Leading Economic and Stock Market Indicators
The Index of Leading Economic Indicators declined to 111.2 in December from 112.3 in October (using original estimates released by the Conference Board), and was below the year-ago figure of 111.4, indicating that the economy is not yet rebounding in a significant way. In addition, the Average Weekly Hours Worked by Manufacturing Production Workers fell to 40.9 in December from a high of 41.1 in June, while the Average Weekly Claims for Unemployment Insurance rose to 419,000 from 377,000 in November. More importantly, consumers’ confidence in the outlook for the economy going forward, as revealed by the University of Michigan’s Consumer Expectations Index, fell to 68.8 in early February 2003 from 72.8 in September 2002 – the lowest level since September of 1993.
On a positive note, Building Permits for New Housing Starts rose during each of the final three months of 2002, as did the Institute of Supply Management’s Purchasing Mangers Index. Manufacturers’ Orders for Consumer Goods also rose during the fourth quarter (from the third quarter of 2002), but they were down from their high in October.
Although the increase in Building Permits was accompanied by an increase in the M2 Money Supply, and the spread between yields on 10-Year Treasury Bonds and the Fed Funds Rate remained positive, there were negative attributes associated with each of these important leading indicators:
The rate of increase in Building Permits rose only 10.5% from their year-ago level, which is significantly below the rate that we have found to signal continued economic growth during past economic recoveries.
- Short-term interest rates are at extremely low levels, with the Fed Funds rate at the lowest level since July of 1961, and the Federal Reserve Discount Rate at an all-time low. Given that money continues to pour into long-term Bond Funds, long-term interest rates are likely to continue to decline, while the Fed doesn’t have much room left to lower short-term rates. If short-term rates were to rise above long-term rates, this could create a drag on stock prices, as disillusioned investors may choose to invest in “safe” money market accounts as opposed to placing funds into “risky” stock investments.
- The M2 Money Supply grew at a year-over year rate of less than 10% for every month during 2002. Our research indicates that M2 Money Supply growth below 10% is too slow to stimulate a weak economy, especially when the velocity of money is consistently declining (as it has been doing since the third quarter of 2000).
Based on the information presented above, we believe that the U.S. economy could easily dip back into a recession during the current year, and that the major stock market indices will continue to trade side-ways for several more months. However, once the conflict in Iraq is resolved, we believe that (1) consumer confidence will improve and that (2) President Bush will have a better chance of getting his economic stimulus plan passed, which in turn will lead to a rebound in stock prices during the second half of 2003.
Other Economic and Stock Market Indicators
As illustrated on Page 2 of our Market Indicators Web pages, the employment situation in the U.S. has gotten worse during the past year, and there are signs that it is continuing to deteriorate. The Unemployment Rate has risen to 6.0% (as of 12/31/02) from a recent low of 5.7% in September 2002, while Help-Wanted Advertisements have declined 17% from December 2001.
Although interest rates are at all-time lows, the velocity of money has continued to decline, while excess deposits held by commercial banks at Federal Reserve Banks are at the highest level since January of 1991, as businesses have been unwilling to finance capital expenditures. This hesitancy of businesses to invest for the future has been accompanied by a decrease in both the Industrial Production Index and in Industrial Capacity Utilization from July 2002 to December of last year. Given that Corporate Profits declined throughout year 2002 (on a sequential basis), and in light of the lack of confidence displayed by consumers regarding the future outlook for the economy, we do not expect for capital expenditures to increase anytime soon. However, once consumer confidence improves and the Iraqi situation is resolved, we believe that businesses will increase their investments in plant and equipment, and that they will begin adding to their product inventories. This, in turn, will lead to an improvement in employment (in our opinion) and the beginning of an economic recovery in the second half of 2002.
During the next several months, however, we expect for the economy to continue to slumber, as a result of the uncertain situation in Iraq and the high price of oil associated with this uncertainty.
Current Stock Market Environment
Although many stock market participants have left the market and appear to have given up on stocks, outflows from stock mutual funds have recently slowed, and flows into bond flows have declined (Click Here to review Statistics). Additionally, the number of Initial Public Offerings has risen during the past three months, suggesting that the market may have bottomed. Technical stock market indicators that we use support our belief that stock prices will trade in a side-ways pattern between 7,500 and 8,700 on the Dow Jones Industrial Average over the next few months.
Once the geo-political situation in Iraq is resolved, which in our opinion will occur within the next six weeks, we believe that consumer confidence will begin to improve, that President Bush will begin to focus on getting his economic stimulus plan passed, and that businesses will begin to increase their investments in capital assets. Given the current low level of inventories maintained by most businesses, we believe that companies will also begin to increase their output of goods. If such does occur in the way that we are forecasting, employment should also begin to improve towards the end of 2003.
The psychological impact on investors of (1) a more-certain geo-political environment and (2) a subsequent decline in oil prices will, in our opinion, lead to a rebound in stock prices beginning in May of the current year. We are projecting the Dow Jones Industrial Average to reach 9,500 by year-end, and for the S&P 500 Index to rise to 1,000.
December 27, 2002
Although there has been a predominance of “negative” news announcements during the past two weeks, we believe that the major stock market indices will advance sharply during the first few days of the coming year, as Mutual Fund Portfolio Managers and individual investors alike will likely sell stocks, in our opinion, that generated losses during year 2002 (for tax purposes) and will begin purchasing “new name” stocks of young companies that have been growing their sales and earnings in the continuing difficult economic environment.
Given that the third year of a U.S. President’s first term in office tends to be a good year for stock prices, as a result of actions taken by the President and his staff to grow the economy (in efforts to get re-elected), we believe that political speeches centered around cutting taxes and stimulating the economy will be propagated by President Bush during early 2003. The psychological implications of these speeches and likely economic proposals will, in our opinion, lead to a rapid run-up in stock prices during the month of January.
November 27, 2002
Just as we had projected on November 12, 2002, the major market averages have rallied during the past two weeks, with the Dow Jones Industrial Average rising from a close of 8,386 on 11/12/02 to a high today of 8,975, and the Nasdaq Composite increasing from a close of 1,350 to today’s high of 1,491. Once again, we are now projecting for the market averages to fall back to their recent price-support areas of around 8,300 on the DJIA and 1,360 on the COMP.
November 12, 2002
Last Tuesday, when the Dow Jones Industrial Average (DJIA) closed at 8,678, we stated that we believed that the major market indices had likely topped on a short-term basis, and that they would pull back in price over the next couple of weeks. Since then, the DJIA has declined to 8,386 while the Nasdaq Composite Index (COMP) has fallen from 1,401 to 1,350. Given that our Market Indicators continue to suggest that the market averages will trade in a sideways pattern over the next several months, with sudden upward movements followed by corrective downward movements (and visa versa), we are now projecting the market indices to rally during the next two weeks. Once the DJIA approaches the 8,800 price level, however, we believe that it will again turn south and fall back again to the 8,300 area.
November 5, 2002
We believe that the major market averages have likely topped, on a short-term basis, and that they will likely pull back in price over the next couple of weeks.
Please note that we see this as a positive development, given that several stocks that we recently added to our Stock Picks page have recently proven themselves in terms of market action — institutional investors appear to have recently been buying these stocks.
We are now waiting for the stocks that we are currently rating as a “FOLLOW” to pull back to certain price levels. We will then likely change our rating on some of those stocks to a “BUY”, as all of them seem to have strong fundamentals.
October 31, 2002
Please note that we have updated Page 1 of our Market Indicators pages.
We will be updating Page 2 and Page 3 of the Market Indicators pages over the next several days, and we will write our Quarterly Market Analysis (whereby we review current factors affecting the investment securities market and make projections for the investment environment going forward) towards the middle of next week.
At this time, we urge investors and market speculators to understand the following: Although several indicators illustrated on Page 1 of the Market Indicators pages have turned red during the latest quarter, this does not necessarily mean that the major market averages have topped during the current investment cycle and that investors should be selling their stock positions.
Although a predominance of red-marked variables often suggests that stock prices will begin to decline, we view the apparent slow-down in the economy (indicated by the recent trend of most of these “Leading Indicators”) to be a positive development in the current market environment. We will explain our reasoning in our Quarterly Market Analysis next week.
