is a simple model, but it works. As long as short-term interest rates rise, it is crucial to be selective and to look at other asset classes as an investment.
Money is too cheap. Low short-term interest rates are fueling the economy and the bull market in commodities. Exposure to commodity sensitive stocks is appropriate in this environment.
There are some basic trends that you can rely on.
- Short-term interest rates will continue to rise until the economy grows very slowly. High borrowing costs will cause the economy to slow down in 2006. The continuous flattening of the yield curve will be another indicator pointing to slower growth.
- Commodities are unlikely to decline as long as short-term interest rates stay close to inflation and the economy remains ebullient.
- It will take several months for the economic slowdown to become visible (in the second half).
- 2006 will be a good year from an economic viewpoint. It will be quite similar to 2005, however, as far as the financial markets are concerned. Two important skills will be needed to make money.
a) Flexibility. It will be important to react quickly to changes in market conditions.
b) Asset classes. Matching asset classes and stock sectors to economic trends and events will be crucial.
Let me recap: In 2006 you will not make money by throwing darts at the stock page and thinking long term."
Stock Trader's ALMANAC INVESTOR NEWSLETTER
79 Main St., Ste. 3, Nyack, NY 10960.
Monthly, 1 year, $295.
Some rough going with
The mid-term election year
J. Taylor Brown: "Taking the cyclical, non-cyclical and technical elements into consideration as well as real world situations and our perspective on the markets the following is our guidance for next year. We feel that the high for the year will be set before the low. The Dow is expected to test its all-time highs in the first half of 2006 in the vicinity of Dow 11500. The S&P should top out around 1350 and Nasdaq should stall in the vicinity of 2500.
After that we expect some rough going with the mid-term election year lows (see below) most likely set in Q2-Q3 in the area of Dow 8500, S&P 950 and Nasdaq 1750. Once the midterm election year lows are set, we think the market will go into a major rally moving up to Dow 11000, S&P 1250 and Nasdaq 2500 by year-end and continue rallying to the top of the wartime range near Dow 12500, S&P 1500 and Nasdaq 3000 in 2007 representing the pre-election year highs. This is going to be a major buying opportunity.
Major cyclical pattern - mid-term election year
After the midterm congressional election and the invariable seat loss by his party, the president during the next two years will likely jiggle fiscal policies to get disposable income and social security benefits up and interest rates and inflation down. By Election Day he will have danced his way into the wallets and hearts of the electorate and, hopefully, will have choreographed four more years in the White House for his party.
After the Inaugural Ball is over, however, we pay the piper. Practically all bear markets began and ended in the two years after presidential elections. Bottoms often occurred in an air of crisis: the Cuban Missile Crisis in 1962, tight money in 1966, Cambodia in 1970, Watergate and Nixon's resignation in 1974, and threat of international monetary collapse in 1982. Of the 11 quadrennial cycles in the past 44 years, only one bottom was not reached (1987) in the midterm year.
The midterm election affect on 2006
Post-election high to midterm low: 22% loss.
Since 1913 the Dow has dropped -22.2% on average from its post-election-year high to its subsequent low in the following midterm year. The Dow's 2005 post-election year high was 10940.55. A 22.2% decline would put the Dow at the 2006 midterm bottom. The S&P (since 1930) has averaged -23.2%. From a high of 1268.25 it would fall to 974.02. Nasdaq (since 1971) has averaged -27.5%. From a high of 2273.37 it would slip to 1648.19.
Midterm election year low top pre-election year high: 50% gain.
Conversely, since 1914 the Dow has gained 50% on average from its midterm election year low to its subsequent year. A swing of such magnitude is equivalent to a move from 8511.75 to 12767.63. The S&P has averaged 49.2%. From a low of 974.02 it would rise to 1453.23. Nasdaq has averaged 82.9%. From a low of 1648.19 it would rise to 3014.54."
PEARSON INVESTMENT LETTER
P.O. Box 3739, Apollo Beach, FL 33572.
Monthly, 1 year, $150. www.pearsoncapitalinc.com.
Medical sector could
best the most dominant sector
Walter Pearson: "Looking forward for 2006 it appears the Fed rate hikes are completed, or perhaps Mr. Greenspan may add one more before his departure. The housing market will continue to slow down for many months and corporate earnings are going at a 15-18% year-over-year rate. International markets will attract a surge of new cash as investors seek higher returns than U.S. stocks can deliver. As we move into 2006, our research personnel and I share the opinion that the medical sector could be the most dominant sector for growth. Other sectors in which we see tremendous upside potential are minerals, with gold and silver as solid contributors, and the energy sector. We will also increase our foreign investments as they continue to become more and more attractive. As market conditions at home or abroad dictate where to find the best opportunities, we'll move immediately into a particular sector, or part of the globe, with an ETF or an individual company stock."
EMERGING INVESTMENTS
P.O. Box 97, Williamsport, PA 17703.
Monthly, 1 year, $287.
Inflation: Sleeper of the year
Stephen Lord: "We think inflation will remain the sleeper of the year in 2006. An inflation scare in October 2005 notwithstanding, financial markets still assume growth with low inflation. Yet virtually all major economies in the world are firing on all cylinders, which has traditionally driven inflation higher, and major commodities like copper, steel and platinum remain at very high levels. While headline inflation in the U.S. has receded somewhat in recent months, service-sector inflation is running at 4% annually. Moreover, if past is prologue, a Bernanke Fed is much more likely to tolerate a little inflation in the system rather than risk a depression by over-tightening rates.
Probably the best news for the markets this year is that stocks are not expensive. In spite of strong corporate profit growth, the U.S. stock market underperformed global markets in 2005. A large proportion of U.S. stocks are trading at discount to their 5-year historical P/E ratios, which should deter a full-blown crash and suggests stocks have room to advance. The biggest risk to stocks in 2006: a marked slowdown in corporate profits by early summer."
THE YAMAMOTO FORECAST
P.O. Box 573, Kahului, HI 96733.
Monthly, 1 year, $350.
Will higher earnings coincide
with elevated stock prices?
Irwin Yamamoto: "In the early half of 2006, the domestic economy is going to appear strong - even robust. Initially, equities might react to the uplifting news by advancing upward. That's understandable. Hey, a powerful business backdrop equals rising corporate profits. Historically speaking, higher earnings do coincide with elevated stock prices.
But check the other side of the story. After greeting the favorable bottom-line prospects, investors will realize how interest rates tend to accompany the momentum of the economy. In other words, too much of a good thing can be bad. At a moment's notice, the focus switches from revenues and incomes of companies to increases in interest rates. Eventually, the latter takes precedence over the former. It's priority number one.
In December, the Federal Reserve increased the benchmark federal funds target rate by a quarter-percentage point to 4.25 percent. The action placed rates at their highest level since May 2001. Regardless, traders moved stocks up on the perception that Fed rate hikes may be nearing an end.
We have a different slant. If the Fed had its way, it would probably want to cease pushing interest rates up. Yet as the economy resumes its expansion, the concerns about inflation grow. And if the unemployment rate declines further, the excess of business conditions becomes apparent. At that stage, the Federal Reserve might not possess any option other than to keep raising rates.
Let's suppose the equity market's correct on the theory that the Fed being almost done with interest rates hikes. Would stocks soar in response? Surprisingly, maybe not. According to an article by the Hulbert Financial Digest, two fund managers - Ame Casscells of Aetos Capital and Clifford Asness of AQR Capital Management claim the market's present price/earnings (P/E) ratio based on trailing earnings is 36 percent overvalued. The positive news could already be discounted by investors."
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-- February 2006