Our Investment-Timing and Stock Market Forecasts

2016 Forecasts

11/28/16: Our President and Chief Market Strategist, David N. Frazier, advised our clients to get fully invested in equity securities, saying, “The Trump Bull Market Has Begun, Stocks Headed Substantially Higher during 2017”.  Frazier added, “our research … suggests that U.S. stock prices, as well as stocks of companies headquartered in certain other regions of the world, will appreciate substantially over the next 12-18 months. That same research indicates that commodity and real estate prices will also rise sharply during the year ahead.”

2015 Forecasts

05/06/15: Frazier said his research indicates that stock prices, in general, are in danger of pulling back sharply over the next few weeks. As a result of that research, he advised his firm’s clients to sell the majority of their equity holdings and to allocate a substantial portion of their holdings to cash-like investments (i.e. money market securities).

01/08/15: Following a report issued by Automatic Data Processing on January 7, whereby that payroll processing firm reported that 241,000 new private-sector jobs were created, on a seasonally-adjusted basis, in the United States during December, Frazier said he expects U.S. stocks to continue to trend higher.

2014 Forecasts

12/16/14: Frazier advised his clients to increase their allocations to equity securities in response to the latest release of some key economic indicators, which turned positive.

07/27/14: Frazier told his newsletter subscribers that the most-recent readings on some of the key indicators that compose his Tactical Asset & Sector Allocation Model flashed some warning signals over the past few weeks.

Frazier went on to say, “if the major U.S. stock market indices were to break down below some key price-support levels, there’s a good chance that I would make some changes to our recommended holdings.”

He added, “my research indicates that stock market indices for most regions of the world will pull back a bit during the week ending August 1.”

05/18/14: Frazier said the latest readings on some key economic indicators suggest that the pace of economic growth in the United States will improve during the second half of this year.

04/07/14: Frazier said to ignore the recent big drop in “story stocks”, as his research indicates that stocks, in general, will stabilize through the week ending April 11, 2014 and turn higher within the next couple of weeks.

2014 Forecasts

12/16/14: Frazier advised his clients to increase their allocations to equity securities in response to the latest release of some key economic indicators, which turned positive.

07/27/14: Frazier told his newsletter subscribers that the most-recent readings on some of the key indicators that compose his Tactical Asset & Sector Allocation Model flashed some warning signals over the past few weeks.

Frazier went on to say, “if the major U.S. stock market indices were to break down below some key price-support levels, there’s a good chance that I would make some changes to our recommended holdings.”

He added, “my research indicates that stock market indices for most regions of the world will pull back a bit during the week ending August 1.”

05/18/14: Frazier said the latest readings on some key economic indicators suggest that the pace of economic growth in the United States will improve during the second half of this year.

04/07/14: Frazier said to ignore the recent big drop in “story stocks”, as his research indicates that stocks, in general, will stabilize through the week ending April 11, 2014 and turn higher within the next couple of weeks.

2013 Forecasts

12/22/13: Frazier notified his newsletter subscribers that his Tactical Asset & Sector Allocation Model (and associated “Buy-Sell” Index) flashed a “buy” signal On December 22, 2013.  That “buy” signals indicates that now is a good time for financial market participants to get fully invested in stocks, if they haven’t already done.

Frazier added, “now that the employment situation is showing signs of improving, with a substantial number of jobs created in the relatively high-paying Professional and Business Services (17.2% of all newly-created jobs), Transportation and Warehousing (15%), Manufacturing (13.3%), Construction (8.4%) sectors during November, I expect economic activity in the housing sector to continue to improve during the months ahead.”

As a result of those developments, Frazier said that he expects stock prices, in general, to continue to move higher during the coming months.
03/24/13: Frazier said stocks will continue to trend higher during the months ahead. Separately, he said his research indicates that gold prices will move lower in response to (1) inflation rates remaining under control and (2) financial market participants selling many of their holdings in gold to fund investments in stocks.

03/05/13: Frazier said stocks are poised to move higher, as his research indicates that substantially more jobs were created during February than Wall Street economists are estimating.

He advised investors who subscribe to his investment newsletter to buy stocks of companies that operate in the financial, industrial, technology, and consumer discretionary sectors of the market, as well as ETFs that hold the stocks of companies in those sectors.


02/17/13: Frazier said stocks will pull back considerably over the next couple of weeks in response to investors’ concerns about automatic U.S. budget cuts that will begin, supposedly, on March 1
in the event that the Congress does not agree to reduce the federal budget deficit by at least $2.4 trillion over the next 10 years.

Frazier went on to say that the latest readings on numerous leading economic indicators for both the United States and several other countries around the world suggest that any such pullback would be short-lived.


02/02/13: Frazier said that numerous economic indicators indicate that the outlook for the U.S. economy will improve, and that stocks will continue to trend higher, during the months ahead.

01/02/13: Frazier advised investors who follow his Core Investment Portfolio to get out of stocks, as his experience indicated that stocks would soon pull back sharply in response to the U.S. Congress’ failing to make any meaningful reductions to the U.S. budget deficit and federal government spending.

2012 Forecasts

12/23/12: Frazier said that in spite of the so-called “fiscal cliff”, his research indicates that stocks will trend substantially higher than their current levels during 2013.

12/09/12: Frazier said the readings on his Tactical Asset & Sector Allocation Model (and associated Buy-Sell Index) remain in positive territory, which indicates that stock prices, in general, will continue to trend higher during the months ahead.

11/18/12: Frazier said stocks to rebound during the coming week after they pulled back sharply from October 19, 2012 to November 16, 2012.

11/04/12: Frazier said the latest readings on numerous leading economic indicators suggest that the pace of economic growth in most regions of the world will accelerate during the months ahead.

10/21/12: Frazier said that regardless of who is elected as the next U.S. President, his research indicates that stocks will trend higher during 2013.

According to the readings on Frazier’s Tactical Asset & Sector Allocation Model (and his associated Buy-Sell Index), economic conditions in most regions of the world will improve considerably, and the pace of worldwide economic growth will accelerate, during 2013.

10/16/12: Frazier advised subscribers to his investment newsletter to allocate a substantial portion of their financial market assets to equity securities, as his research indicates that “the worst is now over for the U.S. economy, as well as for numerous other economies around the globe.”

09/29/12: Frazier said a likely slowdown in the pace of economic growth due to a substantial decline in household spending and business investments will cause stocks to pull back during the coming weeks.