October 22, 2002
The market has been performing in a very typical way during the past two weeks, following what appears to have been the bottom in the current Bear Market — institutional investors are starting to purchase the stocks of new-name, growth companies, while most individual market participants (so-called “investors”) are shunning stocks. At the same time, corporate sales and earnings are starting to improve. However, as we stated on 10/17/02, we expect the market to trade in a sideways pattern for the next three to four months, with big up moves followed by big down moves. Therefore, we urge investors and market speculators to not buy stocks at their current levels, as we believe that most stocks will pull back in price over the next week.
During the next five days, we believe that the Dow Jones Industrial Average will fall to the 8,000 level from today’s close of 8,450, and that the S&P 500 Index will decline to around 850 from its current price of 890.
We are currently updating and reviewing our Quarterly Market Indicators, and we plan to update our Quarterly Market Analysis Web page next week.
October 17, 2002
Some recent data suggests to us that the market has likely bottomed and that it will now begin to trade in a sideways (basing) pattern over the next several months, with volatile up and down movements in the major market averages.
As we have been saying since May 8, 2002, we expect the market to perform strongly during year 2003, with a major up-trend beginning around February of next year. Towards the end of October, we will provide a detailed update on our analysis of the market, as well as our projections for stock prices going forward.
October 8, 2002
Given what appears to be a deteriorating employment situation, indications that corporate profits will continue to decline (on a sequential basis), a decline in New Housing Starts during each of the past three months (as of August 31, 2002), and a recent slowdown in retail sales, we believe that the U.S. economy will dip back into a recession sometime during the next six months. However, stock prices look as if they may have already hit bottom and that they could begin to trade sideways over the coming months.
If, however, the S&P 500 drops through and closes below 775, and the Dow Jones Industrial Average drops through and closes below 7380, we would recommend for market speculators to sell any positions in common stocks and to sit on the sidelines until a new up-trend in the major market averages is established.
October 6, 2002
Nothing has changed regarding our analysis of (and outlook for) the investment securities market since our last update on September 20, 2002. We believe that the major market averages will continue to decline over the coming weeks for the reasons and factors that we presented on 9/17/02 and 9/20/02. During mid-October, we will be updating our Quarterly Market Indicators and Quarterly Market Analysis.
We continue to recommend for both market speculators and long-term investors to ignore what we refer to as the “Wall Street Con” — contrary to what many stock market “experts”, including market strategists at Investment Banking/Brokerage firms and portfolio managers at Mutual Funds are saying, the economy is not improving (in any significant way), corporate earnings show no sign of continued improvement, and stock prices have not yet bottomed. We strongly suggest for market speculators and investors to consider the source of any investment advice promulgated by these so-called “experts” (and the motive for such advice) before committing any new funds to either stocks or actively-managed mutual funds.
September 20, 2002
Listed below are some major points concerning the current investment environment:
- Industrial Production, a very reliable coincident economic indicator, turned down in August.
- New Housing Starts, a reliable leading economic indicator, have declined during each of the past three months.
- The Four-Week Moving Average of Unemployment Benefits has risen for each of the past three weeks, while Help-Wanted Advertising has declined.
- Wholesale Prices haven fallen during each of the past two months (as compared to year-ago levels), indicating the lack of pricing power that producers currently have.
- Oil Prices have risen from $19.71 per barrel in January to $29.83 as of last Friday (9/13/02).
- Consumer Expectations for the future, another reliable leading economic indicator, have declined during each of the past four months.
- Corporate Profits have declined during the most recent two quarters, on a sequential quarterly basis, and our review of earnings forecasts by companies indicate that they will decline again in the third quarter ending 9/30/02.
- A majority of the Federal Reserve districts reporting for the latest Beige Book reported a slow-down in business and manufacturing activity.
- The Mortgage Bankers Association of America reveal that the number of home loans on which foreclosures have started rose to its highest quarterly rate ever at 0.4%.
- The nation’s third largest less-than-truckload carrier, Consolidated Freightways Corp., recently announced that it will discontinue operations due to economic conditions.
- We at Frazier Research & Analytics expect for numerous companies to write-down the value of their assets during the coming year as a result of recently changed rules in accounting for acquisitions under the Financial Accounting Standards Board’s (FASB) Statements Number 141 and 142. These new accounting rules require companies to compare the book value of their assets to the market value of those assets on an annual basis. If the market value is less than the book value, an impairment charge must be recorded to account for the deficiency. Click on the following link to view a list of companies that have substantial amounts of “Goodwill” — the asset most likely to be written-down — on their balance sheets: Companies with Significant Amounts of Goodwill.
- Brazil’s leftist presidential contender Luiz Inacio Lula Da Silva, whom investors believe will adopt policies expected to increase the country’s already large debt level, has widened his lead over Jose Serra in Brazil’s latest political opinion polls.
- The potential of a war in the middle East appears to have risen.
All of these developments have occurred during the past thirty days, yet business economists and numerous stock market commentators continue to state how the U.S. economy and corporate earnings are supposedly improving. We can’t help but wonder what they’re reviewing.
The 10-year chart of the S&P 500 index from 9/20/92 to 9/19/02 clearly shows that stock prices in general have not yet rounded out a bottom formation, and that they may still be headed lower.
We strongly recommend for investors in individual stocks to monitor their holdings closely and to sell any positions that break through major price support areas.
September 17, 2002
The Federal Reserve reported today that U.S. Industrial Production was down 0.3% in August from its reading in July; (it had been trending up during each of the past seven months). We view this as a big negative, as Industrial Production is a very reliable coincident indicator.
Yesterday, Iraq accepted the return of U.N. weapons inspectors (on its military bases), according to U.N. Secretary-General Kofi Annan. However, President Bush seemed to indicate that he will continue to recommend military action against Iraq in response to Saddam Hussein’s unwillingness to abide by various U.N. sanctions during the past ten years.
After the market closed, October crude futures gained back much of what they lost during regular trading hours to close at $29.45 a barrel, after the American Petroleum Institute announced that U.S. supplies of oil fell by 6.4 million barrels during the latest week.
Given the lack of any positive stimulus affecting the market at this time, we believe that “the line of least resistance” for the market (to quote Jesse Livermore) is down, and we believe that the major market averages will decline substantially over the next several days. We are therefore recommending for investors to carefully review their stock holdings and for them to sell any positions that break through major price support areas.
September 1, 2002
As we expected, the major market indices declined last week, with the Dow Jones Industrials falling to 8,664 from 8,873, the S&P 500 declining to 916 from 941, and the Nasdaq Composite falling to 1,315 from 1,381. We expect the market to trade sideways during the coming week, with continued volatility.
The market correction resulted in one of the stocks that we have been following during the past several months, Magma Design Automation (LAVA), to pull back in price to a significant price support area, while another stock on our list, Forgent Networks (FORG), continued to trade sideways. Given that both of these companies have very strong fundamentals, we issued a “Buy” rating on each of them, as we believe that the upside potential gains realizable from investing in them at their current prices greatly outweigh the downside risk of loss. (We caution investors, however, to sell LAVA immediately if it drops below $9.50, given that the stock has no price support below that price.) We expect to post several other “Buy” recommendations to our Stock Picks page during the coming week.
During the past week, we reviewed several of the economic and stock market statistics that we regularly monitor, and we conducted a study of a few historical investment environments, including the period from 1922 – 1929, 1950 – 1969, and 1980 – 2000. In reviewing these extended Bull markets, and the economic fallouts from their subsequent declines, we noticed a few disturbing similarities that has somewhat changed our outlook on the type of investment environment that we now believe may occur over the next several years. Rather than go into all of the details here, we have decided to write about these findings in our first Investment Newsletter, which we expect to issue in late September. (This newsletter will be posted to our Web site for anyone to download at no charge. We will notify subscribers to our Market Alert and Stock Alert services of its posting as soon as the report is issued).
Our findings suggest that the major stock market indices may continue to trade in a sideways pattern for the next several years. Although we still believe, based on our Market Indicators, that stock prices will turn up sharply in early 2003, we believe that there is a good chance they will then fall back before realizing any sustainable gains. If our forecast is correct, we believe that the key to investment success over the next two years will be choosing the right sectors of the market, and individual stocks, in which to invest — simply investing in a diversified portfolio of securities will not produce significant gains, in our opinion, over the eighteen months. We point out to our readers that during the three-year period from 1972 – 1974 only 3% of all equity mutual funds tracked by Weisenberger Investment Services reported gains. However, during that same period, stock prices in each of the following industries were up substantially — Mobile Home Manufacturers, Restaurants, Retailers, Home Builders, and Gold/Silver Miners. We are NOT suggesting that investors look to these same industries for gains in the current market environment, as every economic period differs in certain ways; (we note, however, that stocks in these same industries have performed well over the recent past).
