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MONEYLETTER
360 Woodland St., P.O. Box 6020, Holliston, MA 01746.
1 year, 24 issues, $150.
Walter Frank: "We are coming to the end of the earnings season, and so far the market's response to the earnings has been neutral. It is not the earnings, they have been fine. It's just they haven't blown the lights out. Put another way, the earnings have met expectations, and somewhat more, but they haven't pulverized expectations, and after last year's run that is something of a disappointment. What we have seen is perfectly good earnings being announced only to see the stock slide. Oh, grateful Wall Street.
Of course, it is just that the powerful bull market has driven stock prices to the point where the market is no longer cheap. Specifically, the market's price-earnings ratio, based on anaysts' twelve months ahead earnings estimates, is no longer cheap. But neither is it rich. At 18.4 it is at the lower end of the fair value range, in our opinion. Unless earnings surprise, the upside is limited.
We see the market now as moving into the next, and more mature, phase of the bull market. P/Es will stabilize and further market gains will depend on earnings gains. Keep your expectations realistic."
Libera's CLOSED-END COUNTRY FUND REPORT
725 15th St., Ste. 501, Washington, D.C. 20005.
Monthly, 1 year, $225.
U.S. and China leading
the world into recovery
James Libera: "The U.S. and China are leading the world into recovery this year. The recovery is not irreversible and could be short-circuited by a number of potential factors: e.g. Fed tightening, persistent lack of U.S. job creation, global currency turmoil, a banking crisis in China or an unforeseen political/security disaster. But our baseline forecast is for global GDP growth of 3.5% in 2004 (after about 2.5% growth in 2003). Corporate earnings will show positive growth this year, but rises will be less than last year. Equity markets will take advantage of low interest rates and rising earnings, at least during the first quarter of the year. Around mid-year, we think, rising interest rates and relatively high valuations will bring markets down.
The European economy is reviving gradually from its near-recession in 2003; we project 2004 GDP growth of 2%. Despite the weak recovery, we think European corporate earnings will grow slightly faster than in the U.S. U.S. companies over the past several years have restructured more than European firms; the latter have more room now for cost-cutting. In the longer term, however, European economies and companies are constrained by rigidities in labor and capital markets. Reforms so far proposed will help only modestly. European valuations are lower than in the U.S. and we recommend moderate equity exposure here.
Central European economies are still struggling with economic problems, especially high budget deficits. The May 2004 accession to the European Union will be no panacea, but it will sharply improve the prospects for stable long-term growth. Convergence with western Europe will continue and equity markets should generally outperform their western European counterparts. We recommend significant equity exposure to the region.
The Japanese economy may finally be emerging from deflation, with 2-2.5% GDP growth expected this year."
THE VALUE LINE INVESTMENT SURVEY
220 East 42nd St., New York, NY 10017.
1 year, 52 issues, $598.
The bulls hold the edge at this point
Charles Clark: "The first half of 2004 will be light years apart from the opening half of 2003. Then, some were predicting that the expansion would run aground and be followed by a new recession. That pessimism faded in last year's second half when the favorable combination of low interest rates, higher federal spending, lower taxes and the need to replenish depleted inventories helped the economy rally. That momentum has carried over into 2004 and shouldn't abate soon. In all, we think the nation's gross domestic product will increase by 4%, or more, this year.
The broadening business upturn is generating a strong rebound in corporate earnings, with blue chips like J.P. Morgan Chase and Johnson & Johnson, leading the way. We think such earnings strength will persist.
There are some clouds in this otherwise bright picture. Global concerns, including the threat of new terrorist attacks, won't fade for years to come. Inflation, by comparison, is of little immediate worry, as recent reports show that pricing is muted in the main. However, the recent rise in the quotations for oil, gold, and other commodities bears watching, as does the increasing budget deficit.
Investors continue to look on the bright side of things. That explains the current high level of stock prices. Encouragingly for the bulls, there seems to be enough positive price momentum in place, ample strength in the economy, and adequate growth in earnings to keep the stock market heading higher during the first half of this year. We caution, though, that there is little margin for error given the high P/E ratios now in place.
