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THE LONE BULL
The New Era 2003 to?
Since October 2002 the markets have rallied substantially with the Dow up 26%, the Nasdaq up 40% and the S&P up 29%. In June we predicted that the rally would pause and so it has. We don’t see the Bear Market returning. As indicated in previous market letters, we explained how the market’s upside pattern since October 2003 has broken the Bearish trend. However in order for a New Bull Market to become established the following two levels of resistance points need to be broken above: Dow 10,679/11,600, Nasdaq 2098/2328 and S&P 1174/ 1315. We believe the market is establishing a “New Pattern” which will be a “Sideways Trend”, within a yet to be determined parameter for a three year period. What sort of strategy would you employ?
Recognize That This Is A New Era:
The Old Era saw the benefits of Globalization, the Internet and Deregulation.
The New Era will focus on “ finding solutions”
to the negative implications of globalization, instant communications &
deregulation. The markets during the 1990’s went up some 20% per year
without setbacks. This straight up pattern was unlikely to have occurred and
is even less likely to reoccur. Likewise the Bear Market of the last three years,
which saw a “perfect storm” as there was a technology stock bubble,
corporate and accounting malpractices, and large-scale foreign wars is also
unlikely to reoccur. The New-Market Era we are entering is foggy. However, there
are some features that are more pronounced than others:
1. Federal, State and Consumer debt is growing: To help finance this debt the
Federal Reserve is growing the money supply at a 10% rate. Of course this is
an election year so the Fed may act differently after 2004. At any rate, the
present implication calls for a weaker dollar, more inflation and higher interest
rates. All this may have an effect on the prices of homes whose large increase
in the prices has made U.S. consumers feel richer (and actually they are). However,
higher interest rates could put a hold on that feeling of consumer confidence.
2. World Wide competition will continue to keep wages and profit margins low:
China and other countries are extremely competitive in the Labor market, keeping
worldwide wages low. India and other countries are extremely competitive in
technology services, keeping prices low. The Internet is so efficient, that
consumers are instantly able to buy homogenous products at the lowest prices
and smallest profit margins possible. This is a New Era in which major manufacturers
would rather sell their products at breakeven just to keep their labor force
working, rather than deal with the costs of labor union layoffs.
If the New Era exemplifies the negative side of globalization, instant communication
and deregulation, how should investors behave?
Become Self-Reliant:
Most investors stopped being self reliant through the 1990’s, as they gave their money to professional money managers (Mutual Funds & Wrap accounts). That may have worked well in the Old Era when the market was up 20% per year. However, as indicated earlier, we don’t believe a new Straight up market is likely. After a Big Bear Market, such as we have experienced, markets usually pause for a while, as New Era parameters become clear. In Japan, after the market rallied from 10,000 to 40,000 and back to 10,000, that market moved sideways below 10,000 for 13 years. In the United States a previous Bull Market broke above 1000 in 1966. It took till 1983 before the market could stay above 1000. Slower economic growth & high management fees will greatly diminish the possibility of obtaining double digit returns for investors with mutual funds and Wrap accounts. It won’t be any good to blame politicians for false expectations. There is only one person who has the responsibility for your financial security and that’s yourself. Educate yourself about investment alternatives. There are books, publications and the Internet at your disposal. Then what?
Select Individual Portfolio Issues:
Depending upon your Risk Tolerance, select individual stocks for your portfolio. Do the research to select issues that are conservatively valued fundamentally & will be able to take advantage of finding solutions for the problems of our New Era. The world is getting older and staying alive longer. What companies are positioned to take advantage of this phenomenon? Also look for U.S. corporations that help us become more productive and foreign companies that are beating U.S. corporations at becoming more productive. You now have a world of stocks to choose from. Additional income can be obtained from an Option writing program. Also if you need income there are annuity products and individual issues to meet your needs. Select bonds that are short term and ladder the maturities. As bond prices went up when interest rates declined, so bond prices will go down if interest rates go up. Shorter maturities will lower the yield, but reduce the possibility of having to sell before maturity at a loss. New to the marketplace are TIPS or Treasury Inflation Protected Securities, where the interest rate adjusts with the Consumer Price Index. The principal value of the bond also increases with inflation. TIPS are usually attractive whenever the coupon on a new offering is near 3%. That’s the historical real rate above inflation of return on Treasuries. These are best for tax deferred retirement accounts, as you would otherwise have to pay the tax on any upward adjustment in the value of the bond even though you don’t receive that adjustment until maturity or when you sell the bond. Here in the United States you have all of the alternatives available to you along with a world of stock selections. However, in the New-Era the “buy and forget” motto of the Old Era does not and never did apply. How do you protect yourself in a more volatile environment?
Exercise Market Timing:
As mentioned above, the motto for the Old Era was “buy and forget” which was a distortion of the “buy and hold” motto. We suggest the motto for the New Era as “ Buy Low, Sell High”. How do you attempt to do that? We suggest the technical methods explained in such places as our own pamphlet “Stock Market Forecasting through Charting”. Here are explained what support and resistance areas are. Also explained are trend lines, cycles, suggestive formations, overbought and oversold indicators and patterns etc. Interpretation of charts will assist you in “listening” to the market tell you what its doing and where its going. The technician believes that price reflects all factors influencing the market and that price movements show each investor's fundamental knowledge and emotions. Thus the price is the end result of all economic and psychological pressures. By studying these price movements, the technician forecasts future price swings by charting the prices of stocks and interpreting their formations and trends using historic precedent as a guide. These methods were well known and used during the 1966 to 1983 period where the market went Sideways for seventeen years. How else were double digit returns available during that period, expect through market timing? However, these technical market methods seemed to be forgotten during the 1983 to 2000 period when double-digit returns came easy. Well, it’s no longer easy. Need help?
The Broker/Client Relationship:
Just as the technical methods of forecasting price movements, market timing
and self-reliance fell by the wayside during the Old Era, so has the broker/client
relationship. With cheap Internet trading available and professionally
managed accounts and mutual funds promoted by brokerage houses, the relationship
between a broker and a client has almost disappeared. We believe the relationship
of clients with brokers (who are familiar with market timing and conservative
evaluation) is in need of a revival. Yes, commissions through a broker
cost more than an Internet transaction and yes, it takes more effort than buying
a mutual fund. However, will you get your money’s worth in service and
the peace of mind of being “self reliant”? Asking for help from
a well informed broker doesn’t diminish self-reliance, it enhances it.
-- Carl M. Birkelbach
8/19/03
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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