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The Peter Dag PORTFOLIO STRATEGY & MANAGEMENT
65 Lakefront Dr., Akron, OH 44319
1 year, 24 issues, $398. www.peterdag.com.
Odds favor another
5-10% rise by year-end
George Dagnino: "The market is acting as we anticipated. It is overbought and needs some rest. This, however, is no time to panic. The odds favor an appreciation of another 5 10% by the end of the year.
Fundamental indicators. The bad news is the growth in monetary aggregates is not rising anymore. The weakness of the dollar is also cause for concern. The good news is stable short-term interest rates, declining bond yields, and rapidly improving profits.
Technical indicators. Momentum remains strong. The market is still overbought. These two factors are saying the market needs to regroup. Volume has to rise for prices to resume the up trend.
Sentiment indicators. Sentiment of NYSE floor specialists is long-term bullish. They are rarely wrong.
Seasonality. The seasonality patterns point to an increase of 5 10% by year-end from current levels.
Attractive stock sectors. Real estate, precious metals, utilities, and retailers (specialty).
Investment implications. In the near-term, the market will suffer a modest correction.
In the long-term, the odds favor higher prices. Emphasis should be given to stocks with a generous dividend and easy to understand business model.
The business cycle. The industrial sector is coming out of the doldrums. Manufacturing will have to replenish inventories due to sales that are rising faster than inventories. This is a classic signal pointing to a stronger manufacturing sector.
Trends in the growth of monetary aggregates, however, do not suggest a vibrant pick up in activity. In other words, Wall Street seems too sanguine with its 4 6% growth outlook for 2004.
Commodities: The commodity complex remains strong across the board. Its trend reflects a firmer tone in the global economy and a stronger industrial sector in the U.S. If the economy settles down to lower growth rates, commodities are much closer to the top than the bottom
Bond yields. Bond yields have declined as we predicted. Slower growth in bank credit and other monetary aggregates and the slumping dollar point to a softer economy in 2004. Add to this scenario low inflation and major global overcapacity and you must come to the conclusion that bonds should be doing fine in the next few months.
High-yield bonds are also performing very well and remain attractive."
NATIONAL TRENDLINES
14001 Berryville Road, North Potomac, MD 20874.
1 year, 4 issues, $85.
Decline in prices should afford
opportunity to buy at lower levels
Douglas Jimerson: "Stocks have continued to creep forward since their June highs. The majority of investors and the media appear to be convinced that a new bull market will quickly recover the losses of the past three years, although the Nasdaq remains 65% off its all-time highs.
Time cycles are anticipating a decline over the next few months.
Bonds finally succumbed to negative long-term cyclic pressure and declined nearly 20% since our last report one of the worst sell-offs in modern history. This should be just the first leg in a new bear market for bonds.
Gold stocks are fighting negative time cycles and should succumb to their downward pressure as all equity prices begin a concerted decline this fall. Since gold stocks are the most volatile of all stocks, investors who have participated in this rally should take profits before any serious selling begins."
Richard Geist's STRATEGIC INVESTING
1905 Beacon St., Waban, MA 02468.
1 year, 12 issues, $157.
Buy on any market retreat
Dr. Richard Geist: "The stock market is consolidating the gains of the past year. We are not convinced this correction is compete as yet and, therefore, remain cautious on a short-term basis. Our best guess at this time is that the market will begin to rally again about halfway through the fourth quarter.
Despite the headlines, we believe the economy is slowly picking up steam, and continued high productivity should lead to greater capital spending and higher company profits. Eventually this will mean new hiring, but it will take some time before companies are ready to increase their payrolls.
Long-term monetary policy remains very accommodative and valuations remain low. Psychology, as reflected in the sentiment surveys, is more negative, but not dramatically so. Our long-term market outlook remains bullish with some caution short-term. As we have suggested for several months, there is strong reason to be a buyer on any market retreat."
Editor's Note: Dr. Richard Geist, a psychologist and investing guru tells you how to out-psych Wall Street in his, "must-read" book, Investor Therapy, 308 pgs, Crown Business, $24.95. Available in book stores or as an eBook from www.CrownBusiness.com.