05/01/12: Frazier told investors the readings on his market-timing models indicated that stocks were about to turn lower.

04/02/12: Frazier advised investors who follow his firm’s Core Investment Portfolio recommendations to get completely out of the stock market and to allocate 100% of their financial market assets to cash-like investments (i.e. money market securities), as the readings on numerous technical indicators suggested that stock prices, in general, would pull back during the ensuing weeks.

03/29/12: Frazier forecast gold prices to trend lower during the weeks ahead, as his research indicated that the Federal Reserve would not implement a new round of quantitative easing – of purchasing huge amounts of U.S. Treasury securities – any time during at least the remainder of this year.

2011 Forecasts

12/04/11: Frazier said, “A New Bull Market Has Begun.” He went on to say, “my proprietary Asset & Sector Allocation Model, which has forecast every major turning point in the U.S. stock market since 1969, registered a buy signal last Wednesday. Therefore, I expect stocks to trend higher during the months ahead.

“Meanwhile, my Sector Relative Performance Model and my Overbought-Oversold Index also turned positive last week.

“With the readings on some key leading economic indicators suggesting that the pace of economic growth in the United States will increase over the next couple of months, and both industrial production and retail sales – two of the more significant coincident economic indicators – continuing to move higher, my experience suggests that a new bull market has begun.

“Therefore, I advise both conservative and aggressive investors, as well as stock market speculators, to now get fully invested in the U.S. stock market by allocating 100 percent of their financial market assets to stocks of companies that operate in the financial, technology, and industrial sectors; (those sectors tend to perform well during the early and mid stages of economic recoveries).

In addition, I urge aggressive investors and stock market speculators to consider investing a portion of their capital to the following stocks:

  • JPMorgan (JPM)
  • Entropic Communications (ENTR)
  • SolarWinds (SWI)
  • LivePerson (LPSN)
  • IPG Photonics (IPGP)
  • Ford (F)
  • Caterpillar (CAT)”


11/30/11:
Frazier advised investors to get back into stocks.

He said, “Although economic and geopolitical factors suggest that stock prices will remain confined to a sideways trading pattern for several months, the recent trading action in the financial markets indicates that the downturn in stocks that began during May 2011 has come to an end.” In addition, he noted that the recent readings on some key economic statistics indicated that economic conditions in most regions of the world would improve during the coming months.

He went on to say, “numerous statistics indicate that stocks, in general, are currently trading at low levels in regard to their future earnings capacity and the value of their underlying assets.”
07/06/11: Frazier advised investors to get out of stocks, as his research indicated that the pace of economic growth in both the United States and numerous other regions of the world would continue to slow during the months ahead and that the sovereign debt situation in several European countries would continue to inhibit growth in Europe for at least the next 12 months.

Frazier said, “The factors mentioned above suggest that stock prices around the globe will trend lower over the next several weeks and potentially the next few months”.
05/02/12: Frazier advised investors to reposition their portfolios because his research had flashed some warning signals and several of the leading economic indicators that compose his Tactical Asset & sector Allocation Model had turned negative.
01/04/11: Frazier said, “Stocks Are Headed Higher, Get Fully Invested”

He added, “My research indicates that stocks will trend substantially higher than their current levels during 2011, as worldwide economic conditions continue to improve and economies in most regions of world expand at a much faster pace than they did during 2010.

“That forecast is based, primarily, on the following:

  1. The Employment Situation: Numerous factors suggest that the employment situation in the United States will improve considerably during the current year. For example, claims for unemployment benefits declined sharply during the past four months, employers increased both the total number of hours and overtime hours that their employees worked during November (the latest month for which data is currently available), and employers posted more job advertisements at internet web sites during each of the past three months.
  2. Household Debt and Net Worth: The debt and net worth of American households improved considerably during 2010, as Americans reduced their debt, relative to their income, to the lowest level since 1998, and the value of their financial market investments rebounded.
  3. Expectations Regarding Future Economic Conditions: The expectations of American households and business owners improved considerably during the past few months, as a result, primarily, of recent improvements in the employment situation and the overall economy, and because many Americans and business owners think that newly-elected members of the U.S. Congress will strive to enact some prudent economic legislation during the current year. That legislation would likely include measures to reduce the size of the federal budget deficit and measures to incentivize businesses to increase the sizes of the workforces and to expand their operating activities. Two such measures were already included in the recently enacted tax bill, with the Congress reducing the payroll tax by two percentage points for this year and allowing businesses to deduct 100 percent of their expenditures on machinery and equipment during the current year on their 2011 income taxes.
  4. Corporate Profits: Corporate profits, in the aggregate, will likely continue to rise during the current year, as a result of improvements in the economy and because most companies will be able to maintain their labor expenses near current levels throughout 2011.

“There’s already ample evidence to support my forecast, with manufacturing in both the United States and many other regions of the world increasing substantially during the past few months, auto sales in those same regions of the world rising sharply during the past four months, and household spending on consumer goods and services also increasing substantially during the past few months. Meanwhile, a substantial number of leading economic indicators suggest that worldwide economic growth will accelerate during at least the next few months.

“Therefore, I urge those of you who currently have a large portion of your financial market assets invested in bond funds to sell those funds and to invest the proceeds of those sales in equity securities.”

2010 Forecasts

11/30/10: Frazier said the European debt crisis hasn’t ended; the media just stopped covering it.

Specifically, he said, “once the 2010 midterm elections ended and the media began to lose interest in discussing the Federal Reserve’s new round of quantitative easing, journalists were forced to identify a ‘new’ topic to cover.

“On Nov. 9, they discovered such a topic – the ‘resurgence of the European debt crisis’ — when credit-default swaps on Ireland’s sovereign debt and on that country’s banks surged to record levels, as investors that hold Irish government bonds and the bonds of Irish banks became more concerned that Ireland’s government and some of its banks might default on their bond payments.”

He added, “The yield on Spain’s 10-year bonds rose today to 5.7 percent — a euro-era record difference of 3.05 percentage points against the benchmark German 10-year bond — while the yield on Portugal’s 10-year bond remained near record levels. Meanwhile, the yield on Greece’s 10-year bond rose to 11.63 percent.”

Additionally, he said, “In regard to the potential impact of the European debt ‘crisis’ on the U.S. economy, my research indicates that few U.S. banks will be adversely impacted by the situation in Europe and that a likely economic slowdown in Europe will have a minimally negative impact on the overall U.S. economy.

