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Bernie Schaeffer's OPTION ADVI$OR
1259 Kemper Meadow Drive, Cincinnati, OH 45240.
Monthly, I year, $200.
Biggest opportunities lie
namely in tech and gold
Bernie Schaeffer: "As we move out of a period of sub-par seasonality and into a period of above-par performance, our message for investors remains the same - keep about 50 percent of your portfolio in cash; the biggest risk is in the blue-chip names; and the biggest opportunities are in the perceived "risky" names, namely tech and gold.
I began this commentary using the word "par" intentionally, as I see an analogy between this market and the golfer who is in the unfortunate predicament of having a big tree lie between his ball and the green. Meanwhile, sand and water lurk menacingly in the distance. Sure, this may not be an impossible situation to overcome - luck, skill, or a friendly wind could result in the golfer making a great shot to the green and thus escaping with an outstanding hole. At the same time, a slight miscalculation could result in more trouble as the golfer digs himself into a deeper hole. As such, the golfer must carefully approach how he plays his shot or the strategy he chooses to employ.
This is the predicament we see the typical investor facing with respect to today's market. There are pockets of opportunity, yet danger lurks. With stock-picking skills and the safety of cash (or the availability of stock insurance via put options), you can manage the risks while taking advantage of the opportunities.
So what are the trees, sand traps, and water in this market? This can pretty much be summed up in a new feature on our website, "Schaffer's Daily Contrarian." In this section, we look at the day's news and put a contrarian viewpoint on the opinions expressed within articles that we find of interest. In perusing the postings from the last few days, I'm seeing trends begin to develop and some are not pretty. For example, reactions to earnings reports over the past couple of weeks have been poor, yet we are seeing signs of complacency that suggest to us that follow-through declines have a higher probability. One such article suggested market participants view the recent sell-off as "orderly" and "healthy." We'd prefer to see more fear on poor earnings reactions that is typical of a climactic sell-off rather than that of a perceived "orderly" decline, which tends to linger like an unwanted houseguest.
A separate article about earnings going forward suggested the expected slowdown of earnings growth to 12 percent (annualized) in the first half of 2004 is "pretty good" for investors. This reminded me of another danger lurking - valuations. Can the current S&P price/earnings ratio of 33 really support 12-percent earnings growth? Is 12-percent earnings growth "pretty good?"
Another article we highlighted discussed the prospects of higher interest rates, in which Treasury Secretary John Snow predicted higher rates would not hurt a rebound. With all due respect, Mr. Snow, this could very well be a threat to an economic rebound. With a weakening dollar, which may force overseas companies operating in the U.S. to raise prices, and the Commodity Research Bureau Index up almost 40 percent since October 2001, it's altogether likely that higher interest rates amid higher prices could very well knock the economic rebound deep into the rough.
Then there's the danger lurking in market volatility, as explained in Bernie's most recent "Schaeffer on Charts" commentary. Volatility on the S&P 100 Index (OEX) is near historical lows, which has been a harbinger of downside moves in the past. This is especially true if volatility forms a bottom and moves higher. So while this is not by itself a bearish signal, it does indicate some vulnerability for the overall market. And volatility in the tech sector, while declining to record lows as well, is showing no signs of turning higher, a positive for this group.
Despite the warning signs, I don't want to leave on a sour note. As the saying goes, "A bad day golfing beats a good day at work." Golf is a great and enjoyable game. Just because there are a few hazards, it doesn't mean you shouldn't play. As long as you know where the water and hazards are, you'll be better able to play to safety. The same is true in the market. Our job is to inform you of the dangers and point to the safer spots that will yield a better score.
We remain selectively bullish on the market, with our sights set on tech, gold, and some of the higher-leveraged sectors, such as airlines and auto. Tech has been on a monster rally this year and no one seems to believe it. We're still seeing a huge influx of short interest and put protection, while tech mutual funds go begging for new money. To our way of thinking, such activity takes some of the danger away from this sector.
For those who see the tree, water, and sand, the risks can be managed and profits can be had. For those who don't, we wish you the best of luck."
Louis Navellier's BLUE CHIP GROWTH LETTER
7811 Montrose Road, Potomac, MD 20854.
Monthly, 1 year, $299.
Louis Navellier: "The economy is now so strong that by the time the fourth-quarter earnings are released early next year, corporate profits will probably be in record territory. Yet the stock market will still be significantly below new highs - especially the Nasdaq. The Nasdaq Composite was over 5000 when the market peaked in March 2000.
I suspect that the stock market will be very strong for most of next year. The third year of a presidential term is historically the strongest year in the election cycle. The next strongest year is the election year itself. As the economy steadily creates more jobs, President bush's opponents will start to de-emphasize the economy and instead focus on Iraq, health care and other issues that are on the minds of voters.