Kenneth Coleman's INVESTMENT TRACKER
4805 Courageous Lane, Carlsbad, CA 92008.
Monthly, 1 year, $139.
Where are we in this business cycle?
Kenneth Coleman: "The stock market does not exist in a vacuum. It, like everything else, is affected by the macro events in our economy. However, analysts, along with the media, often ignore this fact. It is not uncommon to hear the media comment on a down market. For instance, one might hear, "the stock market was spooked today by a fall in the stock price of XYZ Company, which ended the day down eight points," implying that the decline of a major stock can affect the stock market as a whole rather than the other way around.
There are reasons why the price of a company's stock declines that have nothing to do with macroeconomics. The implosion of MCI will suffice as an example.
In general, most long-term movements, either up or down, are caused by macroeconomics. Individual stocks usually suffer losses due to technical or fundamental reasons, such as loss of earnings or mismanagement. An important factor regarding the bullishness or bearishness of the stock market is determining the market's primary trend. Are we in an up or down phase in the business cycle?
Most investors are clueless as to where we are in the business cycle. Nevertheless, the business cycle (also known as the investment cycle) is a very important tool for predicting trends and divining profitable stocks.
The Business Cycle Theory
The business cycle theory was pioneered by Ludwig von Mises. The Theory of Money and Credit, by Ludwig von Mises, describes the circulation-credit theory (currently referred to as the Austrian Theory) of the business cycle as the result of fractional-reserve banking of a central bank.
According to Mises, "Under a fractional-reserve banking system, bankers can create money substitutes ex nihilo and give these substitutes to their customers in the form of fiduciary credit or circulation credit." In other words, a central bank can create money out of thin air and loan it to borrowers.
Mises continues, "When this happens, the new supply of fiduciary credit reduces interest rates below the equilibrium level. This, in turn, distorts entrepreneurial calculations. At that interest rate, more investment projects appear to be profitable than would otherwise have been the case.
"But this impression is fallacious because the quantities of real resources have not increased. It is not possible to complete any additional investment projects. If entrepreneurs, deluded by the increased availability of fiduciary credit, launch new investment projects, they squander resources and set the economy on a crash course" According to Mises, "The bust is a period of stagnation and destruction.
Mises sees the business cycle's boom and bust rotation as a time when wealth is redistributed. Investors, as well as others, become deluded by easy and cheap credit during a business cycle. Consequently, they take brainless risks. I say this because, historically, the business cycle has collapsed not too long after the boom moves to excess. It has become a popular cliché that the Federal Reserve takes the champagne from the table after the economy has started to overheat and everyone has come to the investment party.
Nonetheless, business cycle after business cycle, entrepreneurs continue to make the same mistakes. A friend of mine lost his fortune twice during the boom and bust cycle during two business cycles, first in the 1970s, and again in the 1990s. He is a classic case of an entrepreneur becoming deluded by the easy money and over-optimism that prevails during the overheated phase of the business cycle.
For this reason, I have developed my own version of the business cycle. It revolves more around the stock market as opposed to the use of natural resources and corporate squandering of resources.
I have never read any of Mises' books. I reinvented the wheel. I met Murray Rothbard many years ago when we both spoke at a seminar in San Francisco. This is when I became aware of the similarity between my work and that of Mises. My business cycle chart "The Economic & Business Cycle" is self-explanatory.
As Mises stated, it is fractional reserve banking that allows the Fed to act as the timing mechanism of the business cycle. The Fed's lowering of the interest rates thirteen times between January 2001 and June 2003 could be best compared to a submarine finding itself in harm's way, then crash diving in order to avoid catastrophe.
Main Street commits the mistake of failing to recognize the forces or actions influencing the business cycle. It was obvious to Wall Street that business was in the process of recovering (see initial recovery on the chart) once the Fed began lowering interest rates month after month. At this point, sophisticated investors began buying stocks.
We are now between recovery and rising property values. The business cycle is almost 65% complete.
So, what lies ahead? A bullish stock market, a bearish bond market, and rising interest rates. Thus, 80% of the business cycle will have been completed once these events have occurred, perhaps by the end of 2004.
When does Main Street decide when the bull market has arrived? Main Street comes in during every blow-off period of the business cycle. Thus, many investors participate in only 20% of the cycle.