Our analysis suggests that the biggest stock market winners during the coming year will be stocks of companies offering significantly new products and services — the very types of companies for which we at Frazier Research & Analysis are always on the lookout.
In closing, we repeat what we wrote about in our latest Quarterly Market Analysis on 8/10/02 — we believe that the most important factor in determining the direction of stock prices over the next several months will be the trend of corporate profits. Although corporate profits increased significantly during the fourth quarter of 2001, they fell during the first quarter of this year, and they were down again during the second quarter.
August 23, 2002
The market is setting up beautifully, from our perspective, as we expect the major market indices to decline next week and then to trade sideways the following week.
We see this as a big plus, (assuming that the market does decline during the coming week), for we have seen enough evidence of late to feel comfortable in now getting aggressive with investment recommendations on the stocks that we have been following.
We plan to post several new stocks to our list of Stock Recommendations towards the end of next week, if the major market indices act in the way that we are projecting.
August 10, 2002
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Since January of this year, we have been projecting for the major stock market indices to be rather volatile and to trade in a somewhat sideways pattern. We have also repeatedly warned investors to be very cautious in choosing stocks in which to invest, and (as subscribers to our Stock Alert service are aware) we have posted very few stock recommendations on our Stock Picks page during the past eight months.
Earlier during the year, we stated that our Market Indicators suggested that the market would perform in a way similar to the period from 1980 – 1982, and that we expected the market to bottom in July of this year. Although the market currently appears to have bottomed, we are concerned about its direction going forward; (these concerns are discussed in the sections that follow).
The charts below, which can be enlarged by clicking on them, clearly indicate that the major market indices have traded in more of a downward pattern than in the sideways pattern that we forecasted back in January. Given that the U.S. economy has improved dramatically since September of last year, although it remains very fragile (in our opinion), we believe that the fraudulent actions of CEOs and CFOs at numerous large companies have been responsible in large part to the ongoing Bear Market. Misstatements of corporate financial results and other questionable company activities have resulted in stocks behaving more similar to the way they did during the 1973 – 1974 period than during the ’80 – ’82 market environment; (click on the following link to view charts of the ’73 – ’74, ’80 – ’82 and current Bear Markets: Bear Market Comparison Charts). We believe that this exogenous factor can be viewed in a way similar to the unforeseen Arab oil embargo during late 1973 that had a very detrimental effect on U.S. stock prices during the following year.
Major price support areas, which are heavily influenced by psychological factors and by program trading triggers set by institutional investors, have so far prevented the major market indices from continuing their downward slide. However, given that many of the large-cap stocks in which most institutional and individual investors tend to concentrate are still considerably over-priced relative to earnings (in terms of historical P/E ratios), we continue to believe that the market will be very volatile throughout the remainder of 2002 and that a new Bull Market will likely not begin until sometime next year. This does not mean that investors should not be buying stocks in the current market environment. Rather, we believe that now is an excellent time to be adding (cautiously) to long-term oriented investment portfolios. For, as we have stated in the past, the best time to buy stocks is often when most persons are selling them. We list several stocks on our Stock Picks page that we believe will perform well during the next 12 months, although we do not claim to know exactly when they may begin a major price advance.
In the section that follows, we present our analysis of the major factors currently affecting stock prices and we provide a forecast of the market going forward.
The Good News – (Improving Business Demand and Employment)
Although the U.S. economy is currently very fragile, our Leading Market Indicators clearly suggest that the underlying economy is still strong, and that conditions have improved significantly over the past twelve months.
The Conference Board’s Index of Leading Economic Indicators has risen consistently since March of last year and was up 2.6% in June, as compared to the same period a year ago. The interest rate spread between 10-Year U.S. Treasury Bonds and the Fed Funds rate has been positive since May of last year and has recently been at its highest level since January of 1993. Both of these economic statistics have been very reliable in the past in forecasting the future direction of the economy and the stock market.
The unemployment rate remains at a relatively low level of 5.9% (as of June), while the average weekly hours worked by factory workers has increased from a low of 40.3 hours per week in February to a current rate of 41.1 hours per week. Weekly claims for unemployment benefits have consistently declined since October of last year.
Most importantly, new orders of consumer goods from manufacturers, a very reliable economic and stock market indicator, has consistently improved since February, while the Institute for Supply Management’s Index of business activity has been in plus territory since that same month.
All of these market indicators bode well for the U.S. stock market going forward, once investors’ fears of corporate fraud subsides and money starts flowing back into mutual funds that have the buying power to push up stock prices quickly.
The Bad News – (Current Lack of Investor Confidence and a Topping Housing Sector)
The U.S. Housing Sector has largely been responsible (in a very low interest rate environment) for keeping the economy growing and for maintaining consumer confidence. However, building permits for new housing starts have declined recently from their high in February (as have the actual number of new housing starts), and consumer confidence has declined during the past two months. If Business Investment does not continue to improve over the coming months, a prolonged decline in these two economic variables could have a very detrimental effect on the U.S. economy and stock market, and could lead to what is commonly referred to as a “double dip” recession.
Given the current high level of oil prices, along with the recent decline in U.S. supplies of crude oil, potentially higher gasoline prices and rising home heating oil prices (going into the winter months) could lead to even a further erosion in consumer confidence.
For these reasons, we believe that the U.S. economy is currently very fragile and could easily dip back into a recession.
The Uncertain News – (Corporate Profits)
The most important factor likely to determine the direction of stock prices over the next several months, in our opinion, will be the trend of corporate profits. In the fourth quarter of last year, corporate profits increased to $628 billion from $492 billion in the preceding quarter — an increase of 28%; profits increased at a rate of 5.7% on a year-over-year basis. However, during the first quarter of 2002, corporate profits declined by 2% to $615 billion, although they were up 11% on a year-over-year basis; (for those of you who may think there is a seasonal effect on corporate profits, our research indicates that such is not the case).
Our daily review of quarterly earnings releases indicates that more firms are reporting increases in corporate profits than are reporting decreases. So, the trend for corporate profits seems to be continuing to improve, although many companies have been able to grow their earnings only by cutting expenses. This is a major concern going forward, as eventually, companies will need to increase their sales to realize persistent increases in profits.
We stated in January of this year that approximately 12 – 15 months would likely be needed (in our opinion) for businesses to exhaust their excessive inventory levels built up in the late 1990s. Since that time, the inventory-to-sales ratio has improved dramatically and now stands at 1.36, after reaching a low of 1.35 in April — the lowest level since organizations began compiling this statistic in 1992.
With business borrowing rates at their lowest levels in 37 years, and given the current low level of business inventories, we believe that once consumer confidence turns upward again that manufacturers will start increasing their production activities. This should lead to other business investments that will likely provide the necessary stimulus for a sustained economic recovery and a new Bull Market.
Industrial production, a coincident economic indicator, has already improved significantly over the past seven months, as has industrial capacity utilization. These economic measures reached a low in January of last year and have been consistently improving since then. We believe that sustained increases in business investment will lead to further declines in the unemployment rate, which (in our opinion) will result in higher and higher consumer confidence going forward.
As CEOs and CFOs continue to certify their companies’ financial statements, we believe that the psychological impact on investors will be very favorable and that individuals will again begin adding funds to equity mutual funds (for retirement purposes), in light of the extremely low yields currently being earned on fixed-income securities.
For these reasons, we continue to believe that the stock market will perform very strongly in the coming year, and we believe that now is the time to be searching for bargain-priced stocks of companies that have consistently been able to grow their sales and earnings. We expect to add several more stocks to our Stock Picks page during the next several weeks.
July 30, 2002
We have updated Page 1 of our Market Indicators Web page. We will be updating the other two Market Indicator pages over the next several days, and we will then update our Quarterly Market Analysis comments early next week.
Our Leading Market Indicators clearly illustrate the fragility of the U.S. economy at this time, as Building Permits for New Housing Starts appear to be topping and as consumer confidence has waned — sustainable economic recoveries are usually accompanied by a significant increase in New Housing Starts and a steady improvement in consumer confidence. We expect for Business Investment to increase between now and the end of the year, but if such does not occur, we believe that the U.S. economy could easily dip back into a recession. Therefore, we believe that investing in the right sectors of the stock market and selecting the right stocks will be the key to successful investing during the remainder of 2002.
