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November 4, 2019

It has been eleven months without a long term forecast.  Not a lot has changed.  Interest rates are still very low ,home prices as expected have leveled off and started to fall. And the tariff issue is the most important element having an effect on the economy. The recent talks looked hopeful but I expect that with the market so ready to drop on any bad word the administration will extend the talks over the longest reasonable period of time and to fix the problems as close to the 2020 elections as possible.  This way the market has a chance to hold up for another year and it may just do that.  Volatility is low which it a proxy for fear and even with the impeachment hearings there seems to be very little fear in the market.  The big question I have, but it is a year away, is what would Donald Trump do with regard to tariffs if he lost the election. Would he implement huge tariffs on China and / or our allies in a fit of rage?  Lets hope not.  Our programs are doing an excellent job bringing in new highs along with the market and for the time being it looks like clear sailing ahead.


December 19, 2018- Update

This update comes because of what occurred today. We noted a short term bottom in the NDX, it is rather rough and could be over run with another sharp down day, but I don't believe so. The Fed's comments are out and not devastating, The US economy continues to grow slowly. The world's economies are not doing as well, but that should ensure that there should be more and not less cooperation between countries. There are less available funds for tools of war. The US is pulling out of Syria, for example and the US/Mexico wall was put on the back burner. Although this is good is will not stop the slow climb in rates going into 2019.  Real Estate construction will slow down even more and home prices will level off and probably fall. We still have mild inflation as measured by our T-Index, that is healthy. Our Market Structure level remains well into the negative area, giving us expectations of more downside.  The market should be able to hold above today's lows for awhile as volatility cools and that might be followed by a mush down, then as interest rates continue to rise the market most likely resume a more volatile downside.  Any fix in the tariffs should send the markets higher and the opposite is also true. The NDX is down more than 6.5% from our last post earlier in the month see below. These are my views and are separate from our day to day trades which will move either long and short as conditions indicate.


December 4 2018- Update

I expect that the rally is over and we are once again moving lower. Our Market Structure level moved back negative last week but the market continued to climb, now the market stopped climbing. This is no longer a buy and hold market.  With the current high volatility and the expected longer term direction down this is not a friendly place.  There will be safer times to get back into the market on the up-side.  Without the tariff problem settled you can expect to see more sharp market swings as bits of news leak.


November 16, 2018- update Nov. 19

I have chosen to update our last forecast since the market has now moved into what I see as a transition area where the market psychology is changing from negative to positive. The elections are over and though it appears that there will be gridlock in congress the bright side is there should  be less chaos and better directed spending. Tariffs remain the largest negative issue facing the economy,  with paying for the recent tax breaks a large second. I expect the transition to be completed this coming week, and I expect the volatility to ease and the markets to resume an upward but maybe more cautious path, ending the year higher than where they are now. Our T-Index is in a mildly inflationary mode which is good and going back to our September comments we should see gains into April. You can see that long term forecasts have their problems as the recent switch from September's positive to October's negative has taken a chunk out of that prior forecast's 10% gain, and it now looks like getting back to even the September 26 th level by April might be optimistic....I will update this when the transition it complete.--update Nov 19.. Today the  Market Structure Level moved fully positive positive. While at the same time the market plunged close to levels where it usually stages an intermediate term rally. Combined these two factors should mark the bottom of the current plunge anytime between today and later this week. [Barring unknown outside forces.] 


October 18, 2018 

Conditions have changed quickly  from our last comments. Our Market Structure level is now negative, not good. The volatility has moved higher above the long term median range and together with the negative Market Structure is cause for alarm. This is bad to the extent that the intermediate term direction is now down.  The first stop is the elections.  The only way to survive in this type of market (as I see it), is to go day by day.  Consider this a major cause for alarm if you own stocks.


September 26, 2018 

We had the expected market rally and are now looking at more interest rate increases.  Today's Fed rate increase was the third this year.  Conditions have changed somewhat from our last comments. Our Market Structure level is firmly positive, a good thing. Volatility has moved back down and is in the low range another good thing. The T-Index has moved from a positive deflationary range (normal returns) to a positive inflationary range (best returns). Consumer confidence is very positive, a positive indicator. What  we have is that  the short term is all good, but  where it appears we are headed is not good at all.  Tariffs on imported raw materials and manufactured goods are very bad and expected to get worse. The home builder index HGX looks like it peaked in January and has fallen about -20% over the past eight months.  Prior to the market top in December of 2007 the HGX had fallen for 21 months.  This will not be an exact copy but that leaves 13 months.  So it is clear we have good short term conditions and bad and getting worse long term conditions. This should leave some room for new highs. Giving it 6 months at the average rate of gain for the Positive T-index inflationary we would be looking at another 10% in the NDX, but of course anything could happen so we, as always, need to take it one day at a time.


February 20, 2018 

There are a number of changes that we see since our last forecast. Out Market Structure Level has moved into the positive area. This is positive for the market.  The volatility has increased, this gives us a more erratic market . And the tax bill was passed, this will add a large amount to the deficit, pushing disaster into the future, but should be a short term positive.  So near term remains positive.  The sharp market drop in early February should have taken care of a build up in over confidence. Money flow remains shaky in February but by early March I would expect to see new highs. Volatility cuts both ways and higher volatility can lead to a more quickly rising market as well as a plunging one.  For now with interest rates still under control I pick the former path.  Continuous non pull back markets are more of a low volatility, low interest rate condition and we have gone past that.  We now have a higher volatility, upward moving interest rate market which needs greater attention making buy and hold more difficult as there should now be larger and more frequent down moves than we have seen in the past few years.  


September 2, 2017 

Our T-Index program has moved out of the deflationary range. It sits on the low normal inflationary side and will not have much of an affect on the economy while at current levels.  Our opinion has not changed much since our last long term forecast in early April.  Long term interest rates have moved a bit lower and short term rates moved a bit higher but not significantly.  Daily market movement in terms of volatility has increased but remains relatively low historically.  A large portion of foreign leaders and our own population does not seem to have confidence in our leader and that could lead to increases in interest rates and volatility.  The president's contacts are now being managed and the past week has been quiet, a very good thing.  The market's recent new highs could be a result of the calm.  My expectation is that it will not last but I can not make a forecast on gut feel. We will have to watch the daily changes, and too many above +/-1% would be worrisome especially if accompanied by higher t-bill rates. Another problem could be natural disasters. Hurricane Harvey will take a toll on the treasury.  Some jobs will not return but there will be a demand for labor to rebuild the city. It will take from the third quarter GDP.  One bad natural disaster will not be a problem but more full scale disasters could put a heavy burden on the economy. Again we only have one and can not draw a conclusion.  The recovery remains intact but slow, and that is most likely how it will continue going into 2018.   



April 5, 2017 

Our T-Index program tells us if we are in an inflationary or deflationary environment.  We have been in a solid deflationary environment since September of 2008 and are just now close to moving back into the positive, more normal, inflationary area.  Based on the current growth in the index we should turn positive in the next four to eight weeks. If the index numbers remain positive and do not get too high, indicating strong inflation it is a good sign.  If our Market Structure level also turns positive, or the daily stock market changes remain small we should expect continued upside to the market as well as improvements in the economy.  If we get instead, large daily market changes or much higher interest rates we should expect to see a market pull back.  High prices for health insurance acts as a large tax on the lower wage earners that will suppress their spending in other areas.  Medical costs and rents continue to eat away at workers earnings. 

With interest rates remaining low for such a long time and workers withdrawing from the labor force, weaker pension funds will most likely begin to default during the next down turn. This has been a problem and will remain a problem like the sub prime mortgages of 2007 and 2008.  Keep your eye on the size of the daily market changes and on the rates for T-Bills.


November 14, 2016 

Our last long term forecast called for a mostly flat market and as of Election day the market was within 6 tenths of a percent of where we were on Sept 7.  The election was an upset and split the market much like the country. The NDX fell over 2% during the week while the RUT gained 8.5%.  This type of behavior is betting on what might happen, but big change is not that likely. For example manufacturing jobs will never return in the numbers that left, because times change.  In May it was announced that the Chinese company that manufactures I phones dismissed 60,000 workers to replace them with robots.  Robotics has had great growth since the 80's and any resurgence of manufacturing in the US would imply robotics to be competitive.  One robot alone  would replace anywhere between 3 to dozens of jobs by working faster, more perfectly and cheaper.  So yes the US could become more competitive, but only with better robots. 

Interest rates have started to rise.  When this happens real estate  prices level, then fall. Stock prices eventually fall, especially after being held up for years by ultra low rates as money will flow out of stocks and back into CDs and bonds. 

What to watch here is the level of market volatility.  Not necessarily the VIX, but the size of the daily market changes. Right now they are on the low side of average.  When they go above average they cause a significant increase in risk as well as potential.  With the degree of uncertainty that Trump represents the still below average volatility tell me that the markets are not ready to have any major pull back.  If the volatility level does not rapidly climb the most likely scenario will be a slow recovery in the NDX that may be delayed for a week or two as our Market Structure level tries to climb off the bottom and back to the neutral area.  If the volatility  picks up we should see the markets turn ugly since the Market Structure Level is already negative.  I expect that the tight range we have seen over the past two months is over. 


September 7, 2016 Trending again.

Our last long term forecast called for a drop with an April bottom near 3985, instead the decline was a little deeper but much shorter, we got a February bottom near 3950.  We also said we could go into a longer term market decline as long as the daily changes did not shrink, as small daily changes support an upward trending market.  We are now experiencing very small daily changes close to the lowest recorded in the past 23 years.  Since this is a presidential election year we would normally expect a rising level of volatility but the expectations are that Mrs. Clinton will win and Wall Street will not have any distractions. The Fed continues to make noise about raising rates but can't get the economy to support that plan as slow growth in earnings and falling revenue is the trend and jobs are not going unfilled. Our Market Structure level reached a new low and that tells us that the market will struggle to make gains over the next three weeks or more, though the plague of small daily market changes should keep it from falling very much. Over all unless we see some increases in volatility we should continue in a very tight, mostly flat,  trading range not far from where the market is currently sitting. 


January 13, 2016  Downtrend in effect.

Our last long term forecast was pretty much on the money with a NDX market top forecast for 4712 made on September 13 (see below) when the NDX  was more than 8% lower. (actual closing high was 4719 on November 3 ).  This new market drop came quickly with the NDX closing at 4691 on Dec. 29th only eleven trading days ago.  Today our Market Structure level turned negative signaling a long term market decline.  The signal is more in line with a change in psychology for the market and is reliable as long as the daily changes are near or above long term average levels as small daily market changes do not encourage fear but instead create conditions where investors feel safe to invest, sending the market higher rather than lower.  Currently the volatility is a little over mid range and that satisfies our requirements.  Our Market Structure level does not go negative very often and when it does it usually stays negative for at least 3 months.  We have 23 triggered conditions in the past 23 years with an average length of 3 months and a median drop of -6.7% for the NDX.  So will will use that as our starting point and look for a bottom in April at a target price of 3985   This is only a target and since the variations can be very great I would be very surprised if we came close in either time or price. There is a lot supporting the drop.  Not only corporate earnings but corporate revenues are down. The Fed is apparently just wrong and inflation is nowhere to be seen except in health care and education.  Election years generally cause market stress and do not do very well.  (Trading the NDX during election years since the start of 1996 would have cost you over 32.5%, Trading the S&P would have cost you 26%. Terrorism is on the rise and with the world of "everything connected to the internet" expect disruption.  We trade one day at a time to keep risk low and potential gains high. 



September 13, 2015  New Direction.

In my previous post I said the Market Structure level had been negative since March of 2015, that was an error, it should have said March of 2014.  Since my last post the market Structure level climbed into the transition zone on September 3 rd. And turned fully positive on September 10th. The longer term direction of the market is now higher.  The current high volatility should help move the market to new highs prior to the end of the year.  I would target about a 9% gain from current levels. Bringing the NDX to a level of 4712.  This forecast brings with it a number of assumptions. (1.) The volatility level remains high for about half the remaining days this year. (2.)  The Market Structure level does not slip back into negative territory.  Supporting these assumptions is the median amount of time the Market Structure level remains in the positive or transition area without turning  negative is 94 days (over past 20 years).  And the volatility spends about half the time in the high range (20 years).  This does not mean that the market will go straight up, it will probably suffer a couple of minor slams over the next few months.  It is difficult to say how long this phase will last.  The Fed continues to talk of raising rates but none of the talk has moved the rates in anticipation.  Our T-Index remains solidly in a deflationary mode telling me no good will come from a rate raise and any change would probably be very small.   On the political front both parties are confounded by non traditional candidates taking the lead or close to it.  This brings uncertainty to the markets and should provide some support for higher volatility.  


August 25, 2015

We are now in a longer term down trend mode.  As I said in my prior posting Once we see an end to either low interest rates or low volatility we will see the markets go lower.  High volatility is here and with a continuation of our negative Market Structure we should be heading lower until either the volatility dries up over a couple of weeks or our Market Structure moves higher though the transition zone and into positive territory.  It has been negative since March of 2014.  As for volatility extreme high levels usually mean the market had burned out is about to turn around, but we are not there yet.  


June 18, 2015

Our recent work on the influence of volatility on the markets has provided additional illumination to the stock market's current and future behavior.  Under recent conditions the markets have risen and fallen within a tight range while our Market Structure was showing negative overall conditions and the volatility was either falling and supporting a rally, or rising and triggering a small decline.  As long as we continue to see the Market Structure remain negative and the volatility not increase very much the current conditions should continue.  With t-bill rates near zero I would not expect to see any very large jump in volatility. I also do not expect to see the Market Structure turn positive in the near future as the market is fully priced, or even overvalued by a number of types of valuation and in my mind only remains at this level (and is able to continue to slowly climb) because of low interest rates and low volatility.  Once we see the end to one or the other we will see the markets go lower.  I do not see much growth for the S&P or NDX over the rest of the year. 


October 19, 2014

So far our previous long term forecast was on the money.  During the year we have observed money flowing away from the RUT and then more recently we see the VIX increasing with negative trends developing in the market.  At this point in time our Market Structure in solidly negative.  That indicates that the downward market movement should extend for a number of weeks to a number of months.  The higher VIX supports this trend.  During the earlier part of the year when the Market Structure first turned negative the VIX remained very low.  That was an early warning sign that we were topping.  Watching the Market Structure should give us a sign when the market  downtrend has run its course.  The housing recovery seemed to have taken a temporary pause and with the extension of low interest rates should continue for a long while.  Forget about inflation for now.  Our T-Index never budged off of the deflationary level it first tagged in 2008.  With the US back in the oil market and oil prices dropping along with a slow down in Europe and a tempering of growth in China, the pressure is off of commodity prices, cutting external inflation.  Low interest rates and the lack of real gains in the jobs market are keeping a lid on internal inflation so deflation remains the big concern. The cut in oil prices will help the local economy as the money not spent on oil will be spent locally providing an aspirin to the pain of the local worker.  Overall I expect more near term downside extending a number of weeks to months.  The Market Structure Level gives us enough warning for overall direction as it steps higher or lower and gets close to going positive, but we can not predict from here, when that change will take place. The Market Structure Level in conjunction with the overall level of market volatility does give us an excellent window into the near term future.  


January 5, 2014

During 2013 unemployment insurance was extended, home prices climbed well into the late fall and Fed bond buying kept interest rates low. This helped support stock index prices throughout the year.  Now once again we are looking at the possible expiration of extended unemployment insurance, home prices have leveled off, and the Fed is ready to cut back on bond buying.  I believe that we will have no true US recovery without ground up job growth and that current administration policies are not supporting this need.  Still with enough continued job cuts and low interest rates we should continue to see productivity gains in the listed corporations, and that will satisfy the growth in corporate bottom lines. As housing growth continues to slow investors may transition into more stable securities and away from the growth segment.  Our T index continues to reflect deflation and without any serious job growth there is no inflation in sight.  Our "market structure" work shows the current market in a strong positive mode and that could hold for at least a few weeks to a number of months. Volatility is very low another indication of stability in the market.  The market does tend to over extend its runs both up and down.  This is usually accompanied by an increase in the VIX index, but currently we see the Vix at less than average levels when the last 20 years are considered.  So expect the 2014 market gains to slow down and some more negative trends developing later in the year.  Overall I expect the year will close to the slightly positive side.


January 31, 2013

The latest GDP figures released for the fourth quarter showed a decline at an annual rate of 0.1 percent.  With our T-Index still giving a strong deflationary reading it is no surprise.  Slowing government spending took a large toll and the government will continue to have a negative impact on GDP as the recent hike in FICA rolls through the economy.  In the 1950's manufacturing represented as much as 28% of the GDP, this past year it was about 12%. Due to technological improvements manufacturing now employs only 9% of US workers.  The current break down for the US GDP shows all of industry accounting for 19.2% of GDP, agriculture accounting for 1.2% of GDP and services accounting for 79.6% of GDP.  It shows a continuous trend from the tangible to the intangible.  With real estate beginning to show promise after a four year decline there is some hope for a continuation of the recovery. Banks should start to lend more on real estate as the year goes on and that should help keep the markets afloat and help employment.  Companies have done well and show earnings growth without growing top line. This is mostly productivity increases, which spell a decrease in labor.  Unemployment insurance will run out for many in 2013 causing an increase in the underground economy which can be associated with many types of crime.  So although the overall news is not good the stock market may continue to advance at a slow rate through 2013, though the bulk of the run-up may have already passed in January. Our "market structure" work shows the current market in a positive mode and that should carry well into February. The VIX is low and that leads to small daily changes which leads to a more orderly, though slow, up-trend.


August 24, 2012: Special report.....Tax and Incentive.

There exists through tax and incentive enough power to awaken even the deadest economy.  What is lacking is the honesty and courage to enact the policies to do it.  

To improve the economy people must buy more than they are currently buying. This increase would lead to more jobs to meet the demand for more goods, and the increase in employment would further increase the demand for goods, an ongoing boost to the economy.  Simple no?

Would spending cuts do this?  Cutting spending would reduce the workforce.  More people out of work means less spending.  Less spending means more layoffs. More layoffs mean fewer goods needed, etc. That does not  the right tool for this problem.

Would cutting taxes for those making over $250,000 do it?  Where would the money not going into taxes go?  No way to tell.  It could go into the bank but banks are not doing much lending so that is no real help. It could go into business expansion, but since most companies are reporting lower sales the money most likely would not go there.  It could go into the stock market, but unless it went into IPO's it is not helping the economy.  Some of it would work its way down the chain, but there is no direct path as we must assume that most of the tax money saved was discretionary, and not needed to live, and thus, did not have to be spent on anything.  And any tax cut increases the debt.

What about cutting the FICA for the lower earners. A temporary cut would result in more spending since the bottom earners do not have much in the way of savings and spend for survival.  So this idea works, and is clearly better than the other two choices, but by itself is not enough to turn the economy around and does add to the country debt. 

So lets look at tax and incentives starting with real estate.  Poor incentives regarding real estate were the cause of the current economic problem and could be the cure.  It is hard to get people to buy real estate unless there are taxes and incentives, a carrot and stick approach.   So look at real estate and the relative level of taxes and tax deductions.  As tax rates fall there is less need for tax deductions or a tax shelter. As tax rates rise money will flow into those areas that can protect and shield income.  By raising taxes at the higher end of the tax scale and allowing proper deductions for investment and interest payments the housing market could be revived.

Some may call the tax breaks loop holes but they can be very intelligent ways to guide investment from those who have the capital resulting in both moving the capital down the chain to those who need it and will spend it and also allowing those who generated the large amounts of capital a way to keep that capital. 




 When we have flat economic growth with many unemployed we have a catch 22 problem.  Building factories won't help, unless some one will buy what the factory makes.  People can't buy if they are unemployed.  Cutting spending would 


June 12, 2012:

I took a while to update this long term view as the last view still holds true. We are seeing shrinkage in the top line from corporations even as the bottom line continues to show profits.  Well run, well capitalized companies will function that way, as they can make the adjustments necessary to survive. The problems in Europe we saw last year continue to haunt the market.  The fears run from Greece to Spain to Italy, with more waiting to be uncovered.  Most of the activity has been toward pushing the problem further into the future.  US real estate has not yet turned around and the coming elections have frozen action from both parties.  Our economy remains in a deflationary mode that started in 2008.  There are two courses of action that can be taken to boost the economy, 1: top down stimulus. Where low cost loans are made available to corporations and very strong borrowers. Tax cuts for the highest incomes also fall under top down stimulus.  The second stimulus is bottom up stimulus.  This can consist of cuts in FICA taxes, low income tax cuts, or other forms of support to low income families.  Each type of stimulus works best under certain conditions and does little under other conditions. It does not take genius to see that when the gears are already turning and jobs are available that top down stimulus works best as companies are poised to expand and just need a little help to capture the demand that already exists.   When there is heavy unemployment and companies are contracting, as is the current case, the incentives needed are bottom up. The less fortunate consumers are already spending all that they receive and will continue to spend what is given to them stimulating the economy and in so doing boost revenues going to the corporations.  It is frustrating to see the political rhetoric tricking the public into believing that only one stimulus is always correct. It is just wrong. What is most amazing is that under the last Republican president we did get bottom up stimulus and under the recent Democratic president we have been getting top down stimulus.  Both of which came mostly at the wrong time and did little to remedy the problem.  The European problems are overshadowing the US problems, supporting both the dollar and our stock market. This should continue throughout the year in an ebb and flow manner,  adjusting along with the perceived strength in the European economies.  One of the most vibrant points of economic activity is in smart phones and it is interesting to see how their use has changed.  The devices are growing in size as they are being used  as much for texting and media consumption as they are for talking.  The split has been ignored by Apple who should has stuck with a one little phone fits all model.  Netflix type companies should drive the sales of large screen TVs especially outside the US. Retired baby boomers and unemployed workers are strong targets in the US.  Overall do not expect a local recovery until the government gets with the proper stimulus and real estate bottoms.  Multinationals on the other hand are expected to continue to show very slow growth. 


August 19, 2011:

This is probably a good time to look into the long term crystal ball.  If you look at New York Stock Exchange index 10 year chart we see the index slide from over 6000  to 4500 as the US economy contracted into 2002. Then a climb to over 10,000 as easy money fed a real estate boom into 2007. Another contraction into 2009 pushed  the index back down to below 4500 and a QE1 & QE2 rebound into 2011 bringing the index back to 8500. Now as the country slips into another contraction phase the NYSE is under 7000 and one has to wonder what is available to cause another expansion?  Where will it come from?  I don't see one.  The structural changes to our economy will most likely prevent this from happening.  We have outsourced our jobs. That may be fine for answering the phone and giving tech support but we have also out sourced our ideas.  When the engineering and designs are done overseas the innovations and birth of new companies happen overseas leaving us a shell.  I-pads are for one purpose, to receive data.  A large part of that data is to entertain.  It is not a product for creation.  We are a country of consumers. This is unfortunately a one directional flow.  Computerization and the Internet continue to reduce the need for labor and that along with out-sourcing means a shrinking economy.  The NDX is still over 56% below its peak in March of 2000 over 11 years ago. Eventually the administration will stimulate the country from the bottom up and the slow turn around will begin. We are already seeing shrinking top end corporate reports as revenue misses targets. Corporations will adjust their scope downward and stock prices should rise and fall with a negative slant going forward for a year or two. During that period the unemployed will realize they must become more resourceful and save themselves as big business will still be looking overseas at expanding economies.  Stock prices do not move in full sync with the economy but I consider early 2011 a market top.  Even so, I expect another sizeable rally later this year and that should make some feel a new high is coming, after all 2012 is an election year but election years and rallies do not change the fundamental that have evolved over the past dozen years. We continue to be in a deflationary mode and that means shrinkage.  