However, not every business cycle is alike. This one differs from those of the 70, 80s and 90s. Once more, the stock market does not exist in a vacuum. Macroeconomics affects it.
It is macroeconomics that determines what will move higher, as well as the degree of height it will obtain."
MUTUAL FUND MONITOR
1412 Spruce Street, Berkeley, CA 94709.
Monthly, 1 year, $79.
Are tech stocks in a new bubble?
Larry Luce: "Tech stocks have had a huge run-up this year, and some thoughtful people are asking whether they have acquired a new bubble status.
It does seem clear that the prices have lost touch with reality. Wall Street Journal reporter Lee Gomes took the trouble to visit Silicon Valley in early August. He reported that the working stiffs there had a question for Wall Street: "What planet are you on?"
The fact is that in mid-1999 the top companies Microsoft, Dell, Cisco, and their like were growing revenues on the order of 30% per year. Today revenues are growing about 4%. Nevertheless, price/earnings multiples remain very high, as before.
Are Profits Sustainable?
True enough, profit increases can still be in double digits. However, these are heightened by cost cutting and favorable currency conditions, which do not provide sustainable growth in the manner of revenue increases.
Moreover, many of the high fliers are the favorites of the past. This is unrealistic, as we know, because the leadership in technology is in constant process of change. Investors, says Gomes, "still appear to think of tech as a magical part of the economy."
Has IT Become A Commodity?
Moreover, we must always ask whether any given technology is becoming, or will become, commoditized. Look back to hand-held calculators. When they first came out, you would pay a fair amount for one of the new gadgets, and a premium for a Texas Instruments model. Now the price has gone way down across the board, and no brand commands a premium. This is great for consumers as the technology passes into common, inexpensive usage, but companies cannot make much money on the item at this stage.
Gomes reports that the Harvard Business Review apparently is arguing that this has happened to much of information technology. IT "has become much like electricity or telephones: indispensable in running a business, but nothing that by itself will make you better than your rivals."
HENNING, The Curmudgeon
Higher rate = real estate bubble burst
Thomas Henning: "The Bond Market has rallied upward, digesting the downleg that busted the bonds from 123 to 103. (See my article in this issue.)
Near term, the rally is acting tired and has cracked downward, suggesting that the next downleg may have started. A close below 103 would leave nothing but air under the bond market and would suggest a move down to the 90 area, give or take a few points.
Oh, by the way, if the bond breakdown is confirmed, look for the real estate bubble to burst.
The Stock Market has waved upward in a terminal move that is beginning to lose upside gusto. The internal measurements are starting to bend over, and the hard momentum is failing.
Closes below Dow 9200, Transports 2650, would bust the indicators to the downside and suggest that the bull swing is over. Assuming that the long-term count is valid, a breakdown would signal the start of a cyclic bear market.
The Gold Complex has moved into a corrective phase, which was anticipated in my article in this issue. It should have a life expectancy of a few weeks. This is standard operating procedure.
Closes above spot gold 400, XAU 100, would confirm the start of the next upleg.
The Dollar Index looks like it's ready to crack the old lows in the 92 area. Given a breakdown in stocks, bonds, and the Dollar, don't be surprised to see a panic into gold as the debt implodes and faith in the tissue paper currencies evaporates."
MONEYLETTER
360 Woodland Street, Holliston, MA 01746.
1 year, 24 issues, $140.
Much ado about the dollar
Walter Frank: "The market sold off sharply on Monday, September 21st on news that the G-7 nations had endorsed the U.S. view that all currencies should be allowed to float. Of course, the statement is aimed first at China and then at Japan. China has fixed its currency to the dollar (for all practical purposes) and Japan's currency floats, but the Japanese try to control the range of movement.
The G-7 statement set off a large drop in the dollar against the yen and, in sympathy, against the euro. Stock markets around the world dropped. The drop is understandable. Large currency changes send a shiver through the financial world, because domestic investors in foreign countries find the value of their assets changing. Some investors sell then as a precaution against further losses.
