INVESTMENT QUALITY TRENDS
7440 Girard Ave., Ste. #4, La Jolla, CA 92037.
1 year, 24 issues, $310. Online, $265.
Oil shocks associated with recessions
Kelley Wright: "Oil is hanging around the upper $40 range again but surprisingly investors and the financial media are behaving extremely sanguine about the situation. As we have discussed previously in this space the "template" for the oil story has changed, accordingly crude prices approaching $50 is no longer a concern, not to mention an issue.
Our friends at Hoisington Investment Management note in their 4th Quarter Review and Outlook (hoisingtonmgt.com) that in the first two months of the quarter total consumer fuel expenditures jumped to 8.30% of wage and salary income, the highest seen since 1990. Fuel expenditures now require an additional 2.1% of total wage and salary income from the lows in crude prices in 2001. The current oil shock now stands as the third largest of the five that have occurred since the early 1970's. Each of the preceding oil shocks were associated with recessions. Hmm, what are the odds we'll go for a perfect six of six?"
From the New World Order
into the No World Order
Thomas Henning: "The Bond Market is in the terminal stage of a bull cycle that started in 1982, with bearish divergences loaded into the terminal recent strength. The wave count is mature. The first hint that the fun is over would be a close at 116 or lower by the spot month. A close at 113 or lower would re-bust the Daily Hard Momentum downward. A close below 109 basis the spot month would lock the bond market to the downside and the long-term rates to the upside.
The Gold Complex bottomed in late 2000, has legged upward starting a cyclic bull market. In the last few months, the wave count has been pure chop suey, but hooray, some clarity has entered the picture, which suggests that we've been in a corrective wave, consolidating the 5-wave upleg that peaked in early 2004.
This suggests that the next upleg will be a #3, which is always the most fun for the bulls.
Backing up this concept, the complex is oversold, waved out, loaded with bullish divergences, and an XAU close above 96 would turn the Weekly Hard Momentum bullish and would confirm the start of the next upleg, which should be a dandy. Early buy signals have flashed with beautiful On-Balance-Volume action.
The Stock Market has been in a cyclic bull market since 1982 and is waved out.
Near term, the favored count suggested another final upleg, which has indeed evolved.
In short, the upleg has all of the stench of a failure rally loaded with bearish divergences. Closes below Dow 10, 360, confirmed by the Transports below 3450, would confirm a breakdown and the start of a cyclic implosion.
In sum, the bond market looks finished on the upside, the stock market is in its terminal phase, and the gold market is in the final phase of a major correction preparatory to its next major upleg within a bull cycle. If the previously specified levels are busted, look for an implosion. The New World Order will evolve into the No World Order as public and private debt implodes. That's why the gold has been under accumulation. Again, it's all about gold."
Editor's Note: See Thomas Henning's article, Gold: What the Game Is All About, Part III.
MONEYLETTER
360 Woodland St., P.O. Box 6020, Holliston, MA 01746.
1 year, 24 issues, $150.
Dollar's devaluation a
positive for the U.S. economy
Walter Frank: "The big fear is that a dollar crisis will erupt on the world financial markets. That is, currency market experiences sudden, persistent heavy selling of the dollar, causing a stock (and bond) market panic as everyone tries to sell dollar assets. Interest rates shoot skyward. Could it happen? Well, yes, after the Indian Ocean tsunami why rule anything out. It is likely to happen? Not if the Chinese, the Japanese, the world's central bankers and our Federal Reserve have anything to say about it.
Why is the dollar weak? There is no reason, but certainly the overwhelming one is our trade deficit. Among other things, correction of that deficit calls for a weaker dollar to make our exports cheaper on world markets. That is underway, and we are already seeing a pickup in export orders.
Meanwhile, on the world currency markets the Chinese and Japanese are financing our deficit by purchasing dollars on the world markets, helping soften any devaluation. They are not doing it out of the goodness of their hearts. They are doing it because they want to export to the United States. Both countries are depending on their exports to help solve domestic economic issues. A world in which the dollar collapses is the last thing they want.
As we have said, we view the dollar's decline as a positive for the U.S. economy. We expect to see the trade deficit improve as our exports increase and our imports slow. The dollar's devaluation is one of the reasons we expect reasonably good economic growth this year."