Conclusion: We believe the bulls hold the edge at this point, but that edge is slim and vulnerable to any unpleasant surprises.
THE PRUDENT SPECULATOR
P.O. Box 1438, Laguna Beach, CA 92652.
Monthly, 1 year, $295. Includes Hotline messages.
Returns will not match 2003 gains
John Buckingham: "So what do I see in 2004? With the disclaimer that we care little about the 30-stock DJIA as we own only a few of its constituents, I have gone on record with a year-end 2004 target of 11,700. While this 1,250 point DJIA gain may seem wildly bullish, one should keep in mind that it is only a 12% advance. Considering that large-cap stocks have historically returned 10%, it could reasonably be construed that my outlook is a bit more optimistic than usual, but I do not expect returns this year to be anything like what we saw in 2003.
I do think that many of the conditions that gave rise to last year's rally persist today and we know that the fourth year of the Presidential cycle has historically been very favorable. With economic data improving, inflation remaining virtually non-existent, corporate profits rising, interest rates resting near historical lows, the Federal Reserve remaining accommodative, dividend and capital gains tax cuts taking hold and alternative investments yielding peanuts, equities should still be very rewarding. And once again, I believe the undervalue and out-of-favor stocks that we favor will outperform the market averages, just as they have for the much of the past 26 year."
The Peter Dag PORTFOLIO STRATEGY & MANAGEMENT
65 Lakefront Dr., Akron, OH 44319.
1 year, 24 issues, $389
George Dagnino: "This is what is likely to happen in the first half of 2004.
- The US economy will be strong, especially the manufacturing sector. Sales are growing faster than inventories, and production has to be stepped up in the next several months.
- The global economy is bound to strengthen. The leading indicators of the industrialized world point to robust growth ahead.
- The Fed is aggressively monetizing the economy by forcing short-term interest rates - which should be close to 4% - to stay well below the inflation rate of 1.8%. The outcome is historically low real short-term interest rates and a very steep yield curve.
- Meanwhile, credit spreads remain high, reflecting a substantial risk premium in corporate bond yields.
- The strengthening global economy and the Fed easing are sending commodity prices, and gold, to new highs. They will continue to move higher and peak after the economy slows down. They are an important investment theme.
- Inflation will remain under control.
- Treasury bond yields will stay close to current levels as long as the Fed does not feel compelled to let short-term interest rates rise to their market level.
- The stock market will continue on is upward path as long as short-term interest rates stay close to 1%.
This ideal investment climate will eventually unravel. I do not know when. It could be as early as March-April, or as late as the fourth quarter of 2004."
SUPERSTOCK INVESTOR
1900 Glades Road, Suite 441, Boca Raton, FL 33431.
Monthly, 1 year, $395.
History is on the side of the bulls
Charles LaLoggia: "Last year was a generally fairly easy year to make money in equities, especially in smaller capitalized stocks in areas such as:
- Military plays like Armor Holdings and Cubic.
- Earlier in the year as the regional airline industry took off, regional jets became more plentiful and new designs with larger capacity became available which we took advantage of via Mesa Air Group.
- Many gambling related situations have worked out to satisfaction as more states have realized the gaming business could be an effective way to deal with a portion of budget shortfalls in many states around the country.
- Water utilities overall have done well with expectations of more consolidation becoming clearer as smart business decisions.
In my opinion enough positive information about a range of industries and the economy in general has become visible to a much grater number of market watchers and is discounted in many stock prices. Hence genuine equity opportunities are becoming harder to find.
Granted, 2003 was the first good year in equities since 2000. This is a presidential election year and history is on the side of the bulls during these periods. Interest rates are likely to stay low for the foreseeable future and the economic numbers are satisfactory."