May 18, 2011:

For a long time International commerce was foreign companies selling goods into the US and US companies selling goods into foreign countries. Outsourcing was a way for US companies to be more competitive in their sales in foreign countries. This of course has evolved to US companies outsourcing jobs and manufacturing in foreign countries for products to come back for sale in the US.

Currently  multinational corporations are lobbying for reductions in taxes on foreign earnings. Changes in how multinational corporations get taxed will have a major negative impact on our local economy.  Consider if a multinational company like Apple makes an Ipad overseas for $200. Ships it to the US and sells it through an Apple store which pays $X and then sells it to a US customer for $595.  Since Apple owns or controls the full chain from manufacture to final sale they can dictate how much profit is made at each point along the chain. How much the Apple store pays for the unit, $X will depend on the US and foreign tax rates. If the rate overseas is 10% and the rate in the US is 30% the Apple store could pay a high $550 for the unit making little if any profit on the US sale at $595, in this case the overseas division would make and show the bulk of the profits and be taxed at the lower rate. Not being involved in the actual process I may be missing something, but as more formerly taxable earnings are funneled overseas the tax burden shifts to the already heavily burdened local economy. Looks to me that lowering the foreign tax rate will shift more earnings overseas. 

The US economy is still the single biggest buyer of goods, but corporate earnings depend on profit margins as well as revenue. Where the after-tax margins are the highest will get the focus. As growth continues to stagnate in the US, US labor will get cheaper, land and housing will get cheaper and eventually the corporations will be able to make low tax deals in exchange for providing jobs. Again a plus for the stock market. The best companies in this environment will not only manufacture and sell overseas but will build and sell back to the US with full control from manufacture through retail sales. 

The market was supported by the QE's cash injections that kept interest rates low. (Low enough for Goldman Sachs to offer their own 50 year bonds last fall). These purchases of Treasuries helped weaken the dollar but boosted stocks. The newest version of the QEs involves using the revenue from the recently purchased mortgage backed securities to buy even more treasuries thus continuing to keep interest rates low and stocks high with continued pressure on the dollar. With this support the VIX index has fallen below 15 and now sits in the 16 area. This results in smaller daily changes and, as foreign buying tires of lack luster returns in terms of their own currency, should result in lower volume and a less pronounced climb in market prices. With small daily changes the direction will tend to flatten and  without a clear market direction random events will have greater short term impact on market direction. I am looking for a declining market during the second half of May which might be enough to kick up the VIX a bit.  Early in June we should see a recovery from May.  As for our programs they will continue to focus on one day at a time and anticipate the market changes. 


January 5, 2011:

On October 19 Goldman Sachs issued $1.3 billion of their 50 year bonds. In my comments of October 25, 2010 I said "I believe Goldman has just notified us of the bottom in interest rates". The bottom on the 10 year note was October 12th at 2.36% on the 25th it closed at 2.55% today it is 3.48%. Occasionally  you don't need inside information to make an informed decision as sometimes the big players can't help but to leave giant signs in their footsteps. Prior to the Goldman sale I was expecting that rates would remain low for many months.  Now I believe they will slowly creep higher, but not very rapidly from here as internal conditions do not call for it.

Our T-Index remains close to the -400 level, slightly worse than the level in September.  Internal deflation is still a problem compounded by external inflation in commodity and food prices. Cost cutting and business failures will continue but at a slower rate. We still have not reached strong enough jobs figures to make a dent in unemployment. The dollar fell some during the fourth quarter and will provide another kick to the multination earnings, but may have stabilized for awhile.  This means the multinationals will have a first quarter devoid of the boost from a falling greenback.  Using this as a background I expect the markets to continue higher going well into earnings season. But once the majors report there will be pressure to lock in some profits and that means selling. With no boost from a falling dollar going forward and the end of QE2 in June most player will take a more cautious position having two strong years behind them. February has historically been a weak month and that is the most likely time to see some downside. By year end I don't expect to see very much upside in total.


September 22, 2010:

Rates on ten year treasury notes are higher today than in December of 2008, but have already fallen  35% since March 2010. What is this saying?  Lower interest rates mean lower expectations for the economy as a whole. Bonds compete with stocks for investment purposes.  Low bond rates mean investors prefer bonds and are looking for safety over capital gains. Bond yield is an indicator of inflation, since investors will not want their investment to deteriorate they will look for a bond yield greater than inflation. Gold hit an all time high, though it can be an indicator of inflation it is more an indicator of fear in the markets.  We continue to see internal deflation within our local economy as people pay off credit cards and  reduce debt rather than spend.  Multinational corporations are lobbying to devalue our dollar creating external inflation that the Fed can't control.  Although a lower dollar will make our goods easier to sell overseas one must ask what goods are these that are created locally for export?  More likely the increase in costs to the average citizen will put even more pressure on local business resulting in more unemployment,  vacancies and business failures.  

Our long term cyclical program will turn "short: on October 5, 2010 and remain short for a number of months.  This is not the ultimate in signals, but has been helpful in determining the market direction over the life of the signal and uses prices and interest rates.  

So to sum up, we are still in a deflationary mode where prices of products created in the US should continue to hold flat or decline.  With building permits declining I do not expect growth in housing starts. This is a negative for home builders, appliance makers, furniture etc.  Corporate earnings are growing at the expense of jobs as top end revenue growth is not keeping pace with earnings.  The stock market has gone positive for the year and could easily run into resistance very soon in line with our cyclical projection. As long as earning continue to grow the market should be able to stabilize and not go into a panic sell off.  The administration must learn how to explain that any real recovery must come from the bottom up rather than top down.   How many more haircuts does the upper-class person get compared to a middle class person?  The wealthy can not create jobs without having someone to buy their goods.  Apple can not pull this county out of this sagging economy by itself..........................................

Added 9/23/2010  Just  a note on Netflix.  Sometimes there occurs, at a certain point in time, a convergence of things that combine to form a special opportunity for some and disaster for others. Netflix is a case where they originally struggled to make money shipping DVDs by mail. Going public in 2002 their labor and cost intensive shipping model did manage to break even by 2006. But since they started other factors began to change.  As real estate pricing soared movie theatres raised ticket prices. TV prices went into decline while TV set sizes greatly gained in size and resolution improved significantly making the home view option more enjoyable. Screen went from analog to digital improving the viewing surface, cutting reflections and just making things better.  Better sound became and even bigger part of the TV experience. Out side of TV wireless speed and transmission improved allowing more homes to go wireless. Higher internet transmission speeds became the norm in homes.  Video transmission speeds increased.  Netflix was able to offer thousands of movies for download at no extra monthly charge.  The stumbling block was a black box that needed to be purchased, but eventually the Wii was made to support Netflix downloads and the cost of the black bock dropped. When  the recession hit people who lost jobs spent more time at home.  Eventually the consumer put everything together and realized what this meant.  For under $10 per month they had beautiful large screen access to thousands of movies.  For millions of people that was better than renting the latest movie or going to the theater. Blockbuster, their major competitor, faltered, eventually going into bankruptcy. Movie theaters continuing to raise rates to maintain income have lost customers but the customers have changed their habits and will not go back. Even the social scene has changed with "dating" no longer the young people model. This all reads well for Netflix and bad for movie theater operators and Blockbuster.  Redbox has made inroads with kiosks that rent DVDs for $1.  This is a Band-Aid  which because of its high operational costs and limited selections will eventually be squeezed back down in size and struggle to survive.  Netflix will at some point become overpriced as everyone jumps on the stock, but as a company it should do very well. I expect they might spin off the DVD handling portion and go fully download, expanding into multinational markets as a sleek low cost large profit operation.


May 5, 2010:

Looking out into September our long term cycle program remains positive. Short term, for the rest of May, we should see a continuation of the recent decline and bottoming. Pressure on the various "Euro" countries should push the US dollar higher keeping the stock market under a cloud. The BP oil spill is another downer. I expect that both will clear by month's end. Our T-index remains very negative as is has been since the end of 2008 indicating that Deflation is in control. The RUT still has a double digit gain for 2010 and I am surprised, since they have the least to gain from international sales and the most to lose from the sluggish US economy. I think it is over valued. As unemployment continues and States run out of money the burden falls on the average US citizen. There seem to be only one wise solution, which would be to increase taxes on corporations which are doing a large portion of their business overseas. Corporations continue to report strong earnings and are one of the few areas able to sustain the increase in tax that must happen to avoid greater damage to government, both state and federal. If this happens it would come up closer to elections and push the market lower. With multinationals making most of their money overseas there is no longer an alignment of interests with the population. No longer is "What is good for General Motors good for America".  Times change and so must investor opinions of what it takes to earn money, what is good for the US, and who is looking out for their interests. We are still in a long term bear market that has lasted over ten years. If you purchased stocks ten years ago you probably have a loss. That is not a good investment. Conditions today are worse than they were in 2000. It is much harder to forecast long term than short term but I believe stocks will go higher into the summer. 


February 12, 2010:

From our T-Index we see that we are below -400 telling us that we are firmly in the grip of deflation according to interest rates. The US economy was designed to properly operate under low level (internal) inflation where by the stock market and real estate fit perfectly into a long term buy and hold methodology. I call this inflation internal inflation because it is caused by rising wages and local price increases.  As inflation causes prices to go up, investors make gains and feel good. Incomes go up and tax payers fall into higher tax brackets. Loans can be made, backed by the increases in home and securities prices. The level of this type of inflation can be adjusted by increasing or decreasing interest rates. Currently we have deflation combined with external inflation caused by a simultaneous increase in foreign demand for commodities and a drop in the US dollar. This is a very bad combination. Raising and lowering interest rates do not have much of an impact on external inflation. Since this type of inflation is relatively new many do not realize that things have changed and expect old methods to continue to work under the new conditions. The external inflation puts an extra tax on US households with increases in the cost of food, fuel and byproducts of oil, lumber etc. at the same time jobs are lost, hours are cut and home values decline. The multinational corporations are outside the problem as they can continue to show growth in earnings outside the US and since the bulk of their earnings comes from overseas they are not inclined to want to see a stronger dollar. So from an investing point of view the multinational corporations will be able to survive at a slow rate. Local companies will suffer and many will fail. US households will not do very well. The stock market has most likely overshot its proper valuation and at some point should correct. From our cycle work which looks ahead a few months I do not see the correction coming, but the cycle work is not 100% accurate. I expect to see the problems in the US to continue for a number of years. The demographics of baby boomer retirement does not bode well and should further depress the economy as it unfolds. A strong economy requires strong demand for products. This was generally caused by an increase in available funds. In the 1920s time payments were introduced allowing people who could not afford to purchase to buy goods and boost sales. Credit cards expanded this idea. They started in the 50's and really took off in the 70's, putting more funds in circulation. If a little boost is good a big boost should be even better as 100% home loans finally hit the streets at the end of the 1900s. But like the use of excessive margin in the 1920s, once the prices backed off a collapse was triggered. Understanding this we see that we need to once again stimulate the markets, but in a controlled way. However with many jobs sent overseas, home prices under water, credit card debt being paid off rather than used for spending, and banks making their money in safer ways than in business lending  we do not see any turn around soon. All of this points to an economy that is in deflation and shrinking. The stock market has become more separate from the US economy, with most corporations multinational, and the problems of the economy should not completely overwhelm the market as the market will be more influenced by its own overbought and oversold cycles. Briefly I see new highs for the market in 2010 but also, later, what may be the continuation of a long term decline, especially if income from overseas sales drop or stagnate.  



September 18, 2009

I am going to start by reprinting our long term comments from December of 2001.


DEC 16 2001:  A historical perspective is very important here, but keep in mind as John Maynard Keynes  said: "It is dangerous... to apply to the future inductive arguments based on experience, unless one can distinguish the broad reasons why past experience was what it was."

Let's look at the Dow Jones index over the last 100 years.

06/17/1901, DJIA 78.26 

06/24/1921, DJIA 63.9     20 years, market decline -18.3%

09/03/1929,  DJIA 381.17   8 years, market rises 597%

06/13/1949, DJIA 161.60     20 years market declines -57.6%

02/09/1966, DJIA 995.15     17 years market rises 616%

08/12/1982, DJIA 776.92     16 years market declines -21.9%

12/31/1999, DJIA 11,497.1   17 years market rises 1,490%

To date:

12/14/2001, DJIA 9,811   2 years market decline -14.7%

9/18/2009, DJIA 9,820     ~10 years into the market decline -14.6%

What we notice is the bull runs lasted from 8 to 17 years and the bear runs lasted from 16 to 20 years.  Now I will always be the first one to point out that we have a very small sample size here. It may be 100 years, but it is only 3 Bull runs, and 3 bear runs. So you must be careful about what kind of conclusions you draw from the data.  looking at the data overall we find that we have spent 58 years in declining markets and only 42 in rising markets.  This is an overview and you can slice the market any number of ways, but for those who only invested in the 80's and 90's it should be an eye opener.

So the first thought that comes to mind is that this bear run is not over yet.  The second thought is that if it is over it is unlikely that we are in for another super run like we had through the 80's and 90's, and it is probably time for most people to rethink the way they invest. 


-----September 18, 2009 

So the value of the Dow has not changed since that post almost 8 years ago. Now ten years into the decline I can't see our way out. The last few months the markets had a huge rebound that by some measures (NDX ~+2% last 12 months) has brought it back to last September, but by other measures (S&P, DJIA ~-10% last 12 months) it is still lacking. While our accounts are up +42% over that same time period (last 12 months).  The FED meets on Tuesday. Deflation is still the problem internally while inflation due to the declining dollar is the problem externally. There is very little the Fed can do to stem external influences in this global economy, especially since the government decided it was better to bail out the shareholders and executives of the top banks than to keep the dollar sound. But it is what it is. Tuesday's meeting should not bring any surprises but could be the start of some early investors taking money off the table. Pure conjecture on my part, but from my work, the market could pull back next week, then after a week lower, reach new highs near the middle of October. This would fit in well with our cycle studies which show the market going lower into mid November.  This market is quite similar to the market response in March of 2003 by overlaying 2003 on 2009 it looks like the 1800 level on the NDX would make a year end top, but not without some pullbacks on the order of 5%. From December of 2003 to March of 05 the market was in a trading range. The recovery had gotten ahead of itself and the investors held on without seeing returns. I expect to see a similar response this time around but with more problems the further out we go.  The number of unemployed keeps growing. Perhaps they will eat green shoots. We have about 170,000 troops in Iraq and Afghanistan. When they return home they will add to the unemployed. When the new earnings reports come out the "spectacular" comparisons from overly pessimistic forecasts will be over. Improved sales will not have materialized although addition cuts in staff and facilities may keep the earnings numbers from looking too bleak. In all we have seen most of the move and will soon enter a digestion period. 


July 15, 2009

Looking at the earnings of the S&P 500 we see that the weekly adjustments of estimates are still being lowered, but at a smaller rate than earlier this year. Most of the write-offs were taken in the last quarter of 08 and going forward Standard and Poors shows increased earnings each quarter. This increase in earnings is coming from somewhere. Some may be from the back end of massive write-offs and some from overseas earnings that were not hit as hard as those in the US. So the multinational end of the economy will be the first to recover and that should be helpful to the stock market in the coming months. Small companies as measured by the Russell should trail, with the smallest companies dependant upon the local economy to be under severe stress. Our cyclical studies show market improvement going into mid-October, but we are not long term specialists. Housing is still a problem and that could take 18 months to stop falling and another year of going nowhere. The stock market has been in a down turn since March of 2000 so we are over nine years into a stock market decline and things are clearly worse now then they were in March of 2000. For a buy and hold mentality 9 years is a long time to hold on to a 40% loss in the S&P and a 68% loss in the NDX.  I can see some short term upside but I do not think the long term decline is fully done. 


April 28, 2009

The Administration's stimulus package has been a psychological stimulus for the markets. A psychological stimulus is not a measurable variable, and its impact, though large will dissipate over time. Leaving the market to once again respond in a normal way to earnings, interest rates, cyclical factors, money flow and our favorite forces "fear and greed". Our longer term cyclical program has missed this recent up-move since it reads numerical changes from the past to project upon the future and the "stimulus" is an outside event. However, without the stimulus, it was looking for the markets to rebound after the 4th of July. Don't confuse a recently rising market with a recovered economy. Or perhaps we should not confuse a disastrous economy with a bad stock market. Stock markets and economies generally move together and will soon get back into sync. We still see more layoffs coming, more jobs being lost and more homes going into foreclosure. I don't see foreign sales improving quickly or demand for goods growing in the US. I expect to see the GDP decline through the end of the year.  Since we us a balanced double sided (long / short) model we like to see markets that behave in a more normal fashion, that's when we make big money. But all market return to the mean over time and usually quite quickly as any outside shock to the market passes though. 


February 19, 2009

Our longer term indicator stays under water through June, which is as far as I can see. I expect that going forward we will see the failing US banks nationalized, and new lows in all market indexes. Gold remains the bright spot for a while, but is outside my studies. There is a major shift in real estate prices to get back to normal historical inflation adjusted levels. Low income areas like Flint MI will be devastated since the preponderance of abandoned gutted buildings brings land values down to near zero. While other areas will adjust to a lower value of home price to average income. So expect a continued drop in value that could last well past 2009. Corporate shareholders will eventually realize that over-compensation of top executives is a disincentive, and demand changes away from the African war lord mentality that currently prevails in boardrooms. The trend is starting for a major readjustment in thinking that will have to take place before the country / world will get back on its feet. China is poised to take a larger piece of the pie. Their economy can be self supporting because of strong internal demand that can be satisfied internally with low labor costs as the fuel. Our large deficit will take its toll on the dollar and eventually force the price of raw materials and oil back up, but not I believe, during 2009.   On the positive side I expect the administration will find and capture Osama Bin Laden in a matter of months, giving a brief psychological boost to the country. But I don't think that anything they do will keep us from going into a full depression. 


December 12, 2008

It seems like we have another major name going bankrupt every few days. The fall out from plant closings and bankruptcies comes months down the road with unemployment and home foreclosures. The layoffs are cutting into the tax base for both the states and federal budgets. The budgets were made prior to this economic disaster and the incoming taxes will not be enough to cover the plans. Government spending will fall and expand the problem from the consumer level into the industrial areas. With the budget cuts will come layoffs from state, local and federal government payrolls.  Crime will increase and demands will be made on government funded medical care. The worse is not over yet.  The Government bail out of the auto companies will not end well. For many years from the 50's through the 70's the auto companies, on behalf of the share holders, were taking advantage of the consumer with poorly made cars and trucks. From the 80's on top management realized that they could take advantage of the share holders as well as the consumers and stuffed the cash directly into their own pockets. That mentality will not change with bail out money, it will only be reinforced.  What is needed it a total replacement of top management with lower paid and more ethical management most likely from outside the USA.  If we are looking for a turn around in the stock market we must first look for signs that the layoffs and plant closings have leveled off. Once the rate of decline gets flat or slows significantly we could expect that the cost cutting moves from the better corporations will be in place, and stocks should start to recover.  This will happen ahead of their earnings, but it has not happened yet and the government layoffs have just barely started.  The recent drop in interest rates for loans is a big plus for the economy. But more is needed because the rate cuts do not help the areas with the greatest number of foreclosures. This is because they are in poor areas, where finding buyers with good credit and enough money for down payments is difficult. Obama will help with public works projects but this too has its problems since it trades short term stimulus for long term debt. Overall outlook is gloomy with more downside expected. This forecast extends into May, but I expect that we will update it in about a month. 


September 27, 2008

We were correct on the resolve of the Fanny/Freddy problem, but missed the disaster that followed.  Our one-day-at-a-time trading and philosophy kept us out of trouble. Today the Financial Times reported that it is less expensive to insure against a McDonalds default than it is to insure against the US government default. Scary as that sounds it has more to do with market insanity than reality.  Judging from our cycle work we were expecting an upswing starting soon after Labor day and lasting into December, obviously we have some serious problems now. Will they get worse in December? I can't say. I do know that our program was able to maintain a greater than 60% level of correct daily forecasts so far for the month of September so we continue to invest daily. I will update this long term view when I can see some stability going forward. 


August 26, 2008

Expect some very positive news to come from either the Administration, Treasury or the Fed. Ok, I am a cynic, but I would bet that the news will not come prior to the close of the Democratic National Convention, but come soon after.  I am looking for news or a rumor about stabilizing the Fanny/Freddy problem. Mortgage rates are too high relative to the 10 year notes and are putting a damper on any recovery. Higher rates make it easier for banks to resell the loans, but harder for home buyers to qualify. Resolution of the Fanny/Freddy problem could encourage investors to purchase the mortgages at lower rates. A boost to the banks will be a boost to the market. The Thursday or Friday after Labor Day would fit it well with my work for a turn around point to launch the upside move that should give us a lift into December.  I would expect any relaxation in credit to benefit the airlines, motors and financials.  On the negative side, the world downturn will continue to exert downward pressure on the basic materials. 


August 1, 2008

Our cyclical work gives a very encouraging view of the markets after Labor day.  Though the first few days in September may be slow the positive move should build throughout the month. Going forward we do not see a cycle change until mid-December.  Perhaps September will bring news of a flattening in the rate of foreclosures. There should be a good buying opportunity come September, but most likely the effects of the foreclosures will come back to haunt us in December.  When stores that anchor a mall fail, the mall fails. Right here in our Pacific Palisades neighborhood new landlords, in a hurry to cash in on the rise in home prices, raised rents in the local business area.  We had a well respected deli close because of the price increases and was replaced by an up-scale restaurant.  The price of a hamburger went from $5 to $16. People stopped going, and since the old restaurant brought customers to all the stores on the block, people no longer go to that block.  What was the center of town is becoming a blight, with a number of stores now vacant. The new landlords are netting less money than they were because of the vacancies and even the new restaurant is losing money each month. The effects of foreclosures work their way through the economy over time and damage will spread to new areas and come back to cause more pain for the stock markets. So although July or August may look like the market bottom  expect another round of bad market behavior come late December. 


July 24, 2008

I am still looking for an up-swing in the stock market just after Labor Day. The link between the stock market and oil is still strong. With oil falling for the past couple of weeks my guess is that there will be another up move and a test of the top in oil, sometime in August, that will fail and the oil markets will head down to under the $100 level. That should be the driving force behind a sustained market up turn in stocks that lasts through the fall. 