STOCKTRADER'S ALMANAC INVESTOR
184 Central Ave., Old Tappan, NJ 07675.
Monthly, 1 year, $295.
Jeffrey Hirsch: "Seasonality remains Bullish but not for a lot longer. The Best Six Months will be over in April. January's decline was contrary to the usual patter, which is negative in itself and leaves the rest of the pattern more uncertain than usual.
Our original forecast for Dow 1200-13000 (S&P 1350-1450 and Nasdaq 2500-3000) has been lowered. We'd be surprised if these three main indices moved 10% higher from here. Even if the high/top is yet to come it is likely to occur at lower levels than initially anticipated. Notwithstanding what the pundits, the street or anyone else says, the market's recent strength is not nearly as powerful as we have seen at previous bottoms - nor was the drop extreme enough to qualify as a real rallying point. Remember October 2002 when no one wanted to believe that we hit bottom.
There seems to be some fundamental change in the stock market and the bull is scrambling to hang on, but not moving higher with undeniable authority. The year has started out badly, never a great sign. Iraqi elections went better than expected and Mideast peace is looking promising; good news for the planet, but the road ahead is treacherous in that part of the world and elsewhere. Fourth quarter earnings came in ahead of estimates. But what will Q1 hold? We all know this market will not go straight up forever. We will pay the piper sooner or later. And I think sooner. At this point, I see Dow 9750 before Dow 1200."
THE PERSONAL CAPITALIST
6811 S 66th E Ave., Ste. 301, Tulsa, OK 74133.
1 year, 24 issues, $195.
Sean Christian: "The trading range has been broken on the upside with the Bush reelection. This suggests a move to 12,000 for the DJIA and as high as 2,500 on the Nasdaq. Having said that, we will interject a word of caution. We are quite concerned regarding two things:
1. Recent market activity has not looked strong. The DJIA has opened mostly higher in the morning only to close lower in the afternoon. That's typically the opposite pattern of what we expect in a bull market.
2. The January indicator, based on the first five days in the New Year looks weak.
We'll stick with our target of 12,000 for the DJIA and 2,500 for the Nasdaq but can't state if this will be achieved early or late in the year. In fact, a short-term drop below 10,500 might provoke a test of the 9,500 level before the Dow could move higher. We hope the 10,500 level will hold but can't know for certain.
With regard to the economy as a whole, barring another terror attack, we see economic growth remaining strong. The other caveat has to do with a China disruption which could cause a mid-year dip in growth. By year end, however, we see the GDP growth back above 4% with an outside chance at even stronger results.
As for inflation, we believe that the artificially low numbers produced by government statistics will give way to reality. We see inflation above 3%, which wouldn't be tragic. This may come about because of a Chinese currency revaluation. While this might cause some short-term pain, it would be beneficial over the long run.
Our last major economic prediction has to do with employment. We believe that the job market will tighten and see unemployment rates falling below 5% for the first time in years. This, too, will add wage pressures and move inflation higher.
Beyond the market and economy, we have a few other thoughts:
1. We believe that there will be substantive reform of the tax code with very powerful long-term implications politically and economically.
2. We likewise believe that there will be a major overhaul in Social Security that will also be beneficial over the long run.
3. We predict a major terror attempt will be thwarted and as a result, terror networks will be further dismantled. [Of course, if we fail to thwart the attack, it would derail much of the optimism.]
All of the above will strengthen and embolden the Bush administration. As a counter-measure, you can expect his political opposition to attempt to dig up a number of scandals and exploit them.
From a demographic standpoint, we should enjoy relatively smooth sailing and good results for another seven years or so. The baby-boom generation will first hit age 65 in 2011, with the entire age cohort of those born between 1946 and 1964 now in their 40s, 50s, and 60s.
These are very high earnings and savings years with a great deal of social stability. These demographic facts underpin and support our mostly optimistic outlook."
Forbes/Lehman INCOME SECURITIES INVESTOR
6175 NW 153 St., Ste. 201, Miami Lakes, FL 33014.
Monthly, 1 year, $195.
Richard Lehman: "I leave the specific securities selections to the reader and will focus on the allocation of the capital instead.