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Charles Allmon: "Recently I read an analyst's growing recommendation for XYZ company, based on his assumption that the current share price was substantially less than "True Market Value." Of course, there was no detailed explanation of "true market value," who defines it, how is it defined, what are the credentials of the expert, how do others rate the same stock? I dare say that ten analysts examining the same company would come up with ten different figures for "true market value." Next time you see a fancy claim for "true market value," better stand aside. Someone is about to pick your pocket."
THE WALL STREET DIGEST
8830 S. Tamiami Trail, Ste. 110, Sarasota, FL 34236.
Monthly, 1 year, $150.
Six Powerful Wealth Building Trends
Donald Rowe: "Current economic data indicates the first leg of this economic boom and bull market will last until at least 2009. However, with a new, growth-minded Fed chairman in 2005 - who doesn't see inflation around every corner - this next wealth building era could last 20 years or longer. The Industrial Revolution powered the 40-year wealth building boom between 1870 and 1910. Will today's non-stop Technology Revolution power the next 40-year boom for Americans? These six powerful trends will create more wealth than you can possibly imagine.
The last time four of these trends were present, a record 40-year wealth building boom unfolded between 1970 and 1910 in the United States."
Donald Rowe has isolated the following six powerful trends that will drive the next Great Wealth Building Boom in America:
1. Low inflation and price stability are essential for the creation of wealth.
2. Low interest rates, and
3. An accommodative monetary policy are essential for accelerated non-inflationary economic growth.
4. Low taxes are essential for high productivity and job creation.
5. The Technology Revolution will continue to produce new products
and services that will increase the standard of living for all consumers.
6. Globalization, with enormous help from the Internet, will increase efficiency while keeping prices low.
THE JERRY FAVORS ANALYSIS
7748 Chancel Dr., Columbus, OH 43235.
Monthly, 1 year, $190.
Gann Yearly Chart: Bullish
Jerry Favors: "Perhaps our most important long-term indicator is our Gann Yearly Chart. For the last 107 years this long-term chart has turned up during every true bull market and has turned down during every true bear market. When we combine the momentum action from our 14-Week RSI this year with the upturn in the Yearly Chart we arrive at a picture which we have to conclude is bullish, at least into later this year, and perhaps into early 2005, before the next truly serious bear market. More of our rationale for this conclusion will be examined here."
GLOBAL INDICATORS
The George Washington University, Dept. of Finance
710 21st St., NW, Ste. 206, Washington, DC 20052.
U.S. economy rests on a set of contradictions
William C. Handorf: "The U.S. economy rests on a set of contradictions. The unemployment rate declined yet only 1,000 new jobs were recently created. Commodity prices are surging yet inflation remains near record low levels. The U.S. dollar continues to depreciate despite especially strong growth and projections of continued expansion in the United States.
Americans continue to die and be wounded in Iraq yet preliminary feedback from the presidential campaign shows the war is less an issue in 2004 than last year. Despite the foregoing, the U.S. shows significant promise. Long-term interest rates remain low and support housing and construction. The manufacturing sector is reporting a rebound in orders, export orders, production and employment. The equity market continues to post bullish gains and the debt market signals vigorous growth. The fiscal deficit is large but will moderate if and when the expansion creates new jobs well in excess of 100,000 per month. Jobs remain the key issue for the presidential campaign and the economy."
Editor's Note: Global Indicators is prepared by William C. Handorf, Professor of Finance, Department of Finance, School of Business and Public Management, The George Washington University, Lisner Hall 540, 2023 G St., NW, Washington DC 20052.
THE CHARTIST
P.O. Box 758, Seal Beach, CA 90740.
1 year, 17 issues, $175. www.thechartist.com.
January Barometer flashes a Buy signal
Dan Sullivan remains in the bullish camp.
"The S&P 500 finished January with a 1.73% gain. Based on the January barometer, which maintains "as goes January, so goes the year," this bodes well for the market's prospects. This historical pattern concludes if January is up, the odds favor a positive trend for the rest of the year.
Since January is being used as a forecasting tool, the real question is: How did the market perform during the remaining eleven months of the year?