June 15, 2008

To flush out our previous brief comments below.  A market rally in September could be caused by a sharp drop in oil prices about that time. With the summer over, gas prices should pull back and that fits quite well with our cycle work. Add to it the election factor and the influence that an oil connected administration might have, increase the probability that our assumptions may be correct. The drop may be connected to oil regulation in the futures market. If you remember back to the early 80's the powers that be destroyed the Hunt brothers when they put a squeeze on silver. Rules were imposed by the exchanges to prevent further buying of silver by the Hunts or anyone other than legitimate industrial users or the shorts who were buying back silver they had previously sold. The Hunts were unable to buy, and there was no one to sell to. This caused the silver market to collapse. The exchanges could do it again, they already did it once. 


June 11, 2008

Based on our cycle studies, which have done very well this year, the current down cycle which started May 5th is expected to end just after labor day.  Oil prices should be heading down and, provided interest rates have not risen very much, the markets will be in a much better position to rally. This upturn should last at least for a couple of months going into the elections, and maybe further.  Keep your eye on the S&P earnings which continue to be marked lower each weekly posting.  


March 17, 2008

Amid great concerns about the failure of Bear Stearns our T-Index moved markedly lower sending a danger signal regarding the economy, with implications that deflation was the major concern.  The Fed has helped liquidity and proved that they will support the economy, but problems of solvency remain.  Probabilities are strong for more failures in the financial industry, and lending between banks has dried up due to fear. This problem will take some time to heal.  Our dollar is rapidly falling. Looking back in history when a country's money was devalued the cause was distrust in the government and economy of that country. And the country's symptoms exhibited high inflation with soaring interest rates.  We do not have high interest rates. And although we have inflation in the core food and oil prices it is not due to any internal factors. Our wages are stable and interest rates are low.  Our 90 day t-bill rates are now under 1%. But the root cause is still a lack of trust in the government / economy.  The good news is that the Fed is functioning well and doing what seems to be the right thing to save the economy from dire consequences.  We most likely will see the feared recession that most were expecting and that recession, I expect, will spread overseas.  And while we are struggling to get out of our recession Europe will be beginning theirs. They will be forced to cut interest rates as we will be starting to raise ours.  This should come at a time when our political situation will be a little more settled. A new administration, Republican or Democratic will bring hope of improvement.  Brazil has just released figures of a bumper harvest and grain prices should be headed down. A world economic slow-down would bring down oil, and the metals.  The dollar should turn around pushing prices down faster and gold should also fall.  We will have to deal with deflation since home prices should continue to fall and not provide the piggy bank for stimulating the economy.  Overall I expect relief from from high oil and food prices to come soon. The credit problem to hang on awaiting two quarters without major write-offs for the banks and brokers. Low interest rates through the summer and lower stock prices as they follow overall earnings lower.  This is a complex forecast and could easily get sidetracked by any number of influences, but it is my take on the situation at this time.


February 16, 2008

The market forecast for the first half of this year is rather bleak. The economic stimulus package will not have much of an effect till later in the year. Most likely positioned for maximum impact on the elections. The market has additional worries. Based on the turnout for the democratic party during the primaries there will be a change coming in 2009. Many conservatives will probably not even vote, and I believe the vote will be very one sided. The fear is that corporations will no longer have it so easy to get things done their way, and that more government spending will spark inflation and deepen the deficit.  I think investors are worried and will drag the market lower.  Our cycle program is showing a positive cycle into early April then going negative well into the summer.  External inflation is already very strong pushing up food and energy prices and that is a constant reminder that things are not going so well. 


January 23, 2008

If additional Fed rate cuts happen and refinancing is stimulated, the effects should be a "major" boost for the economy. Often, when home owners refinance, they take out some extra money and "spend" it. It doesn't go into the bank, instead it pays for a new roof, upgrades on furniture, college spending, you name it. It stimulates the economy. If these rates do go as low as I expect then there should be room for banks to extend and slowly adjust the sub-primes saving themselves from having to foreclose in a bad market. Remember this is a presidential election year. As for real estate, I am not that optimistic short term. Real estate does not turn on a dime and the overhang of homes on the market will take time to evaporate. The rate cuts should help real estate long term by keeping some foreclosures off the market and making the current overhang easier to dissipate thereby shortening the down portion of the real estate cycle and making it less steep. 

All of this will not be good for the dollar, but the rate cut scenario should give the economy a quick "pop" and prevent a prolonged recession.... At least until next year when the new administration will have to face the implications of a devalued dollar. For the near term we still have about two weeks left of that downward cycle that I mentioned on December 30 in this section. So there could easily be another test of today's lows or (assuming a climb from here) a pullback to this current level over the next two weeks. But after that we should have a number of weeks of rising market. 

January 22, 2008

The 3/4 percent Fed rate cut changes the horizon. The implications are that the fed will continue to cut rates into the summer. This makes sense from both an economic and political point of view.   By that time low long term rates will influence mortgage rates to a low enough level for refinancing. This should make Bank of America's takeover of Countrywide look smart and push up economic activity making the "recession" a lot shorter than expected.   

January 11, 2008

Our cyclical work shows the market improving after Super Tuesday.  The respite from the bears should last into early April when it returns to its negative tendency.  What would be very dangerous would be for the T-Index to also go negative at that time, as historically that combination of double negatives has been very bad.  

January 4, 2008 (also see Dec 30, 2007) 

A few additional comments regarding the longer term, unemployment and the political race. The employment numbers came out Friday and the markets plunged to a degree that indicates to me that we are starting on a downward path. Intel is now off 15% in the first few days of the year this is not a pull back, it is a change of direction. 

The people of Iowa have sent a clear message to the politicians and it says they want someone different from the main stream this time around. This message was strong in the Republican election, but undeniable in the Democratic election. When a 95% white population can elect a mixed race candidate the politics of race is finally over, and the focus has switched to a real cause.  When the turn out is almost double what was expected to this end, we know we are seeing the beginning of a new direction.  They elected the conciliatory style of Obama over the confrontational style of Clinton and the key word for 2008 is change.   My guess is this is the real thing and he will take New Hampshire and South Carolina.  If Edwards joins him as a possible vice president candidate we may see a movement that would remind us of JFK.  All this should be initially bad for the stock market. But ending the war means stopping the 200-250 billion dollar drain on the economy. And that means restoring the value of the dollar. A stronger dollar means lower food prices and lower oil prices.  I believe this will also be to the benefit of small business at the expense of the corporations.  I don't know if an Obama would be our best choice for president, but I would love to see the US population work to bring another statesman into the White house to try to undo the damage and mend our relationship with the rest of the world. In total, initially I expect a poor acting stock market, but long term we should be looking at a more balanced budget and better times for a greater portion of the population.  


December 30, 2007

Time for our end of the year forecast.  Sometimes I have something of value to say, like our forecast of August 12, 2005: "Major banks, which should know better, are advertising interest only real estate loans.  They must be planning to sell those loans before any trouble starts and trouble we shall see.  Many homes are under construction and that is where the trouble will start." 

But nothing comes with a guarantee. I try to assemble the data as I see it and project it over the next 12 months.  There has always been a strong link between the stock market and our economy.  And a link between the dollar and the stock market.  Those links have changed.  The stock market is currently inversely correlated to the dollar and the stock market is no longer tightly linked to the US economy.  The US economy is now just one of many economies feeding the stock market. The sum total of the global economy is now more important than its individual parts.  Although the government functions by taxing individuals and corporations the larger share has always come from the individual. The share the individual pays is growing as corporations shelter more overseas earnings, and the overseas earnings have become the largest part of their earnings.  Corporations can lobby to influence government tax policy, individuals have no real means of doing so. The falling dollar that was first cheered as helping the multinational companies show growth from overseas earnings is now pushing up the costs of food and oil and causing inflation. This is not inflation that can be easily controlled through modifying  interest rates.  This makes it difficult for the Fed to deal with.  We are seeing inflationary forces mostly effecting the necessities of life, food and fuel, while deflationary forces, are making luxury goods cheaper, like large screen TV's and most electronics. The deflationary forces are primarily from productivity increases and overseas sourcing.  Are we in for a recession. Probably not in the traditional sense, but a very real recession for many people as our country splits between the have and have-nots. And that also holds for the have and have-not industries.    

Wages continue to favor the rich over the poor as the multiple of the highest wages to the lowest within corporations continues to grow rapidly.  So the spread between the rich and poor is growing.  Inflation of necessities will cause great difficulty for those near the poverty line and for those already stretched from the housing problems. This normally leads to an increase in crime which also impacts the very rich. States will be squeezed at both ends. California is considering early release of prisoners to offset lost revenue from falling home evaluations. This should fuel the crime problem.  

As we approach year end the markets are showing a continuation of the decline that started in the fall. Both the Emerging markets and China indexes have fallen off their highs.  From my cycle work I am expecting a decline going into mid or late February.  Since interest rates remain low I doubt that stagflation will take hold.  Earning's growth as recorded by the S&P has paused due to the banking fallout, and has become more of a gray area going forward.  As we go into the early part of the year we must keep our eye on interest rates along with watching prices of commodities and fuel. If all of these continue to rise we could be in for a dangerous time as the year unfolds.  Right now I don't see that happening.  Mostly I expect a new rally will start late February and move the markets into a trading range.  The mortgage effects should put a damper on the world economy for a while as the banking problems continue to surface around the world, therefore I am not overly optimistic on the markets in 2008. I believe that once we have passed beyond the date when most of the teaser loans will have come due the markets should have a chance for new highs, provided that some clearer heads have moved into Washington and have restored some confidence in our country and leaders. I don't see this as happening during 2008 so expect a trading range market, with downside leanings early in the year.  

Thirty one years ago the movie Network was released.  In 2006, Chayefsky's script was voted one of the top ten movie scripts of all-time by the Writers Guild of America. In 2007, the film was 64th among the Top 100 Greatest American Films as chosen by the American Film Institute. If you haven't seen it in a while see it again. The message that was not meant to be taken seriously, in 1976 when the film was released, has new meaning as 2007 comes to a close. 


September 24, 2007

Looks like the market has made it through the liquidity crisis. The Vix index went below 19 on Friday on its way back from a peak of over 31.  This indicates stability and a reduction in worry. Our T-Index closed at +40 indicating a strong economy.  A look at the volatility of the T-Index shows that indicator also returning to normal, but more slowly than the VIX.  Recently the emerging markets have had a strong influence on the US markets.  A look at the Chinese stock market as measured by the Xinhua China 25 Index and the IShares FXI show a long term pattern very similar to that of the NDX (Nasdaq 100) as of November 1999.  The NDX index peaked in March about four months later.  We also use a combination of our T-Index with a lagging 6 month cycle of stock market prices and interest rates. That indicator gives us a down turn starting about the first of the year.  Both of these views point to year end or very early 2008 for problems.  My earlier views were that problems would come in the fall, but our T-Index is very strong and with volatility diminishing, the markets could hold up longer than previously expected. 


July 29, 2007

The first question is "What happened?"  We can spot two major elements (1) The sharp jump in high yield interest rates. This is a fall out of the sub-prime mess. The I-shares EFT "HYG" is a good indicator of this. and (2) The sharp drop in basic material stock prices. (This would indicate fear of a pending global slowdown. The I-shares EFT "IYM" is a good indicator for this.)  As I see it, these two factors combined to force the stock indexes lower.  Looking deeper we see (1) the government 10 year bonds did not falter, instead they climbed lowering the government interest rates and (2) the CRB index held as the actual costs of materials did not fall sharply. This leads me to believe the condition is temporary, perhaps a warning shot as to what might happen, for real, latter in the year. So for the second question, "Will this drop continue?" We will have to look deeper into the fundamentals.  Normally with 10 year interest rates over 5% a negative T-Index means "run for cover". Investors are willing to continue to put money into long term bonds even though the rates are less than what they can get short term. This means they believe that rates will fall further in the future pushing their bond prices higher. It also means they believe the economy is not strong enough to put the same dollars into securities.  When rates are below 5% it usually means that there is an excess of liquidity and the economy will continue to grow. But now as the corporate bond rates climb, we have a mixed signal. The negative from the T-Index (closed Friday at -24) may no longer have the redeeming factor of the low rates under 5% (10 year T-Bond rates closed at 4.79%) because of the surging corporate rates. The problem is in this gray area, we do not have strong historical precedent to lean on in either direction. We do not have a fixed % value we can rely on, because the 10 year notes are saying "lots of liquidity" while the high yield bonds are saying "credit crunch". The market will sort this out, but until it does we don't have an easy road map going forward. What I suggest is that we look at this sharp drop as a correction, bringing us back to a more neutral position where we look at the economy as neither a positive or negative influence on the stock market.  Thereby leaving the economy out of the equation for the short term, and relying on other influences to determine market direction.  This initial jolt will most likely carry forward with erratic markets over the next two weeks. Keep you eye on the VIX index for relief. I would like to see it back around 16 for an indication on calm.  The good news is the sorting   out will most likely not take too long and we can still move day by day with caution. 


June 27 2007

With our T-Index at +6 and the 10 year note above 5% we are positive, but not clearly out of the woods. The recent dip and recovery in the market may have burned off the excesses of the market rise since last summer.  


June 1, 2007 - update:

Interest rates are beginning to rise. When the 10 year rates are below about 5% it means there is lots of liquidity and little borrowing.  A consequence of this is that our T-Index which measures the slope of the interest rate curve means little, but as rates climb to and above the 5% level the index becomes important. We are currently just at that point. Our T-Index is at a crossroads flat at zero. If rates climb and the T-Index goes negative expect the rally to falter. If the rates drop or the T-Index goes positive expect to see the rally continue.  The record for the T-Index being correct has been excellent going back many years. 


May 6, 2007

This update was a long time in coming but really not that much has changed.  Although I had the direction correct in the last report I did not expect the magnitude of the advance. I still expect the rally to continue well into the summer. 

One new economic twist that we had not seen before is the market's positive response to the falling dollar. It is rather intriguing as a weak currency generally leads to an increase in inflation and higher interest rates. So far the dollar has not had an impact on interest rates. The reason the market went higher is most likely due to the increase in earnings from the US based corporations that do most of their business overseas.  More and more corporations are falling into this group. Currently 48.5% of the earnings for the S&P 500 come from outside the US. Corporations exert a great influence on the US government. As we move through the 50% mark we will have more corporations pushing for a weak dollar to boost earnings on their balance sheets.  Corporation have always had the ability to influence governments through lobbyist pressure.  With the "new breed" of super rich corporate executives, their compensation tied to stock prices, and their boards of directors interlinked to other corporations, the pressure is extreme. Politicians want to be re-elected and want incomes after they are out of office, both easy bargaining tools for the "new breed" to utilize.  Though lacking in morality these forces will be good for the stock market. The market will climb until it breaks as it did in 2000, then these same corporations will take excessive one time charges and start climbing again.  The working public will most likely lose ground, .. but slowly, and laws will be written to protect the interests of corporations at the expense of the public. 

The sub-prime problem is popping its head in a few places such as the 90% drop in earnings for General Motors whose GMAC financing arm took a "sub prime" loss. Parts of the housing market are suffering, but not all. The home builders are reporting losses and their stocks are down about 20% from this time last year. This should get worse, in California for example the default notice sent to home owners reached its highest level in almost ten years. This is the result of flat appreciation, slow sales, and post teaser-rate mortgage resets, but not a sharp rise in interest rates as had usually been a prime cause in the past. This time the change in the rate of defaults is very steep reflecting the barrage of Sub-Prime mortgages that were written in 2005.  So far it does not seem to be having a large impact on the economy, if interest rates climb and add fuel to this fire the damage will spread. 

Gas prices are in the mid $3.00 a gallon level. Our very unpopular view is that we need a large tax on gas like they have in the UK and most of Europe. This tax could be coupled with a tax credit for heating oil to relieve the overall impact especially for those on fixed incomes. Reducing the cost of heating homes would be the only chance that could make this proposal acceptable to the general public. The result would be the shifting of populations closer to where they work, the reduction in our dependence on foreign oil and a drop in our foreign debt.  

Overall we have an upward bound stock market that is still reasonably priced compared to interest rates and earnings. Improvement in the yield curve and a housing drop that is well behaved.  Other than a few quick pull backs the road ahead looks clear over the next few months.   


January 28, 2007 (additional update Jan 29, 2007)

This long term view will try to examine a variety of time frames. For the near term, February I see a run up early in the month followed by a pause mid month probably the second and third full week of the month.  This may be a sharp few day correction. Starting the last week in February we should see a substantial rally that could add as much as 5 percent to the NDX by sometime in June. The only impediment to this scenario that I see would be a rise in interest rates while our T-Index remained negative. Currently with interest rates low and low corporate demand for funds the inverted yield curve and negative T-Index are not a deterrent to market improvement, but rising and rates and an inverted curve would be. The combined effects of the internet and outsourcing increased  productivity and brought about a lessening demand for expansion capital. This has managed to keep interest rates low.  With so much cash around the banks got into risky nothing-down interest-only real-estate loans that provided them with premium rates and could be sold off to foreign investors.  The government which should have been regulating these time-bomb loans looked the other way. The economy should continue strong in 2007 and may have already  reached a point where demand for loans could put some upward pressure on rates. By the fall this increase in rates could start to impact real-estate. The real-estate markets, have already slowed with fewer homes being sold as home owners keep their homes off the market waiting for higher prices and buyers hold back waiting for lower prices. As rates rise layoffs in the real estate area should start to filter through the economy as cut backs in purchases of furniture, appliances building supplies etc. impact on corporate earning. Thus causing a cycle of increase in adjustable rate loans, lay-offs and defaults on those shaky real-estate loans we mentioned earlier. If this happened the stock-market would suffer and we would see lower prices going into year end. Now you can see that long term forecasts hinge on shorter term forecasts so we need to watch and see how things play out.  Going out even further we have major problems. 

I don't know what it does, but I want it. 

When drug companies were allowed to advertise prescription drugs directly to consumers only the drug companies themselves knew where it would lead. Medicare and MediCal are collapsing under the costs of drugs and hospitalization.  The full impact of this problem is just a few years away.

Corporations run as dictatorships.

In my long term comments of April 30 2006 I mentioned the disparity of workers wages to corporate officer payouts. This week Senator Jim Webb said the same thing in his response to president Bush's speech. Unfortunately for America the corporate board rooms are draining money out of the corporations and into their own pockets.  Money that should be going back to the share holders. This is weakening the real productive side of the corporations and weakening America. This legal corruption will continue as corporations continue on as mini dictatorships, no better then some third-world war-lords. This problem is stretching the gap not only between rich and poor, but between rich and middle class. With the strong influence corporations have in government it will not change soon.

War blunder.

There is much to say on this one, but a $500 billion dollar waste is probably enough for now. And could lead to catastrophic problems. 


October 7, 2006

My forecast has modified some.  We find that the T-Index is still negative giving us recession concerns. But we must look a little deeper into the cause of the interest rate inversion.  Normally as businesses pull back from spending on expansion, interest rates fall, since there is less demand for capital.  This time many corporations are flush with cash and did not need to borrow as much, diminishing the significance of our indicator. So we must look to the employment figures to look for other hints of expansion or contraction.  And although the new job numbers are not that great, we can't forecast all gloom and doom right now. The real estate market is key here.  This market is slow to turn and reverse course.  As we watch it roll over we look for signs that will tell us how bad it will be. The drop in interest rates is keeping the no-money-down borrowers, and adjustable rate mortgage holders from defaulting.  Since the adjustable rate mortgages are not climbing.  Few foreclosures means no rapid drop in home prices.  Yet the slow decline in home prices means fewer jobs in that industry, less construction, and fewer jobs eventually spreads to other areas of the economy, but this will take time to unfold.  The lower interest rates and lower fuel costs have given the economy a second chance, but my guess is this is temporary life support. During the later part of November and all through December we could see the carry through of earlier ripples that were set up during the summer. This should cause the stock market to lose some ground that it acquired going into the fall. Going forward into the new year we should see another recovery pattern. I don't think that we will see the effects of a poor economy and bad real estate market until well into 2007. 

Recently it was reported that the average salary gain at the high end of Corporate America was 16%.  To say that the corporate heads are draining the profits that belong to the stock holders may be a bit harsh, but it is close to the truth. The distribution of wealth is becoming unbalanced and without a better distribution the economy will eventually suffer. The lowest paid must be able to survive in society. If this does not happen the choice of turning to crime becomes a more reasonable alternative for the poor, and crime is a heavy tax on lives and the economy.  There is no free lunch.  


August 21, 2006

Our short term forecasts have been on the money this year as we have pushed our gains well over 30% ytd.  Long term is more difficult. Going step by step we find the market index values reasonable when compared to earnings and current interest rates.  One can not look at earning in a vacuum. The same earning that my look wonderful when interest rates are 1% would be miserable when rates are at 10%.  Right now there is no problem in that area. Looking at the economy we do find a problem.  Our T-Index is negative by a fair amount indicating an impending recession. This factor by itself generally means the markets will drift lower with more down days than up days.  A look at our longer term price & interest rate model shows a negative impact in the November/December time frame.  If the T-Index is still negative at that time ( and it looks like it will be) we should see the markets weaken considerably, accelerating to the downside. With president Bush asserting that troops will remain in Iraq as long as he is president we have a guaranty of high war expenditures, continued deficits and weakening of the US dollar.  This weakening trend I believe will continue, keeping up the price of oil, which would normally fall under fears of recession, and will hold up the prices of precious metals. It will also put the Fed in the difficult position of fighting an external inflation with internal tools.  The Interest rates on the 10 year notes have drifted lower, now at about 4.85%.  With the fear of Fed tightening out of the way (for now) domestic and foreign investors have been buying long term government bonds. And that is keeping the rates down.  The Financial Times reported today that the largest 100 companies have record levels of cash. So they have no reason to borrow, borrowing would have the effect of raising rates. This current condition is a help for real estate and should keep the real estate markets from a collapse. So the forecast is for a trading range for now until November then a sharper decline. But remember it is easier to forecast "one day at a time".   


....Once again...June 27,2006

Just when we thought it was safe, the T-Index moved back below zero bringing the markets lower. With the T-Index negative, but flipping about, ( This is the third time it has gone negative since the beginning of the year.) we do not have a clear direction of the economy or longer term stock market.   T-bills are a safer bet at this time. 


....More....June 15, 2006

Changes are happening very rapidly these past few days. Our T-Index which reached a -13 on Tuesday moved positive this morning. This is good news and it came sooner than I expected, (see below).  The concern is we need to watch the level of interest rates on the 10 year notes.  We do not want these rates to climb rapidly or real estate and business will suffer. Unless we again see a strong drop in the T-Index, the market low of Tuesday should hold.  The markets should start to wind their way higher through the summer and it once again seems safe to start buying. 


....More.....June 13, 2006

My expected scenario is for this down draft to turn into a choppy market up into the fourth week in June then firming awaiting the Fed move.  Regardless of what the Fed does we should have a rally as the thinking most likely would be that the "core" inflation elements should cool, since the oil and metal prices have gone much lower and the Fed hikes should be suspended from this point. After the Fed meeting money will then flow back into the US markets and out of the 10 year notes causing those interest rates to rise. (Which is what raising the rates was supposed to do, but didn't.) This will bring the T-Index back to positive and the economy back to normal.  Real estate will remain cool, but the overall low rates will keep it from dissolving. 