“With an increasing number of economic indicators suggesting that the U.S. economy will enter a period of long-term recovery during the second half of 2011, I expect the recent downturn in the U.S. stock market that resulted primarily from the media’s recent coverage of the European debt situation to come to an end within the next couple of weeks.”
09/21/10: Frazier said stocks have likely bottomed.

Specifically, he said, “While the Gloom and Doomers like Nouriel Roubini continue to talk about the likelihood of a ‘double-dip’ recession, the recent action in the stock market suggests that stocks have likely bottomed.”

He added, “Several economic indicators suggest that the worst is over for the U.S. economy and that the economy will enter a sustainable period of slow, but steady, growth during the second half of 2011.

“For example, the S&P 500 Index has traded sideways since the final week of May even though worldwide economic conditions worsened during the past few months.

“Separately, investors withdrew a relatively small amount of money from stock mutual funds during August in spite of the fact that the Dow Jones Industrial Average fell last month below the psychologically-significant level of 10,000 for the third time this year. Specifically, investors withdrew approximately $11 billion from stock mutual funds during August, as compared to $24.8 billion this past May.

“Those developments suggest that investors have factored most, if not all, of the ‘bad’ news into the markets and that stocks are in the process of bottoming.

“In regard to the economy, numerous economic indicators suggest that the U.S. housing market will remain weak through the middle of next year and that Americans will limit their spending to necessary household items rather than spending indiscriminately on unnecessary discretionary products and services. However, those same statistics suggests that the housing market will improve and that Americans will increase spending during the coming year.

“For example, inventories of newly-constructed homes fell sharply during July while sales of newly-constructed homes fell to their lowest level since at least 1963 (when the U.S. Department of Commerce began collecting data on of home sales). Specifically, inventories of newly-constructed homes relative to the population of the United States declined during July to a level that was 26 percent below their previously lowest level on record. (Inventories of previously-owned homes also fell sharply during the past two years).

“The fact that the construction of new homes remained near historic lows during August suggests that inventories of homes will decline further during the months ahead. That would be a positive development, if it were to occur, because home prices tend to rise when inventories fall, thus leading prospective homebuyers to purchase homes before the pries of such homes rise to restrictive levels. In turn, increases in home purchases lead homebuilders to increase their construction of homes, which forces those builders to increase the sizes of their workforces. Hence, the employment situation tends to improve during periods when homebuilders increase the number of homes that they construct.

“Meanwhile, recent foreclosure statistics indicate that the pace of foreclosures will slow during the coming months. For example, the percentage of mortgage loans that entered foreclosure proceedings rose only 6.3 percent during the quarter ended June 30, as compared to the same quarter a year ago, while foreclosures rose at a year-over-year rate of 20.3 and 38.8 percent, respectively, during the quarters ended March 31, 2010 and December 31, 2009. Prior to the fourth quarter of 2009, foreclosures had risen at a minimum pace of 50.5 percent during every quarter since the current recession began during December 2007.

“The fact that the median price of previously-owned homes is currently near its lowest level in more than six years and that mortgage rates are currently near their lowest level since at least 1971 also supports the likelihood that both the construction and sales of homes will begin to trend higher as soon as the employment situation shows signs of improving.

“That would be a very positive development for the direction of stock prices because stocks tend to bottom approximately six to nine months before the construction of new homes bottoms.

“Meanwhile, several economic statistics suggest that Americans will increase their spending on all types of goods and services during 2011. For example, Americans have made substantial improvements to their household finances since the onslaught of the credit crisis that began during 2007. In fact, the household debt of Americans as a percentage of their after-tax income declined during July – the latest month for which data is currently available – to its lowest level since November 1998.

“Separately, recent comments made by, and actions taken by, the Federal Reserve indicate that the Fed will increase its efforts to maintain low borrowing rates during the months ahead. Hence, there’s a good chance that personal consumption expenditures, which account for approximately 79 percent of the total output of goods and services in the United States, will trend higher than their current levels as soon as the employment situation begins to improve.

“Although I expect the economy to grow at a slow pace during the coming year, the factors and developments mentioned above suggest that the U.S. economy will be much healthier during the next several years than it’s been since the 1990s.

“In light of the fact that stock prices tend to bottom approximately six-to-nine months before overall economic conditions bottom, my experience suggests that now is a good time to begin to position your investment portfolio for a likely improvement in the economy during the coming year.”
05/18/10: Frazier said, “An increasing number of technical indicators suggest that stocks are in danger of falling further within the next few weeks.

“For example, the number of stocks that have traded at new 52-week highs less those that have traded at new 52-week lows fell last week to the lowest level since July 2009.

“Meanwhile, the percentage of stocks that have closed above their long-term (200-day) moving average trended lower during the past four weeks. Those statistics indicate that the demand for stocks has fallen considerably since mid-April.

“Separately, institutional investors, who account for approximately 80 percent of all trading activity in the financial markets, have consistently reduced their exposure to stocks since the beginning of this year. In addition, those investors increased their allocations to defensive sectors of the equities market during April.

“Of utmost importance, all of the major stock market indices have failed to break up through their prior price-support levels and those indices have traded at lower highs since April 26. That type of trading action has historically been a precursor to lower stock prices.”
04/13/10: Frazier said, “Stocks About to Roll Over, Get Out Now.”

He warned, “The so-called Wall Street ‘experts’ have been telling investors recently that worldwide economic conditions will continue to improve and that stock prices will continue to trend higher during the months ahead.

“Many of you probably recall that those same ‘experts’ made similar claims in the weeks leading up to Oct. 9, 2007 — shortly before stock prices peaked and then fell precipitously over the next 17 months.

“In contrast, I repeatedly warned investors during late 2007 that worldwide economic conditions would deteriorate substantially and that stock prices would fall sharply during the ensuing months.

“Now my models indicate that stocks will soon peak and then, within the next few months, pull back sharply.

2009 Forecasts

03/23/09: Frazier said, “New Bull Market Here; Buy Before it is Too Late.”

He noted that two key leading economic indicators turned positive and the Federal Reserve announced that it’s taking additional steps to unclog the credit markets.

Specifically, he said, “construction of new homes rose during February, after declining during each of the past seven months, and initial claims for unemployment benefits continued to trend lower after peaking at 670,000 during the week ended Feb. 20.

“Meanwhile, the Federal Reserve announced last week that it plans to increase its purchases of mortgage-backed securities up to an additional $750 billion, bringing its total purchases of those securities to up to $1.25 trillion this year. The Fed also said that it’s expanding the types of collateral that the Fed will accept for its Term Asset-Backed Securities Loan Facility (TALF).

