Shields Up In The Fullness Of Time 1996

December 6, 1996

The Emperor Has Spoken

I should call this Wake Up, not What's Up!

Federal Reserve Chairman Greenspan undeniably commands attention. If someone did not know who really runs the economy and thought the President did, well. All day long you could here time after time from those who still don't get it and still deny the significance. That is also the same kind of investor who complained about the method and not the meaning back in 1987 when in the summer, newly appointed Greenspan had to prove to the markets that he too was going to fight inflation and raised rates causing the reallocation of funds from stocks to cash that turned into the mess of October. This is not like that period though, earnings are decelerating.

Murmurs have been occurring over the last couple weeks from Fed officials for the first time since last summer. It seems to be the common practice to warn the markets with preemptive comments so as to not hurt the alert. The alert are those who are criticized by the long term investors who are people who only look up and cry in these situations about the alert investors who are going for a cash stash after hearing the warnings. Alert investors are plentiful at the bottom of a bear market while long term investors are plentiful at a top.

What a top this may be? You can see money rotating out of the big blue chip index stocks that have been the main part of the game since the beginning of this recent Newtclear rally that started back in November 1994. The money does seem to be moving into the small cap stocks setting up this seasonal rally, but that is a risky game because it is harder to get out if you are not the only few sellers at the time. This is musical chairs and the music stopped briefly and will stop again soon. Stocks like GE can go back to 101 but may roll over as alert investors sell into strength and the long term investor cruise down with the ship to around 87 or so and starts to feel a little worry.

For the last few weeks, I have been seeing a sell off setting up and feel there is more selling to come to retest the 6300 area but eventually go to last summers prices. Before the comment from Chairman Greenspan, the yield curve had narrowed to a point that was starting to look very flat which is one of the warning signals to get cautious. This is one of the reasons why I suggested shielding your investments especially if you are concerned about capital gains.

To have the big boys buy bonds like they did, makes me feel even more bearish because for that trade to work means that interest rates will go lower and I see the only way for that to happen is to have the stock market decline significantly and have a trillion or so go to money heaven.

November 11, 1996

First Year Summary

When this newsletter was started last Thanksgiving, a large part of the model portfolio was invested in the precious metals mining sector which performed very well until after the early part of this year. January brought additional profits due to a few declines in stocks and indexes that I owned put options on. May forward into the summer turned out well for I started to buy additional puts on the SPX index after noticing various signals that called for a very defensive posture. Profits were not maximized in these positions for the market went down faster and harder than I had anticipated. Two large hits were due to going long the SPX index too soon with call options causing an approximate 7 1/2% loss and staying short with put options after July that caused another approximate 10% loss. Fortunately, I was long in other positions that buffered the hits and kept things close to neutral. I hate calling the price fluctuations in the stock and bond market right and trading wrong.

I know that some subscribers did better using my trend prognostications to make their own trading decisions. So, after my first year of this officially time documented financial newsletter, I have found many ways to improve and grow with this continually developing form of communication. One such way will be to have two or three portfolio examples with different risk factors instead of one to follow. I thank my current subscribers for their loyalty, trust and interesting dialogue along with those who became managed account clients. May knowledge and luck be on our side in the future!

September 15, 1996

Earnings And Revenue Growth Is Everything

In this economic environment, whether or not interest rates go up, there may be no need for concern if a company can continue to grow both revenues and earnings. It may be very difficult to do so with wages and borrowing costs rising causing the cost of operating to rise to a point that will either squeeze margins or force finished prices to inflate. Regardless, those companies with proprietary products and quality management should do well. The risk is high now so using shields will help you stay in the stocks.

To have interest rates rise to slow growth is a very difficult thing to do for it may have opposite effects such as increasing the incomes of those with savings. Their incomes would increase but would the increase be as swift as inflation or just keep up? Supply and demand situations with crops and other commodities are virtually impossible to control efficiently with interest rates. It reminds me of the situation Former President Nixon was in that caused him to decide to use price controls. Just shield if you have "A Need For Yield" by using the math instead of the myth.

July 15, 1996

Cash Or Crash

Could we be at a point similar to June-July 1987 where bonds bounced and the stock market flew. Greenspan did the right thing back then and after the week of August option expiration, the markets started to descend. Bonds went down big time after the Fed tightening move until the stock market crashed. Well, I know I am still on planet Earth and the ground is what I always felt after a fall which is what the stock market may see because the perception of value is changing due to the adjusted earnings expectations and you need to do something before all you can do is with small change.

The best I see intermediately is a trading range for the Dow between 5300 and 5800 with the bond yield stopping at 7 1/2%. Bonds broke loose on a Fibonacci Time Zone established in the 1994 slide. The Dow Jones Utility index is basically at the same point it has been for ten years and seems to be forming a head and shoulders pattern short term. The XAU index is moving into a Fibonacci time zone that could be a significant point for a trend reversal and so are the major averages.

When you have network marketers having cute mutual fund parties along with detergent and perfume, something like Japan before they woke up between 39,000 or 14,000. That is when I look for the six year moving average to try and see how extreme on the downside things can become. Scary, that would put us at 3,700 on the Dow. Perhaps cash to avoid a crash.