June 6, 2006

Mr. Bernanke's hawkish comments regarding raising interest rates are having a reverse effect on long term rates, it is time he realizes that it is a no-win situation.  Investors are convinced that higher short term rates will kill the economy and are buying long term bonds. This causes the long term rates to go lower, giving us an inverted yield curve and a negative T-Index. If Mr. Bernanke leaves the rates alone the Long term yields will (with the buying pressure off them) seek a slightly higher level, keeping the yield curve in the normal area and allowing the economy to continue to grow.  Neither call is a great one, since neither will really curb inflation.  However smaller and more widely spaced rate hikes could do the trick.  One eight point raise, on a bi-monthly path would send the message that he is focused on slowing inflation without killing the economy and using a scalpel rather than a hatchet.  

Our falling dollar is a major contributor to the inflation rate, making everything from oil to steel more expensive. Our deficit is a big reason for the falling dollar. A strong economy is what can keep the dollar from falling further.  Eliminating the deficit can only be accomplished through increased tax revenue, which is a by-product of a strong economy.  Federal state and local governments are dependant upon tax revenue to operate. They depend upon the growth in home value and stocks to avoid shortfalls.   This can be assessed valuation of homes, or capital gains from stock market sales. It is in the governments best interests to keep the markets supported and real estate prices moving higher at a controlled rate and not come tumbling down. 

Consider this scenario, Mr Bernanke following a normal course continues to raise interest rates, inflation, most of which is externally caused, does not get the hint and continues to rise.  Mr Bernanke showing he is tough continues to raise.  Home prices start to fall and the economy heads south.  100% financed homes are abandoned and more people start to rent. Rents are still low relative to home prices and rents continue to rise. Imports instead of falling continue to rise as the consumer shifts to lower cost alternatives from more expensive American made products.  Asian economies fueled by the American dollar continue to buy fuel and metals, pushing those prices higher yet, sending more inflationary messages through our economy  adding more pressure on the Fed to raise rates, while wall street and the American public cry for relief. 

From a historical point of view a negative T-Index most often brings lower stock market prices. I do not recommend any new long term market investments under these conditions. 


April 30, 2006:  The world grows smaller.  We had another turn around in our T-Index on March 29 and the index has remained slightly positive closing at +6.  The markets are basically unchanged since then, reflecting the tight trading range since early January.  As our longer term pricing indicator remains positive in addition to the positive T-Index we have a positive longer term view going into the summer. 

My trip to Bangkok was very interesting.  Bangkok is growing, street signs are in English and Thai, so it is easy to get around and most people speak some English. The bulk of the people are poor and you will see thousands of food stands along the sidewalks throughout the city, providing a living for a sizable portion of the population.  Real estate has increased in value as rapidly as it has in most of the world over the past few years.  There is a lot of building, or rebuilding, yet the infrastructure is old, streets narrow and packed with mid size autos, motor scooters and three wheel motor scooter taxies.  The people seem to have a lot of respect for each other and they are pleasant to be around.  Over all the outlook seems quite positive.  Yes you can find Starbucks and McDonald's.  There seems to be lots of potential for continued growth.  While prices in England seemed about 50% higher than in the US, prices in Bangkok were much lower, a four star hotel had rooms for $60 per night.  Clothing make in Bangkok was very much cheaper.  I got good insight into the copyright infringement problem with bootleg movies, recordings and software.  It is illegal in name, but not enforced.  From the country's point of view its population does not earn very much, and it would be a burden on the economy to have funds from the hands of young people flow out of the country for movies and recordings and funds from small companies flow out for the purchase of software.  Thailand does not produce very much in the way of movies or software so the bootlegging does not do internal harm.  The world is indeed changing and most people do not really understand what is happening.  From a historic point of view, initially, religions controlled the populations.  From there, in the West and Far East, governments with defined geographical boundaries competed with and finally took most of the power from the religions. In the Mid East, religion is still in control of the populations as their governments have never fully evolved.  Now many Multinational Corporations compete with governments for control of the populations. I do not believe the corporations understand what it takes to interact with religions or if it is even possible.  There is a big difference between working with a government and working with a religion.  Some individual corporations are already larger than small countries.  Each of these three governing bodies, religion, government and corporations has different plans for the populations. Each of these entities struggles for their own survival.  Most corporations want stable governments whose populations have sufficient earnings to purchase their products (McDonalds etc). This is a good thing and should lead to more cooperation between governments (of developed nations).  Some corporations sell to governments and have little care about the stability of the government or well being of the people and actually make their money reconstructing after disaster (Halliburton). This is not a good thing and will lead to more conflicts with developed nations waging war on undeveloped nations.  Multinational corporations not only compete with governments, they exert great influence over the governments.  As the income from overseas operations exceeds that from internal operations the multinationals no longer have allegiance to a specific county.  Laws will change or be relaxed to suite. Tariffs will be eliminated.  The multiple between  minimum wage and the income of the corporate insiders will continue to widen.    In the mid eighties to late nineties it looked like a new age of entrepreneurship would take hold as small companies were able to take advantage of the rapid changes in technology and large companies stumbled.  But the resources of the large corporations won out and the flow has once again swung back to favor the large multinationals.  These are my views and I would like to here from you, in agreement or not.  The more we understand the present the better able we are to prepare for the future. 


March 18, 2006: Not much has changed.   On January 2nd we cautioned that the T-Index was near zero, but also suggested that not much would happen if the index did worsen.  On January 9th our T-index turned negative and the stock market peaked two days later.  The T-Index remained below zero and closed yesterday at -15.  The stock market over the past few months fell, then recovered ending with the S&P slightly higher and the Nasdaq 100 slightly lower than back in January. So no major change.  Last week the T-Index climbed as high as -1 only to fall back as interest rates, in general, retreated.  The Fed has caused the T-Index to fall below zero and additional tightening moves will not help inflation (since most of it is externally caused), and will only make matters worse for the economy and stock market.   Our second indicator which measures longer trends from changes in prices and interest rates is still positive and forecasts strength into August.  The negative T-index and positive price projection tend to cancel each other out and leave us with a trading range forecast.  If the Fed stops tightening and the long term rates climb slightly on their own our forecast would turn positive.  

Our trip to England was interesting and enjoyable, aside from the cold and somewhat wet weather.  We stayed mostly in the town of Guilford, population about 66,000+.  This compares to our home town of Pacific Palisades California, with a population of about 20,000.  A few economic comparisons:  Prices in general in England are about 50% higher than in the US.  Their prices include a VAT or value added tax.  So if it is cars or cough drops, expect to pay 50% more.  Both Guilford and the Palisades are up-scale and have a large number of real estate offices.  The Real estate boom looks to be in full force in England.  The minimum wage in England is higher than in the US, and it is very necessary with the higher cost of living.  Another comparison I found was that Guildford had many more shops than the relative populations would account for.  However the Palisades has two large supermarkets with giant parking lots, while Guilford had only one semi-large market (that I saw) with many more checkers and many more shoppers and no parking lot.  Another big difference is car size.  The Palisades is filled with giant  SUV's, and the eco friendly Toyota Prius (both status type vehicles).  while Guilford (and England) is focused on small fuel efficient cars, but very few hybrids.  While we were accustomed to seeing the 3, 5, and higher series BMW's at home, Guilford had mostly the smaller 1 series BMW's, A series Mercedes, and even very tiny Fords.  I never even knew they made these cars since they don't sell the smaller models in the US.  What I find interesting about this is that although gas prices are much higher in Guildford than in the Palisades the miles per year traveled in California is most likely much higher, resulting in probably little difference it total gas costs  for the same vehicle, yet the English have made the "mind set" change to smaller vehicles.  The fuel efficiency there is also greater than in California ( I believe), due to our more stringent smog laws.  As unpopular as a large fuel tax is, it seems to have done wonders for British thinking and has greatly reduced their dependency on foreign fuel.  A large fuel tax would need to have some tax credits for business so as to not be an overall tax on the economy....... We really can decrease our dependence on foreign oil, but it is hard to undo Hollywood and automaker hype.  Though I don't like seeing government interfere with business, I think it is necessary when business lacks the integrity to self govern and government works for the greater good of the people.  Mandating fuel efficiency was a good idea that has not gone far enough and should be re-implemented, this time with SUVs included. 


January 2, 2006: Caution T-Index near zero.  With corporations flush with cash there is no upwards pressure on interest rates from that sector.  Demand for mortgage funds is also weakening so the government's 10 year note has no serious competition from other types interest paying paper.  Meanwhile foreign demand for the notes is pushing our rates lower.  In the past when we have approached the inverted yield curve condition it was from a position of higher interest rates which caused businesses to cease borrowing and investors to shift funds into high yielding short term bills. But rates are not very high,  this makes it a somewhat different condition and we should proceed with caution.  Long term rates are actually  low enough to encourage, not discourage borrowing. What seems to be lacking are good solid investments in order to put that money to work.  Our second indicator which measures longer trends from changes in prices and interest rates is still positive and forecasts strength well into April.  I don't think the market will fall apart at this point even if the yield curve would invert.  Rates are just not high enough to discourage business borrowing and most big businesses have enough cash not to care.  We have seen some market participants leave the market in recent days during some low volume holiday trading, causing the market to go lower.  So what will happen this time if the rates invert......  Not very much initially.  But expect the banking industry to be hurt first since they depend on the spread between the rates.  And the higher short term rates may draw some money away from the stock market.  So although in this case the economy should continue to roll along, money may move out of stocks reducing the PE ratios.


December 6, 2005:  Buy the dips.  The S&P did pull back the expected 5% from the September highs and then returned to the upside.   There seems to be only one thing standing in the way of a continued up-move and that is the FED.  So use our T-Index to monitor any damage to the economy.   We use two long term indicators.  Our primary indicator is the T-Index.  It measures the current state of the economy and gives a good indication of how the market will react to current conditions. Our second indicator measures interest rate and stock price movements about six months out of date. This indicator allowed us to call the 5% dip in S&P prices in October.  Presently our second indicator is giving us an "all clear" signal going into April (which is as far as we can read at this time).  This all-clear signal is based upon the T-Index staying positive.  So as long as we have a positive T-Index the best trading strategy will be to buy the dipsA recent economic concern is the trend of companies to eliminate pensions.  This puts more burden on employees to have their own retirement plans, but will they?  Along with out-of-control health costs the future of pensions and social security are the major long term concerns, made worse by the war and deficits.  Long term it does not look good. But over the next few months buy the dips.


August 31, 2005: Greenspeak made easy.  Mr. Greenspan finally admitted that his raising the interest rates have been an attempt to slow the real estate market.  Why does he think that asset prices will plunge after a spell of low risk premiums (low interest rates)?  It works like this. Lets say  you can get 3% on your money in a bank or you can buy an apartment house for $100,000 and clear $5,000, (5%) in rent if conditions remain constant. That is 2% better than the banks.   If interest rates rise and banks start to pay 5%  your apartment house is no longer a good deal and you want to sell.  If your buyer also wants to make 2% better than a bank,  the value of your property must fall to $71,428 then the $5,000 return becomes 7%. Which is 2% more than the 5% banks pay. You would take a 28.5% loss.  When interest rates are low like they are now, the risk becomes very real, and real estate prices can fall sharply.  This is Mr. Greenspan's concern.  But how real is this concern under current economic conditions and why aren't the long term rates going higher?  Rates move opposite to the price of the notes. Capital moves to the best risk adjusted investment available at the time.  Since long term rates are not going up it means that there are lots of buyers bidding up or holding up the price of the notes.  This means that investors believe that  the 10 year notes currently at 4.02% represent one of the best risk adjusted investments.  If there were better investments the money would flow out of the notes and into other investments causing the rates to rise.  It also mans that investors do not believe inflation is a problem, since inflation would reduce the real return over the 10 year holding period of the notes. If many corporations were expanding and borrowing money that action would compete for investment capital and some capital would move from the 10 year notes into corporate bonds. This is not happening.  Part of the reason is the productivity improvements are still filtering through the system and the other part is, the economy is just not "hot".  It is running fine but not causing inflation.  The recent run up in oil is also putting a damper on the economy, although higher oil prices are  inflationary, the damage caused to the growth in the economy acts in the opposite direction.   The major internal long term trends are operating against rising interest rates.  Previous run-ups were caused by rapid expansion.  We are in a short term boom, but there is the possibility that it is part of longer term consolidation rather than expansion.  What are foreign nations buying from us?  We have an expanding market in drugs, education and entertainment.  But what else? Our housing market is internal and providing one of the few sources of good paying jobs.  So what investors in the 10 year notes are telling Mr. Greenspan is that they are not worried about inflation.  Maybe he should listen. Better ways to combat run away house prices would be to implement higher down payment requirements.  Put restrictions on what percentage of loans that banks could resell. This would make banks more responsible.  Banks are currently unloading risky loans on foreign and less sophisticated  investors as fast as they make them.  It would also be good to limit interest only loans to those who already have substantial equity in their  home.    Our T-Index (I believe to be the best indicator of the state of the economy) has fallen to +23.  This is a loss of 77% since April.  The index reads the current state of the economy and it can hang at low positive levels without going negative for many months, or it can quickly plunge in a few weeks.  So we must  just watch.  Overall it has been a good idea to stay out of the stock market during negative periods.  On June 1st we told you to watch TOL for a hint of a real estate correction.  TOL has gone down 17% from it's peak.  We also gave you a way to watch Los Vegas real estate prices. Up only 1% for the past year.  The recent surge in oil prices has pushed down rates on the 10 year notes which has lower the mortgage rates, which in turn has added fuel to the real estate market.   I believe the housing market will eventually fall as it has many times before, but I don't believe it is a good idea to kill a contracting economy, that has a war and large deficits to support, to bring the real estate market to a faster demise.

Our crystal ball shows a choppy upswing into the end of September,  then lower till just before Thanksgiving, this drop could be around 5% on the S&P.  Then we expect a resumption of the up-side.   


August 12, 2005:  Mr Greenspan's push in rates to pop the real estate bubble should show results in the October - November time frame.  For the first 5 months of this year the 10 year note was not correlated to the 90 day bill or the rate hikes, if anything it had a slight negative correlation.  But, starting in June the correlation was greatly improved as most of the "air" was squeezed out between the rates causing the 10 year rates to move lock step with the bills.  From June 1st to August 8th both had moved higher by 1/2 point reflecting the 1/2 point raise in rates. Now that they are marching lock-step results should be apparent very quickly.  Major banks, which should know better, are advertising interest only real estate loans.  They must be planning to sell those loans before any trouble starts and trouble we shall see.  Many homes are under construction and that is where the trouble will start.  I don't believe there will be a Fed meeting in October so expect a rate hike in September (20th) and one in November (1st) which should do it.  Our T-Index has fallen to +35 once it goes negative it will indicate the economy has turned sour.  This index has fall from +100 in just four months.  Our proprietary work on market technicals indicates that we could see the market under pressure from mid September till the week before Thanksgiving.  This would be in line with the rate hikes having a more severe effect in this time period.  The wild card is oil.  The problem is the lack of flexibility in meeting even a slightly higher demand.  With China and India's rapid growth prices could be pushed out of sight.  So the impact on the economy and stock prices could happen quickly and be harsh.  I expect to see temporary relief in oil prices later in the fall that should give the markets another upwards thrust. Another factor to buoy the markets will be money coming out of real estate and back into the market.  We most likely will escape disaster for another year but watch out for 2007.  

Here is how it breaks down.  The Fed is expected to raise short term rates....a given.  Then long term rates will either go higher squeezing the only major buoyant area of the economy, real estate.... Or long term rates do not go much higher, keeping real estate alive,  causing Greenspan to continue raising rates and crushing the rest of the economy under a negative T-Index.  Oil will either help the economy by backing off or finish it off by going higher.  Although it is rather certain it will go higher over the long term the short term is cloudy.  The real estate bubble will burst but will money run back into the stock market.  Probably yes for the next year, if the markets in 2006 will do well under these adverse conditions it will have to have funds from somewhere fueling the prices and that will be from real estate.  


July 3, 2005:  It is clear to me that the Fed's continued increases in the short them rates are targeting real estate. Which is currently the easiest to control inflation threat.  Once the short term rates get within about  3/8th of a point of the 10 year notes money will flow out of long term notes and into short term bills causing long term rates to rise and pulling  mortgage rates higher.  There is much more risk in long term notes, so no reason to be in them, if you can get almost as much in the 90 day bills. Normally the long term rates would have already jumped as business borrowers would bid up loans, but the economy though alive and well is not booming and loan demand outside of real-estate is low.   Interest rates now move as part of a global economy.  High oil prices have put a damper on world wide corporate earnings.  With the prospects of another recession not that far away Sweden recently cut their rates. Europe is having a harder time than we, and will soon be cutting rates again.  In the US the Fed still has the luxury of raising rates to dampen the housing bubble.  Down side, as I see it, will come in the fall.  If rates rise at the same rate the air will get let out of real-estate, and maybe the stock market, since the real-estate market is responsible for most of the spending- boom keeping up corporate earnings.  For now we are fine. The T-Index is holding up at +49.  

The VIX rate (or volatility) continues to fall, and overall daily price movement has decreased.  A stocks price movement consists of two parts, one part is due to the company's own generated operations and the other is what the overall market does.  Under low volatility conditions overall market movement becomes the smaller component.  The other component like a strong balance sheet and improvements in productivity now become much more important and we (Palisades Research) will be spending more time focusing on this component of market price.  You may have heard the saying "a high tide lifts all boats" applied for a rising market.  This market has very little tide.   This past week we took positions in four stocks with solid and improving financials.  SEB @ $1649, JAX @ $8.90, PLPC @ $40.57 and XJT @ $8.595.  More on this strategy at a later date.


June 1, 2005: The rally we were expecting in late March didn't start until late April.  Out T-index is now at only +55.  This decline was the result of the Fed tightening during a fragile recovery.  Had the recovery had more substance outside the housing boom we would have seen the interest on the 10 year notes increase.  Instead it declined.  We now have an interesting situation with the 10 year notes under 4%. England's short term rates are now higher than their long term rates.  If we had a T-Index for them it would be negative.  This starting to happen in other countries like Australia.  If you look at my comments back in December of 2003 you will see that we had the opposite situation. The US had a negative T-Index and the England and Australia were positive.  Money was flowing into those countries and out of ours. Now it is reversed.  Our dollar is becoming stronger as our economy offers a better alternative to the other economies. As the dollar becomes stronger we should see a continued increase in stock prices.  With England starting the slide in Europe, Asia should not be that far behind.  A slowdown will cause oil prices to drop and I expect to see lower oil prices going forward.  Commodities should also drift lower with oil.  For the short term as our economy gains over other countries we will see more money flowing into our ten year bonds holding the interest rates down.  This will keep mortgage money cheap, fueling the housing boom.  Eventually the housing boom will ignite real inflation due to rising rents.  If rents go too far the results will be a number of vacancies as businesses and tenants move to less expensive locations, or lured by new construction.  Those heavily leveraged in the housing boom will need to quickly sell off excess properties to avoid foreclosure causing prices to fall.  Real estate does not move as fast as stocks but keep your eyes on companies like tol who's price should give an early warning.  Also watch the trend in Las Vegas.  Land is not that expensive there and home prices are closely tied to construction costs. <> Type in 89128 for the zip code and you will get a history of home prices.  There was a plateau after October 04 but this May was another new high. 

Over all,  both real estate and stocks should continue to gain as long term rates stay low. We do not want to see our T-Index go negative as that would signal the end of the bull economy (from my point of view), and the end of the stock market rally.


February 26, 2005: We are still as bullish on stocks as we were in our Jan 2, forecast below.  The market got the slow start we were expecting,  with January and February showing the S&P perfectly flat and the Nasdaq 100 down about 6% for the time period.  We expect a strong rally in stocks to start in earnest later in March and last long enough for investors to make some money over the next few months.  The T-Index which measures the slope of the interest rate curve and relates it to the strength of the economy is sitting at +95. With +100 defining a perfect balance between long and short term rates ( from our programs point of view) the economy looks very good.  And this should continue for a number of months, most likely more than a year.  The continued drain on our economy by the weak dollar especially as it is reflected in the price of oil and other commodities will keep US companies from reach their full potential in terms of earnings.  The war is another major drain and will continue to be so for a number of years.  Hello Vietnam.  With these two problems dragging us down  the boom may be shorter than we like and the next dip longer and deeper, but that should be far down the road so prepare for a moderately strong rally and hope all goes well.


January 2, 2005:  2005 should be a good year for stocks.  I expect a slow start with January and February being flat or lower and then a resumption of the rally.  Our T-Index which reflects the economy is in positive territory and is not yet close to signaling inflation.  Interest rates are still low enough to encourage  business growth,  real estate purchases and refinancing.  Oil prices have come down significantly off their highs and  the Tsunami crisis has nations pulling together, and more focused on saving lives than killing and war.  The economics and psychology are positive going into the new year. We do have some long term concerns.   In a global economy any country foolish enough to start a war risks falling behind as they waste their resources.  That is now my biggest concern for America.  When the Soviet Union fell it enabled us to move dollars away from defense and into growth, now we are at risk of creating a drain that we may not be able to correct.  When a decision costs hundreds of billions of dollars is should not be made too quickly.  France instituted a 35 hour work week in 1999 from a 39 hour week with wages remaining the same.  By 2004 the government admitted they made a huge mistake.  Among other problems of the shorter week  the loss of productivity cost the French in the global market place.  A continued waste of assets in the US will eventually cause the countries holding our treasury bill to sell, causing a large upturn in interest rates and the collapse of our economy under inflationary pressures.   As you can read in my December comments below I do not see that as an inevitable happening, but I do see it as an eventual happening if we do not stop the dollar leak.  Our leaders must  learn how to properly govern in a global economy, the rules have changed dramatically in the past 10 years.  Like investing in the stock market, it is now a multi dimensional game board and a one or two dimensional  approach will no longer make you a winner.   


December 1, 2004  What is in store for stocks,  the dollar and gold?  The economy is key for stocks.  A look to the T-Index gives you a reading on the economy.  On Sept 8, 2004 the T-Index turned and stayed positive. (See our Sept 7 forecast.)  Since then the markets are up 6.75% in the S&P and 16.75% in the Nasdaq 100.  As long as the T-Index is positive we should have no real problems with the stock market that are economically driven.  As for the dollar, the dollar is first concerned with political stability, second with a trade balance and third with economic strength.  I have read many reports that the nations holding our treasuries will drop the dollar for the Euro, that the dollar will totally collapse and we will see stagflation in the US.  I don't think so.  We are politically stable and have just completed elections.  Our economy is healthy and we should see a stronger recovery than Europe which is plagued by labor/pension problems and costs.  With our dollar already greatly depreciated and economy strong we are no longer in the same position we were in a few years ago and foreign cash should start flowing back into US securities.  The table below shows which countries hold us treasuries. 

