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The latest score from the year 2000 high to the new lows established this October is as follows: NASDAQ down 77%, S&P 500 down 50% and the Dow Industrials down 36%. That averages out to be a 55% decline in 34 months. That makes this the worst performing market since the Depression (which lasted 39 months). The previous "worst market" award occurred in 1974 when the market fell 50%. However, that Bear Market lasted only 9 months. So, if you are still reading this "stuff" about the stock market, you are one of the survivors of the worst Bear Market since the Depression. Congratulations! Like the old joke about the optimist: "With all this horse manure, there's got to be a horse around here somewhere". So it is with the market: "With all this devastation, there's got to be a market bottom here somewhere". Most of the news is still bad, but it always is at a bottom. As the market always moves in advance of anticipated news, the market will probably be up substantially before the news turns positive. Then how can you determine a bottom? How about the market itself.
The process which is needed to establish a major low is for the markets to first rally from a low (which they are doing), and for that low not be broken for the Dow, NASDAQ and S&P by any setback sell offs. Next, there are a series of former support areas that have now become resistance areas for the market to break above. For the Dow the first major resistance area is 9,010, the NASDAQ 1,426 and the S&P 964. If this can be accomplished the Intermediate Term Breakout points (that in my opinion would end the Bear Market and begin a new Bull Market) are 10,679 for the Dow, 1,759/2,098 for the NASDAQ and 1,174 for the S&P. These breakout points are still a long way off. That is because the Bear Market we are now in has done a lot of damage, which only a major reversal of prices can change. We expect this process to take several years. In the meantime, watch for Short Term Support Levels to hold. They are Dow 7,197, NASDAQ 1,108 and S&P 768.
Our April 2002 market letter spelled out the "Perfect Storm" that created a "Crisis in Confidence". The litany goes as follows: the NASDAQ fell from 5000 to 2000 as the "bubble burst" of high expectations, followed by massive layoffs, followed by the shock of 9-11, followed by the Enron and Arthur Anderson disasters. "Creative Accounting" and "financially engineered earnings" are now a thing of the past. However, the current adjusted realistic earnings magnify the current economic slowdown. Now the latest concern is that pension plans that are calculated at a 9.5% growth rate and are the bottom line obligation of the corporate employer, may have a negative effect on future corporate earnings (if stock portfolio returns remain low). In addition, this is a continuing concern about another 'mass destructive' terrorist act and the consequence of a war with Iraq. Not a pretty picture. Is this an opportunity or could things get worse?
The 'Bearish case' is built upon a lower expectation of Corporate Profit margins and earnings. Competition, which was the lifeblood of the market place, is out of control. The new world market, that was to open up new opportunities has opened up a "Pandora's Box" of price-cutting and labor exploitation. In the past, the free market has functioned well because there is an inefficiency in the market place, which created a gap between cost and price sold, called a profit margin. Through computerization and hyper fast communications of the free markets (on a world wide basis), the profit margins of corporations have shrunk to almost nothing. Communism fell because factories employed twice as may employees as needed to create full employment. Now, GM and Ford sell cars below cost just to keep the factories going, because it would cost more to fire an employee than to keep him. United Airlines has twice the cost per passenger as ATA. Put simply: This is a period of dynamic change. Gone is the concept of 'In the long run if you just hold on to your stocks in a diversified portfolio, they will grow at 8% a year. This was never a 'primary truth'. A 'primary truth' that does apply is 'Buy Low, Sell High'.
The securities industry is the only business I know of that scares potential
customers away by decreasing prices. Every other business attracts customers
as it decreases prices. By all judgments of scale (down 77% in 34 months) a
bottom could be here now. Watch for the technical changes to occur (spelled
out above) that are required for a bottoming process to be completed (Ask for
a FREE copy of our pamphlet Stock Market Forecasting
Through Charting). Watch for the U.S. Federal Government to truly turn its
attention to the economy. President Bush like President Hoover (before the Depression)
has so far ignored economic stimulus. Its time to act not to react. In my opinion
the economy needs:
1. Investment tax credit advantage for new equipment purchases
2. A relaxation of the double taxation of dividends and an increase of the maximum
allowable deduction for loss carryover to $25,000 from the present $3,000 to
encourage investment in stocks
3. A three-year substantial lifting of minimum for retirement programs (especially
for those over 50 and bigger for those over 60) to re-establish the value of
diminished portfolios
4. A national program for safeguarding and simplifying our national communications
network and
5. Massive government spending on public works programs to revitalize the inner
structure of our cities, roads and National Parks and public lands.
In the Lone Bull Letter 2001, I outlined the 'next
upward wave', under the section "After the Bear Market". "While
the effect of new technology is difficult to assess, and the NASDAQ has to proceed
through a bottoming process, I believe that 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." We believe future investing can best
be made through the individual-to-individual broker/client relationship. Remember;
Buy Low, Sell High.
-- 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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