The Federal Reserve will likely hold short-term interest rates steady through next year's election despite a growing economy and rising bond yields. The Fed has many objectives, one of the biggest is to fight inflation and prevent deflation. Now that the U.S. dollar has weakened after the G7 meeting, it's possible that inflation could slowly materialize as the cost of commodities and imported goods rise. However, I suspect that the euro will weaken against the dollar, simply because the economy is gaining strength. Eventually, if inflation materializes, the Fed will be forced to raise short-term interest rates.
The federal budget deficit estimates were cut by over $70 billion due to a growing economy. Coincidentally, the savings in the federal budget deficit happen to just about equal the amount of money that President Bush is seeking to help rebuild Iraq. Although it looks as if the Bush administration is trying to reduce the estimates of the federal budget deficit in order to get additional funding for Iraq, the truth is that the surging economy is generating more revenues and helping to narrow the budget deficit.
With record corporate profits approaching, you might think that these record earnings would help eliminate the budget deficit, however, corporate tax revenues are still a small portion of Uncle Sam's overall revenues (approximately 8%). In other words, these profits help, but they can't wipe out the deficit all by themselves."
THE YAMAMOTO FORECAST
P.O. Box 573, Kahului, HI 96733.
Monthly, 1 year, $350.
Irwin Yamamoto is 100% invested in money market funds. He is bullish on the bond market, short-term (3 to 6 months). And remains Bearish on stocks and Bullish on gold.
"At current heights, the market's pricey. The risk/reward ratio doesn't make sense to us. For the month of November, and through the end of the year, a 5-percent return (maximum) on the upside is possible. While 10-percent decline lurks on the downside. We don't envision an imminent collapse or the end of Western civilization. On the contrary, we're just biding our time for a better entry level."
MONEYLETTER
360 Woodland Street, Holliston, MA 01746.
1 year, 24 issues, $150.
Walter Frank: "As the numbers roll in, it is obvious even to the most dismal of Wall Street's dismal scientists, that an economic recovery is underway. As is usually the case when the economy finally turns (either up or down), the early stages of the move are much sharper than anyone expected. That is what is happening now.
The market, as is sometimes - but not always - the case is following its script to perfection. It anticipated the cyclical turnaround correctly and drove stocks higher long before any recovery was confirmed by the data. Not only that, but the sector that usually leads the market higher in a cyclical recovery, small caps, is also performing its role to perfection.
We responded to the earliest signs that odds of a recovery developing were favorable and took a very aggressive stance in our allocation advice for Venturesome and Moderate investors. As things developed our fund system chipped in and told us that small caps were the way to go. We had no hesitation in following the system's suggestions. We did not follow the system blindly (we never do), and avoided some of what turned out to be the hottest funds of the subsequent rally. The long bear market left its indelible mark on us. We make no apologies. The funds we did choose did well enough, thank you.
Now comes the hard part. At some point it will be time to lower our aggressive allocation a notch or two. Timing is not everything in investing, but it matters greatly. Consequently, we are back to the same question we wrestled with a month or two ago, as the market advances: are the risks rising faster than the prospective rewards? And then there is the sub-question: how does the risk/reward balance look now?
Unfortunately, there is no ruler we can use to measure and give you an answer. It is all a matter of judgment. What do we know? We look at the overall market and we see the S&P 500 still selling at 17.6 times the estimate for S&P 500 earnings over the next twelve months, an OK number for us. As we all know, earnings estimates take on the tenor of the times. During a bear market, earnings estimates woefully underestimate results and, of course, in a bull market earnings estimates miraculously inflate along with the market. If we learned any lesson from the bubble, that is one to take home.
Has the earnings inflation begun? Not yet, from everything we can see, Chuck Hill, of First Call, the earnings gathering company, has a keen nose for earnings puffery. In his recent commentary he stresses the very low level of earnings warnings relative to positive earnings statements. This applies to this quarter (the year-end quarter) as well. Things may change, of course, but right now Hill's "guesstimate" is for earnings growth of 25% this quarter. That is a big number. Looking at the analysts' actual estimates for this quarter, there is nothing to suggest that the analysts have moved to the far side so far.
On that basis, we are comfortable with market valuations, at least as far as the S&P 500 is concerned. Still, the world of the S&P 500 is one thing and the world of the small caps is another. As the Dutch uncles in Wall Street have been warning, there is speculation down there. And, indeed, there is. But there are also companies where earnings are growing at extraordinary rates. As the recovery gathers steam over the next few quarters, especially in manufacturing, we should see knockout earnings reports from many small companies.
We will also see the market catching up to those earnings. But it is not there yet. This bull market still has ground to cover. We have strong earnings gains ahead, stronger than in analysts' current estimates. Our conclusion: the risk/reward ratio still justifies our posture, but the ratio is not as favorable as it was.