“Separately, the U.S. Treasury Department announced on March 23 that it will soon implement a new public-private partnership to buy so-called toxic assets (illiquid mortgage-backed securities and non-performing loans) from financial institutions.

“The Treasury Department anticipates that its partnership with private institutional investors will unload as much as $1 trillion of distressed assets from the balance sheets of commercial banks and other financial institutions. That would be a very positive development, as it would significantly improve credit conditions in the United States.”

Frazier ended by saying, “Although many money managers, economists, and financial pundits are claiming that the two-week rally in the U.S. equities market was merely a rally in a bear market, my models indicate that a new bull market has begun.”
03/19/09: Frazier said, “Stocks Could Surge if Accounting Rule Shifts.”

Specifically, he said, “The Financial Accounting Standards Board (FASB) — the organization that determines the ways in which companies are allowed to account for their assets, liabilities, and income (profits and losses) — made an announcement this past Tuesday that could cause stock prices to rise substantially within the next few weeks.”

He went on to say, “If the FASB’s proposal is approved by its members, holders of mortgage-backed securities (such as commercial banks) would be able to begin valuing a larger portion of their holdings of mortgage-backed securities in the aforementioned way rather than the current marked-to-market way for interim and annual periods ending after March 15, 2009.

“If, however, a company determined that it would likely sell its holdings of mortgage-backed securities before recovering any unrealized losses on those securities, it would still be required to report those unrealized losses on the company’s income statement as “other-than-temporary” impairments.

“Should the FASB approve the changes mentioned above, commercial banks and other financial institutions will likely soon stop recording massive losses from their investments in mortgage-backed securities. That would be a very positive development for the U.S. equities market, as my experience suggests that stocks of financial companies would soar in the event that the aforementioned changes are enacted.”
03/11/09: Frazier said, “Stocks are Headed Higher.”

He went on to say, “stocks are now trading at ridiculously low prices relative to their companies’ cash flows, net asset values, and future earnings capacity.

“Although my models indicate that the economy will remain weak during the months ahead, those same models indicate that economic conditions will improve during the second half of this year and that real GDP will rise substantially.
02/17/09: Frazier said, “Buy Stocks Now While They’re Down.”

He added, “The risk of stocks falling substantially lower than their current levels is limited due to the fact that stocks are currently trading at bargain prices relative to their long-term earnings capacity. I therefore expect stock prices to trade sideways over the next few months.

“Meanwhile, the expected earnings yield for stocks, relative to yields on bonds, is currently near its highest level since January 1973. That’s one reason that successful investors like Warren Buffett have recently been selling bonds and buying stocks.

“Separately, my models indicate that equity prices will trend substantially higher than their current levels during the second half of this year — in spite of [President Obama’s flawed government] spending plan.

“I’m therefore recommending for aggressive [investors] to allocate 100 percent of their capital to equity ETFs.

“While many investors are currently too scared to buy stocks, history has shown that the best time to buy any asset is when ‘there’s blood in the streets’.”

2008 Forecasts

12/31/08: Frazier said, “While the past year was one of the poorer years on record for equity investors, recent developments in the financial markets suggest that the coming year will be a prosperous one.

“For example, the Federal Reserve increased the monetary base at the fastest pace in history during the past two months; investors currently have huge stockpiles of cash sitting on the sidelines in low-yielding money market securities; and the projected yield on the S&P 500, relative to yields on bonds, is currently at its lowest level since at least 1962.

“Meanwhile, recent cash flows into and out of equity mutual funds suggest that the majority of stock investors that were considering exiting the equities market have already done so and that only those investors looking to buy stocks are currently active in the equities market.

“Of utmost importance, the Democrat-controlled U.S. Congress has virtually assured the American public that it will enact the biggest fiscal stimulus policy since the 1950s shortly after President-elect Barrack Obama is sworn into office on Jan. 20, 2009.

“Therefore, I expect stock prices to trend substantially higher than their current levels during the first half of 2009.”
11/17/08: Frazier said, “Although I expect economic conditions to worsen over the next few months, my research indicates that stocks can now be purchased at very favorable prices relative to the likely future earnings of those companies — now’s a good time to buy stocks near their lows.”
11/06/08: Frazier said, “My research indicates that an Obama presidency will lead to improvements in the economy and gains in the equities market. Although I’m concerned about the longer-term implications of Obama’s economic proposals, because they will likely lead to a significant rise in the federal budget deficit, I expect an implementation of Obama’s government spending plans to stimulate the U.S. economy and to lead to gains in stock prices over the next 12 months.”

He went on to say, “I’m very confident that some tremendous investment opportunities will be presented over the next six to nine months.”
09/30/08: Frazier warned investors that the U.S. economy would likely continue to weaken over the near-term. He noted the following:

    • The housing market will likely remain in a slump for at least the next 12 months because most homeowners will continue to try to sell their homes at inflated prices. As a result of those decisions, a glut of homes will remain on the market, and homebuilders will therefore likely continue to construct a very small number of new homes during the months ahead.
    • U.S. manufacturers will likely continue to move a large number of their manufacturing facilities to foreign countries where labor costs are much lower.
    • The employment situation will likely continue to worsen during the months ahead.
    • U.S. households will likely continue to tighten their pocketbooks over the coming months.
    • Foreign countries like Mexico, Germany, China, India, and Japan that rely heavily on exports to the United States will experience a slowdown in their economies, as U.S. consumers and businesses reduce their purchases of foreign goods.
    • Business enterprises will likely continue to reduce their capital investments because of the ongoing worldwide economic slowdown and because of the likely significant increases in long-term borrowing costs.

09/23/08: Frazier said, “I expect the employment situation to continue to deteriorate, U.S. businesses to continue to reduce their investments in capital assets, and for retailers to experience declines in their sales of automobiles, household appliances, clothing, and numerous other consumer goods. In simpler terms, I expect the total output of goods and services — the U.S. gross domestic product (GDP) — to decline during the months ahead.”

He added, “If Congress approves Paulson’s bailout plan, there’s a good chance that the U.S. budget deficit will grow to at least $1 trillion over the next couple of years (or 7 percent of the U.S. GDP) and that U.S. government debt will rise to 70 percent of GDP — the highest level since 1954 when the nation was still paying down costs incurred from World War II and the Korean War.”

Added to that is the cost to bail out Bear Stearns, which cost taxpayers an estimated $29 billion, and the government takeover of Fannie Mae and Freddie Mac, which has already cost taxpayers approximately $200 billion.