July 23, 2002
Although we have felt for about the past 18 months that the major stock market indices would perform in a way similar to the period from 1980 – 1982, three charts that we prepared today clearly indicate that the current bear market more closely resembles the bear market of 1973 – 1974 than that of the ’80 – ’82 period.
Given that we did not foresee the wave of corporate scandal that has been revealed during the past six months, we have been relying on our Market Indicators, which have been suggesting to us that a new bull market would begin by the autumn of this year. However, we now believe that the fraudulent actions of corporate CEOs is affecting the stock market in a way similar to how the unforeseen oil embargo by Arabic countries (beginning in 1973) negatively affected the U.S. stock market in the ’73 – ’74 period.
We continue to believe that a market bottom is near, but as we stated on 7/20/02, we now believe that several more months may pass before the market enters a new bull phase.
Click on the following link to view charts of the ’73 – ’74, ’80 – ’82 and current Bear Markets: Bear Market Comparison Charts.
July 22, 2002
Our current recommendations to investors in stocks and stock mutual funds is very simple — Hold onto your stocks of financially strong companies that are still growing their sales and earnings and that are reasonably priced; don’t panic; save a portion of your income; and begin looking for new investment opportunities.
We strongly urge against investing in bonds at this time.
We point out to those “investors” who got caught up in the foolishness of buying stocks of unproven companies during late 1999 that little has changed in the stock market environment over the past 100 years — the “new paradigm” on which many investment professionals were commenting obviously doesn’t exist.
But, now is not the time to be selling the stocks of strong companies and equity mutual funds. Now is the time to be cautiously looking for new investment opportunities and to be preparing for the next bull market.
July 20, 2002
Well, the market onslaught has continued during the past week, as more and more investors are “throwing in the towel” by selling their stocks and mutual funds. During the latest week, the nation’s largest stock mutual funds have had outflows of $18.4 billion, according to mutual fund tracker Trim Tabs.
As we stated on July 16, we have been expecting the major stock market averages to decline over the past six weeks, and for the market to bottom in July. We have also been forecasting the market to then trade sideways for about six weeks and to begin rising in the later part of 2002. However, we are now concerned that the market may not enter a new bull cycle for many months, unless something is done to curb the wave of corporate fraud committed by CEOs and CFOs at publicly-traded companies.
So far, congress has acted on this matter in just the way we expected since the Enron story first broke in October of last year — they have done nothing, except to give speeches (in an effort to get re-elected), and they have focused their attention on subjects that distract from the real problem; they have deliberated on the concept of expensing employee stock options, as opposed to enacting laws to deter corporate officers from misstating company revenues and earnings. We are not surprised by their inactions, given that the enactment of laws that could put highly-paid CEOs in jail might mean convicting many of the same persons that often help to get some congressional members elected.
However, we believe that there is a solution to this inaction by congress; (unfortunately, we are sure that few investors will heed our advice). We recommend for all investors to contact their representatives in congress and demand that something be done immediately to place dishonest CEOs and CFOs in jail, to seize their assets, and to sell those assets in a public auction to repay investors that were harmed by those corporate officers’ misdeeds. (We recently phoned our three congressional representatives with such demands, and their response was that if they received such phone calls on a regular basis from their constituents, that they would probably act quickly to actually do something about the corporate fraud that could have some long-term negative effects on stock prices).
So, for those of you who are complaining about the recent direction of stock prices and the corporate fraud that has been conducted by numerous CEOs/CFOs, we suggest that you quit blaming others and that you get off your butt and do something about these problems — phone your congressional representatives and demand action, review a company’s financial statements before investing, and seek advice from investment professionals who can demonstrate that they place your financial interests above their own.
July 16, 2002
As many of you have witnessed, the market sell-off is continuing, as the “regular suspects” are focusing on promulgating negative news “stories” that they can easily propagate to their uninformed audiences, rather than studying and commenting on the many positive developments that we believe will lead to a rebound in the major stock market indices in the third quarter of this year.
As we first stated on May 8, 2002, our market indicators were suggesting at that time that the major market indices would bottom in July; (those indicators continue to suggest that a bottom will occur this month). Just as we expected, negative investor sentiment has developed during the past six weeks, given that most publicly traded companies are in between their quarterly earnings announcements — since there are few earnings announcements to discuss, market commentators have needed to find other topics on which to comment. Thus, they have chosen to focus on the easy “negative” stories to sell, such as corporate accounting scandals, rather than to comment on the many positive developments currently underway. This has lead to large redemptions by individual investors in mutual funds during the past six weeks, which in turn has apparently forced mutual fund managers to sell some of their equity positions. However, we see this as a positive going forward, as more cash will be “sitting on the sidelines” available for investing in the future.
We strongly urge long-term investors to ignore most of the negative news that is currently predominating the headlines, and instead to begin searching for solid investments that can be purchased at bargain prices; for, in our opinion, the best time to invest is often at a time when things seem to be at their worst.
We will begin updating our Quarterly Market Indicators at the end of this week, and we will post those updates to the Market Indicator pages of the Frazier Research & Analytics’ Web site once they are completed. (Please note that many of the economic statistics that we follow do not come available until approximately three weeks after the end of each quarter). We will also update the Quarterly Market Analysis page, which will provide more details regarding our forecast of the major market indices for the remainder of this year.
July 11, 2002
As many of you are aware, the major stock market indices have pulled back sharply in price during the past five trading days. This is not surprising to us, given the extremely negative psychology currently prevailing in the investment markets. We believe that the Dow Jones Industrial Average may continue to decline to a low of around 8400. However, we believe that the NASDAQ Composite has likely already reached its low.
From this point going forward, we expect for the markets to trade in a sideways pattern for the next 6 – 12 weeks. We believe that the major market indices will then begin advancing and that stocks, in general, will perform strongly in year 2003, with technology stocks outperforming.
June 27, 2002
Since January of this year, we have been projecting for the financial markets to perform similar to the way they did during the period from 1981 – 1982, and for the major market indices to be quite volatile, trading in a sideways manner. Also, other than for one blunder that we made on May 14, we have repeatedly warned investors to not get sucked into market rallies, but instead to sit on the sidelines and to wait for more encouraging signs on the economy before aggressively committing funds to equity investments.
On May 8, we stated that many of the economic and stock market indicators that we follow suggest that the U.S. stock market will bottom in July of the current year, and that the market will perform strongly in year 2003. We continue to believe that the market will bottom in July, if it has not already done so in the past week. However, unlike many of the stock market commentators who are currently focusing on the negative events affecting the financial markets, we see numerous positive signs developing.
Our research indicates that many investment experts and market commentators tend to follow the herd, and that they are often wrong near major turning points in the market. During late 1999 and early 2000, when numerous stock market indicators suggested that the major market indices had topped, few of the investment experts and commentators that we follow were forecasting a Bear Market. But, now that we have experienced a prolonged Bear Market, many of these so-called experts seem to be focusing on recent negative events, rather than paying attention to the numerous positive factors that are likely to affect the market in the near future.
We strongly believe that the stock market will advance significantly in year 2003, and that technology stocks will be among the top performers. However, rather than waiting for stocks to be up substantially in price, we believe that now is the time to be purchasing stocks of financially sound companies that have been consistently growing their sales and earnings. We are NOT recommending for investors to foolishly place all of their investment funds in individual stocks. However, we suggest for persons who can afford the risk of loss presented by equity securities to place a portion of their investment funds in stocks of strong companies that can currently be purchased at bargain prices. (Investors who may be considering our investment recommendations should review our general philosophy on investing by clicking on the following link: Our Investment Philosophy).
During the past week, we have added three new selections to our list of Stock Recommendations. We will likely continue to add to that list over the coming weeks, as we are now finding numerous stocks that meet our investment criteria.
June 25, 2002
From our perspective, the investment environment is looking better and better; for, the best time to invest, in our opinion, is when stocks of solid companies that have been consistently growing their sales and earnings at rapid rates can be purchased at bargain prices. Not to our surprise, the major stock market indices have been declining lately and are approaching their September 2001 lows. We view this as a major positive for astute investors seeking long-term investments in common stocks.
Although many Wall Street market commentators have been shunning technology stocks as of late, we believe that now is the time to be purchasing stocks in some industries of the technology sector. We particularly like the semiconductor industry at this time. Semiconductor Equipment and Materials International (SEMI), the trade association serving the global semiconductor equipment, materials, and flat panel display industries, reported on 6/19/02 that North American-based manufacturers of semiconductor equipment registered a book-to-bill ratio of 1.26; this means that $126 worth of new orders were received for every $100 of product billed. SEMI pointed out that, for the second straight month, bookings showed positive year-over-year growth and surpassed the $1 billion mark for the first time since March 2001. Also, during the past two weeks, several companies operating in the semiconductor industry have announced increased bookings.