Sept 2004 Jan 2004

1. Japan -- $720 bln $584 bln

2. China -- $174 bln $157 bln

3. UK -- $135 bln $ 94 bln

4. Caribbean Banking Centers -- $100 bln $ 55 bln

5. South Korea -- $ 67 bln $ 60 bln

6. Taiwan -- $ 57 bln $ 53 bln

7. Germany -- $ 51 bln $ 48 bln

8. Hong Kong -- $ 50 bln $ 54 bln

9. Switzerland -- $ 49 bln $ 45 bln 10. OPEC countries -- $ 43 bln $ 43 bln ----------------------------------------------------------- (Sources: International Monetary Fund, Bank for International Settlements, U.S. Treasury, national central banks, Reuters)

As you can see Japan is the largest holder by far and they are very unlikely to switch from the Dollar to the Euro.  We will probably see continuing weakness, especially since we are locked into a war in Iraq, but I do not see a rout.  As for gold, both the dollar and the economy come into play to determine the price direction.  As the dollar falls, gold goes up in price, and as the economy improves, gold goes down in price.  So it looks like gold is caught in the middle between a rising economy and a falling dollar.  I believe the economy's growth will out last the fall in the dollar which I see correcting,  so our forecast for gold is that it will go lower longer term, but may have some near term life left in it.   


November 5, 2004 

Our T-Index turned and stayed positive on September 8th when the S&P index was at 1116 and the Nasdaq 100 index at 1376. (see our previous post Sept 7 ).  In the past two months since, we show a 4.5% gain in the S&P and a 10.8% move in the Nasdaq 100  (our investing program had a 5.8% increase).  The T-Index is a very good indicator of economic health and its going positive means most of the economic problems are over for the near term.  Long term we still have a growing trade deficit, falling dollar and out of control health care costs.  But at least we have some buffer time to work on a solution if the powers in charge care to do so.  Bush's call for Social Security reform with younger workers in charge of their own accounts does not make sense from a number of directions.  The current existing system  does not involve investments and investing risk, since  the retirement payments are paid by the current workers. If the social security tax from younger workers was removed from the system the system would be unable to pay for current obligations as the portion paid by business would not be sufficient to carry the load. Therefore the amount paid by business would have to be increased along with more likely an increase in the social security tax for workers that would go directly to support the current system.  The business portion of this cost is already an impediment to job creation for small business.  The second problem is adding investment risk into the mix, those workers that eventually retire that had poor investments will no longer have the protection from absolute poverty the current system provides.  The third problem is the increased cost of managing the program.  The system needs to be revised but it looks like more thought must go into it.  Anyway for now enjoy the positive T-Index currently at +45.  We expect that as long as the T-Index is positive the market will grow, we should have a few years of positive growth. 


September 7, 2004  Good news ahead for the stock market!  The T-Index which measures the slope of the interest rate curve turned positive last week and is now riding the borderline between plus and minus.  Most likely it will go fully positive over the next few days or weeks.  Southern California real estate has seen a jump in homes put on the market.  This should mark the end to the surge in real estate speculation, since rates are poised to go higher and supply increased.  A good portion of the recent supply I believe is from the speculators.   Where will the investment cash go?  A new intermediate term market analysis program we have just finished forecasts about three months of up-move in the stock market starting now and ending about the first of December, give or take a few days.  To temper the good news you must realize that very low interest rates can support very high PE ratios, but as the interest rates climb other less risky  investments start to compete for funds.  Current PE levels are very high, but in line with what we would expect from the low interest rates.  Can earning climb faster than the interest rates climb?  We will have to see about that. 


August 26, 2004.  We see a big improvement in the T-Index.  Now at -18 it is days away from going positive.  A positive T-Index means all is normal on the economic front.  This means the economy is operating under ideal interest rate conditions  for business and will lead to increased company earnings over the next few years.  It will also mean longer term interest rates will begin to climb. The 10 year notes closed today at  4.23%.  If the T-Index stays positive I  expect to see 5% within 6 months.  With increased earnings and higher interest rates we will see money flow out of real estate and back into the stock market.  This should be a more gradual move since interest rates are at a low level.  The economy improving  will mean more employment, but the home affordability level will continue to decrease due to the interest rate rise.  This should mean the real estate markets will flatten, maybe go a little lower but not collapse.  The price of apartment houses should not only flatten but show more decline as buyers will demand a greater return on investment in line with rising interest rates.  Gold should fall from the spotlight and move lower.  Oil will move along with the unrest in Middle east. It was over $49 per barrel spot price a few days ago.   If we withdraw from that area expect to see prices move back to the $30-$35  per barrel range.  Brent crude for 2006 delivery is now under $34.   


May 31, 2004.  Iraqi terrorists, or freedom fighters depending upon the way you look at it will continue to cause problems for the US and the rest of the world as their influence pushes the price of oil skyward.  The Bush plan was to stabilize the Middle East, instead we are seeing chaos.  Foreign workers are being chased away, and doctors kidnapped as Iraq and neighboring countries seem to be moving backward.  Not until we leave Iraq will we see some lower oil pricing.  And it will happen eventually. Current demand is not pushing oil ever higher, the fear that supplies will be restricted is the culprit.  Not every country is using more oil, but the large users are, the US included. Our usage was up 16% in barrels per day from 1980 to 2002.  China's increase was 192%. India was up 240% and South Korea was up 306%.  On the good news side France and Germany showed amazing restraint and decreased oil usage of 12% each. (Info from the Financial Times)  The current higher oil prices will add to our balance of payment deficit, keeping pressure on the dollar.  On the interest rate front the ongoing consensus is that rates will go higher.  A look at the higher rate of earnings in the S&P, now at about $52 per share (trailing 12 m) would support that view.  We still see interest rates holding their very steep slope, however, indicating that deflation is not completely out of the picture.  On the political front the award winning movie Fahrenheit 911 may very well mark the end of the Bush run.  More terrorism in the US will be good for Bush.  More terrorism outside the US will be bad for Bush.  Withdrawal from Iraq would be a Bush plus. Capture of Bin Ladin very near election day would be a plus.  Prolonged focus on Ahmad Chalabi's role in duping the CIA about Iraqi weapons of mass destruction will be a big minus.  Getting our troupes out of the Middle East would reduce oil prices and go a long way toward mending our relationships with our allies.  That would help ease the deficit and reduce the balance of payments leading to an improved economy which could support higher stock prices. Until we see that happen expect to see more range trading. 


January 2, 2004.  The falling dollar currently is more of a problem for the European community than it is for America.  But we are living in a closely linked world and what impacts one trading partner will turn around and impact another.  Over the past year the dollar has lost about 21% with regard to the Euro.  It has lost about half of that relative  to other countries, like the UK and Japan. Over the past two years however it has lost well over 20% of its value world wide.  China's currency the renminbi,  is pegged to the dollar and has remained firm.  This combination has hurt the European members linked to the Euro (Austria, Belgium, Finland, Germany, Greece, Ireland, Italy, Luxemburg, Portugal and Spain).  Their exports have become more costly compared to all their other trading partners. As the prices of imports for the European community decline and the demand for their own goods decreases they will find themselves under deflationary pressure and will need to be more competitive.  The European community is not in a position to be more competitive, having strict work rules and a socialist leaning mentality.  Japan has not pulled out of its deflationary mode after a dozen years of problems. Germany will most certainly succumb to deflation and could bring with it a hand full of other countries. As for the US,  the reason for the dollar's fall is the sharp increase in our trade deficit.  We buy about $500 billion a year more from foreign countries than they buy from us.  This is our balance of payment deficit.  This is different from the budget deficit which is also close to $500 billion.  The dollar is like any other commodity.  If a foreigner buys an American car they basically exchange their currency for dollars, (buying dollars). When we buy foreign merchandise the reverse happens.  Twenty years ago we imported about 28% of the oil we used, today it is 63%.  This trend is not something easily reversed.  As the dollar falls we will still import increasing amounts of oil.  Only we will import it at higher prices, worsening the deficit.  In 2003 we imported about 3.5 billion barrels of oil at an average of $31 per barrel.  Over $108 billion dollars. The falling dollar helps out some big exporting companies like Microsoft and some companies that have been hurting from foreign competition, but it lowers the standard of living for the average worker due to the higher cost on his purchases from foreign cars to cotton sheets and cuts back on his trips to Europe.   So where is this headed?  As long as the interest rates stay low here in the States we should be able to keep the consumer in a refinance mode.  The falling dollar should help local manufacturing and international companies will bring in more foreign profits.  Slowly reviving our economy.  Our government will hold fast under these conditions as the economy grows and Bush's re-election is assured. Our stock market recovery has helped keep foreign money from pulling out of America big time.  But the world now perceives the US to be taking on an imperialist and risky foreign policy.  This policy is adding to our deficit, causing a negative impact on our economy and trade relations. Why should foreign investors which hold a significant amount of our bonds (est.30% - 40%) and a smaller (est 10%-12%) percent of equities, continue to hold on to their positions when in terms of their local currencies there will be losses?  They most probably will not.  A pull out of bonds will raise our interest rates, this will cut off the consumer in his refinance mode and limit business expansion due to the cost of funds.   Our stock market is fully priced and there is little reason to get another bubble. A pull out of foreign investors from the market will cause the market to stall.  Which I believe will happen early in the new year.  If Europe falls to deflation along with Japan we will be hard put to survive the threat ourselves.  I am looking for an early end to this market rise with large well financed international companies the last to fall.


December 13, 2003.  The wording in the Fed notes indicated that deflation is still the major concern and that being so, they have no plans to raise rates.  The Fed does not like to use the deflation word.  If interest rates should hold there will be more refinancing to help keep the economy afloat.  The best measure of inflation / deflation that I have is the T-Index and that is free for download from our site. The T-Index gives a measure of the current state of the economy.  It is quite simple, if the economy was in better condition we would see the short term rates creep up in anticipation of the Fed tightening.  This would cause our T-Index to start moving in a positive direction.  This is not happening.  Other countries, like Canada and Australia have strong economies and if you measure them, strong T-Indexes.  These countries also have much stronger currencies than ours at this time.  Money has been flowing out of the US and into those countries chasing not so much higher yields in their bonds, but much higher returns in combined yields and currency fluctuations.  Gold is an internationally priced commodity and as such has not risen as much when judged through other, stronger currencies. There is still a substantial amount of money in money markets earning almost nothing.  The US stock market is at full valuation levels.  The Nasdaq is experiencing record margin buying.  So we are left with a perplexing where do we put our money?  From a long term point of view I do not see anything to hasten a change in the direction that gold and the currencies are headed until we see a change in the strength of the US economy.  The Nasdaq has shown a good deal of hesitation to going much higher from these levels and remains unchanged over the last two months.  There is a lot of speculative money in the Nasdaq and I do believe it will leave the table in a down turn that could be very hard.   Our short term trading program  has stabilized and has shown strong gains in recent months. We have left the model unchanged as it is very much in sync with the market.  When I get more time I will rebuild the T-Index in terms of the price of gold and in terms of the US dollar index.  Gold and foreign bonds of economically strong countries seems to be the place to be right now.  We are living in a shrinking world and need to consider world wide investing.  But not without the proper tools to measure the potential opportunities and pitfalls.  My expectation is that we are in a bear market rally in terms of stocks and that we will once again head lower.  


October 19, 2003.  Top coming.  We are experiencing good earnings reports after massive write-offs and cost cutting.  We also have a market that has not exhibited any technical failings.  Technological improvements in industry will continue to spur sales in all area from medical to toys.  That's the good news.  Lurking in the background is a growing debt fed by the federal  government who should be coping with the problem instead of adding to it.  A lack of inflation which is usually used to "deflate" the debt by paying it off with cheaper dollars.  An aging population with baby boomers close to retirement.   A stock market that is priced at multiples seen at market tops, not near the early stages of recoveries, while insiders are selling at record levels.   Severe State budget deficits with massive state layoffs coming.  Expected collapse of the US Pension Agency responsible for standing behind corporate pension plans.  Earnings of large older companies are being plagued by pension and health care problems and continue to lay off workers.  An outflow of  technological employment from the US to India, Ireland and China.  The drain on employment is a critical issue with implications that may have gone overlooked.  We first saw this happen in manufacturing with companies going overseas to make everything from tires to sheets because of the cheaper labor.  Now we find that companies are using cheaper "tech support", cheaper programmers, cheaper financial analysts.  The difference is when brain power is fed overseas it grows and regenerates overseas, and the fruits of that brain power are lost to the United States.  What has kept the US ahead of the rest of the world has been our technology, we are losing that edge.  Refinancing has kept the economy alive through liquidity and may be coming to an end.  And there is still no clear sign of a recovery in capital spending.  Current employment figures are not taking into account the numbers that are out of work but no longer getting benefits. I read that current margin debt is higher now than at the market peak in 2000, with interest rates low and the Nasdaq climbing it seems like an easy way to make a quick buck until there is a down turn.  Then watch out.  Gold is now in the early stages of a bull market aided by the weakness in the US Dollar.  Our T-Index reading at levels last seen during the depression in the 1930's.  Just a short happy list of plagues that must be overcome to see continued gains in the stock market over the next few years. What to I foresee?  Some continued gains especially in the Nasdaq for a short while. Then back to real value investing and a correction that should bring the market back to "much" more reasonable PE ratios.  Isn't investing fun? 



September 4, 2002.  Going Higher?  The S&P is now 5% higher from our last report.   From the current technicals we see the market continuing to go higher.  From an economic point of view based on interest rates we do not like what we see and are concerned that this upward move may not last very long.  The T-Index closed today at -171 still in a deflationary position.  As productivity continues to increases  we should find capital spending will increase and the unemployed will find new jobs, be retrained or become entrepreneurs.  This does take time.  Baby boomers are near retirement and the deficit is growing.  What's an investor to do?  It is a balance between the short term and long term influences.  Right now we are cautiously optimistic as long as the market maintains its momentum.      


August 10, 2003: Going down. The market seems to have confirmed our call of a top on July 7th and 9th.  The Nasdaq 100 is off 6.8% from July 9th, not quite the double digits I expected, but sizeable. When business is booming money flows through the system, we get near full employment and low crime, there is plenty of money for schools and people are generous with philanthropic causes. Any leader that can correctly focus on the economy will benefit all the people.  Looking at current events we see that Soros the Billionaire hedge fund money manager and philanthropist, pledged $10 million to help defeat Bush.  I would suspect that he believes Bush's policies are heading us into deflation.   Soros know business and business isn't prospering under Bush policies.       Mr. Greenspan, who rarely seems to make a mistake, may have misjudged the economic implications that came out of his remarks about continuing to use the adjustment of short term rates as the economic tool of choice to guide the economy.  His failure to reinforce the necessity to keep long term rates low was taken as a call to "dump" bonds, wrongly believing that he was giving an "all-clear" signal on the economy.  In good times bonds are issued to fund expansion, pushing up rates. However the drop in bonds might have had more to do with the need for large business and States to refinance their pension funds through the issuing of more bonds.  What ever the reason, it has forced long term rates up about 1%.  The raise in interest rates with a dragging economy will result in decreased home buying,  more slowing of the economy and very likely deflation.   We now have our T-Index at -162 in a deflationary mode.  Our long term Nasdaq100 technical indicator turned negative in July.   We also have the normal negative influences of summer and a rising interest rate market.  If the rates could come back down we would have a chance of pulling out of the slump and not falling into deflation.  As the economic boom fails to materialize there will be some pressure on rates to fall.  However with the needs of the States and big business to issue bonds  to support their pensions and some states, like California having a need to re-finance to survive, it doesn't look likely that rates can fall very far.   Forecast: lower stock prices and bonds flat. 


July 16, 2003: ReEvaluation:   Yes the market has gone down a bit since our double alert a week ago, however some of the prices we get from our data providers (that we use for our indicators and signals) were restated by them, and I received confirmation from the Nasdaq indicating that the revised prices are correct.  All this leaves the question open.  We must watch for either a sharp drop or very large one-day up-moves to confirm the peak. It is like a spinning toy top, you can always tell when the top will stop as the gyrations become larger and the top looks unstable.  Please bear with us for a while as we negotiate this turn. 

July 9, 2003: Alert. Alert.   The reason for the double alert is that the current combination of long term technical and long term economic indicators, negative at the same time, has spelled disaster in the past. I would not be surprised to see the indexes drop double digits by this time next month. 

July 7, 2003: Alert.  The long term Nasdaq 100 technical indicator turned negative which shifts the bias to the downside. With the T-Index already very negative we should see the slide begin this week. These are long term indicators so the slide should continue for awhile. 

July 6, 2003:  The T-Index is deeper in deflation territory. Now at a -147. This means we should expect to hear news of more layoffs and low earnings.  From our own experience we see that the States and Cities are having financial problems but most are still working on the "spend your budget" or "lose it" mentality.  Since they are not judged on making a profit they will spend till the last dime is pulled from their fingers and we are seeing some of that happening. Businesses are concerned with making a profit and their spending was cut way back two years ago. We do not see any increase from the business front.  Large private universities are still spending, but public institutions are not. When the business spending kicks in the economy will follow. Our long term signal readings in the technology sector remain strong. But technology has not been as affected by changes in interest rates as other sectors of the economy. Because the T-Index is getting weaker from an already low point and we are entering the summer season where markets generally decline or at best march in place I believe the top of this rally for the S&P was put in place two weeks ago and we will see a down trend.  However since the Long term technical indicator on the Nasdaq 100 is still giving a positive reading we seem to have a split market, economically negative and technically positive. These are more difficult markets and are best followed very closely. My view is that the technical indicator will turn negative before the economic indicators turn positive, but the shift may take some time.   


June 14, 2003,  We have not only added a new short term technical indicator, but we've added a long-term technical indicator also. This index measures the amplitudes of the daily changes to determine if the pattern is a normal to a bull or bear market. It is an interesting way to do it, and right now it is saying we are in a bull market. The T-Index on the other hand gives a measure of the economy and is firmly negative. During the past ten years the technical indicator, has always been the one to change direction so expect the bull run to end soon. The T-Index has become much weaker since the end of May, reflecting a weakening of the economy if my measurements are correct. Over the past ten years this new long term technical indicator can take a position from a few days to many months our longest "Bull" run was 33 months while the "Bear" runs tend to be much shorter at a max of two and a half months. The T-Index runs tend to a little longer. With a 35 month "Bull: run and a 7-3/4 month "Bear" run. For our long term assessment I continue to look for a downturn, but for now I am content to wait for the technical long term indicator to align with our T-Index, when that happens expect some negative fireworks. With the Fourth of July coming up soon that could just be the time.


May 31, 2003   It has been a month since the last report.  The S&P has gone about 3.5% above my forecast top and the (static) T-Index has improved from -81 to -49.   Can the market continue to climb? Lets look at what we have.  The PE ratios are about 34.5 on the S&P "as reported earnings", and about 20 on their "operating earnings". Not your normal low PE ratios for launching a bull market, but our current 3.35% long term rates are exceptionally low and could justify a higher than normal PE. How high? We need to see a reason for supporting the high PE's and that would mean improved earnings.  To get higher earnings we need to see increased capital spending. A good deal of capital spending comes from government agencies and they are financed through taxes. So we have a catch 22. If the stock market goes up and the States can tax capital gains, they can spend the money on capital equipment to boost the economy making the stock market go up.   Money must flow through the economy. Rates must stay low as plants come back up nearer to capacity. I am watching the T-Index. Since the T-Index is a good reflection of the current economy we would like to see it go back to positive. It was positive during the early part of the recovery last year. If it stays negative we are in danger of moving into a deflationary mode where earnings will stagnate or fall, not rise as I feel we must have, to justify the current price level. If you are a long-term investor consider that we are now moving into the summer months.  July, August and September show an average negative return of -1% per month for the past 10 years (on the S&P) and you can carry the negative return much further back. June on the other hand averages a plus 1% per year. If the T-Index goes positive we will still have to face the summer months. If it (T-Index) stays negative and this rally continues the market should run into a wall by the fourth of July. It seems that there is not very much to miss by waiting for the economy to confirm or deny the recent run-up.  


April 26,2003   This week I am focused on the long-term relationship between the economy and the stock market.  In general what is good for the economy is good for the stock market and good for the population as a whole. The 1990's saw a strong economy, booming stock market, low unemployment and a drop in crime. Sometimes however an unabated strong economy can and has lead to excesses in valuations in the stock market. The opposite is also true, as a poor economy will bring evaluations down to levels that are unrealistically low.  This of course presents a "once in a lifetime" opportunity for those who still have cash.  Because an ongoing strong economy can cause markets to get one sided, we really can't use the levels of the markets themselves to say the market is over or under valued.  The link to the economy is too strong to do this and we can only look at relative valuations and be aware of where we are in these market cycles.  Also strongly connected to this price movement is a herd mentality.  In my personal observations I see the herd mentality more in the real estate markets than in the stock markets. In Southern California during the late 1980's home prices were driven to very high levels as interest rates climbed.  The combination squeezed many potential buyers out of the market eventually causing the market to collapse.  What I found most strange was the failure of the market to recover after the interest rates dropped, the home prices fell and the economy made a recovery. So although may more were qualified to purchase a home, the recent drop in prices brought on a fear that was difficult to overcome.  It took a number of additional years for the herd to move again.  The stock, market, on the other hand, seems happier to stay in step with the economy, especially as it is measured with regard to the slope of the interest rate curves and as reflected in our T-Index.  The current interest rates show we are still in a deflationary mode.  This is a red light to the future growth of the stock market when you factor in that we are at the high end of historical market valuations.  Deflationary modes can not easily be helped by adjusting monetary policy which would seem to tie Mr. Greenspan's very capable hands.  This puts the solution into the much less economically knowledgeable hands adjusting fiscal policy. The economy seems stalled not by lack of advertising dollars or quality goods attracting buyers, but by lack of spending dollars in the hands of would be buyers. This shifts the recovery away from the companies and on to the consumer.  The world is undergoing a shift away from few large companies to many small companies and the large companies are laying off workers faster than the small companies are being generated. We are stalled and may fall back into a technology driven recession where the productivity increases have eliminated many low level jobs faster than the economy can absorb them.  We can only hope that the economy can pull itself out without the help of a good fiscal policy, since under the current conditions it will have to.  I find both political parties lacking in the strong economic understanding that is necessary for prosperity, luckily for the most part, our economic problems were with regard to inflation and not deflation.  That left the Federal Reserve in charge of the cure.  For those looking for a target number on the S&P our 3 month target range for the S&P is 843 to 931 this is based on the S&P projected earnings and current interest rates. 


April 6, 2003  We posted the Static version of our T-Index on the web today. It should be fine except for some cosmetic touches. If you haven't downloaded it you should, the program is very small and easy to use. It will fit on a floppy disk. Since the program was developed using data from 1970 through 2003 I thought it would be interesting to see what a reading from the early 1930's would say. The market crash in 1929 was followed by the Great Depression in the 30's. The chart below compares the Crash to the current market.  You can see that the 1929 crash was steeper, and took 32-1/2 months or to reach a bottom, that would interestingly put the bottom in sometime in mid May. Bear in mind that the stock market was open on Saturday back then so it was 6 days per week and 32-1/2 months projects to 39.25 months under current conditions. 