“If Congress approves Paulson’s bailout plan, there’s a good chance that the U.S. budget deficit will grow to at least $1 trillion over the next couple of years (or 7 percent of the U.S. GDP), and that U.S. government debt will rise to 70 percent of GDP — the highest level since 1954 when the nation was still paying down costs incurred from World War II and the Korean War.”

He went on to say, “In addition to those bailouts, the Treasury Department has proposed the establishment of a $400 billion Federal Deposit Insurance Corporation fund to insure investors in money-market funds.

“Meanwhile, the wars in Iraq and Afghanistan cost taxpayers approximately $16 billion per month, and U.S. automakers recently asked the government — that is, the taxpayers — to provide them with $50 billion in low-interest loans over three years to modernize their assembly plants.”

Frazier noted that the outcome of those bailouts would likely be “a swelling of the U.S. budget deficit, higher taxes, and a substantial rise in long-term borrowing costs.”

Frazier added, “Rather than helping to stimulate the U.S. economy, my research indicates that the bailouts will lead to a significant increase in long-term borrowing costs over the next few years. If foreign investors were to lose faith in the U.S.’s ability to repay its loans on a timely basis, long-term interest rates could skyrocket as investors would likely demand much higher returns on their loans to the U.S. government.

“Meanwhile, the government will likely be forced to raise both corporate and individual tax rates to pay off the loans. With U.S. consumers already highly in debt, and the employment situation continuing to deteriorate, my research indicates that consumers will therefore significantly rein in their spending during the months ahead. That’s a very worrisome concern, because consumer spending accounts for approximately 70 percent of the United States’ total output of goods and services (GDP).

“If consumer spending does continue to decline, I expect U.S. business to continue to reduce investments in manufacturing facilities. That’s also a big concern, because business fixed investments are another major component of GDP.

“Although U.S. exports enabled the U.S. economy to expand during each of the past three quarters, I also expect that trend to reverse course during the months ahead, as most leading economic indicators for European and Asian countries indicate that economic growth will slow considerably in those countries over the next couple of quarters.”
09/17/08: Frazier noted that the Federal Reserve has bailed out private business enterprises that pay their employees exorbitant salaries while lowering the value of assets held by ordinary people (via higher inflation) and by potentially increasing the taxes that Americans will need to pay during the years ahead to compensate for the worthless mortgage-backed assets that are now held by the Fed. Meanwhile, the U.S. Treasury Department announced on Sept. 7 that it was in the process of taking over Fannie Mae and Freddie Mac because those publicly-traded companies had become insolvent.

Not to be outdone, the Congress decided on July 31 to provide financial relief to hundreds of thousands of persons who signed mortgage agreements to live in homes that they can’t afford. The bill raised the national debt ceiling by $800 billion (to $10.6 trillion) and created risks for taxpayers that are virtually impossible to calculate.

Now, presidential candidate Barrack Obama wants to get in on the action by proposing that the U.S. government — that is, the taxpayers — spend $130 billion a year in new government programs over the next 10 years. Obama essentially believes that the government can solve the nation’s economic problems.
09/03/08: Frazier noted that oil prices continued to fall sharply, as the value of the U.S. dollar rallied sharply against other world currencies. With economic growth continuing to slow throughout many regions of the world, he said that he expects expect the demand for oil to continue to fall during the months ahead.

Meanwhile, I expect the dollar to continue its ascent against other world currencies in response to slowing economic growth in Europe and Asia, and as U.S. economists pressure the Fed to fight inflation by raising short-term interest rates.
08/20/08: Frazier noted that numerous money managers claimed during the past few weeks that the U.S. economy is not in a recession. Yet, several economic indicators suggest that the economy is in a recession. For example, the rate of increase in real personal income fell for seven months in a row; the employment situation has gotten worse every month this year, with the non-farm sector experiencing 463,000 job losses over the past seven months; and inflation-adjusted retail sales have declined (on a year-over-year basis) during every month since December 2007. Meanwhile, the rate of growth in U.S. industrial production fell sharply between January and May of this year, and the total production of industrial goods actually declined during July.

In addition to the negative economic developments mentioned above, household net worth fell during each of the past two quarters; first-time claims for unemployment benefits rose last week to the highest level since May 2003; and the average consumer’s debt rose during June to approximately 24 percent of their after-tax income.
07/23/08: Frazier said, “contrary to claims made by most of the so-called experts, the worldwide supply of oil has risen considerably over the past six months, while the demand for oil has fallen. Therefore, I expect crude oil prices to continue to decline during the months ahead.”
07/08/08: Frazier noted that The exchange-value of the U.S. dollar rallied against the Euro over the past few days and he said, “there’s an increasing amount of evidence that the dollar will continue to rally over the near-term. Meanwhile, my research indicates that the demand for oil will continue to fall during the months ahead, while oil supplies will likely increase. I therefore expect oil prices to fall sharply over the next couple of weeks.”
07/01/08: Frazier – The U.S. Department of Commerce reported that construction spending fell 6.0 percent during May, as a result of additional cutbacks on both residential and non-residential construction projects. Meanwhile, Ford Motor Co. announced that its auto sales fell 28 percent during June – the seventh straight monthly decline for the number 2 United States. General Motors and Chrysler, which report their sales later today, are also expected to report a big decline in their June sales.

Separately, stock prices in general, as represented by the major stock market indices, have formed a long-term “head-and-shoulders” top and are in danger of trading substantially lower. In fact, my research indicates that the Dow Jones Industrial Average could fall below 10,000 and that the S&P 500 Index could decline to around 1,140 within the next few months. Therefore, I advise investors to allocate a portion of their financial markets assets into inverse-equity ETFs.
06/12/08: Frazier – Recent political rhetoric from persons like U.S. Presidential candidate Barrack Obama, and discussions in the U.S. Congress about the effects of index speculators on the surge in oil prices, suggest to me that oil prices will soon peak and that oil could fall sharply during between now and August. (Note: Crude oil prices did in fact peak on July 3, 2008 at $145.31 for West Texas Intermediate Crude Oil, and they then fell to a low of $30.28 on December 23, 2008.
05/20/08: Frazier – I expect food costs to continue to rise during the months ahead, as a result of the rising incomes of consumers throughout many regions of the world. Meanwhile, consumers in China and India, the most populous countries in the world, have continued to increase their consumption of meat, which requires as much as 10 times more grains to produce than a vegetarian diet.