Our research indicates that many of the large corporate users of computer equipment have not made major upgrades during the past three years. Given the reduced cost at which some technology equipment can now be purchased, we believe that once the business cycle turns up, these large corporate users will begin increasing their outlays for computer hardware and software.
June 4, 2002
We pride ourselves on generally being right about the future direction of stock prices, and although our forecasts have been very accurate during the past eighteen months, our latest call on the market seems to have been wrong.
On May 14, we stated that we believed that the latest stock market rally “was for real”, and that a new Bull Market may be underway. Since then, the S&P 500 is down 5.4% and the Nasdaq Composite is down 8.9%.
We still believe that the stock market will perform strongly in year 2003, but stock prices have apparently not yet reached their bottom. This does not change our viewpoint that now is the time to be purchasing out-of-favor stocks of growth companies that have been consistently growing their sales and earnings. Numerous indicators that we follow still suggest that the bottom in the market is near, and that stock prices will turn up in the second half of the year. We point out to investors that the best time to be buying stocks is often at a time when things seem to be at their worse.
May 21, 2002
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In our last Quarterly Market Analysis on January 5 of this year, we forecast the major stock market indices to trade in a side-ways pattern during year 2002, and for the market averages to be quite volatile — Q4 2001 Market Analysis. Since then, the market indices have, in fact, traded side-ways and they have been rather volatile. As of May 21, 2002, both the S&P 500 (SPX) and the Dow Jones Industrial Average (DJIA) were virtually unchanged from their levels in January, with the SPX closing at 1,080 and the DJIA closing at 10,106 and (as compared to 1,173 for the SPX and 10,260 for the DJIA on 1/05/02).
Over the past several months, we have repeatedly warned investors “to not get sucked into short-term market rallies,” as we suggested that they “sit on the sidelines and wait for more encouraging signs on the economy.” However, we now believe that investors should begin taking a more aggressive stance in their approach to the market by purchasing out-of-favor, big-cap technology stocks, small-cap growth stocks, and aggressive growth mutual funds. Our recommendation is based on numerous factors, some of which are outlined below.
- Interest rates continue to be very low, thus allowing for businesses to obtain low-cost investment capital, and for consumers to purchase big-ticket items (such as homes, automobiles and other consumer durables) on low rate credit.
- The rate of inflation remains very low. As a result, the Federal Reserve is unlikely to raise interest rates to a level that would starve off any significant increase in demand — the rate of economic growth will likely be able to increase substantially without a threat of the Fed raising interest rates.
- Corporate Profits seem to be starting to improve, and year-over-year earnings comparisons in the third quarter of 2002 are expected to be relatively positive. For the quarter ended 12/31/01, corporate profits increased 5.7% over profits in the fourth quarter of 2000.
- Industrial Production, a coincident economic indicator, recently bottomed in December of 2001, and it has turned up for each of the past three months (as of 3/31/02). Industrial Capacity Utilization also recently bottomed, as did the Business Inventory-to-Sales ratio.
- The U.S. Government has been employing an expansionary fiscal policy, with Federal Spending rising at the fastest rate since the recession of 1990, and the enactment of the biggest tax cut since the recession of 1981.
- Investor’s contributions to Stock Mutual Funds increased dramatically in the latest reported month ended 3/31/02, and they were the largest since April of 2000. Net new cash flows into Stock Mutual Funds in March of the current year were larger than in any period during the past five years, except for the first four months of 2000 before the market began its decline.
- Several Leading Economic and Stock Market Indicators that have been very reliable in forecasting past tops and bottoms in the stock market are now suggesting that a bottom has been reached and that the major market indices will trend up in the latter part of 2002.
Although P/E ratios for both the SPX and the DJIA are still relatively high (with P/Es of 43 and 27, respectively), the P/Es of many stocks, including stocks of numerous companies that have continued to grow their earnings at rapid rates (even during the recently difficult economic environment), are quite low. The growth rate of many of these companies’ earnings is currently above their stock’s P/E ratios; thus, they can be now be purchased at bargain prices. Yet, many of the so-called Wall Street “experts” are currently recommending investments in historically low-return consumer staples and other defensive stocks. For example, on Monday (5/20/02), Merrill Lynch’s Chief Quantitative Investment Strategist, Richard Bernstein, recommended for investors to sell technology shares and to buy utility, consumer staple, and defense stocks, as he believes that demand for technology goods will be weaker during 2000 – 2005 than it was during 1995 – 2000. Although we agree that demand for some types of technology goods may be less during the next three years than during the five year period from 1995 – 2000, the time to sell technology shares was at their peak in late 1999 when they were clearly over-priced, as opposed to now when the stocks of many technology companies that are still consistently growing their earnings at fast rates can be purchased at bargain prices.
Consumer staples (and other defensive stocks) are often relatively safe investments that sometimes make sense during difficult market environments, but these stocks can fall just as fast as stocks in any other sector of the market the moment institutional investors begin rotating their holdings. Thus, we reason that the potential gains that can be realized from investing in consumer staples and other defensive stocks do not warrant the risk of loss from such investments.
Instead, we recommend investing in long-term growth sectors of the market when stocks in such sectors can be purchased at bargain prices. Although investments in consumer staples and other defensive stocks (such as utilities) may continue to perform well over the next several months, such investments are foolish (at this time), in our opinion, since the economy seems to be finally improving and many long-term growth stocks can currently be purchased at bargain prices.
Over the next few weeks, we plan to add several stocks to our Recommended List on the Stock Picks page of this Web site, as we believe that the stock market will perform well in the latter part of this year, and that technology and other growth stocks will increase substantially in price during year 2003. Since we do not claim to have a crystal ball and therefore do not know exactly when stock prices will begin a new major up-trend, we believe that now is the time to start purchasing the stocks of growth companies with strong fundamentals rather than waiting for them to be up 50% (when the “experts” may again be recommending them).
As for the recent fears displayed by some investors regarding the threat of new terrorist attacks against the U.S., we suggest that they review the table below for an illustration of the affect that similar events in the past have had on future stock market returns.
EVENT RISK and STOCK MARKET RETURNS
Performance of the DJIA
1 Day After Event from 3 Months Before Event
3 Months After Event
1 Year After Event
|Germany Invades Poland
|Korean War Begins – Crossing of 38th Parallel
|Castro Takes Control of Cuba
|Berlin Wall Constructed
|Cuban Missile Crisis
|South Vietnam’s President Diem Overthrown
|President John F. Kennedy Assassinated
|First U.S.Combat Troops Sent to Vietnam
|6-Day Israeli-Arab War Begins
|Soviet Union Invades Czechoslovakia
|Shah Pahlevi of Iran Overthrown
|Beginning of Iranian Hostage Crisis
|Soldiers Fire on Students in Tiananmen Square
|Iraq Invades Kuwait
As is illustrated in the table, past unforeseen events that may have seemed overwhelmingly negative at the time of occurrence appear to have had no lasting influence on the U.S. stock market. In fact, stock prices were generally up in the year following these events. So, once again, we strongly suggest that investors ignore all of the hype put forth by “the regular suspects” — stock market commentators — and that they instead focus on factors that have been shown to consistently affect stock prices — the economy, corporate sales and earnings, and general demographic trends.
May 14, 2002
Is the most-recent market rally during the past two days for real. We believe that it is. Last week, we stated that our market indicators suggest that the major stock market indices will bottom in July and that the market will perform strongly in 2003. We now believe that the market may have already bottomed and that a new Bull Market may be underway.
There are several factors that lead us to this conclusion:
- Market-related news has turned positive in the past week after being negative for the past nine weeks. Of course, one week of positive news doesn’t mean much, and we will be closely monitoring the news going forward to see if it stays positive. (Interested investors can view the table that we display every day at the bottom of our Market Diary Web page, where we keep a moving average of the ratio of Positive-Negative news).
- The number of Advancing-to-Declining stocks (as well as the trading volume of Advancing-to-Declining stocks) has been positive for the past week, the past six weeks, and the past three months. (Investors can keep track of this important market statistic by visiting our Market Statistics Web page).