Overall, the indicator correctly predicted market direction 74% of the time. In the past 54 years, stocks followed January's lead in 40 instances. The average gain from February to December after a positive January was +13.37%. The average decline after a negative January was -1.25%.
The odds Are much better, however, of a positive January maintaining its bullish trend than a negative January sticking to its bearish forecast. In the 34 periods when January was positive, the other eleven months were higher 30 times - an 88% success rate. Conversely, the 20 periods when January was negative, the market followed suit only 10 times.
In our last letter, we reviewed the election year cycle which, in the context of the four-year cycle, is second only to the pre-election year in profitability. As we pointed out, the last time there was a double-digit loss in an election year was back in 1940 (using the Dow as a measurement). On the upside, it is interesting to note that the Dow has recorded its high of the year during the fourth quarter of election years approximately 60% of the time, going all the way back to its conception. So, although the sentiment numbers are bearish, we do not expect 2004 to be a bear market year. As always, we will take it one day at a time."
M.M.A. Cycles Report
PO Box 250012, West Bloomfield, MI 48235.
1 year, 17 issues, $249.
U.S. Presidential Election and the market
Raymond Merriman: "The U.S. presidential election campaign season is now upon us. That means we will see and hear about more problems and worries than usual regarding the U.S. economy, political situation, and character of both the president and his "would-be successors" than usual. The result is that the equity markets will likely be more volatile than we have seen in the past 10 months. The U.S. stock market in particular will have to struggle to climb against the proverbial "wall of worry." And in an election year, it takes a lot to unseat an incumbent president. It is usually a case of being "his election to lose." In other words, incumbents usually win, unless the economy, national security, and/or character of the president, are issues that are so bad that the majority votes him out.
There is but one special note that I follow during this time of the presidential election year. And that is the polls. If the polls show the incumbent is gaining in strength, then the stock market usually rises. If the polls show the other party is gaining in popularity, then the stock market usually falls. In addition, I also watch for the "Pre-Presidential Election Year" though, that usually unfolds sometime between October and March (and sometimes as late as May) preceding the election. I am most interested in what happens after that trough. If the rally that follows does not take the high that preceded it, and the following low finds prices falling even lower (lower high, lower low), then it usually indicates the incumbent is defeated. But if the reverse happens - the following crest exceeds the pre-election year trough, and the following trough is also higher - then the incumbent usually wins."
THE PERSONAL CAPITALIST
6911 South 66th East Ave., Ste. 301, Tulsa, OK 74133.
1 year, 24 issues, $195.
2004: Short-term cautious
and medium term bullish
Sean Christian: "In regard to stock prices in 2004, we predict that the trading range will persist into the first quarter. While we've already seen the range briefly broken on the upside with the DJIA now trading above 10,500 and the NASDAQ above 2,100, we expect that this situation will be brief. Perhaps the range should be moved slightly higher. Regardless, though, we expect that a 10% decline is "in the cards" at some point soon. This should eliminate the bullishness that has been created and set the stage for another strong move higher. We expect that the DJIA can still reach 12,000, maybe in late 2004, maybe in 2005. We also expect the Nasdaq to reach 2,500 late this year or early next. The bottom line is that we are short-term cautious and medium term bullish.
The main driver behind stock price gains will be strong earnings. These, in turn, will be driven by tremendous economic growth. By year-end, we could be seeing real GDP gains approaching 5% for the year as a whole. This strength should peak sometime around the third quarter.
In regard to inflation, we see "an accident waiting to happen." Rapid economic growth, a declining dollar, rising commodity prices, and renewed monetary stimulus should combine to give us the first real inflation of the century. Prices should rise 3% or more and, in fact, could rise in excess of 4%, depending on when the survey is taken.
In regard to employment, we will carry forward our 2003 forecast and predict a decline to 5% in the unemployment rate. Based on demographic factors as well as economic growth, the rate could actually fall to 3% in coming years. With the weaker dollar, there is less incentive to out source labor. The one exception is a country whose currency is "pegged to the dollar" (primarily China).