Several other developments also suggest that food costs will continue to rise during the months ahead. For example, global stockpiles of corn, soybeans and wheat have dwindled during the past twelve months, as a result of droughts, adverse growing conditions in key producing crop producing areas, and a virus that’s destroying large wheat crops. In addition, mandates for ethanol production in the U.S. are causing farmers to increase their production of corn for bio-fuels and to reduce their production of other grains.
05/09/08: Frazier – With the inflation-adjusted compensation of non-farm workers falling during the first three months of 2008 by the largest percentage since 1996 and payroll costs continuing to rise, my research indicates that consumers will tighten their pocketbooks further during the months ahead and that corporate profit margins will continue to decline.
04/23/08: Frazier – My research indicates that oil prices will continue to rise during the weeks ahead and that more U.S. companies will report a significant decline in their first-quarter earnings. Perhaps more importantly, I expect a significant number of companies to lower their second-quarter and full-year 2008 earnings guidance, as those companies begin to acknowledge that a continuation of the slowdown in the U.S. economy will reduce their sales while rising inflationary pressures will continue to raise their costs.

A continuation of the recent increases in petroleum prices would likely lead to an eventual decline in the demand for petroleum products and to a subsequent decline in the prices of oil, gasoline and other petroleum products. However, a decline in the demand for oil would likely be accompanied by a decline in both business and leisure travel and therefore to a decline in the revenues of companies that operate in the service sector – companies that operate in the leisure, retail trade, and hospitality industries.

A slowdown in the service sector would, in turn, likely lead to a further deterioration in the employment market, because all of the jobs created in the U.S. during the past fourteen months have been in the service sector.

If the employment situation were to continue to deteriorate, household spending would likely continue to fall and the U.S. economy would likely enter a recession later this year, if we’re not already in a recession.
04/17/08: Frazier – Contrary to the claims being made by some investment pundits, my research indicates that the ongoing economic slump in the U.S. will lead to slower growth abroad during the months ahead.
04/16/08: Frazier – With most leading economic indicators continuing to point south, and the purchasing-power of the U.S. dollar continuing to decline, I expect real retail sales to continue falling throughout the remainder of 2008. I also expect corporate profits at U.S.-based companies to fall sharply this year.
04/03/08: Frazier – I’ve yet to uncover any major catalyst that would lead to a sustainable stock market rally over the near term. Meanwhile, Federal Reserve Chairman Ben Bernanke has begun to agree with my economic forecast, saying in his testimony to the U.S. Congress’s Joint Economic Committee on Wednesday, “It now appears likely that real gross domestic product will not grow much, if at all, over the first half of 2008 and could even contract slightly”.

Separately, the International Monetary Fund cut its 2008 forecast for global growth on Wednesday and said there’s a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression.
03/28/08: Frazier – While I expect current (and likely future) initiatives taken by the U.S. Government and the Federal Reserve to alleviate the fallout from the sub-prime mortgage debacle and to provide a level of support for stock prices during the months ahead, there is no major catalyst at this time to support a sustainable stock market up-trend.

My research suggests that continuing efforts by the Federal Reserve and other government agencies to alleviate the credit crisis and to stimulate the economy will provide a floor of support for the equity markets for least the next few weeks.

However, those actions will have no impact on the continuing slump in the housing market and they will do nothing to improve the deteriorating employment situation. Therefore, I expect the U.S. economy to continue to grow at an anemic rate, at best, over the next couple of quarters and for corporate profits to fall during the months ahead.
03/26/08: Frazier – My research indicates that home values will continue to fall during the months ahead as foreclosures add to the glut of unsold properties already on the market and tighter lending rules prevent many interested home buyers from getting a mortgage.

The slumping housing market and slowdown in the financial sector will likely lead to further job cuts over the coming months, which in turn will lead consumers to further tighten their pocketbooks.

In light of the fact that the employment situation is continuing to deteriorate and consumers’ expectations regarding future economic conditions is continuing to decline, I expect the U.S. economy to experience further declines in consumer spending and retail sales over the coming months. I therefore expect the U.S. economy to grow at a very sluggish rate throughout the remainder of 2008, or perhaps, to fall into a recession.
03/21/08: Frazier – Yesterday, the U.S. Department of Commerce reported that construction of new homes fell during February to the lowest level in more than 16 years and that building permits for new housing starts – a very reliable leading economic indicator – declined 37 percent, as compared to the same month a year ago.

The manufacturing sector is also showing more signs of weakening, with the Federal Reserve Bank of New York announcing on Monday that its index of manufacturing activity fell during February to the lowest level since April 2003.

With the non-residential construction market also experiencing a slowdown over the past three months, and a host of financial institutions announcing massive layoffs, the U.S. economy will likely continue to experience job losses over the coming months. I therefore expect the U.S. economy to continue grow at an anemic rate, at best, for the remainder of 2008.

Meanwhile, my research suggests that high oil and gasoline prices, as well as rising food costs, will continue to cut into the average consumer’s pocketbook and cause U.S. households to significantly reduce their spending during the months ahead.

In light of the factors and developments mentioned above, I recommend for investors to continue to be patient by sitting on the sidelines in cash-like securities. In addition, I advise investors to hold small positions in a basket of inverse-index mutual funds and/or ETFs in an effort to protect their capital against potentially further declines in the equity markets.

The path of least resistance for stocks is still down and the housing market will likely remain in a slump.
03/19/08: Frazier – Numerous economic developments continue to bode poorly for the future direction of stock prices. For example, the housing market remains in a slump, the employment situation has continued to deteriorate, and growth in personal incomes has fallen sharply over the past few months. In addition, household net worth fell during the fourth quarter of 2007 for the first time since 2002, and long-term interest rates have recently been rising in spite of the Fed’s cuts in short-term rates.
03/05/08: Frazier – Recent comments from Government officials suggest that the U.S. Government may come to the rescue once again with initiatives to save certain home buyers and Wall Street speculators from their irresponsible financial decisions. Such initiatives, if they were to occur would likely propel stock prices higher over the near-term.

A preponderance of economic statistics strongly indicates that economic growth in both the U.S. and numerous other countries will continue to slow during the next few months. Meanwhile, commercial banks and other lending institutions have significantly tightened their lending standards, the employment situation has worsened, several financial institutions recently took more asset write-downs, and U.S. consumers are highly in debt. These factors clearly suggest that stock prices will likely continue to trend lower over the near-term.
02/28/08: Frazier – At the risk of sounding like a broken record, I urge investors once again to ignore the latest rally in the U.S. equities market. My research strongly indicates that the recent stock market advances resulted from one-time events that will have no lasting impact on the economy. Households will continue to feel the negative effects of the slowing economy, and my models indicate that corporate profits will fall sharply during the first two quarters of this year.