- Several of the Leading Market Indicators that we track suggest that a bottom has already been reached or that a bottom is not far from being realized. (These indicators can be viewed by visiting page 1 of our Market Indicators Web page). Other indicators that we track, some of which will be updated on page 2 of our Market Indicators page on May 20, also suggest that the market averages may have reached a bottom and that the market is soon poised to enter a new Bull run.
- The third year in a U.S. President’s first term in office, which begins next year for President Bush, has historically been a good year for the stock market. There are numerous political reasons for this, on which we may comment in a future update.
- Many of the Wall Street “experts” are currently recommending slow-growth, defensive stocks as opposed to long-term growth stocks — they seem to be “throwing in the towel”, and few of these “experts” is currently recommending technology stocks. (We view this as a “contrary market indicator”, as empirical evidence supports our belief that many of these so-called market experts are often wrong).
TECHNOLOGY, TECHNOLOGY, TECHNOLOGY
We are amazed, and yet not surprised that many of the Wall Street “experts” have recently been recommending investments in consumer staples and other defensive stocks — stocks such as Proctor & Gamble, Helen of Troy, and Anheuser-Bush. Investments in consumer staples have been relatively safe investments over the past year, but no one is ever going to make big returns by investing in consumer staples. And, the moment that institutional investors begin rotating their holdings to other sectors of the market, stocks in this sector can fall just as fast as stocks in other sectors. Thus, we reason that the potential gains that can be realized from investing in consumer staples and other defensive stocks do not warrant the risk of loss from such investments. We believe that sitting on the sidelines (by investing in money market funds), and waiting for the right opportunity to begin investing in long-term growth companies makes much more sense.
However, once reliable indicators suggest that investments in long-term growth sectors of the market again makes sense — earnings are starting to improve and stock prices are at reasonable levels (relative to earnings growth rates) — we believe that investors should begin focusing on these sectors. Starting in the third quarter of the current year, earnings comparisons for many growth companies in the technology sector of the market will likely be favorable. Therefore, we recommend for investors to begin seeking investments now in out-of-favor, bargain-priced, growth companies in the technology sector of the market before such stocks are already up significantly and before the trend-followers on Wall Street begin recommending them.
So, although the “experts” have been shunning technology stocks, we believe that long-term investors should be starting to invest again in this sector of the market. We believe that the biggest returns will be made from investing in the stocks of relatively young companies that are offering new products and that are growing both their sales and earnings at a rapid rate. We have analyzed numerous companies over the past three months that possess these characteristics. Next week, we will begin posting our new investment recommendations to the Stock Picks page of the Frazier Research & Analytics Web site.
Although our focus is on small-cap growth companies, we believe that there are also some big-cap technology stocks that will perform well over the next 12 months. Two examples are Dell Computer (DELL) and Intel Corporation (INTC). However, we urge investors to invest only in the stocks of companies that can be purchased at bargain prices — stocks of companies that are selling at low prices in terms of their growth rates; (a stock’s P/E ratio divided by the company’s earnings growth rate is a good proxy of its relative value).
We also recommend for those investors who are more comfortable in diversifying their holdings by investing in mutual funds to consider investing in technology-oriented growth funds such as PBHG Growth Fund (PBHCX) and Alger Small Capitalization Fund (ALSCX); (these funds often perform poorly in down markets, but they have historically earned big returns in up markets). However, we suggest for investors to purchase these funds in some type of tax-deferred account (such as an IRA account or a deferred annuity “Separate Account” managed by life insurance companies). By doing so, one can defer paying taxes on the fund’s annual dividend and capital gains distributions until either the fund is sold or the investor begins making withdrawals from the account.
On Tuesday (5/21/02), we will provide a more-thorough review of our current analysis of the U.S. economy and the stock market.
For those readers who may get the false impression that we think negatively about everyone on Wall Street, please refer to the list below for a few market analysts/investment managers that we have found to be consistent forecasters of the future direction of stock prices.
||RBC Dain Rauscher
||Schaeffer’s Investment Research
||Blue Chip Growth Letter
||William O’Neil & Co.
May 8, 2002
Many of the economic and stock market indicators that we follow suggest to us that the U.S. stock market will bottom in July of the current year, and that the market will perform strongly in year 2003. However, just as we had warned investors on March 4 “to not get sucked into the market rally” that occurred between February 28 and March 8, we again warn investors to not become overly optimistic about the advances in the major market indices that occurred today.
Today’s increases in the market averages were greatly impacted by the latest quarterly earnings announcement from Cisco Systems (CSCO). Although we also interpreted yesterday evening’s earnings report from Cisco as a “positive” (as indicated by us on our “Market News” Web page), astute investors should consider the following regarding Cisco’s earnings:
- Product Sales were down for the quarter (as compared to year-ago sales).
- Total Revenues increased as a result of an increase in Cisco’s Service Revenues. (A company such as Cisco Systems, whose Product Revenues have historically contributed in excess of 80% of the company’s Total Revenues, would prefer for revenues to increase as a result of an increase in Product Revenues as opposed to an increase in Service Revenues).
- Although Product Sales declined, Cisco’s Manufacturing Costs of producing its products rose.
- In the comparable year-ago quarter, Cisco recorded $1.2 billion in Restructuring Expenses (as compared to no such expenses being recorded during the current quarter, making for an easy earnings comparison).
- In the comparable year-ago quarter, Cisco recorded $181 million in expenses related to the Amortization of Goodwill (as compared to no such expenses being recorded during the current quarter). In the future, many companies will be forced to periodically record an “Impairment” charge for Goodwill rather than regularly amortizing such charges.
Thus, although an increase in year-over-year quarterly revenues is a positive for Cisco Systems, the bottom-line net income reported by the company is not terribly impressive, especially since Cisco reduced its outlays for Research and Development, Marketing, and Administrative Activities (including a reduction in headcount) to achieve its increase in “Service Revenues”.
We mention these details concerning Cisco Systems because of the impact that such a (supposedly) “positive” earnings announcement from a closely-followed company like Cisco will often have on the major stock market indices. Given that CSCO comprises approximately 5% of the NASDAQ 100 Index, one should not be surprised that the NASDAQ 100 was up substantially today.
Another major factor likely affecting the market today was the supposedly dramatic improvement in Labor Productivity reported yesterday (and talked about emphatically on numerous financial news programs today). Non-farm Business Sector Output per Hour — Productivity — increased at an annualized rate of 8.6% during April, as compared to March. Although consistent increases in productivity are importantly related to the overall growth of an economy, we emphasize the following points regarding Productivity:
- Productivity often increases during periods immediately following substantial employee layoffs; this should not be surprising since (a) remaining employees tend to become more productive in an effort to keep their jobs, and (b) company industrial capacity — the amount of capital assets (such as machinery and equipment) employed by a firm — tends to remain constant. Since productivity is a function of labor and capital, it will often tend to increase even during recessionary periods. For example, productivity increased during certain quarters for each of the past U.S. economic recessions: the 1973-1974 recession, the 1980-1982 recession, and the 1990 recession.
- Annualized Quarterly Increases in Productivity is not a reliable stock market indicator. For example, Productivity increased at an annualized quarterly rate of 5.4% in the fourth quarter of 1980, yet the S&P 500 Index fell from a high of 140.52 on 11/28/80 to a low of 102.6 on 8/11/82 — a decline of 27%. Productivity increased at an annualized quarterly rate of 6.7% in the first quarter of 2000, yet the S&P 500 again declined over the following months — from a high of 1527 on 3/24/00 to its recent low of 945 on 9/21/02.
So, although we are seeing numerous encouraging signs regarding the economy and the stock market, we again warn our subscribers to not get sucked into what we believe may only be another short-term rally. We urge investors to be patient, and to pay no attention to the market hype from the so-called investment experts and inept market journalists who seem to either be not doing their homework or to be unaware of the factors that have a sustainable influence on future stock prices.
April 8, 2002
We have become very concerned during the past week about the future direction of the U.S. stock market. As a result, we believe that most stock investors should currently be “sitting on the sidelines” and waiting for more encouraging signs on the economy. As we have been saying for the past several months, we do not expect corporate sales and earnings to increase, on average, during year 2002.
During the past two weeks, numerous publicly traded companies have issued “pre-announcements” of their “expected” earnings for the quarter ended March 31, 2002. Although many of these companies have forecast sales and earnings that will “beat expectations”, we point out to investors that “beating expectations” does not necessarily mean that a company has improved its sales and/or earnings. We alert investors to note that “sell-side analysts” at securities brokerage firms are the main participants (in addition to corporate officers) who set earnings expectations — who forecast future sales and earnings. Often, when the operating prospects for a company have diminished, these “analysts” will lower their “expectations”. As a result, a company may more easily surpass “expectations” going forward.