We have all seen the phrase "bear market rally" frequently used to refer to today's market (though much less frequently lately than before). The implication is that when this (presumably) short-lived rally is over the market will slide back to the lows of the bear market and lower.
We just don't see any basis for this view. Naturally, the bull market we are in will end. We don't know when. And, by definition, when it ends, the broad market will go down again. But there is nothing to suggest that the next bearish phase of the market will be anything other than the normal run-of-the-mill bear market, retracing a fair portion of the gains of the bull market.
Of course, rampant inflation could return. Of course, the Fed could raise short-term rates to very high levels. Of course, we could be in the midst of a new bubble. Anything could happen. But are any of these likely over the next year or two? We think not."
THE PERSONAL CAPITALIST
6911 South 66th East Avenue, Suite #301, Tulsa, OK 74133.
1 year, 24 issues, $195.
Trading range around DJIA 10,000
Sean Christian: "Our forecast calls for a brief market trading range to be established around the DJIA 10,000 level. The market could easily trade between 9,500 and 10,500 for a season. Our initial thought is that the market would then continue higher although we will monitor the economy carefully before making that assertion. There's a very real possibility that the economy has entered a new "super boom" that will ultimately take the DJIA to 15,000 and higher. We continue to believe that small stocks and special situations will outperform the market as a whole."
The Peter Dag PORTFOLIO STRATEGY & MANAGEMENT
65 Lakefront Dr., Akron, OH 44319.
1 year, 24 issues, $398.
George Dagnino: The stock market is overbought. It means that it may go down. The problem with this measure is that it confirms the strength of the market. When stocks are in a solid up trend it is not of much help. Overbought conditions just point to a slower growth rate. This is exactly what is happening.
- Fundamental indicators. The third year of the presidential cycle sets the tone for the following election years. The administration does all it can to get re-elected. Taxes have been cut. Government spending is soaring. The Fed is flooding the banking system with money. Short-term interest rates are still close to 1% and their stability is positive for the market.
The problem is that the growth of the monetary aggregates keeps slowing down and the dollar is weak. These are not bullish trends.
- Technical indicators. The most important trend is that the advance-decline line is rising. Stocks peak several months following some weakness in this gauge. The market has still more room to go on the upside according to the a-d line. Volume is also rising, which is bullish. The declining trend in option premiums is also bullish.
- Sentiment indicators. Investors are overwhelmingly bullish. This is a sign of caution. It suggests the market will rise at a more subdued pace and it may top.
- Seasonality. The seasonality of the market is bullish until the end of the year.
- Attractive stock sectors. Real estate, precious metals, home building, savings & loan, retailers, cyclical stocks.
Investment implications. In the near-term, the action of the market is supported by rising trading volume and superb strength in the advance-decline line.
In the long-term, as long as short-term interest rates stay close to 1%, there is limited risk on the downside. Stocks will continue to rise until the end of the year. The fact that growth in the money supply is declining is not promising for 2004. Risk is definitely rising."
Henning, The Curmudgeon
Thomas Henning: "The Bond Market has rallied up to 112 after legging down from 124 to 103, kicking off a probable cyclic bear market.
Near-term, the bonds are still consolidating the previous downside smash, but a close below 103 would confirm the cyclic bear and lock in the uptrend in interest rates. Oh boy!
The Stock Market has been in a cyclic bull market since August, 1982. If this assumption is correct, the recent upleg off of the March low is the terminal move within the larger cyclic pattern.
Near-term, internal indicators are beginning to fail and move into upside non-confirmations as the external market has scored marginal new highs. The first very sensitive suggestion that the uptrend has quit would be closes below Dow 9710, Transports 2920. Closes below Dow 9225, Transports, 2650, would bust the Weekly Hard Momentum downward and would suggest that the twenty-year cyclic bull market is done. Watch for downside coordination with the bonds and the Dollar.
The Gold Complex is in a cyclic bull market generating profits for the gold bulls. The only problem has been the identification of a clean wave count. I have at least four hundred potential wave scenarios. No matter. The easiest thing to do is pay homage to the old rule: "The trend is your friend" and let it evolve.
Near-term, a breather is due with the metal just under 400 and the XAU at the 100 level. If a correction evolves, the real fun should begin after the correction, if the bonds and Dollar confirm downward."
Richard Geist's STRATEGIC INVESTING
1905 Beacon St., Waban, MA 02468.
Monthly, 1 year, $157.
Solid 4th quarter for the market
Richard Geist: "While the consolidation winds down we are becoming a little more aggressive in suggesting that the fourth quarter will be a very solid one for the market.
Keep about 10% of your cash on the sidelines to take advantage of buying opportunities, but we feel the combination of the internal dynamics of the market, the improving economy, the seasonal trends, and a presidential year are all aligning themselves in a bullish pattern. There will be bumps in the road, but at this point we recommend using them as buying opportunities."
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