While Wall Street economists and portfolio managers continue to debate whether the U.S. economy is about to enter a recession and whether or not stock prices may have bottomed, the majority of leading economic and stock market indicators suggest that economic growth in the U.S. will continue to slow over the coming months. These indicators also suggest that stock prices will continue to trend lower.
02/20/08: Frazier – The ongoing downturn in the housing market, and rising inflationary pressures, strongly suggest that more trouble is ahead for the U.S. economy and that stock prices will continue to trend lower during the months ahead.
02/14/08: Frazier – I expect most retailers to report a sharp decline in their profits for the first quarter of this year. That would be a negative development for stock market investors because stock prices generally follow the path of corporate profits.
02/06/08: Frazier – We’re no where near the bottom. Stocks will continue to decline during the months ahead.
02/05/08: Frazier: While the Wall Street cheerleaders are claiming that the recent downturn in stocks is nearing an end, I urge investors to not get sucked into believing that stock prices have reached a bottom and that economic conditions will improve in any significant way over the near-term. That’s because numerous fundamental developments suggest that economic conditions are worsening and that stock prices in general are headed lower over the coming months. Meanwhile, several technical indicators suggest that the recent rebound in stock prices will be short-lived.
02/04/08: Frazier – I strongly urge investors to not get caught up into the current stock market hoopla by thinking that the bad news is already behind us and that stock prices will continue to rebound during the coming weeks. The major stock market indices have merely rallied back to their respective overhead price-resistance areas and are currently trading significantly below their long-turn (200-day) moving averages. In addition, short-term momentum oscillators strongly indicate that stocks have risen to overbought levels and are about to turn lower once again.

Meanwhile, my models indicate that stock prices are headed significantly lower during the months ahead. I therefore urge you to ignore the recent advances in the major stock market indices, as my research indicates that those advances are nothing more than bear market rallies.
02/01/08: Frazier – My models indicate that U.S. consumers will continue to rein in their spending during the months ahead and that corporate revenues will therefore decline.

 

01/09/08: Frazier – Although the Wall Street Cheerleaders have continued to claim that the U.S. stock market is currently experiencing a mere “correction” — a term that they often use to excuse their poor investment advice — I urge investors to remember what you learned as a toddler:  “Humpty Dumpty sat on a wall; Humpty Dumpty had a great fall. All the king’s horses and all the king’s men couldn’t put Humpty together again.” In other words, stock prices are headed for further losses during the months ahead. Therefore, I urge investors to ignore the so-called Wall Street “experts” and to avoid investing in stocks at this time.
01/04/08: Frazier: Cheap Stocks? Think Again! My research indicates that corporate profits for S&P 500 companies fell approximately 6.4 percent during Q4 2007, as compared to the same quarter a year ago, and that corporate profits will continue to fall during the next two quarters. I therefore expect stock prices to fall sharply over the next few months.

2007 Forecasts

12/24/07: Frazier – Santa did a head fake last Friday and again today when the major stock market averages rallied. I continue to urge investors to not buy into the supposedly “good news” that is regularly propagated by self-serving investment bankers and money managers. As I’ve repeatedly stated over the past couple of months, a preponderance of data suggests that stock prices in general will continue to trend lower during the months ahead. In fact, my models indicate that stocks will fall precipitously between January and March of next year.
12/21/07: Frazier – Forget about a “Santa Claus Rally”, stocks are not going to rally this winter holiday shopping season in the way that they normally do at this time of the year.
12/19/07: Frazier – My models suggest that stock prices in general will fall sharply between January and March of next year: The S&P 500 has broken below its 200-day moving average and it is currently trading above its upward-sloping channel, indicating that stocks are in over-bought territory and due for a sharp decline.

If the employment situation continues to deteriorate, stocks could decline even further. Whatever the eventual outcome, my models strongly indicate that the path of least resistance for stock prices in general over the coming months is – DOWN.
12/18/07: Frazier – Ignore the so-called Wall Street “experts” who continuously try to persuade investors to keep buying supposedly “cheap” stocks, as a preponderance of evidence suggests that stock prices are headed lower.

Household debt levels are near record highs, employment growth is slowing, and consumers’ expectations regarding future economic conditions are deteriorating. In addition, manufacturing activity is continuing to slow, bank lending standards are tightening, and home values are continuing to decline.

The Fed can’t force banks to increase their lending or for businesses and households to increase their borrowing. Hence, my research indicates that the Fed won’t be able to prevent the U.S. economy from growing at an anemic rate over the next couple of quarters simply by increasing the money supply and lowering short-term interest rates.
12/04/07: Frazier – Ignore yesterday’s rally in stocks, my models continue to indicate that economic growth in the U.S., as well as in numerous other regions of the world, will slow considerably next year and that stocks will continue to trend lower.
11/28/07: Frazier – My investment models continue to indicate that a slowdown in consumer spending will lead to an accompanying slowdown in the U.S. economy over the coming months.
11/27/07: Frazier – My research indicates that this year’s winter holiday shopping season will be the worst since the last economic recession ended during November 2001.
11/21/07: Frazier – Ignore the Wall Street “experts”, many of whom claim that stocks are currently undervalued and that the recent stock market “correction” in stocks will soon end. My research indicates that stocks are in danger of a severe drop.

 

11/09/07: Frazier – Over the past two months, the Wall Street cheerleaders repeatedly told investors that the U.S. economy was in good shape and that stocks were supposedly “cheap”. Yet, stocks have continued to get much “cheaper”, with the Dow Jones Industrial Average  falling more than 1,000 points (7.9 percent) and the S&P 500 Index declining 7.1 percent since reaching all-time highs on October 9.

In contrast, investors who followed Frazier’s recommendations generated positive returns during October 2007, with his conservative recommendations returning 4.0 percent from October 9 to November 9 and his aggressive recommendations returning 9.9 percent during that same period. Frazier’s top-performing ETF recommendations rose 21 percent, 19 percent, and 8 percent, respectively, while none of his recommended ETFs declined during that period.

In light of the new accounting rules, I expect to see further write-downs at investment banks during the next two quarters.

