The Investment Strategy Letter #516

Late April, 2002

Dow- 10,100

The “Perfect Storm”/ Crisis in Confidence

In our last market letter we outlined a case for “Who do you trust?” The last couple of years have seen a series of events that have created a terrible time for investors as follows:

The NASDAQ imploded from above 5000 to below 2000, as market analysts continued to recommend issues. Apparently they had not heard of the saying “Never catch a falling knife” Reports of an economic slowdown were dismissed as a temporary abnormality. To make matters worse, many analysts came out with “Sell Signals” only after most of the decline had been completed.
The economy fell, especially the tech sector, and one layoff after another has been announced.
The events of September 11, 2001 came as a shock to a stock market and an economy that was trying to recover. Investors continued to be concerned that another event could happen anytime.
Enron made a difficult period even worse by falling into bankruptcy. The actions of management discredited all companies. Investors now view upper management with suspicion. In many cases, it appears that those in the upper ranks have little regard for employees or shareholders and are interested only in lining their own pockets with the spoils of corporate looting.
The final (we hope) blow came from the actions of the accounting firm of Arthur Anderson, which apparently had a conflict of interest that may have jeopardized their objectivity with their accounting practices. This put all financial statements in question.

This “Perfect Storm” has left investors disillusioned and on the sidelines. Everybody seems to be worried about what will happen next.

The “Perfect Setting”/ A New Bull Market

The series of events described above, which themselves are unique, have created a familiar cycle of despair. Of such ingredients are new bull markets made. This is just the opposite of a top, where everyone is positive. Many believe the stock market is now obviously no longer the place to put your investment dollars. The obvious, we believe, is most likely obviously wrong. That’s because most investors make their decisions on only recent criteria. After all, why would anyone invest in the stock market during these uncertain times? The stock market is one of the few places where reduced prices actually drive potential buyers away (and increased prices attract investors). The economic headlines don’t say “Clearance Sale on already Discounted Prices” or “The Stock Market is Ready to Bottom” with a sub-title saying “Sell at Higher Prices Later”. The headlines are discouraging, and so are recent stock market investment returns. Most investors are not just disappointed with their portfolio performance, but are shocked into inactivity.

While nobody can be sure of exactly where or when the stock market will bottom, we can be sure that the necessary ingredients of discouragement, disappointment, apathy and fear are present. The stage is set for hope to enter, followed by an economic recovery. The American dream is far from over. As much as we hoped the business cycle was over and expansion would be perpetual, the business cycle remains a factor. The main question today is: When will the downside end and when will the upside begin?

Stock Market Prediction / What’s Real?

To answer the above question, we have to first look at what won’t give us the answer. The analysts are prejudiced and so is corporate management and so are the accounting figures. Then what’s real? We have been saying for some time that the stock market is still in a Bear Market. Let the economists and stock analysts say what they may. Until the market itself shows us differently, the general Bearish environment remains. We have repeatedly given our upside breakout points as DJIA 10,679, NASDAQ 2,328 and S&P 1,315. As we have indicated on our Current Market Comments section of our website (www.my-broker.com) a clue as to how quickly or slowly the change in trend will take place, will be determined (in our opinions) by the markets ability to break above Short Term Resistance Areas at DJIA 10,400, NASDAQ 1,940 and S&P 1,173 or break below Short Term Support Areas DJIA 9,745, NASDAQ 1,696 and S&P 1,074. In our opinion the present battle between Short Term Resistance and Support Areas will determine the general market environment for the next six months. Regardless, of this outcome the emotional stage appears to be set for the formation of a Long Term Bottom to be followed by a New Long Term Bull Market. The sooner the better!

-- Carl Birkelbach

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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