In regard to China, we do see some dramatic changes that will have an impact on all our other predictions. Most observers agree that China's currency is valued at roughly one-half of its market price. It is being artificially held down by its "peg to the dollar." In addition, China's government has massively subsidized production to gain market share. The result is that China has become a destination location for both out sourcing and production - keeping global prices down for both goods and services.
The downside, however, is that developed nations have lost jobs and productive capacity. In China, the situation is worse because production is not profitable and worker conditions are abysmal. At some point, government loan guarantees will fail and worker rights will be asserted. When this happens, China's currency will be forced to break the artificial peg and be rapidly revalued.
When will this happen? We can't say with certainty. But, it is inevitable. The impact will be dramatic. Inflation will increase, as low-cost imports are no longer available to floor Wal-Mart and other discount stores. Earnings for companies who have already out sourced to China will be dramatically lowered. On the other hand, domestic industry will be instantly revitalized with a rapid tightening of the labor market. It is quite likely that the Federal Reserve will inject massive amounts of liquidity.
At first, China will appear to collapse similar to the fall of Enron. This will be enough to cause stock prices to fall initially, and may be the force behind our expected 10% decline. International bailouts are likely, however, and the crisis will be handled. Over time, the domestic gains from the transition will far exceed any losses.
One of two things will occur. Either this situation will be confronted early in the year or the administration will do everything possible to postpone it until after the election. At this point, it's hard to say which will be the case. With every decline in the dollar, China's currency becomes more undervalued on a global basis. This situation and its ultimate correction will likely be the biggest story of 2004. Regardless of the timing, however, we will stick with out basic predictions for the year."
THE CONTRARIAN'S VIEW
132 Moreland St., Worcester, MA 01609.
1 year, 11 issues, $39.
Bullish trend to continue
Nick Chase: "I think the bullish trend is likely to continue well into spring. This probably will be one of those years where it pays to "sell in May and go away."
However, do not harbor any illusions that we are experiencing anything more than a momentum chasing bubble just like that of the late 1990s and, as such, stocks are currently a high-risk investment. This is not a time to buy anything for the long term, except for precious metals and commodity investments (which are just beginning their decade-plus bull markets). If you step aside and say "I don't do bubbles", you won't get any complaint from me."
CRAWFORD PERSPECTIVES
6890 E Sunrise Dr #120-70.
Monthly, 1 year, $250. www.crawfordperspectives.com.
The major shift to resources is ongoing
Arch Crawford: "We have continued to recommend the Stocks, Bonds and Currencies of Australia, New Zealand, Canada, and to a lesser extent Russia and South Africa (greater political risk) for the last 2-1/2 years! The Major shift to Resources is ongoing and will probably last for years. We firmly believe that coordinated attacks against US$-denominated assets could occur again, especially around the Eclipses in April, and hits to the U.S. birth chart in June."
BANKNEWSLETTER.COM
121 Ball Pond Rd., New Fairfield, CT 06812.
Monthly, 1 year, $790. www.banknewsletter.com.
2004 may be the end of huge
returns for many bank stocks
Douglas Hughes: "2003 marked the fourth straight year the Nasdaq Bank Index outperformed the broader market. With rates still at historic lows, and high valuations, we think 2004 could be the end of the huge returns, seen over the past four-year run, for many bank stocks. We believe good asset quality, potential for more high priced deals in 2004, and potential modest Net Interest Expansion, with overall strong industry profitability should help this sector post another up year, but at a much lower return than the past 4 years. We are looking for a total return of 7%-17%, through stocks dividends, cash dividends, stock appreciation and takeover premiums in 2004. While the downside is still higher than we like, around 8%-13% for 2004, it is less than we though for 2003.
Many of the great values are still in the very thinly traded, Nasdaq BB stocks; Pink Sheet stocks, and or stocks with no symbol that are purchased from individuals directly.