 None of this is really important as there is no reason to believe that we will match either time span. But it is interesting. What is also interesting, especially as it relates to the T-Index are the relative interest rates in the early 30's and today. In April of 1932 the 90 day T-Bills were .77% compared to today's 1.082%   I could not find the 10 year notes so we will deduct .15% from the long term treasury value of 3.68 giving us 3.53, today we have 3.944. Running our T-Index program we have a value of -99 checking it for 1932 we get -160 conditions were worse. What is somewhat frightening to me is that our T-Index value is also very low.  We are in the deflationary area of the T-Index and that is not good.  It isn't good because lowering short term interest rates will not solve the problem when the economy is in this mode.  On a positive note I believe current unemployment levels are much better than in 1932 and our Federal Reserve is much better equipped to handle another recession, so I personally do not believe we will slip into another depression. The war in Iraq seems all but over, but the mumblings about Syria can't be totally dismissed.  My mid-long term view on the market remains negative. If you have any comments on the T-Index please let us know. Thanks for stopping by.



March 23, 2003  Brace yourself for another down leg. The market, I believe has run up to near the top of the next trading range and will be soon headed downward.  The war euphoria, should subside as early hopes had the war won by this past weekend. The deaths, act of treason by one of our own soldiers, and friendly fire casualties bring home the grim realities of war. The pain of the war should cause the investors to focus more on the pain of the economy. February was a very bad month economically speaking.  From my own small range of contacts in the engineering world, sales stood still, while layoffs increased. The first quarter numbers should look bad, we may have double dipped. Most of what is happening long term can be seen through an examination of the interest rates, the shape of the interest rate curve and the level of rates.  It seems to me that we are still in trouble. The bowstring is pulled back but the string has not been released.  These rapid climbs in the index do not help the market, since they are usually unsustainable and fall back to supporting levels, only to discourage those investors that followed the rally.  Take another look at my comments from December of 2001 those comments still hold and the information is important enough to reread. 


March 8, 2003  One question I had for a while was which set of earnings did Standard and Poors report in the past. Dave Blitzer, Chairman of S&P commented on the market on March 5th and stated that S&P historically reported Operating Earnings. Looking at a comparison between the more realistic "as reported" earnings and the "operating earnings" for the past 15 years shows the level of as reported to operating earnings  ranged between 61% and 100% and guess where we are today. Smack at the low. This is not what you see during a recovery. The first quarter has not closed, but with the massive 308,000 jobs lost in February we know that the estimated earnings for the first quarter will have to be cut. Companies don't cut their employees in anticipation of lower sales, they cut in reaction to lower sales and they don't cut if they think things will turn in a month or two, because the cost of hiring and training makes it worthwhile to hold employees past the time they should have been let go. And that does not include the reluctance of most employers to let go of staff in general. So we are in for more hard times. The indexes are getting very close to the July / October lows.  I have been looking for a drop below those lows for a while and haven't changed my mind. I think some kind of news will trigger this break and although the announcement of war is the most likely candidate for it, I think it will be something else. Not for any reason other than the market seems to not do what most people would expect. We are now looking at a March 17th Iraq deadline and the indexes could easily slip to the previous low level by that date. It looks too easy, so watch out. This break, if it happens could get us down to a base level where we could more easily build out of. With interest rates low and productivity growing we really should be able to get the economy going.  It certainly looks like it is an emotional based recession. The capture of Bin Laden's sons seemed to boost the market Friday and support this idea.  That gain was not due to any economic news since the job loss numbers were really terrible and should have forced the market much lower. While it is common to see emotions run the stock market, it is not often we see emotions run the economy in a major way. If this is true then a Bin Laden capture could off-set this expected drop to new lows and give both the market and economy a boost, while another major terrorist act would send both reeling.  As you can see very long term investing has become exceptionally difficult and  may be a thing of the past, intermediate term investing seems possible and our results using an improved T-Index model has continued to work quite well since we started watching it. It is still giving us a negative direction. 


February 24, 2003  With our T-Index still signaling economic problems we hold to our earlier gloomy long term forecast. The earnings are not growing as many would have us believe. Go to Standard and Poors for a look at the latest earnings and PE ratios. The "as-reported" earnings are still poor, giving us a PE ratio of over 29 as of today's market close. Even with S&P's own projections we are easily 18 months away from showing sufficient as-reported earnings to get the PE below 20.  Historical market bottoms would show the PE below 10 so don't be surprised if the market sinks as the economy recovers.  I am not suggesting that the S&P going down to 275 to bring the PE under 10. But going below 700 would not surprise me over the next 12 months. On the other hand if the T-Index can drop to levels more often seen during a recovery then we could see a prolonged but slightly higher trading range.  None of the scenarios call for a runaway market. Cautious stock selection is in order if you trade individual stocks. Most stock valuations should continue to come back down to historical normal levels over the next two years. 


February 9, 2003  I got a late start on this, sorry if you had to visit the page a few times. Please note that we only manage our own trading program for clients and not individual stocks.  We realize that stocks can offer some diversification and that is why we try to help out, no charge for this service at this time.   The stock that I am looking at is FindWhat or FWHT last price 7.54 the company is in the pay-per-click search engine business and it's main competitor is Overture.  What is happening is, companies are starting to realize that if you can't be found at the top of the search engine list they will lose business to someone closer to the top.  So they are willing to spend for position.  How much? From personal experience in the engineering field the price has gone to over $25 per hit on overture on specific words. As the high pricing becomes unsustainable to advertisers in Overture they look at alternatives and that is where FWHT gets it boost.  Go to and type in the symbol FWHT then click on the profile and other bits of information.  I like the business, the company growth and the price of the stock, what I don't like is the overall stock market and fear that there could be a major drop if there is a test of the October lows. If not then I expect a trading range market and stocks like FWHT and NDN (I mentioned it last week, see below) should do very well.  We do not own either at this time. Our forecast for the economy is for very slow growth, with the S&P500 overvalued based on its PE ratio. I expect the PE's to come down faster than the earnings will go up and the means a drop in the price of the indexes.  


February 1, 2003   I have worked very hard on expanding the T-Index to reflect the economy and provide visibility to the stock markets long term direction. It seems to be paying off. We have been in a long-term sell condition since November 6, 02, after a few economic induced swings earlier in the year. The economy appears to be digging itself further into a hole.  The January indicator where if January turns down so does the year, has turned down. The PE ratio is still too high for the S&P index and as-reported earnings are still suffering. Interest rates will hold until profits start to climb. The market should continue to step lower until a balance is reached regarding a proper level of Price to earnings relative to the current interest rates.  Low rates can justify a higher PE.  Any rally from here (without the help of a "buy" signal from our T-Index will probably be stopped at about the 915 level. The downside is more difficult to forecast but 700 would still be within reason so from my point of view the risk is still in being long. 

Gold has started its climb again after about 20 years of decline. I expect that with the continuation of  political uncertainty and the lack of a strong earnings turn around that gold should continue to climb. Real estate investments which now offer advantages over both stocks and bonds as investments will start to falter as the economy begins to heat up, and interest rates rise. This won't happen immediately, but the benefits of investment real estate will shrink relative to other investments and house prices will back off. Since real estate investing is very long term you should be prepared for the change in the cycle.  

This week I took an interest in 99 cent only stores (NDN). One opened near by and I was impressed with the operation from initial promotion to the merchandise. This store had a party atmosphere with shoppers talking to each other in line talking about the "deals" they just got. This stores products are not aimed at just the "poor", you can buy a "USB" cable for your computer, or a car charger for the $200 Motorola V60 cell phone as well as three pounds of bananas. Your choice for 99c. [This is not an ad, just my experience.] It is catering to a vast range of clientele with $ and they are spending it.  There was a Big Lots and Save On store next to it and both were suffering from the competition.  NDN has over 150 stores and very nice continuous earnings with rising profit margins. Target has about ten times the number of stores so there is lots of potential for a NDN.  They are smart and should continue to grow. We don't own any yet but are considering it. Take a look at it.  Even in bad times you can find some good buys and it helps if you can get a first hand look at the operation. The PE ratio, although high for an average stock, is a reasonable one for a stock with this kind of potential. 



January 12, 2003  The President's plan to eliminate taxation of dividends may add some support to this market. There isn't a whole lot that can be done to support the market with its PE ratios still in bubble territory, but the stocks that can pay dividends should find a floor. This should be a good move back to real value and the short term will have lots of questions being asked.  If this becomes a big issue in investors minds then the market will start to move on positive or negative news regarding the possibility of the proposal being passed.  I have a very guarded view of the long term as it pertains to this year, and believe that the best we will see will be a trading range market.  More details are given below in the earlier comments. 

January 1, 2003   We close out 2002 with approximately a 29.6 PE ratio for the S&P 500, on trailing 12 months as reported earnings. Two years ago we had a PE of 24.6. The market fell 32% over the last two years and is now even more overvalued on a PE ratio basis.  This is a scary thought.  If the pundits' earnings estimates are correct and we used the 24.6 PE ratio (from two years ago) we would have an S&P value of only 902. So from a fundamental position we seem to be stuck in a trading range with little potential for 2003.  Government spending is a large factor in the economy. The State governments had not made major cuts in 2002, but will in 2003. I doubt that the increases in capital spending from businesses will take up the slack necessary to provide the strong growth in earnings, and this will make for a sluggish recovery and prevent the market from making any significant gains.  From our own indicators we find the T-Index at .69, improved from its high of .717 on December 3, but still too high to call an all clear, and it can easily take months to see a real improvement. On the positive side, are the low interest rates, and lower than normal interest rates can support higher than normal PE ratios. We have an ever expanding technological front that will create new business and new opportunities for existing businesses.  This is all good. If we can keep the ill effects of war and terrorism at bay the economy and later the stock market will find a way to recover and grow.   

December 23, 2002  Later in the coming year and into 2004 there should be major excitement in the areas of 3D Video monitors followed by 3D still and video Cameras.  The leaders will be Sharp, Toshiba, Sony, Olympus, Kodak and Microsoft. The initial talk is of commercial use so expect the prices to be high, but before long it will move main stream.  This type of 3D will not require any glasses. The monitors will be layered.  This will not be suitable for watching at the movies, but I would expect the movies to be shot in 3D and shown in 2D in the theaters and re-released in 3D on DVD for home viewing.  Technology will continue to pull the economy out of its doldrums, but we don't expect the Stock prices to follow until the PE's come back down to levels that are in line with real value. Current valuations are still too high and the recent collapse will keep a lid on any new insanity for the next few years. Our T-Index (fundamental indicator using interest rates) is also very high and we will  have to wait a while until that drops to signal an all-clear.  We read three negatives right now.  High PEs, high T-Index and the strong possibility of war. Not a time to be buying.  Happy holidays, there should be better opportunities in 2003, and we will let you know when we see them. 

December 9, 2002:  Standard and Poors left the "As Reported" earnings out of this weeks update.  But did note that the PE ratio for the last 12 months, based on "As Reported" earnings, was 30.05 as of last Wednesday's close. And they don't project it to drop below 20 until 2005, as earnings climb.  The other way for it to drop below 20 is for the S&P 500 index to go lower.  The T-Index, now at .704 is also calling for a lower S&P.  Current major pressure is the possible war with Iraq and its effect on the economy.  Any uncertainty, prevents companies and the general population from making purchases, spending money that they think they may later need for survival. It is a damper that will cause this near recession to continue longer than most people expect. We should see the S&P at 800 before we see it at 1000 and I continue to expect to see this market in a long term trading range as the PE ratios wear down to reasonable.  Watch for the spread between the long term and short term interest rates to narrow as a positive indicator for the economy, so far it hasn't happened.      

November 29, 2002:  Never underestimate the power of emotions. Where there is emotion there is no intelligence, instinct rules.  Good investors control their emotions, and understand that other investors are not controlling theirs. Emotions can drive markets very much higher and lower than what we would consider normal ranges and it is important to remember that this can happen, and also important to note that over the long term most likely things will return to normal valuations. Our current condition with high PE ratios is normally seen at the top, and not at the bottom of  markets. And I believe that this abnormal condition will not last. My view is that a recovering economy will cause interest rates to rise and grow the earnings required to decrease the PE ratios to those we see under more normal conditions. The market will have its flashes of exuberance and climb only to slip back and allow time to correct the excesses of the 90's.  Some areas like the Nasdaq will show wider swings, but will also fall in place over the long term. I do not think the market will continue to support the PE ratios of 50+ that are common today in the Nasdaq.  The T-Index closed at .715 and is not showing any signs of dropping indicating the economy has stalled.  At these levels I am very much  more comfortable with daily active management of our accounts.       

November 25, 2002:The T-Index continues to climb.  Under natural conditions (conditions not strongly influenced by the Federal Reserve) we probably would not see such a high value. Both high values and low values are mostly artificial and forced by the Fed.  As a rough rule of thumb the long-term rates usually sit about 3% above inflation. The treasury bills have tracked inflation very closely from 1950 to 1980 then stayed a point or two above it. When in a recession there is cost cutting and that helps keep a lid on inflation. This helps pull down interest rates and the lower interest rates also helps keep inflation down.  You can argue that high interest rates put a damper on inflation, but it is the rapid rise in rates that starves the economy while a slow climb in rates actually feeds the inflation.  Large corporations buying plants and equipment under high rates must pass this added interest cost on to the consumer.  As the short term rates are pushed higher and through the long term rates we have an inverted yield curve and that makes saving more attractive than investing.  Money moves out of stocks and into bonds. There is always competition for cash.  The reverse position of low interest rates with the short term rates very much below the long term rates should stimulate the economy and this condition should not last too long.  But the spread moving further apart is giving a signal that the economy is not responding. Lenders are most likely expecting interest rates to rise dramatically in the future and prefer short duration loans so as not to be locked into under performing long term obligations.  Borrowers are preferring longer term maturities to lock up low rates for a longer period of time.  This combination tends to push up the long term and reduce the short term.  As long as the T-Index is increasing the economy is not expanding, since there is little demand for funds.  Once the economy starts to expand we see the yield curve flatten reflected by a drop in the T-Index.    With today's market close bringing a new high in the T-Index (.713) and  historically high PE ratios at this market junction, we can only forecast more downside activity. But be aware the economy, if not the market, is poised for a recovery. The S&P last 12 months as reported earnings are $36.75 with a PE of 25.4 and next years projected earnings are only $38.95 still a pricey 23.95 even extending past a second year barely drops the PE much under 20.  S&P ( web site ) has made an effort to warn investors about the poor state of earnings and discussed what they call Core earnings.  It is worth reading. 

November 17, 2002:  This past week I expanded my work on the T-Index and interest rates, going back over 30 years to analyze the data. The market as measured by the S&P increased nearly tenfold in that time period, going from about 90 to 900.  I broke the T-Index in to four ranges a low, medium, high and extra-high range. It became immediately clear that when the T-Index was low the market would falter, showing a large loss over this period, and this condition reoccurred. All told, the rates climbed in and out of this "low" area for about seven and a half of the thirty three years analyzed.   With the T-Index in the "medium" or "high" range the market climbed. What was less clear was what happens when the T-Index gets "extra-high", since prior to December of 2001 we had not encountered that condition in the previous 30 years. Since December 2001 the market has moved in and out of the extra-high range, with the sum total of those travels being greatly negative. The T-Index sits at .705 and needs to get down to about .63 if we apply credibility to its history.  But nothing can be considered in a vacuum and this time around we also have historically high PE ratios. The good news is that with interest rates so low we are in an excellent position for another robust economy as the short term rates start to rise.  There is lots of room for them to rise without getting into trouble, and there is little chance that an overzealous FED will raise them too quickly. Forecast: Negative near term, wait for the t-Index to drop.  Next week I will discuss what the ranges of the T-Index mean in terms of what actually happens in the economy.  

November 8, 2002:   This week finds the T-index at more than a ten year high. There was a large jump in the T-Index this week to .689. This was caused by the sharp drop in the 90 day index without an accompanying drop in the 10 year note.  So I think we should touch on it a bit more.  The index measures the % difference between the short and long term rates. When short term rates are more than long term rates it is very bad for the economy, we get a negative T-Index and the market is most likely to suffer.  What is less well known is that when the long term rates are too much higher than the short term rates the market will also suffer. However the market likes to look into the future so we will also find that when the T-Index is very low, but strongly rising, the market is likely to improve, and when the T-Index is very high, but sharply dropping, the market will also most likely gain. I will put this into more precise numbers at a later date. The T-Index measures the potential of interest rates as a driving force behind the economy. There is a sweet spot that has been very good for the economy on a historical basis, when it gets out of this range the economy has a much more difficult time functioning. In a word the T-Index is saying "SHORT".  Another look at the S&P earnings shows some changes and what appears to be errors on the web site.  They state the 12 month June 2002 earnings as $24.74, but summing the numbers gives $26.74.  Also the new estimate for 2002 third quarter "As Reported" earnings was raised to $9.30 from last weeks $8.11. this seems high especially in light of their lowering the same quarter's estimated "Operating Earnings" to $11.47 from $12.08.  Either way earnings are still too low and the very high PE ratios support the T-Index negative long term view.  

October 26, 2002:

 Standard and Poors has just introduced another way to look at earnings.  In addition to "operating earnings" and the lower "operating earnings", we now have "core earnings".  Core earnings would exclude pension fund gains and include stock option costs. In addition it would include restructuring charges and merger expenses.  Applying these to the S&P 500 would give us current earnings of only $18.48 per share for the past year and a pe ratio of over 48 for the past year. This weeks posting by S&P web site shows that they decreased their estimates through the end of 2003 with regard to Operating earnings. But expect "as-reported" earnings to only fall behind through the first quarter of 2003. They are actually expecting stronger as-reported earnings later in 2003. But that is a long way and still leaves the S&P historically over valued at this level. The Core earnings are interesting and a further look at the S&P web site shown above gives the core earnings for each of the 500 stocks in the index.  Masco "mas" stands out with core earnings much higher than its "as-reported" earnings. I am not recommending the stock, but we will see if the recent release of information on its positive core earnings has any obvious effect on the stock price.  Our T-Index is now at .609 still creeping, higher, not encouraging. The next group of earnings reports should be less encouraging than the last and I continue to expect the market to fade soon and fall back into a trading range and edge lower.  

October 22, 2002:

This week we are looking at the "leading economic indicators". This government indicator is meant to predict the strength of the the economy about 6 months into the future. The indicator has dropped for the fourth consecutive month this September, and is below the level it was at in January.  The "LEI" is responsive to the recent direction of the stock market, as the market does influence the economy, just as the economy influences the market.  But keep in mind that the economy and the stock market are separate entities. The three main factors effecting the stock market are the Economy which translate into earnings and and projected earnings.  The level and expected direction of interest rates and the current level of the stock market relative to those factors.  Our long term view of the market's future remains unchanged and somewhat negative, as I look at a slower recovery and a market that remains overvalued.  Our T-Index has moved higher to .61, this indicator is still very high and indicates that there is great potential, but no action. When all is well we will see this indicator fall significantly. 

October 12, 2002:

I skipped a week, but don't expect our long term view to change that quickly.  Go to the Standard and Poor's web site, print out their projected earnings page and put it some where, so that you can check back to the site and see if their projections are rising or falling. This will give you a good feel for if the market will make a more serious attempt at going higher.  You must remember that even with improved earnings the current market still is historically overvalued.  Right now you would watch the Q3E (third quarter estimated) As Reported EPS (8.41) and secondarily the Q3E Operating EPS (12.3) and 2002E As Rep EPS (30.71) and 2003E As Rep EPS (37.52).  The low interest rates keep the hope of market recovery alive, and the projections for Operating EPS show great potential, but without improvement in the "As Reported Earnings", there is no place to go.  In 1999 As Reported Earning were at 93% of Operating Earnings.  Today they are less than 65%. They need to catch up. T-Index climbed to 5.9, that one is going the wrong way so I think this quick hard up-spurt we saw last week is about done. Maybe one more day for Columbus. The market seems to be very fickle these days, as it is closely following the latest earnings release of any company with a recognizable name. A real rally will go against the flow of bad news and not respond to it, but I still do not see anywhere for the market to go without an improvement in the As-Reported earnings. 

October 1, 2002:

A sharp bounce off the bottom and everything is OK?  Not quite that way. Although it looks like we may be headed back up the trading range I outlined on August 30th; but if the harbor strike on the west coast continues, we will see higher gas prices as refineries run out of oil. It will not take much to dampen the hopes of the investor with regard to this struggling economy and we could once again test the lows. It take a strong market to support PE ratios above 20 and this is not one of them. The S&P projected "as reported earnings for 2002 is $30.71 today's close of 847.91 gives us a 27.6 PE.  Even next years 2003 as reported projections gives us a PE of 22.6. From a fundamental viewpoint we "ain't there". Look at it this way, back on October 1st 1998 when things were still flying the S&P closed at 986 and Year 1999 as-reported earnings turned out to be $48.17. These earnings grew 28% from 1998 and that only gave us a projected PE ratio of 20.5. Long term interest rates in 1998 were only about 2/3 of one percent higher than they are now.  We still have some excesses to work off, so don't get too excited by a few days.  I still believe in the trading range scenario, but I see it happening at a lower level than the 1000 I had projected as the upper range. 

September 23, 2002:

Another bad week for the markets and worse, the economic recovery is showing signs that it may have stalled.  The S&P web site gives earnings projections for the S&P and they have trimmed their near term projections enough to give us some concern.  The leading economic indicators have lost ground three months running. Add the Iraq problem and you have what you see.  As for individual stocks we are looking for value relative to price. This is not a simple number like a low PE ratio.  Stocks with no earnings can be a better investment than stocks with big earnings when the rest of the picture is looked at.  I had hoped to bring a few names to the table this week, but have fallen behind with too much to do, so it will have to wait.  A peek at the T-Index shows that it has dropped to .56 and that is an improvement over last week. Like last weeks comment we do not have a real clear buy signal long term and the market is expected to trade in a range as the over evaluations are worked off and the economy improves; with the downgrade of the S&P earnings this may mean some lower lows and a longer time to get the economy up to speed. 

September 16, 2002:

The T-index is improving, dropping from .598 last week to .572 today. It still has a long way to go.  With the announcement of Iraq's agreement to allow inspection we may see the market climb this week, but threat of war is only one of the problems the market faces.  The most ominous is the overvaluation of many securities. I am in the process of looking at some individual stocks.  I prefer to invest in companies that I have interacted with, and have some first hand knowledge of.  I am also looking for insider buying.  Neither of these things can totally prevent problems, but in combination with other sound techniques can offer some insight into the future.  I will touch on a few companies next week. We do not have a real clear buy signal long term and the market is expected to trade in a range as the over evaluations are worked off and the economy improves. 