But from a strictly U.S. point of view floating the Chinese yuan would be a net plus. Considering China's trade surplus, there is no doubt the yuan would rise against the dollar, making Chinese goods relatively more expensive, and our goods relatively cheaper in China. It would make the U.S. more competitive in the Chinese market and would help our manufacturers somewhat in competing against Chinese imports.
Whatever the possibilities, it is very doubtful that the Chinese are about to listen to the G-7 concerning their currency. The Chinese are not about to float. The situation may be different with respect to Japan, but don't hold your breath.
Meanwhile, if something were to come from the G-7 statement, it would be a net positive for American business. Instead of selling off, the U.S. markets should have mildly celebrated. The reason they did not, we suspect, is that much of the selling came from foreign investors who were concerned about losses because of a lower value for their dollar holdings in their domestic currency.
We see the currency issue as a minor irritant as we go forward but no more than that for the market outlook."
THE MAJOR TRENDS
Client Letter. Sadoff Investment Management
250 West Coventry Court, Suite 109, Milwaukee, WI 53217.
Why isn't the economy performing better?
Ron Sadoff: "An enormous amount of stimulus has been targeted at the economy: 13 interest rate declines with 90 day Treasury bill rates now at 1%, two hefty tax cuts, enormous government spending resulting in gigantic deficits and a boom in mortgage refinancing (which unfortunately has petered out due to the jump in mortgage rates). It's not that the economy isn't improving. The problem is why the expansion isn't picking up more speed. Does this put into question the endurance of this upturn? Even the Federal Reserve agrees: "the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal." Remember, there has never been a time when a sustained prosperity took hold within ten years after a bubble/bust cycle. And the recent high tech mania was the biggest ever. Consumer spending for August strengthened somewhat, but the actual numbers were disappointing up only 0.6%, not the projected 1.6% and down from the 1.3% pace in July.
The poor employment numbers are casting a somber mood on consumer spending. The consumer is spending only 20% of the tax cut. Quite dismal! The tax cut was designed to encourage the consumer to spend. Instead the consumer is paying down debt and building up savings. Also the plunge in mortgage refinancing because of higher mortgage rates is no longer a power source of stimulation.
Consumer spending is still the key to economic growth. So far the spending pace is sub-par. If consumer spending accelerates, then sustainable growth is likely. Should consumer spending remain anemic, then the economy will eventually falter."
THE GRANVILLE MARKET LETTER, Inc.
P.O. Drawer 413006, Kansas City, MO 64141.
1 year, 46 issues, $250.
Tremendous future for small caps
Joseph Granville: "The Nasdaq Composite recorded its bull market high at 1905.55 on September 18th. I have gone on record predicting a coming move to 3000. I have noted the fact that most of the low-priced stocks are on the Nasdaq and there I see a tremendous future for them. My reverse gravity concept is what led to my sharp individual stock price projections. Subscribers who have been with me for a while undoubtedly must have noticed this new stepped-up tempo. Instead of a 3 dollar stock projected to the 6 10 area, I have found it to be technically more realistic to extend the forecast to 15, 20, 30 dollars or even higher if the chart calls for it. This is all part of the new ball game ahead."
KEY-VOLUME STRATEGIES
P.O. Box 407, White Plains, NY 10602.
1 year, 24 issues, $419.
Beware of the traditional
birthday present from the bear
Robert Conrad: "Each year the Stock Trader's Almanac reminds us that the October lows provide a reliable springboard for rallies that last into January and even beyond. We're in October now, so soon Wall Street can collect its traditional birthday present from the Bear. Why the Bear? Because October lows tend to occur after setbacks that often qualify as "waterfall declines". The October weakness has been so prevalent that the almanac uses the phrase the "October Jinx". So yes, the birthday present is imminent, but the road to the party shows historic skid marks leading into ditches. If you have the 2003 almanac, study page 84: A Correction for All Seasons. What does our own technical work indicate directly ahead?
The only thing that appears in doubt is the depth of the correction.
A triple threat has reemerged, and October 8 continues to look like the deadline for a skid to begin.
Composite Forecast from Market Hotline: the market will gradually succumb to resistance in the 9621-9749 range, then fall to 9300 give or take a few points. Signals received on that drop will determine whether one or two more down legs are likely, with lows near 9100 then 8900."
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