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Editor: Carl M. Birkelbach
In as little time as nine months, the NASDAQ Composite has fallen 50%. Technology
has gone from the toast of Wall Street to toast. I now believe a bottoming process
is taking place. Normally a full Bear Market is a 62% correction and can take
from one to three years for the market to bottom. The market is currently suffering
from a lot of negative news. Where is the bottom? "A market bottom is formed
when all the negative news is fully discounted. That is when everyone that could
be frightened into selling has already done so. Discouragement, disappointment,
apathy, fear, frustration and the most important ingredient, panic are all part
of a typical market bottoming scenario," Notice the last several sentences
are in quotation marks. It's a quote from the first Lone Bull Letter dated September
11, 1981. That was when the Dow was below 800. In the middle of a negative environment
The Lone Bull Letter predicted a new era, which would be reflected in three
Bull Market Waves. The first wave represented anticipation of better times (1980s),
the second wave, the realization of better times (1990s) and the third wave
would reflect the full potential of this new era. When will the third wave begin?
Whenever this new Bear Market is over (1 to 3 years), the new "Third Wave"
will begin and hopefully "you ain't seen nothin' yet". This of course
is the famous line by Al Jolson at the end of the first talking movie. It's
appropriate because it was just the beginning of a new technology. The Lone
Bull Revisited Letter, dated 2/24/92 (when the Dow was 3,000 and called for
an 8,000 Dow) indicated some of the engine that would drive the "Second
Wave" was the fall of the "evil empire", the effect of technology
on productivity, the lag effect of lower taxes initiated by Reagan and a government
environment conducive to business. The third wave will include all this and
in addition be fueled by the long-term positive effects of the globalization
of the marketplace (watch China), increased connectivity through easy communications
and the internet, and the effect of the full utilization of new technology on
productivity and our society.
This "third wave" should not be confused with Alvin Toffler's 1970's
books The Third Wave or Future Shock, which were a bit negative. The analysis
of what we see as a third wave are more clearly spelled our in the books, Blur
and Future Wealth by Stan Davis and Christopher Meyer. In our third wave "built
to last" means "built to change". The problem with this kind
of environment is that value will reside in intangibles such as intellectual
capital, the speed in which changes can be made, service and relationships.
This makes traditional stock evaluation difficult. For example, Microsoft's
sales to physical assets ratio is 12, for U.S. Steel it is 2. We believe this
means that value of traditional assets should be reassessed. Earning will continue
to be important, but the difficult evaluation of future growth rates will determine
P/E multiples. Concepts have to be changed with each era. Perceptions have changed
as we have moved from a hunting and gathering society to an agrarian society
and to the industrial revolution. This era, which I will call the technological
revolution, (for the lack of a better name) is calling for dynamic changes.
Up until now technology and computers have been used as and valued as, "factories"
to perform routine work. That's the "Old Economy". In the real "New
Economy" which I believe is just dawning, we are moving from hardware to
software, from hard assets to intellectual creativity. Just as Dorothy in "The
Wizard of Oz" suddenly realized "We're not in Kansas anymore"
I believe there will come a sudden realization among investors of this change.
The recent NASDAQ up move to 5,000 was a bit premature. While the effect of
new technology is difficult to assess, and the NASDAQ has to proceed through
a bottoming process, I believe that technology stocks will once again lead the
way. Internet, wireless, fiber optic, video integration, voice recognition and
advanced chips are probably where the action will be. The third wave will be
driven by us, consumers. We will demand service anytime, anyplace, real time,
on line, interactive, user friendly and customized. It's just beginning. The
only problem that is yet to be answered is 1) how deep will the correction be
and 2) how long will the bottoming process take. Stay tuned to the Investment
Strategy Letter for updates.
Just as the economic sector has changed from agrarian to industrial (and now
to technology) the financial sector has made similar dramatic changes. Historically,
assets were held and controlled by the landed gentry and kings, then to corporate
managers and recently to money managers and now with the democratization of
information, to individuals. Individuals are realizing that net worth isn't
necessarily the outcome, but it can be the source of wealth. Put more plainly,
financial wealth is shifting from money that you work for, toward money that
works for you. Real wealth is not how much you spend, but how much you invest.
The funds individuals commit to investment are growing quickly and will be the
primary engine that drives that third wave.
Broker Client Relationship
Through individual ownership or through retirement plans, some 52% of Americans
own investments. With this privilege comes responsibility. The more unearned
income that people make, the more risk that they will bear. Depending on each
individual situation, risk can be viewed not as a threat, but as an opportunity.
The financial sector creates wealth by bearing, trading, and managing risk.
As the average middle class family becomes millionaires, they will need more
help in making financial decisions that are tailored to their needs. We believe
this goal can best be made through the individual-to-individual broker/client
relationship.
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
This report has been prepared from original sources and data we believe reliable
but make no representations as to the accuracy or completeness. Birkelbach Investment
Securities, Inc., its affiliates and subsidiaries and/or their officers and
employees may from time to time acquire, hold or sell a position in the securities
discussed in this report, we may act as principal for our own account or as
agent for both the buyer and the seller.
Past performance is no guarantee of future success. Also, while the above suggested
prices are as listed on our reports and the sell dates and prices are as issued
by our research department, our brokers operate independently and as each individual
client has a unique risk tolerance level, the above list should not be deemed
as a representation of our clients purchases and sales. Some of our suggestions
are volatile and speculative. Therefore, these stocks are only for those investors
willing to assume risk. In addition, there may not be enough information available
in these reports to make an informed decision. Upon request, we will supply
additional information. Purchases should not be made until enough information
is obtained and risks understood.
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