September 8, 2002:

One thing about long term comments, then don't change very much week to week.  I am sorry you had to look around for information on the T-Index and I will put a link to that information up later this week. That index is improving slowly and sits at .598.  What I briefly mentioned during the week the risks of war have changed.  With the potential for a few crazed and rich fanatics to create biological havoc the rules, risks and rewards have changed to a point no matter what your political views, war is no longer the stimulus for an improved economy, but a major unknown ingredient into the economic stew. Where it will take the market I can't say, but my guess this time around is lower.  There is still an excess of valuation on many companies and greater uncertainty on their earnings.  Caution is still the word. If you have your heart set on a particular stock look for insider buying. 

August 30, 2002:

We are in a trading range market. A look at the long term chart shows a declining line coming down at the 1000 level (S&P) and a rising support line coming up at the 800 level. With the economy slowly improving, some excesses of high PE ratios left to work off and uncertainty about real earnings the trading range scenario looks good.  The T-index has yet to break below .6 and is sitting just above that level so I don't get a strong go-ahead from that source.  S&P projects a second quarter in a row of increased earnings, both for operating and "as reported". This shows some slow economic improvement. Reports show that July brought a major out flow from mutual funds as many investor just gave up.  This is probably good news, since it would mean that a large portion of the selling is over.  If you are buying stocks select carefully and do not commit fully. We are now only days away from taking new accounts.   

August 20, 2002: The T-Index rose above .62. More and more I feel that we will move into a trading range market where we will continue to work off the excesses of the 90's.  With reported earnings under suspicion and PE's still historically high I would not bet on another raging bull. I do expect the 1/4% cut from the FED since the short term rates have dropped since the rumor. I do not expect an attack on Iraq with the economy on edge. The most likely then from this point of view would be swings of a few months duration both up and down.  We are now about 17% above the bottom in July so there may not be that much more to this first wave, but from a time point of view it has only been a month from the bottom, so maybe some sideways action is in order.  If you are buying stocks keep this in mind, don't go full throttle, and be very selective.  For those considering us, we will be opening new accounts in September.   

August 12, 2002: The T-Index fell to .61 which is a good sign that things are moving in the right direction.  I will update this comment after the market close on Tuesday to include the results of the Fed Meeting, potential rate cut, and to expand on my comments....Tuesday Aug 13: The Fed held firm, leaving interest rates and our T-Index unchanged. There is really not very much the Fed can do with rates as low as they are.   Who really cares if it costs 2% or 2.5% per year, the cost of doing business is already low.  The same when rates are really high, few will borrow at 20% so if it goes to 30% what difference will it make.  My feeling is still that the long term picture is not an aggressively positive one.  One should be very careful and test the water.  I don't think you will miss the boat. Take another look at the May 12th comments they have the T-Index chart.  Investing now is much more sane than a year ago, but unless you are using some sort of "active management" like we do on our daily trading I would not be ready to trust buy and hold with a sizeable portion of my funds. 

August 4, 2002: The T- Index stagnated at .63. We like to see it moving lower to encourage us to buy.  The latest economic reports indicate that the turnaround will take a little longer than expected and the FED index is still positive. So probably no spectacular run-up but as has happened many times in the past after a recession a long period of zero to low stock market growth. Take another look at my comments of DEC. 16 2001 below, the data goes back 100 years and is interesting.  Though caution still reigns it doesn't have to be all or nothing.  If you like investing in individual stocks you can begin to nibble at sound low PE stocks with good projections that have held fairly well. I am waiting for the T-Index to signal the way for a strong move, but it is stalled along with the economy. 

July 21, 2002: The T- Index has dropped to .63 and the FED Indicator is positive, but I think there is more down side to go. When I see the market drop severely, without special news, and my closing signal was strong, it means there is something extraordinary happening and I don't want to get caught in it.  I would also expect the TRIN to be lining up 2.0+ days but it isn't.  We still have the Operating earnings PE of 23.1for the S&P, and the as reported earnings PE of 34.3 since this drop is a drop based on the belief that the earnings are "suspect" and they are already such that the market is not a "bargain" at this level, we may have to wait till the market is a bargain. That would mean at the least operating earnings under 20. Often these swings over-correct and go too far down, as well as too far up.  If we see some exceptional up volume where the up / down volume ratio is about 9 to 1 we could then say that there has been a change in sentiment.  For now I would continue to exercise caution.  Stay in T-Bills or money market.

July 16, 2002:  The T- Index is between .64 and .65 indicating no change from last weeks reading and still in a nowhere zone as far as its predictive ability. We seem to be near a bottom but don't have any proof and want to see the index drop some more. The Fed, as we said, has done all it can do and the Fed Indicator is positive. Greenspan spoke once again, and steadied the markets but could not bring about an immediate turn around. Stay cautious.

July 9, 2002:  The T-Index has fallen below the .65 mark and is now at .645 as of today's close.  This is helpful. The corporate scandal is putting a big question mark on the earning which already have a problem with the wide discrepancy between "As Reported" and "Operating" earnings. It seems that it has become more fashionable to lump losses into "one time charges against earnings". Take another look at the S&P web site .  This will provide you with a look at comparison of "As Reported" and "Operating" earnings since 1988.  They nicely project the earnings for the next 6 quarters but the "As Reported" earnings projections continue to look glum.  The market is now selling at a 38.6 PE based on trailing As Reported and 24.44 based on Operating. The Operating number is at the very high end of the scale, even considering our low interest rates and with the recent multitude of accounting scandals we know that number is partially fabricated.  Aside from all this our signals now "technically" forecast a long term buy, but we are still cautious since the T - Index is still so close to our "OUT" range. 

July 1, 2002: Another very bad drop precedes this writing. The S&P lost 2.1% today with the Nasdaq100 loosing 5.1%. Once again I am looking for the Nasdaq 100 to drop below the S&P 500 in index value.  Will there be a 4th of July rally?  Not if a terrorist threat is perceived as a strong possibility.  Today's report of the 5th monthly gain in manufacturing shows we are recovering nicely on the economic front, it is the psychology that must change for the market to recover. Our T - Index stubbornly refuses to give ground keeping us in long term doubt about a fast market recovery. It holds above .65.  Last week I though the S&P would hold above the September intra day lows of 944.75 this week I am not so sure, as there seems to be an extra bit of pessimism in the air. I am hoping last week's opinion proves correct.  As for the Nasdaq 100 we must go back 5 years to find these levels.  Our Fed -Signal says "BUY", but our outlook for the long term is "Cautious" as I would like to see the T -Index fall to lower levels before I commit to a full long term buy signal. 

June 25, 2002: This is supposed to be our long term comments, but be prepared for a nasty opening on Tuesday June 26.  As of this writing the S&P futures market is down about 2% and it is still early evening.  The T-Index is still above .65 so although we are in a long term buy we have just barely moved there and like everything to do with market forecasting there is a gray area and no sharp edges.   There is a plethora of scandals unfolding before us and more to come.  The Dot Com bubble was as corrupt as the Accounting scandals and we have not scratched the surface of that one. Today our president (Mr. Bush) was pressing congress to raise the debt limit (so soon after forecasts of ongoing surplus).  And a Fed study was released on how to ward off deflation akin to what Japan has undergone for over 10 years.  Is that were we are headed?  I don't think so. It looks like we are devouring ourselves with doubt, when we should be taking advantage of the new technologies and working smarter. Understandably the Nasdaq100 is headed lower to account for its huge overvaluation. On the way up the Nasdaq100 index passed the S&P500 in April of '96 when the indexes were at 650 now will probably cross again on the way down in the 950 area.  Market psychology has a way of turning abruptly.  It is hard to forecast a rally looking at the overnight screen showing such a sharp drop, but I do expect the September intraday low to hold at 944.75 and the market to recover. 

June 17, 2002: The T-Index closed Friday at .651 moving up slightly to .652 on Monday.   With this indicator under .66 and the Fed Index pointing upward (as it is), we move into long-term buy territory.  I would watch the T-Index for direction. I will be more comfortable with the forecast as the T-Index drops to a lower level.  Amazing how quickly we can see sentiment change.  Mid-morning on Friday we were 5% lower than Monday's close.  Now everyone is happy. 

Today I thought we would take another look at the estimated value for the S&P.  I am not satisfied with the way we come up with this value and stopped using it early in May since it can vary by a great deal, but just as a check, the estimate as of Friday was 1057, a few percent above where we are today.  This estimate uses the Operating-Earnings and not the As-Reported earnings.  When the economy is rolling in a normal fashion the two are pretty close, but during a recession the As-Reported earning drop off sharply to account for one time charges and restructuring.  Based on the recent As-Reported earnings the estimate would only be 679.  Now that is scary and not very realistic.  And with the T-Index dropping, it is not something I even want to consider.   

June 11, 2002: The T index is just under .66, but that is still to high. The now more real threat of a dirty bomb and the lack of strong follow through in earnings hangs as a threat to the recovery.  What we have here is not so much a fear of recession as a digestion of excess from the 90's. This is of course a mental attitude, there are no absolute values as to what is high or low, only relative values and they change according to the situation.  It is much easier and more correct for us to forecast based upon what the Fed action is rather than upon a specific level of PE or earnings. We are still looking for a trading-range market and T-Bills, though very low, are a safe place to wait for the T Index to signal a change in attitude.  I believe the recovery has started and the economy is on the mend.  What is left is a restructuring of attitudes as to what the true value of the market should be. You can see the T-Index chart below scoot down to May 12. 

June 3, 2002: The T index is at .66, still to high. The FED has done all they can do at this point and the FED-SIGNAL would be a buy if it weren't for the reluctance of the short term interest rates to increase. And/or the long term rates to decrease.  The spread between the short and long term rates is like a drawn bow.  There is plenty of potential but until the string is released the arrow will not fly. Until the long term rates drop while the short term rates hold steady or the short term rates increase while the long term rates hold we will have this sluggish if not downward sloping market. This is no place for long term money since there seems to be more risk of loss than chance of gain. 1.7%  T Bills are a better deal for the short term while you wait to invest for the longer term.  It shouldn't take too long, be patient. 

May 27, 2002: The T index is at .67 indicating a continued resistance to earnings growth and recovery.  Do not expect too much from this market until the T index drops to more normal areas.  The S&P web site projections forecast a strong recovery in earnings starting in the second quarter. They are looking for a 39% increase for the quarter year over year.  This seems overly optimistic. But I do expect greater earnings for the second quarter over that of the first quarter and we have seen the up-tick in our engineering related business. Once the earnings numbers start to flow in we will have a better handle on the year and would expect to see the market react in a positive way. Until then I continue to believe we will stay in a trading range. 

May 20, 2002: I got a late start on this one.  The T index is sitting at .672 I like to see this number below .66 when we are using it in conjunction with the FED-SIGNAL. So there will probably be some more rough sailing ahead for the short while, and even though T-BILLs are not paying much there still seems to be a fair amount of risk in this market. I think it would be best to avoid these risks if you can.  Sorry for the short blurb. Hope to have more to say next week.   

May 12, 2002 I spent most of the early part of the week reviewing the way I determined the estimated value for the S&P and when I was finished I wasn't satisfied.  So although the estimate seemed to work very well over the past few months I feel that there are enough things that can go wrong that it is not worth the risk of using it for guidance under all conditions.  Then I turned my attention to the FED-SIGNAL.  I am very big on getting enough data before I make a decision and I will be adding data over the next few weeks to verify what I now have.  I also feel strongly about using as small a set of variables as I can since the two elements work together when designing any forecasting system.  So this week I worked on reducing the few variables that I used on the FED-SIGNAL even further. In conjunction with this work, shown below, is a long term indicator that you can try at home. It involves only using the interest rate on the 10 year notes and the interest rate for the 90 day T bill.  First subtract the 90 day rate from the 10 year rate. Then divide that amount by the value of the 10 year rate. Today's value is (5.127-1.73)/5.127=.66. I call this the T-Index. Over the past 9 years, when this value is greater than .3 or less than .05 there is good reason to stay out of the market.   When the value is lower than .05 the yield curve is either flat or inverted this crushes business investment and stalls the economy.  When the value is greater than .3 it usually means that the economy is already stalled and is having a hard time getting itself moving again. This is where we are now. Looking at the graph below you will see the black line indicates the value of the T index. The bluish line reflects the S&P500 it is divided by 1000 so it would fit on the page and the horizontal lines depict the safe range to invest in the market. These values held for the past 9 years. A look further back in time shows a similar type chart, but the absolute values of the range change somewhat. Dropping below the yellow line and especially going below "0" is not a good thing. While above the white line is less of a problem. When you look at both our FED-SIGNAL and the T-Index, together, we find that the band can widen to include more trading days. Combining this signal with our FED-SIGNAL and looking at today's prices, brings us to a point of caution.  If the T signal should decline below the .66 level it would be a BUY indictor for the longer term. If it should stay at or go above the .66 you could expect flat to negative change.


 MAY5:  The FED-SIGNAL is still a buy.  The estimated S&P value dropped slightly to 1065 leaving the S&P500 the same 1% above estimate that it was last week.  Having the S&P below the estimate while the FED-SIGNAL is in a BUY mode is the best situation because it indicates the lowest risk. But 1% away is not a caution flag.  We had been concerned earlier in the year with the S&P at a much higher level.  At this level we are not concerned about a major drop. I do not expect to see earnings decline from here and there does not seem to be any reason for the FED to tighten.  The recent softness was not accompanied by any strong measure of fear that I could read. And may have been influenced by the strength in gold and in the yen.  But the relationship between gold the yen and the stock market is rather loose.  Most of the bear is behind us the question is more of how aggressive do you want to be on the buy side?    

April 28: This rough past week has reduced the S&P500 index to within less than one percent of our value estimate which is now 1068. The FED-SIGNAL is still in a buy mode so I see little risk of major downside here and greater risk of not being in the market for the longer-term investor. The tech sector on the other-hand may continue to erode or at best stay flat waiting for its earnings to catch up. Corporations are undergoing a major shift in their methods of advertising as they move away from print-ads and mail, and more into the pay per click advertisers on the web. Overture is the big winner right now gaining 33% in one day last week. So although the wild tech days may be over there are still some volatile stocks to be traded if that is something that suites you. 

April 21: Both the market and the estimated value for the S&P500 crept up, the estimated value is now 1073 placing the S&P500 at 5% above its estimate. We are using the operating income for our estimate and real earnings ( or as reported earnings ), are quite a bit less that these. The as reported earnings include "one time' adjustments for a variety of items. and in recession times these adjustments can be a significant portion of earnings. Therefore when a turn around begins the "as reported" earnings will show large jumps, but the operating earnings will climb more slowly.  With the FED holding steady we remain in a "BUY" mode from our FED-SIGNAL point of view. 

April 13:This was a good week for those investors waiting to get back in the market. The market retreated and the estimated value for the S&P advanced, placing the S&P500 within 4% of its estimated value, now at over 1071. Our FED-SIGNAL remains a buy. With improvements in the economy we expect to see improvements in the stock market.  I believe that the market will be careful to not overshoot the economy by very much this time around and rather do a two step up, one step back type of in-sync walk with the economy. Small companies are the one segment of the market that is already doing very well. You can track it with the RUT, which is the index for the Russel 2000,  the two thousand smallest companies on the NASDAQ.  This index is at its highest level since Oct. 2000. This segment has not done very well over the long haul, but is sparkling right now. 

April 7:

Both the S&P index and the estimated value for the S&P dropped this past week. The estimate is now at 1055, and the actual index is at 1123, bringing the market within 6% of the target. Our FED-SIGNAL remains a BUY. Once again we remain in a holding pattern, with the economic out look good, and the market just a bit overvalued, having already anticipated the good news. 

As mentioned last week we updated the FED-SIGNAL chart to get a smoother overall performance.  You might want to compare this one to the one below posted the week of March 24.  You will notice that the overall gain on this chart is not as great as that on the older chart.  However the chart is more of a straight line. And that is what we are looking for. The Vix index moved above 20 this week due to the uncertainty in the Middle East. This is still at the low end of the market for the last 5 years indicating a less volatile market. 


The long-term picture remains unchanged.  The slight decline in the market and a small up-tick in valuation, now puts the S&P 500 as 7% overvalued, with an estimated value of 1073. I have done more work on the new FED-SIGNAL model and it still rings a "BUY".  The latest model reduces the steepness of the climb but smoothes out the dips making for a much more consistent model.  The signal works very with both the S&P 500 and the NASDAQ 100.  I will provide more information on this model at a later date.  So what we have is still an economy that is recovering, but a stock market that may have run a little ahead of itself.  The outlook seems fine on the longer term with the possibility of near term bumps. The drop in the VIX index indicates a move back to the less volatile days in the early and mid 90's.  If this continues it will reduce the overall gains to be had in the market. 



Here is our new FED-SIGNALS model.  It is presently in a "BUY" mode. Turning bullish on September 19 2001. The indications above are hypothetical so we can't get over confident regarding how well they will work in the future.  The FED-SIGNALS are either long or short, but are long about 85% of the time.  The program looks at the fed decisions, whether they are increasing, decreasing or staying the same.  It also looks at whether the cuts or increases are larger or smaller than the previous ones.  It is not a very complex program which is why it has a good chance of continuing to do better than the buy-hold method.  This signal is currently at odds with our market value indicator which puts the estimated value for the S&P500 at 1065. This is up slightly from last week. With this value we find that the S&P 500 index is about 7-1/2 % overvalued.  One nice thing about the fed-signal is that it does not rely on the closing market price. You have time to get in and out without a rush, and it does not change direction very often. 


MARCH 17:  We skipped looking at Barron's altogether this weekend and went straight to Standard and Poor's web site.  I believe they may have some problems keeping up to date, but probably not more than a week behind.  We get 1062 for this week's value estimate of the S&P 500, showing that the S&P is still about 9% overvalued. Projecting out to the end of the year we see a value of 1211 for the S&P about 4% higher than it is now.  More "experienced" forecasters have higher earnings values and if they are correct the projection would be higher.  I am seeing a sizeable increase in interest for capital equipment which should translate into a substantial increase in sales as the year progresses.  Last week we said the Dow looked like it would outperform the S&P over the following weeks, but this week's change is way to small to show anything.  The S&P increased by only 0.16% this week. The Dow increased by 0.33%

MARCH 9: The Barron's S&P500 earnings "error" is resolved. There are two figures for earnings. "As Reported", which includes "one time" charges against income, and Operating Earning. Those write offs happen all the time, and usually As Reported Income is a few percent less than Operating Income.  but in a recession they can make up a substantial Percentage of the reported income. In the 4th quarter Standard and Poor's estimates that Operating Earnings will be reduced by 41%.  Since theoretically the one time charges will not be repeated the Operation Income number is more important. But during normal times the "As Reported" figure is certainly more accurate.  It seems that Barron's decided that because of the big drop in As Reported Earning it would be more useful to report the Operating Earnings. This increased the reported earnings from $28 to $38.  I don't know what is going on at Barron's but for sure they are not checking the numbers that they are reporting. For example this weeks DJ Utility earnings were reported at $13.91 and last weeks at $6.41.  They reported the S&P industrials this week at $30.86, last week $40.94.  DON'T TRUST THE STATISTICS IN BARRON'S!.

As for the value estimate of the S&P 500 we get a value of 1066 for this week, showing that the S&P is about 9% overvalued.  Applying the same formula to the DOW with earnings of $369.98 gives us a target value price of 10,188. within 2 percent of the close of 10,368.8 .  With this in mind we could find that the DOW will outperform the S&P over the near term. Lets see how they compare over the next few weeks.  The earnings forecast for the S&P 500 over the next year seems unreasonably high. But a 30% increase in earnings will not cause a 30% increase in the S&P 500 because interest rates will climb and the short term rates will gain on the long term rates. This combination will offset the gains in earnings slowing down the growth of the stock prices. Most of the time our value estimate is greater than the actual index price and seems to act as a magnet drawing the market up into agreement. So it is not a good thing to still see it still lower and acting as a drag on the market. 

MARCH 3: Using last week's reported S&P500 earnings and Fridays interest rates we arrive at 1054 for the estimated value of the 500. This puts the current market at about 7% over valued.

I have a few comments on the accounting scandal that is in the news.   Anderson is thick in the middle of it all. Friday Anderson agreed to pay $217 million in damages for failing to "uncover" fraud involving an Arizona-based investment fund it audited.  Anderson is in gear trying to put closure on a number of these cases.  Now there is a similarity between the the Arizona case and Enron.  In both cases there were outside off-balance sheet ventures used to hide losses. The big question that comes to mind is were these off-balance sheets missed by Anderson or were they proposed and set up by Anderson. Just had to ask. 

As investors you should be aware of the pitfalls that exist. One way in which these schemes work is to have a figurehead investment fund, this fund becomes the focal point of the scam and gets all the attention. Unfortunately this particular fund is currently closed to new investors, but you are told other similar funds are about to open. The exact way the figurehead fund makes money is always somewhat cloudy. The fund is real but the source of the earnings isn't.  Any losses are hidden by transfers from the off-balance sheet accounts that are made up of the new funds that you are allowed to participate in. These funds are kept quiet. You lose money directly into the pockets of the high focus fund, which is used to attract more funds to be funneled into more off-balance sheet accounts. Beware, there are probably as many variations of this theme as there are sleazy perpetrators. Next week we will look at the earnings of some of the other indexes to see how their valuations compare. 

FEB 24: Reported earning continue to drop, but by small amounts.  I do believe we will get an earnings turn-around by April when the earnings portion from 2002 becomes more significant. $38.72 on the S&P500 this week. That puts our target at around 1051.  Slightly lower than the 1057 of last week. Now on average, this will tend to drawn down on the S&P, but we are very close (under 4%) from the expected target. I would expect to see a market upsurge very soon, with pull-backs to stay close to the target. This kind of behavior, if it occurs, could get us up to the 1200 figure later in the year.  I don't see the down-side going below 1000 with out a good reason.  I know JP Morgan is in the midst of layoffs and it is late in the business cycle for that type of behavior so keep your eye on them.  We don't want any additional banking trouble.

No word from Barrons or Standard and Poors on the earnings report error of a few weeks ago. I will eventually get you something on this. 

I regret that it will be a while before I resume posting the 2-6 day forecasts.  That area needs some major rework, and will have to wait so that I can do it right.


FEB 17: No resolution on the erroneous S&P500 earnings reports.  It will take a few phone calls. This week Barrons reported the earnings as 38.78 down from the previous weeks 38.93. This figure gives us a target value of 1057 (also down from the previous week) for the S&P500 and puts the S&P index about 4% too high.  This is close to target, but not a number to empty the bank account over in either direction.  I would expect a trading range between 950 and 1170. I am happy to see the numbers so close to target, but most of the money will be made as the target number pulls away from center and acts as a magnet, drawing the index to follow.   

FEB 10: ALERT! Barrons reported the S&P500 earnings as $39.28 with a "superscript R" stating that Standard and Poors had changed the way they reported operating income. Last week Barrons had reported the earnings at $28.32.  This is somebody's error and it isn't good when the top financial reporting companies can change the earnings from one week to the next and casually say they changed the way they are reporting.  I have written letters to both companies. And hope to find out what really happened.  You can find Standard and Poors report of the PE as of Jan. 31, 2002 here <> and you can check the market laboratory section of the weekly Barrons for their numbers.  What this means, if we are to believe the revised numbers, is that the market is now only about 2% overvalued, not the 20% we believed based upon the published earnings in Barrons weekly. Expected S&P value based on currently available earnings is 1075. See new chart.   This changes things significantly as we are now basically in sync with the expected price. 