At Frazier Research & Analytics, we focus on the actual operating results of companies, as compared to year-ago results, to determine whether a company’s performance has improved or deteriorated. We have found that the forecasted sales and earnings of most companies that have been issuing “earnings pre-announcements” for the quarter ended March 31, 2002 are lower than year-ago figures. Not to our surprise, many companies and “sell-side analysts” are trying (as usual), in our opinion, to mislead investors. Additionally, many companies that reported increases in actual earnings for the quarter ended December 31, 2002 were able to do so only by incurring significant cutbacks in their operating expenses (e.g. employee layoffs and decreases in marketing activities). Lowering these types of expenses does not generate additional revenues, and therefore such cutbacks tend to increase earnings in only one quarter.
Oil prices are rising, the employment situation has deteriorated, interest rates will likely rise in the coming year, and stock prices are terribly over-priced (relative to corporate earnings). For these reasons, we continue to believe that the major stock market indices will trade in a sideways pattern, at best, for the remainder of year 2002. We strongly suggest for investors to quit listening to all of the hype from Wall Street on how the economy is supposedly improving and how stock prices are headed higher, and instead to focus on preserving their capital during this uncertain period.
NOTE: We will be updating our Market Indicators this coming weekend, and we will present our analysis of those indicators next week.
One bright area of the market for stock investors to consider is the Medical Equipment and Supplies industry. We are currently reviewing companies operating in this industry, and we will post our investment recommendations to the table on our Stock Picks page once we find stocks that we believe represent profitable investment opportunities.
April 3, 2002
We can not help but find humor in the recent pull-back in the major stock market indices. We warned our subscribers on March 4, 2002 that the up-trend in the market that began on February 8 would be short-lived, in our opinion, as we suggested for “investors to not get sucked into what we believe is only a short-term rally.” Four days after our warning, the Dow Jones Industrials reached a high of 10,729 on March 8, and since then all three of the major market indices (DJIA, SPX, and COMP) have been trending downward. As usual, the “regular suspects” — stock market commentators on popular financial/news television shows — have been blaming the recent pull-back on exogenous events, such as the “unforeseen” Middle-East crisis, the “unexpected” negative pre-announcements of upcoming earnings by publicly traded companies, and the spike in oil prices. We note that one “expert” investment commentator, James Cramer, stated on CNBC’s popular TV show America Now on March 6, 2002 that “the Bear Market is over” as he commended fellow commentator Larry Kudlow on accurately forecasting the beginning of a new Bull Market. Apparently, Mr. Cramer has not been doing his homework.
Although the Middle-East crisis is obviously having a dampening affect on the stock market, as is the recent increase in oil prices and negative earnings pre-announcements, we believe that the continuing weakness in the U.S. economy (and other economies around the world), and poor corporate earnings are the major factors causing the sideways market volatility. We pointed out on March 4, and again on March 6, that “stocks are still significantly overvalued” and that “our review of hundreds of companies indicate that corporate earnings will not increase substantially, on average, for at least another nine months”. Thus, we are not surprised at all in any of the negative earnings pre-announcements. Nor are we surprised of the spike in oil prices, given the situation in the Middle-East. We do not consider ourselves pessimists, but we feel compelled to point out that the Semitic peoples of the Middle-East have been in conflict with one another for the past 5,000 years. Why should anyone expect for them to suddenly become friends.
As always, we try to stick to the facts. Those facts continue to indicate that the U.S. economy will likely not improve in any dramatic way during the current year, nor will corporate sales and earnings. For this reason, we continue to believe that the major stock market indices will perform similar to the way they did during the period from 1981 to 1982.
We have recently been reviewing hundreds of companies that meet our initial investment criteria, and we have found numerous companies whose stocks we believe will perform well over the next 12 months. However, we are waiting for the right time to invest in/recommend those stocks to our subscribers. The prices of micro- and small-cap stocks tend to be rather volatile, and therefore, we believe that buying them at the right time is just as important as selecting the right companies in which to invest.
We plan to update our Market Indicators on April 13 – 14, as well as our Quarterly Market Analysis. This coming weekend (4/07/02), we will be updating our Industry Performance Statistics. So, be sure to review those pages, as they are very important in helping investors to decide on (1) the level of aggressiveness that they should be taking in the market, in the opinion of Frazier Research & Analytics, and (2) in what sectors of the market they should consider investing.
March 21, 2002
Just as we have been projecting, the market has pulled back during the past two days from its recent intra-day high of 10,729 (for the Dow Jones Industrials) on March 8, 2002. The latest figures were reported today for Unemployment and for the Conference Board’s Index of Leading Economic Indicators. The 4-Week Moving Average of First-Time Claims for Unemployment Insurance rose, as did Continuing Claims. The Index of Leading Indicators was unchanged from February. These latest market indicators confirm our belief (first mentioned on January 5, 2002) that the stock market will be rather volatile throughout the current year and that the major market indices will trade in a sideways pattern.
On a brighter note, we believe that the stage has been set for certain sectors of the market to perform well over the coming 12 months. We hope to complete our review of numerous investment candidates in our database of micro- and small-cap stocks during the next few weeks. We will then post our recommendations to the “Stock Picks” page.
March 6, 2002
We are seeing more and more signs that the U.S. economy is improving and that certain sectors of the stock market will perform well during year 2002. However, we continue to believe that the major market indices will be rather volatile throughout the year, given the current valuations of big-cap stocks and our expectations for poor year-over-year corporate earnings comparisons.
News announcements have been very positive over the past three days, several economic statistics have improved dramatically, and the percentage of bullish investment newsletter writers (who tend to be wrong at important turning points in the market) has consistently declined over the past eight weeks. Additionally, the number of advancing stocks is starting to be accompanied by significant increases in up volume.
Given these developments, we are now turning our attention to reviewing the stocks of companies in our extensive database of investment candidates. Once we identify companies whose stocks we believe will perform strongly throughout the remainder of year 2002, we will add them to our “Recommended for Review” list on the “Stock Picks” page of this Web site.
In the middle of April, we will update all of our Market Indicator statistics displayed on the “Market Indicator” Web pages, and we will provide a detailed analysis of the market (with projections for the remainder of year 2002). We will also be updating our Industry statistics during mid-April.
March 4, 2002
Not to our surprise, the major market indices have advanced substantially since our last comments on 2/28/02. However, we caution investors to not get sucked into what we believe is only a short-term rally.
The market has advanced over the past few days primarily in response to, in our opinion, an increase in both New Orders for Manufacturer’s Durable Goods and Non-Defense Capital Goods, and to an improvement in the Institute for Supply Management’s Index (which gauges manufacturer’s orders and factory production). Our research indicates that new factory orders are often volatile during the bottoming stages of the economy and that one should not rely on these measures to predict the short-term course of the stock market.
We point out that sales of new single-family homes dropped 14.8% in January from February (the largest drop since 1994), and that both Ford and Chrysler reported sales of new vehicles that were down sharply in February, as compared to the same period a year ago. Additionally, the University of Michigan’s Consumer Expectations Index, a very reliable leading economic and stock market indicator, declined to 87.7 in February from 91.3 in January.
Many stocks are still significantly overvalued in our opinion, as is revealed by the P/E ratios for the Dow Jones Industrial Average and the S&P 500 Index, both of which are currently over 30. While many stock market commentators may accurately state that P/E ratios tend to be high during bear markets and when the overall economy is in a trough, our review of hundreds of companies indicate that corporate earnings will not increase substantially, on average, for at least another nine months. For this reason, we believe that certain improvements in the economy are already factored into stock prices, and that a major up-trend in the market will not occur until later in the year.
We continue to believe that the market will be quite volatile during most of year 2002, and that investors should therefore be very cautious in choosing the stocks in which they invest.
February 28, 2002
We are starting to see signs that the major stock market indices may soon begin to turn upward, although we still believe that the market will be rather volatile throughout year 2002. We no longer believe that the Dow Jones Industrials will drop to the 9,000 level that we had forecasted on January 5 of this year. Rather, we now believe that the recent low of 9,443 on January 30, 2002 may have been the low point for the DJIA in the current stock market cycle.
Please note that we are not concerned with being able to predict exact low points or high points on any of the major stock market indices. Rather, our objective concerning the investment markets in general is to remain cautious during periods of great uncertainty, and to be aggressively buying stocks when our market indicators suggest that a prolonged market up-trend will soon develop.