There will continue to be blow-ups in both small and large banks and we will take advantage of any and all mispriced markets when we see fit."
THE ALEXANDER PARIS REPORT
161 N. Clark St., Ste. 2950, Chicago, IL 60601.
Monthly, 1 year, $195.
More stock market gains ahead
Alexander Paris: "It has been our view for some time that the U.S. stocks, after having the worst bear market since the 1930's, built a sizable base in 2002 and 2003, essentially a tripple-bottom in the S&P 500 in July 2002, October 2002 and March 2003. Once having decisively moved up from that base, we doubt that the rebound in 2003, no matter how scary the Nasdaq bounce may look, is the end of the rally. In fact, reflecting the extended global economic recovery described earlier, we believe we are still in the relatively early stages of an extended new bull market for stocks.
For those with conviction in the presidential cycle, the year before the election is usually the big one as the incumbent president pulls out the stimulative stops to insure a good economy for the elections. President Bush would appear to be following that strategy to the letter and 2003 was indeed a great year in the market (the S&P 500 has risen in 11 of the 13 election years since 1952, with an average gain of 9%), though it will probably not be as great as the third year of this presidential cycle. The best money in 2004 will be made by playing the right sectors and stock selection.
Corporate Profits: We doubt that P/Es will rise in 2004, but they could hold flat, with only modest increases in bond rates, which appears likely. So, the market advance will have to essentially mirror the growth in corporate profits. It will be another good year for corporate profits in 2004, though, of course, the comparisons get more difficult as we move through the year. Currently, First Call analysts are projecting earnings growth for the S&P 500 of 22.4% for the fourth quarter of 2003. They have also recently been raising estimates for 2004. They are expecting first quarter and second quarter earnings growth of 13.3% and 13.6%, respectively. They are looking for 9.8% growth in the third quarter and 14.2% for the fourth quarter of 2004. Actual earnings for the past few quarters have been coming in above analyst estimates for a change and that should be the case again in the fourth quarter. Since corporate managements have remained cautious with their projections, even low-balling them in the opinion of some, we believe there is a good chance that analysts' 2004 earnings forecasts can be on the mark. They are currently expecting a full year 2004 earnings increase of 13%. We believe it will be higher. Ordinarily they start the year strong and reduce them as the year progresses. That relationship was already turned around in 2003. In some sectors, their forecasts could be very low. We believe that will be the case in manufacturing sector stocks.
Looking at some special factors for profits, though productivity will slow on a cyclical basis, past and continuing technology spending will continue to improve efficiency and profitability. The lower dollar will also help profits, improve competitiveness of U.S. companies overseas and strengthen economies among many trading partners. The lower dollar will also give U.S. companies more of a pricing umbrella in the domestic market and some increment of pricing power.
Dividends: We suspect that investors did not really give full credit to the benefits from the Bush tax cut with regard to dividends, both as to longer-term returns for investors and the possibility of improving corporate behavior over the long term. With the stock market roaring ahead in 2003, led by huge moves in technology stocks, higher dividend returns on slower growing companies did not get much respect, even with the lower taxes. In 2004, however, companies will continue to raise or initiate dividends and, with smaller expected gains in the overall stock market, investors should start to pay more attention to the contribution of dividend paying stocks to the total returns of their portfolios.
In summary, we believe the overall stock market will be higher again in 2004, though not likely as strong as 2003, and primarily reflect the growth in corporate profits. It will also be different from 2003 in terms of relative performance. It should still be broadly higher, but large stocks should do some catching up with smaller ones. There will be a greater emphasis on quality and traditional stocks. The technology sector will not disintegrate, but the gap between its performance and the rest of the market should narrow. As with the overall market, the larger technology stocks should retake the leadership from the highly speculative ones that highlighted the 2003 market. Some of the weaker sectors in 2003 may do better, such as consumer staples, but we would maintain most focus on cyclically sensitive stocks as Europe and others join the economic recovery. An exception may be health care, which should also be due for some better performance."
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