My original comments were going to focus on promise vs reality.  With the current uncovering of gross corruption in a number of public companies, it is even more important to diversify.  What are earnings when they are fraudulent or erroneously reported like we spoke of above?  They are unfortunately one of the few tools we have to make an evaluation of the companies we study. When the first Dot-com companies with a big promise and without earnings went public the shares were bid up well beyond all reason. The public ended up stuffing the belts of the insiders. This type of thing doesn't have to happen if one realizes three things. This is a fast moving world and a promise today may not be worth anything tomorrow.  Any company actually making big money will attract even stronger competition. And there really is a correlation between earnings and the price of a stock.


JAN 27:  The market is starting to come back to within a rational range compared to interest rates and earnings.  It is now sitting about 20% above where we would expect it to be (about 940 on the S&P index).  This puts it within one standard deviation from the average and that is on the edge of normal.  It can easily find support here as it waits for earnings to catch up.  The graph that describes the estimated average for the next year includes our estimates for long and short term interest rates as well as earnings. This weeks trailing 12 months earnings as reported by Barrons held fast at $28.32.  An expected additional drop in earnings over the next few months, along with the expected creep-up in interest rates should keep a cap on the market for the short term. For this weeks immediate prospects we are not looking for very much.  Monday looks like a flat day with a slight upward bias.  The "Pre-Fed" rally would be on Tuesday, if enough people thought there was a good enough chance of a rate cut. I will give it an up.  Wednesday would be the day of the cut and that day is usually up if the past two days have not already made a strong jump.  If there is no cut it is harder to say. That could also be encouraging because that shows Fed confidence.  But mostly investors like to see the Fed do something.  Thursday will depend on if there was a cut and the directions of the previous days.  Two days** after the Fed action (Friday) is usually a negative day if the days prior to the cut are weak.  There will be some pension fund money flowing on Thursday and that could counter the trend so we could expect to see a flat day.  Friday we will hold off on forecasting because of the many possibilities, but there will be some pension fund money helping to lift it. 



JAN 13: We continue to view the market as significantly overvalued, with the past week's 2.3% drop only slightly helpful in the correction.  This week we look at another variation of our long term formula. The long term formula involves the short and long term interest rates and the current trailing 12 month earnings on the S&P 500.  When the rate on the 90 day T Bill is lower than the rate on the 10 year note it acts to improve future earnings and when the 10 year interest is higher than the T Bill rate it acts to decrease future earnings.  In this regard it works quite well to use the current trailing 12 months earning rather that a guess at future earnings and let the formula take care of it.  The greater the gap between the short and long term rates the more force behind the increase or decrease in expected earnings of the S&P 500.  This week we compared the estimate with the actual S&P on a week by week basis over the 20 year period and optimized the parameters by summing the gain obtained by buying the market when the estimate was over the actual, and selling the market when the estimate was under the actual value of the S&P.  Using the formula optimized for "profits" still gives us an overvalued market. We used the current earnings found in this week Barrons at $28.32.  The graph  goes a bit further by assuming that the trailing 12 month earnings will drop going into the spring reaching a low of $27 by April, then increase to $35 by December.  This method gives us a current value of about 946  on the S&P making the S&P overvalued by 21% on this particular estimate.  The year out projection for next December improves quite a bit up to 1102, this assumes that short term interest rates increase to 2.25%, 10 year rates increase to 5.5% and trailing 12 month earnings would reach $35 by December 2002. There is still a lot of recent data that has not been included in this analysis and I leave that for a later date. 


JAN 6:The market continues to creep higher and all normal gauges of valuation are moving strongly into the red so what could be happening. If we look at our formula for market valuation it is comprised of two parts. One is the Earnings/ interest rates.  As interest rates drop the allowed valuation of the market increases within limits.  The other component is the slope of the yield curve.  When the short term rates are below the long term there is a green light and when the short term rates (90 day t bills) are higher than the long term (10 year notes) we stall.  What we have now is an extreme case of positive slope.  With the short terms about 1.7% and the long term at 5.14%  This may be like the force behind a sling shot. the greater the distance between the long term and short term rates the greater the thrust. Of these two components the slope component does not require an estimate of earnings and the greater the spread between the short and long term rates the longer (theoretically) it will take the two to come together.  Sort of forecasting a long-term recovery. This view is based upon the economic recoveries of the past as short term rates dropped, the economy rebounded.  It has nothing to do with earnings directly only as a product of the recovery.  It the earnings half of the formula where you divide by the interest rates you can see that there must be limits because as interest rates approach 0 the allowed valuation approaches infinity.  Using a minimum of 5% for the interest rates has worked ok in the past.  But you don't have to use a limit on the slope portion of the equation. (Last week I did use a limit on the slope portion).  By not using a limit and using current earnings we get a current target of 762 for the S&P 500. If we use last weeks estimate of earnings of $35.5 we get a year out target of 949. We have taken the formula with only the earnings related interest rates getting the limits placed on them added the two earnings estimates and put them in our chart.  It still shows the market to be very over-valued but at least it is somewhat earthbound. Using this estimate we are now about 35% overvalued and like we said back in OCT 19 the market can move +/- 35-40% with out causing a major reaction. Where we can get into a lot of trouble is if earnings continue to fall, as I expect they will for the next quarter. This could really stretch the market further out of alignment with valuations.

If this seems like voodoo to you, you won't be alone. Long term forecasting is dangerous. And since there are really only a few data points (boom and bust cycles) to use to draw conclusions and develop formulas, it is scary.  I much rather focus on the very short term and forecast, and grow my account one day at a time. 


DEC 29: Sit down and have a cup of some nice warm beverage.  It might make this easier to read.  Economic slowdowns and market crashes usually come together, but one doesn't necessarily reflect the severity of the other. In 1987 we had a 33% drop in the S&P (using weekly figures) and only a 5% contraction in earnings.  In 1973 the market started dropping while earnings climbed. 99 weeks later the S&p500 had lost 46% of its value while its earnings had climbed by 50%. When the drop started the PE was 19.5 when it turned around the PE was 7.  Right now the PE is 40.7. Doesn't this look exceptionally high?   This week's Barrons published a very interesting comparison of the market bottoms we had over the last 50 years.  One way to tell if earnings are reasonable is to look at the book value to earnings ratio. I don't know of anyone else who checks this number, so it may be just you and me.  This number is much more stable since book value does not jump around a whole lot. I manipulated the Barrons data and found that at market bottoms the BV to earnings ranged from 6.1 to 9.9. Right now the current to BV/Earnings value is 8, right in the center.  Remember this is not market value, it is book value and they are very different. This number gives you a good idea of how reasonable it is to expect a large jump or decline in earnings. When the earnings were at 53 last year, the BV/earnings was only 3.8 indicating that addition growth in earnings would have been very difficult.  At the current value of 8 we can expect to see some growth (or additional decline).  Last year at this time the S&P500 trailing 12 months earnings were $53.73. The latest figures reported this week in Barrons were $28.52. But the drop is not over. These earnings do not include the 4th quarter of 2001. The 4th quarter of 2001 should show to be much worse than the 2000 numbers. I don't know how the quarters break down, but I suspect that the 4th quarter of 2000 was much larger than those that came after it. I would give it credit for at least $12 of the 28. Then I would cut off 40% of it, leaving $7.20. Add this to the other 3 quarters and we have $23.70 for trailing 12 months starting next quarter.  This could mark the earnings bottom. It would also give us a BV/earnings number of about 9.2. If we project out a full 15 months from now assuming earnings growth starting in the second quarter of 2002. We could see an overall increase of 30% on the $23.7 giving us projected earnings of $30.8. We chose 30% because a number of rebounds showed this kind of growth. This compares with the extended 12 months earnings projections we used when we started our long term forecasts in October. Those projections came from a big name brokerage house, and they projected $49.  Right now they look outrageously high so this week I replaced their number with my own.  I like to use projected earnings rather than current earnings because the real market works on what they think the future will bring and not on the present. Now this shows us the fundamentals would project an S&P500 price of about 550.  The current S&P is at 1161. Something is wrong with this picture. In 1988 the earnings rebound showed a huge 80% increase year over year. But our trading partners were not in the poor shape they are now. An 80% increase in earnings gives us an estimated S&P 500 price of 760. Either way the current S&P seems to be very much overvalued. The same conclusion you will find in this week's Barrons. For our long-term charts I used a generous 50% expected increase in earnings giving us a $35.50 earnings value and a 634 value for the S&P.  I can not find a good reason to continue to buy into this market. How long it will take the rest of the investors to think this way I can't say. And it could get more unreasonable before it starts to make sense again.  Our projected 2-6 day forecast is not encouraging either as it is solidly negative starting with the New Year.  Time once again to take shelter.


DEC 23:A quick post prior to the holidays.  The long term analysis remained steady to show the market about 32-33% over its median range. Interest rates fell a small bit and the market increased. We don't believe the market can hold at these levels and there is a real possibility that the market will fall back before earnings can improve enough to save it. We are talking longer term here so this process can take a number of months, sometimes a large number of months. I don't see any reason for the interest rates on the long term notes to go any higher at this time as the 10 year notes offer a much better return than stocks or short term bonds at this point, so continued buying can keep the rates from rising.  That should help the market a little.    Please have a Merry Christmas and happy holidays. 


DEC 16: Our rough long term analysis puts the market at 32% over its median range moving back a bit from last week's 36%.  However the 10 year notes are still over 5% and earnings don't look good. A historical perspective is very important here, but keep in mind as John Maynard Keynes  said: "It is dangerous... to apply to the future inductive arguments based on experience, unless one can distinguish the broad reasons why past experience was what it was."

Let's look at the Dow Jones index over the last 100 years.

06/17/1901, DJIA 78.26 

06/24/1921, DJIA 63.9     20 years, market decline -18.3%

09/03/1929,  DJIA 381.17   8 years, market rises 597%

06/13/1949, DJIA 161.60     20 years market declines -57.6%

02/09/1966, DJIA 995.15     17 years market rises 616%

08/12/1982, DJIA 776.92     16 years market declines -21.9%

12/31/1999, DJIA 11,497.1   17 years market rises 1,490%

To date:

12/14/2001, DJIA 9,811   2 years market decline 14.7%

What we notice is the bull runs lasted from 8 to 17 years and the bear runs lasted from 16 to 20 years.  Now I will always be the first one to point out that we have a very small sample size here. It may be 100 years, but it is only 3 Bull runs, and 3 bear runs. So you must be careful about what kind of conclusions you draw from the data.  looking at the data overall we find that we have spent 58 years in declining markets and only 42 in rising markets.  This is an overview and you can slice the market any number of ways, but for those who only invested in the 80's and 90's it should be an eye opener.

So the first thought that comes to mind is that this bear run is not over yet.  The second thought is that if it is over it is unlikely that we are in for another super run like we had through the 80's and 90's, and it is probably time for most people to rethink the way they invest. 


DEC 7:  I made a change in the long term chart to reflect the +/- 1 standard deviation from normal of the price-earnings-interest rate relationship  Long term range.  The +/-10% range was misleading since the relation ship is rather loose, and 10% isn't very much. One standard deviation in this case is +/- 21% and about 65% of all cases will fall within that range.  We are now at about 36% above normal. So we are in a more rarified area. The monetary indicator (chart shown down below) is now at +2. It is growing stronger as the market stretches further above its normal range.  This tells me there are expectations of increased corporate earnings. But the unemployment numbers released today do not support that theory.  Unemployment numbers should be flattening rather than continuing their decline. So we have a worsening economy with optimistic investors.  Since we probably will not get any help from the earnings area we must get it from the interest rates if this rally is to go much further. So either we see the 10 year rates drop or the market will.  We do not expect to have very much room to go higher as the market approaches a 40% level of excess. We will watch the monetary indicator closely as it is measuring the longer term investor emotion. 

Should we expect tax selling this month and when?  Don't worry about it.  Although I can't say I did a complete study on this, preliminary findings show that there is nothing to worry about for the market as a whole. This is more of an individual stock type of thing.  Our method should reflect the changes as they occur, and the expectation of "December tax selling" does not produce a reliable indication of market direction. 

DEC 1:  Whereas last week the market showed itself to be about 27% above normal price range, this week it is only 19%.  Most of that change was due to the drop in interest rates. A small portion was due to the drop in the S&P index. Today we will focus on the relationships between interest rates and the S&P index.  There are really three relationships here. One is the competition between the interest that bonds offer the investor and the total return offered by securities. That would consist of both dividends and potential appreciation.  When bond interest is very low it makes buying stocks a good idea because they do not have to appreciate very much to compete, but when interest rates are very high stocks will have to go much higher to make them a better investment. 

The second relationship is that between the company and the interest on bonds.  When rates are high companies either can't afford to borrow or will have less earnings left after paying the interest on their loans.  When rates are low, companies can leverage themselves for big returns at low cost. So both of these elements come together very well.  Low interest benefits companies and low interest benefits the investor, because the investor would be buying stocks right when the companies can best utilize capital from a cost-of-money point of view. Some companies require more capital and have more debt than others.  Companies with large capital equipment expense, like airlines and telephone companies, are very much affected.   Now what happened in the dot-com era was that debt financing was not used.  Slick venture capitalists, seeing the potential for launching companies at super high multiples pumped them out.  With lots of cash and no need to borrow, the higher interest rates did not seem to have an impact on their potential, and for a long time you could not find a connection between interest rates and a Dot-com evaluation.  But what was missing from the equation was earnings, and the fact that interest rates had an effect on non dot-com companies. Since non-dot-coms employed most of the consumers and paid their salaries, interest rates mattered to almost everyone else. And it was everyone else that provided the source for dot-com earnings.  Eventually the link between earnings and interest rates and stock prices got around to the minds of the investors. With the resulting 90+% drops in some stock prices. 

The third relationship between interest rates and stock prices is how stock prices respond to changes in interest rates.  This is the proprietary work that resulted in the two charts seen below in last week's comments.  It is sufficient to say that they respond differently in bull markets than in bear markets. The ways they respond reflect the emotional feelings of the investors.  Investors do not bluff, they have no poker face. And their emotions let us know what they are thinking. At least what enough of them are thinking, and this allows us to make our projections.  With this in mind we are still at a plus one level, a neutral reading.


NOV 25: The monetary indicator shown below is very encouraging. With a positive starting point in 1993 the indicator stayed positive until year end 1999. Then in turned negative until the close of Monday November 19 when it reached zero. This past Friday it turned positive with a reading of "1".  Could this mark the end of the bear market? 

The Monetary indicator is a moving average of the number of positive and negative "pulses" recorded over a number of months.  The indicator (below) shows those pulses. To obtain these pulses we measures the response of the stock market to changes in the bond market. The way the market responds creates either a positive or negative "pulse". As we can see there were no negative pulses during the bulk of the bull market. The first negative pulse occurred on August 2nd of 1999 with the S&P at 1328. The market continued to climb for a number of months after that, but fell apart as the negative pulses increased and the indicator fell through zero.

When reading this chart you must once again realize the value of the sample size.  Although it is significant that we have such a large number of positive pulses and no negative pulses during the bull phase of the market, we only had "one" case of the signal crossing through from positive to negative.  This is not enough to draw a conclusion that the bear market is over. Since a shorter moving average would have already turned up and a longer one would still be negative. We chose the length of moving average to fit with the end of 1999. Which I consider the psychological end of the bull market. So to answer the question proposed. It looks like the market is much more in balance with the positives starting to outnumber the negatives. Because we really can't say what the perfect length of moving average should be, since that will always change, we just need to be alerted to the new conditions. What is negative, however, is the size of the recent move up, together with the very recent increase in interest rates causing the market to appear to be 27% overvalued. This leads me to believe that we will see a few more negative pulses in the near future bringing us back below zero on the monetary indicator before we have a real bull market again. But for now, be relieved that the worse seems to be over.


NOV 18: The recent run up in interest rates has caused our expected long term S&P projection to also drop dramatically. We are now about 23% above projections this seems excessive for the current conditions and could easily result in an adjustment of either the rates going lower or the Index going lower.  We do not worry very much about the long term level except when it gets dramatically out of line beyond +/- 35%.  So lets talk about oil.  Oil prices have fallen about 35% since the summer. That is good news for the country since almost all products have to be shipped or created by a process that uses fuel. Not everyone will benefit equally.  UPS for example recently "raised" its rates and maintained their excess fuel charge. So they will benefit in the short run by not passing the savings along to customers. The airlines will benefit since flying is very fuel intensive. The utilities should also see a boost in net profits.....  The war will end very soon.  When winter comes the Taliban's warm bodies and caves will contrast the Afghanistan cold barren topography and will light up our thermal imaging equipment, pin pointing their locations.  One more + for high technology.... I believe interest rates will again move lower over the following months and test their recent lows.  I still do not anticipate this market taking off, but I am not an expert on the longer term.  PE ratios at bottoms are usually much less than they are now. 



NOV 11:  The Producer price index had its largest plunge on record, which can only open the doors for another rate cut in December.  The response to the Fed activity went well in the overall sense, but was not a perfect case. This type of trade works because emotion rules. If you notice children during Christmas you will find they are much happier in anticipation of receiving presents than they are the day after Christmas with nothing to look forward to.  I call it the "day-after-Christmas" syndrome.  It is the emotional letdown that happens after a positive event.  Women experience it after childbirth. The market sees it after holidays and Fed rate actions.....  We did not change our yearly projection this week as the 10 year note stayed below the 4.5% mark and the earnings projections have not changed.  This coming week could easily be a down one judging by the expectations of our emotion based 2-6 day indicators. In addition we would expect some upward movement during Thanksgiving week, as that is traditional.  Especially as it effects the Wednesday and Friday of that week.  So a down week now would fit very well into the picture allowing a recovery for Thanksgiving. 


NOV 4:  You will notice I changed the first few days of the 2-6 day forecast from down to up.  I am still working on the 2-6 day forecasting system and this will happen from time to time as it develops. I do like the way it is developing and will let everyone know when I think it is firm.  This week our newer forecasts are in total sync with the Fed's meeting this Tuesday. As I had mentioned in some earlier notes, investors like to think they are being taken cared of, so whenever the fed meets, if it is to lower rates or to raise them investors tend to buy. They buy early and sell on the close one day after the rate change. These are the average % chance of the market going higher for the day prior to the change +62% (like Monday), the day of the change +66% (like Tuesday) the day after the change +69% (like Wednesday), and the day after that +38% (like Thursday). We should get a rate cut this time around since we continue to require some extra stimulation.   Our new emotional 2-6 day model is proving to be very stable over the last 9 years of testing, but it is not quite finished.....  The government announced the elimination the 30-year bond.  They were buying the bond back to retire long term debt.  The expectation is that they can keep a lid on inflation and thereby keep the interest rates on short-term instruments low.  Unlike companies, the government can influence interest rates and can easily select between the short to the 10-year notes for borrowing purposes.  Interest rates dropped sharply on the announcement earlier this week and although a rebound is expected short term, the direction over the next few months should continue to be down. Rates are already low enough to not have much effect on the stock market.


OCT 26:  With only mild weekend news the market should try to retest Fridays high of 1110.5. Once again I do not see the market going much higher here, as the negative longer term influences should start to kick in later in the week. The market looks about 4% overvalued which means that it is well inside the no-stress range and not close to either edge. Because it is so well centered the influencing factors could move quite a bit without having a strong influence on this market. For example if earnings estimates dropped another 20% from the projected $46 to $36.8 and interest rates and the terrorism factor stayed the same we would still be in a relatively normal range for the S&P right here at 1104.  I don't think interest rates will rise over the next 6 months but I do think earnings projections will get worse and the terrorism factor will become more frustrating. So I see that as an indication that the market will move lower, but since its current price is so well centered it may not. And this is because the long term influences can continue to move in one direction for a long time without having much of an influence on the market.  


OCT 19: I am looking for the market to go lower as the week progresses. If Monday is very weak the down path could easily extend through Friday. 

In continuing with our long term interest rates / earning projection we took a look at the 20 years between 1970 and 1990. I used a little more complex formula to determine the expected or "normal" S&P price that includes the T bill rate to allow for an inverted yield curve.  When you put the estimate into the formula [(Estimate - S&P500 index)/S&P500 index] you find it will range from about-50% to +50%.  Where the very negative numbers were found in January of 1970 (when we had that inverted yield curve) and in September of 1987 prior to the market crash of that year. Very positive numbers were found in December of 1978. These numbers provide information regarding market top and bottoms, but the reliability will depend on the accuracy of earnings projections and that is where we can get into trouble.  But it is useful to determine if you are close to the midpoint or very much over extended in one or the other direction. From here the market looks about 6% over valued. Under the right conditions the market can run between +/- 35% - 40% and not cause a major concern. But with future earnings expected at another 5% lower, the interest rates pegged against the lower levels and the terrorist uncertainty, I would expect to see the market carry a handicap rather than a premium.  If we were to lower expectations -6% to get to normal and -5% for earnings and an additional -5% for terrorism we would have the market at about 915 which we last saw in 1997. This is not a forecast, just a possibility. We see that the Israel market index, TA100, has adjusted to living with terrorism, and continued to follow the same basic path as the US markets over the last few years.  From this we conclude that the US markets will adjust to the new conditions over time and continue to function in a normal manner.  Like high taxes or high interest rates the terrorist acts will be an economic damper on the market, draining resources into non- productive areas and decreasing overall productivity.


OCT 12: For the 2-6 day forecast it looks like we will resume the up-trend early in the week as long as there are no terrorist attacks over the weekend. Using current projections of $49 earnings for the S&P together with the current 10 year note interest rate of 4.648 gives a target S&P 500 price of 1054, so right now we could say that the S&P is about 3.5% above the expectation midpoint, but well within the range of normal. During the mid to late 70's we saw the market go "far below" the expected range as the oil crisis dragged the economy down psychologically as well as economically.  I believe a second major terrorist attack could do the same.  The initial market drop will probably not be as bad as the first one we saw, but not knowing when or where we will be subject to damage will cause a dark cloud to hang over the market. Like every thing else we will get used to it, but be ready for more down side.  The federal and state governments are now cutting back, then restructuring their budgets.  The short term impact will be quickly felt by the vendors who supply the government.  The earnings turnaround will be delayed and the overall direction should be lower. It will be necessary for interest rates to remain low for at least another year so as to not add an additional burden on the economy. I expect the drift lower to be a gradual directional trend as shown in our long term graph (previous page) but with most of the time spent below the midpoint.  If however there is no second major attack for the next few months we should be able to roam freely in the range defined.  This defined range will continue to change as the interest rate changes and new earnings projections are made. The +/- 10% could easily extend to +/- 25% or more since this is a very simple model.


The measure of success is not whether you have a tough problem
to deal with, but whether it is the same problem you had last year.

John Foster Dulles