- First, I would allocate 15% to low risk, investment grade preferreds which qualify for the 15% tax treatment. These issues yield about 6%, but have some capital appreciation potential and are less vulnerable to rate rises.
- I would also put 15% into medium risk bonds and preferreds, with medium risk by my definition including issues rated BB or higher. These will provide you about a 7.5% yield.
- I would also put 15% into high risk securities, but with few exceptions, not those rated B- or lower. The returns on these lowest quality issues is just too low for both the default and rate risk.
- Next I would put 25% into convertible preferreds. They offer only about a 5% yield, but good interest rate protection and a play in the stock market should it show life. Even if not, last year my convertible model portfolio was our best performer with a 14.99% return, but has also been my most inconsistent performer.
- Finally, I would allocate 20% into Canadian Royalty Trusts. These issues not only offer a double digit rate of return, but also, are taxed at only 15%. There is good potential for capital appreciation here and risk tied to the price of oil rather than interest rates.
These allocations leave 10% in cash which should come in handy. In 2005 good buying opportunities will come up more frequently than good selling opportunities.
Two matters normally of concern to investors are duration and default risk. Duration is how many years it will take for a particular debt instrument to repay you the purchase price. The longer this duration, the greater the price drop if inflation drives up interest rates. My advice is to ignore duration for now. We are currently in a low inflation environment where deflation is as likely as inflation. Aside from this, current low commission rates allow investors to seek the highest returns without a significant penalty should it come time to sell. Just another reason why mutual funds are not the ideal vehicle for fixed income investing.
Regarding default risk, this is a concern with low rated issues, but it is also a concern that follows a predictable pattern. Corporate failure is like metal rusting. It is an every day occurrence but has to accumulate over time to reach its breaking point. We are currently in a low default risk environment. This is not to say that companies aren't moving ever closer to default, but simply, that the actual act of default is triggered by foreseeable events. Such events are an impending recession or a tightening of credit. Industry specific troubles can also trigger defaults in that industry. The most recent example being the airline industry. This low default risk environment does not mean it is safe to go out and buy junk bonds. Their greater risk currently is a flight to quality precipitated by an international crisis. A confrontation with Iran, for example, would do nicely. For the same reason, don't bet against the dollar in 2005."
Harloff's THE INTELLIGENT FUND INVESTOR
26106 Tallwood Dr., North Olmsted, OH 44070.
Monthly 1 year, $179.
Dr. Gary Harloff: "Our analysis shows strong stock markets in Latin America, Russia, Eastern Europe, and emerging markets. This is partly due to a weak dollar, although the dollar strengthened in January. The U.S. markets are on a buy now. Other areas we like include: oil energy and energy services, and electronics. Gold appears to have leveled off and we expect it to go higher.
The Dow is stronger now than the Nasdaq and this is one sign that large investors are nibbling in the equity market. Small and mid-cap stocks are favored over large cap growth stocks. The three corners of the style box are strong and similar to each other, with large growth lagging. The small bond yield premium signals weak economic growth ahead. Sometime in 2005, we are looking for large insurance companies and hedge funds to sell large amounts of bonds and buy equities. We but don't see this happening yet due to the tame inflation front. The large deficit, lack of meaningful US jobs growth, and huge importation of cheap Chinese goods will keep inflation and long bond rates for a time. Sometime soon even our government may be off shored.
In general we like U.S. markets and think higher prices are ahead."
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Charles Allmon: "In January 2006, the Federal Reserve will welcome a new chairman, for better or worse. By law, President Bush cannot appoint Mr. Greenspan to another term, after 20 years at the held, come 2006. What are the "20/20 hindsighters" likely to do without a favorite whipping boy? Over the past 19 years, we've seen just about every size brick heaved at Mr. Greenspan. Not one of the heavers could carry Greenspan's briefcase.
Around 1978, a real lightweight somehow snagged the Fed chairmanship. Not long after, all hell broke loose and inflation hit 21%. Long bond rates hit 16%. The new Fed chairman exited quickly before Mr. Volcker rode in with some adult supervision for the U.S. banking system. A wrong turn with a new Fed head could be more disasterous than anything seen in 35 years."
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