We are not yet certain that a prolonged market up-trend will develop during the current year. Instead, as stated by us on February 6, we believe that the economic environment may likely resemble that of 1981 – 1982 when several of the leading economic indicators began to give positive readings and the stock market briefly turned upward, but a few months later the economy again turned south as did the market.
We will continue to monitor the economy, mutual fund flows, political events, and various psychological factors that affect the stock market, and we will update our subscribes when significant events affecting the market occur.
February 16, 2002
The latest employment figures for three of the top U.S. trading partners — Canada, Japan, and Germany — have all worsened since the third quarter of 2001. For the period ended December 31, 2001, the unemployment rates for each of these countries, as compared to the quarter ended September 30, 2001 are presented in the table below:
Unemployment Rates for
Major U.S. Trading Partners
February 6, 2002
On January 5 of this year, we stated that we expected the major stock market indices to pull back sharply by mid-February to around 1,040 on the S&P 500 (SPX) and 9,000 on the Dow Jones Industrial Average (DJIA), from their levels at that time of 1,173 on the SPX and 10,260 on the DJIA.
Since then, both the SPX and the DJIA, as well as the other major stock market indices, have indeed declined substantially — the SPX is down 7.6%, the DJIA is down 5.9%, and the Nasdaq Composite is down 12% since January 5, 2002.
The six-week moving average of our Positive-to-Negative News Indicator currently stands at 0.8, and has been less than 0.6 for two of the past three weeks; as of the close on Wednesday of this week, 80% of the news (as we interpret it) was negative.
Factors Affecting the Market
We believe that two factors have been largely responsible for the market decline during the past two weeks — (1) the Enron scandal, and (2) the fact that most closely-followed companies have been reporting negative year-over-year sales and earnings comparisons (even though many of those companies have been trying to “gloss over” their actual results by reporting “better than analyst expectations” results, or by reporting earnings on a “pro-forma” or “excluding items” basis.
Although numerous leading economic indicators have turned positive since late last year, inventories held by many businesses are still relatively high in comparison to recent sales, and Congress has still failed to pass a badly-needed (in our opinion) fiscal stimulus package.
Our President and Director of Research, David N. Frazier, began stating to investors in late year 2000 (and since then) that the lowering of interest rates by the Federal Reserve would not be successful in stimulating the economy for at least 18 months. So far, this has indeed been the case, as banks have continued to enforce stricter lending policies and both consumers and businesses have tightened their spending purses (as revealed by the low velocity of money).
Our Current Opinions
We believe that investor psychology and consumer sentiment will again turn down over the next few weeks and that several of the leading economic indicators will also turn negative, as the fall-out of the Enron scandal dampens consumer and investor confidence.
We have felt for some time that the economy and stock market may act similar to the way it did in 1981 when several of the leading economic indicators began to give positive readings and the stock market briefly turned upward, but a few months later the economy again turned south as did the market.
So, while many of the Wall Street “experts” were stating over the past several months that they felt the recession was over and that the stock market would begin to recover in 2002, so far they seem to be about as good at forecasting the market as all of the sports “experts” who stated with certainty that the St. Louis Rams would decisively beat the New England Patriots in the Super Bowl this past Sunday.
Current Stock Picks
Two of the companies listed on our Stock Picks page have turned lower over the past few days and therefore warrant close monitoring in our opinion — McAfee.com and FiberCore. However, fundamentals still seemed to be strong for both of these companies, and we are therefore maintaining coverage of them at this time. If fundamentals deteriorate, we will remove them from our list. But until such time, we still see them as “Buys”.
January 5, 2002
We expect the market to pull back to around 1,040 on the S&P 500 (SPX) and to 9,000 on the Dow Jones Industrial Average (DJIA) by mid-February 2002 (from its current levels of 1,173 and 10,260 respectively on the SPX and DJIA). The most-recent highs for these stock market indices were 1174 for the SPX on 12/05/01, and 10,221 for the DJIA on 12/28/01.
As of the end of 2001, the PE ratio was 31 for the SPX, and 28 for the DJIA. We believe that these multiples are rather high for the current economic environment, in which many companies are continuing to report negative year-over-year earnings comparisons.
For this reason, and other reasons outlined below, we believe that the market averages will be quite volatile during 2002, and that the various market indices will trade in a somewhat side-ways pattern. Therefore, we recommend that investors carefully choose in which companies to invest during 2002 if they expect to earn substantial investment returns.
Federal Reserve Stimulus Activities
The Fed has done an excellent job, in our opinion, of attempting to stimulate the economy by lowering the Discount Rate from 6% in December 2000 to 1.25% as of the end of December 2001, and by increasing the M2 money supply at a year-over-year rate in excess of 10% (as of the most recently reported data in November 2001). However, neither businesses nor individuals appear to be taking advantage of low borrowing rates, as witnessed by the decrease in the velocity of M2 (both on a quarterly basis and on a year-over-year basis) – M2 velocity declined by 2.3% from the second quarter to the third quarter of 2001, and it declined by 6% on a year-over-year basis from the third quarter of 2000 to the third quarter of 2000).
The Bad News
Although consumers have continued to spend on low-ticket non-durable items during the past twelve months, we wonder how long this trend can continue given the huge number of persons that have lost their jobs recently – the unemployment rate has risen from only 4.2% in January of 2001 to 5.8% as of December 2001. Compounding this problem, industrial output at factories has continued to decline since March of 2001 – the year-over-year change in the Industrial Production Index was a negative 5.9% as of November 2001.
Housing Starts have remained strong throughout the past year, but they have been trending lowering since reaching a high of 1.8 million units in December of 1998. Although Housing Starts showed an increase of 5.5% on a year-over-year basis in November of 2001 (as the 30-year Conventional FHLMC Mortgage Rate reached a 30-year low of only 6.62% in October), Building Permits for New Private Housing Starts – a major leading economic indicator – declined by 3% in November, as compared to year-ago figures. We see this as a warning signal that housing construction could continue to decline in 2002.
The Good News
On a more positive note, inflation remains under control, and oil prices have declined substantially during the past year – the rate of change in the Consumer Price Index was only 1.9% as of the latest period reported in November of 2001, and the price of West Texas Intermediate Oil had declined from a high of $33.34 in November of 2000 to $19.80 as of November of 2001. Additionally, the U.S. Federal Government has operated at a surplus for the past four years, and the Federal Budget Surplus has reached a high of $280.7 billion as of fiscal 2002. As of the third quarter of 2001, the Budget Surplus as a percentage of GDP was the highest since 1947; (until 1998, the U.S. Government had operated at budget deficits for every year since 1969).
Numerous leading economic indicators gave “Buy” signals for the stock market between September and November of 2001 — these indicators reached either a high point or low point of their recent values — indicating that the U.S. economic recession may have reached a low, and that the economy is beginning to improve. Additionally, many retailers are continuing to report strong year-over-year sales comparisons; however, they appear to be placing fewer orders for goods (as the year-over-year change in Manufacturer’s New Orders for Consumer Goods and Materials remains negative).
Although Corporate Profits are a lagging indicator, they have been declining (and at an increasing rate of decline) for the past three quarters ended September 2001. Yet, on a positive note, the ratio of Total Business Inventories to Sales declined substantially in October of 2001, as compared to the previous month; (very importantly, we point out that the U.S. Census Bureau made an adjustment in computing the inventory-to-sales ratio for the months of September and October in an attempt to account for the September 11 Terrorists Attacks).
New cash inflows to Stock Mutual Funds improved dramatically in November 2001 (as compared to outflows between July and September), but the liquid assets of Stock Mutual Funds remained rather low at 5.7%.
Our feeling is that the worst is NOT over for the U.S. economy, nor for several of the other major industrialized countries around the world.
Companies spent huge sums of money in capital expansion activities during the period from 1995 to 2000, and we believe that another 12 – 15 months may be required for inventory built-ups to be exhausted by these firms. (Although inventories have been declining lately, we believe that the inventory-to-sales ratio will remain relatively high for some time given the lack of current demand from consumers for durable goods).
Once inventories are significantly lowered and sales begin to rise, we believe that businesses will take advantage of low interest rates to leverage their operating structures and to begin increasing their output of goods and services. As a result, employment rates should then improve, and the U.S. economy will, we believe, begin to grow at an annual rate in excess of 4% beginning in the second quarter of 2003.