June 27, 1996

Fed Factor Figured

Illiquidity seems to be the main sensation here in the stock market especially in the NASDAQ and, as of today, more in the Blue Chip XMI stocks. Meeting earnings expectations is critical if the stock prices are to remain at these high evaluations.

Capital preservation is the main goal as the fight to quality continues in the utility stocks and in the long term bonds. All seems to be bracing for the Federal Reserve meeting next week where the notion is that they will raise interest rates a notch. I think they may act in the August meeting instead which will set up for a nice rally in stocks and bonds through July. Even if they do make a move next week, the market may have already discounted it.

May 19, 1996

Treasury Endorsement

Inflation is still being hidden by the press both on the evening news and in the local newspapers. In my town, gas pump prices seemed to jump ten per cent after the local media made it the top story weeks after the realities in the financial market place had occurred. Sure it takes a certain amount of time to have the basic material cost move through the market, but it seemed that the retail element still had the fear of losing business to the one down the street if an increase in price was too aggressive. The outcome after the media attention was a fundamental change in psychology from fear to an attitude of let us see how far we can go before a loss in the customer base occurs.

A major psychological shift has occurred in this current macro economic environment with the endorsement of the United States Treasury. By offering debt linked to some convenient inflation index, the Treasury acknowledged the likelihood of an inflationary period beginning, especially now that wage pressures are becoming more evident. This inflation index will probably have as many items accounted within that have histories of stability. Sort of, if you take out everything that went up, nothing did. It better be accepted as credible by the bond investors or once again, the Treasury may be doing the wrong thing at the wrong time.

April 2, 1996

Two Month Window

The summer rally continues as the T bond, Dow Jones Utility Average and other financial companies stabilize and start to bounce from a serious slide back to critical support levels. It seems quite timely when considering the Federal Reserve meets in late May and the economic statistics revealed over the same period may be seen as neutral which will add enough fuel to see new highs across most of the major averages.

If we do see the Dow Jones Industrial Average over 6,000, that will represent a similar percentage move of around 80% which is equivalent to the move from November 1986 to August 1987. Then, sell calls and buy puts?

If oil and other commodities are still strong, I would expect the Federal Reserve to tighten. Before they do, you may see the T bond and other interest sensitive stocks to start downtrends again. Investors may continue to buy stocks thinking that inflation is not necessarily bad for certain stocks because earnings can be positively impacted by upward commodity price adjustments. When interest rates go to a more competitive level above 7%, then you may see a serious correction in the major averages.

February 16, 1996

Major Shift in Interest Rates!

What would happen if the Federal Reserve reversed their decision last month and tightened rates by raising the fed funds and discount rate back up? That could bring the thirty year T bond below the six per cent rate again, but the stock market would be hundreds of points lower, also. This seems to be an opportunity of a couple months or more for the commodity markets to have a great time and so could the precious metal, oil and other related stocks.

Bond traders may once again lead the way and take interest rates higher as they did moving them lower and the Federal Reserve will follow. Ever since the Fed lowered rates, their actions following that day have been one of tightening in the daily banking operations. They see the dollar sliding, the T bond falling and price of gold compressing at a higher level than before.

What to do? Perhaps look at short term paper such as money market or T bills, own commodity related stocks short term, hedge positions in the bond market using treasury options and hedge long term stock positions using options to protect the down side especially if worried about capital gains and don't want a loss of similar value in a sell off of ten or even thirty per cent. This seems to be a time similar to October of 1993 and several other periods.

February 1, 1996

Maximum Warp Speed until Self-destruct!

A quote from my comments on December 1, 1995, "Special situations in the pharmaceutical sector, gold mining sector, energy and commodity related stocks should be opportunistic." This may still be the case, but if the long bond yield starts to rise over the next few months, watch out.

The Federal Reserve move to lower rates took care of many short term problems such as reappointment, the November elections and employment worries. Now one needs to focus on the long term effects of such a move in this economic climate. I am even more bullish on the gold mining sector now with the world central banks reflating their economies.

January 7, 1996

Not Here to Gab!

Prognostication is my purpose not pontification, so I can guide people through the investment universe and not into a black hole of dead money hell. There are many other forecasters who like to write in great detail, so let them. I am trying to win the contest in the most honest and helpful way utilizing the most current and effective tools available.

The move in the gold stock and bullion sectors seems very strong with little resistance. The first signs of a pause came on Friday, so think a test of the 126 area of the XAU will be tested after a few more points higher and if it holds, the next price range should be 145 and maybe a lot more. Something in scale similar to the move in early 1987.

My next stock to short since USRX may be GE, soon. The brokerage stocks seem to be stabilizing after a sizable break from their highs. This weeks news and price action makes me suspicious of the utility stocks now and I see 235 in the Dow Jones Utility average as the possible end of their rally. This week the bank stocks started to fall and one of the last strongholds, pharmaceuticals, seems to have money leaving. This seems similar to the period October through December of 1993, before the Federal Reserve tightened in January.

The excitement in the first week of trading this year was in the bio-techs, oils and precious metal stocks. It still seems to be the year for commodities and that started in 1993.