Separately, stocks of consumer discretionary stocks fell sharply today, as U.S. retailers reported their worst monthly sales performance in 12 years. In response to today’s drop in consumer discretionary stocks, Frazier’s recommended holding in ProShares Ultra Short Consumer Services ETF (SCC) rose sharply.
10/25/07: Frazier – I urge investors to stop listening to all of the non-sense propagated by the self-serving money managers that regularly appear on CNBC and other financial shows, as my research continues to indicate that stock prices in general are headed lower.
10/17/07: Frazier – My research shows that economic growth in the U.S. will slow considerably over the coming months and that stock prices in general will fall sharply.
10/10/07: Frazier – Slowdown in retail sales suggests consumer spending might have reached a high point and that sales will slow over the coming months. Recent consumer confidence statistics also suggest that retail sales and consumer spending will continue to slow and that stocks are headed lower.
10/09/07: Frazier – Big drop in profits suggests stock prices are currently over-priced and that equities will fall sharply over the next couple of months.
10/03/07: Frazier – Big decline in pending home sales indicates that home prices will continue to fall during the months ahead. Such a decline, if it were to occur, would lead to a subsequent decline in household wealth, which in turn could lead to a big downturn in consumer spending.
10/02/07: Frazier – Economic slowdown an almost certainty. The housing slump and sub-prime debacle is far from over, growth in the manufacturing sector is slowing, non-residential construction spending looks as if it’s headed lower over the coming months, and consumer spending will likely decline significantly during the months ahead. Although the Fed might attempt to stimulate economic growth by continuing to lower interest rates, my research strongly indicates that the Fed will be unsuccessful in preventing an economic slowdown.

Although the Dow Jones Industrial Average broke out to a new all-time high today, both the S&P 500 Index and the Russell 2000 Index are still significantly below their previous business cycle highs. Meanwhile, trading volume has been rather light over the past two weeks and the increases in the major stock market indices have lacked broad participation. Historically, whenever fewer and fewer stocks participated in stock market rallies, stocks usually declined precipitously over the following months.
09/24/07: Frazier – Technical and sector rotation indicators suggest more trouble ahead for stocks. Take steps now to protect your portfolio against the emergence of a new bear market.
09/06/07: Frazier – An increasing number of economic indicators suggest economic growth in the United States will continue to slow and that stock prices are headed lower.
09/05/07: Frazier – U.S. economic growth will likely slow considerably over the coming months.
08/31/07: Frazier – The recent slowdown in consumer spending, and rising claims for unemployment benefits, indicate that the path of least resistance for stock prices is down. Benefit from a decline in consumer spending by investing in ProShares Ultra Short Consumer Services ETF (SCC).
08/17/07: Frazier – Protect your portfolio against a slowing economy and falling stock prices by investing in inverse-equity Exchange-traded Funds.
08/14/07: Frazier – Preparing for a stock market pullback, Wall Street “experts” have begun to invest in defensive stocks, while telling the public that the economy is on sound footing and that individual investors should continue to add to their stock portfolio.
08/07/07: Frazier – Stock prices have broken through major price-support levels and appear to be headed lower.
07/31/07: Frazier – Don’t’ let the latest GDP report fool you, the economy is on thin ice.
07/16/07: Frazier – Buybacks of publicly traded stocks and merger and acquisition activity indicate that the near-term outlook for equities is still positive.
06/28/07: Frazier – Corporate profit estimates bode poorly for stock prices. Stock could fall sharply within the next six months if corporate profits continue to slow.
06/21/07: Frazier: – Employment situation weakening, consumer spending could slow dramatically.

2006 Forecasts

July 27, 2006

Our research indicates that the major U.S. stock market indices will rally sharply over the next several days. We therefore recommend for investors who followed our recommendations on May 14, 2006 to short the major U.S. stock market indices to now cover their shorts. However, we expect economic growth in the U.S. to slow significantly over the next two quarters and inflationary pressures to persist. We recommend for both long-term investors and shorter-term speculators to “sit on the sidelines” in cash over the next several weeks before committing any new funds to U.S. equities.
June 25, 2006

Our research indicates that the major U.S. stock market indices will continue to trade in a sideways pattern throughout the end of August. However, we believe that now is a good time for investors to add to their investments in stocks of diversified and infrastructure-related companies based in India. In our opinion, The India Fund offers a sound way for investors to participate in the rapidly growing Indian economy.
June 18, 2006

Little has changed since our last market commentary on June 13. As we forecast on Tuesday of last week, the major stock market indices rallied on Wednesday and Thursday, but then traded in a narrow range on Friday. We expect stock prices in general to now begin trading in a sideways pattern throughout the end of the summer. However, our research indicates that there is a downward bias and that the major stock market indices could continue to trend lower over the coming months.
June 13, 2006

What a beautiful day (and week) in the stock market. As usual, the major financial “news” programs focused almost entirely today on the “global stock market correction”. This “new” development followed yesterday’s news coverage of a recent report issued by economic forecasting firm Global Insight revealing that 71 U.S. Housing markets, representing 39% of all U.S. Housing, was deemed to be extremely overvalued. In addition, many investment “experts”, economists, and financial news programs are now focusing on inflationary pressures. Our question to all of these “experts” and “news” journalists is, “where were you when investors needed you” — is the average investor supposed to accept that the U.S. economy, and economies in the other major developed countries throughout the world, have suddenly, “on the drop of a coin”, changed course and that inflationary pressures and slowing economic growth are now threatening economic health and stock markets around the world. Or are the “experts” doing what they usually do — telling investors what has already happened, and therefore providing little, if no, value to investors.

Today, several investment “experts” on the popular financial news channel CNBC recommended for investors to now invest in the stocks of “quality” companies that have strong balance sheets, strong cash flows, and that pay regular dividends. Are we to assume that these “experts” generally recommend investments in the stocks of “poor quality” small- and mid-cap companies. The comments made by these “experts” clearly reveal what we have known for years — their opinions and recommendations are virtually useless, and in our opinion only someone who wants to lose money would listen to these self-serving financial professionals.

On the Market Indicators pages of our Web site, which we update on our Web site only once a year during the month of March, but which we update monthly in our investment newsletter, The StockMarket Report, the overwhelming number of indicators that we coded in the color red (indicating a negative development) for the quarter ended December 31, 2005 clearly indicated during March of this year that a stock market correction might be near. A close review of the Leading Economic and Stock Market Indicator charts on the Market Indicator Charts page of our Web site also revealed during March (when these charts are updated each year) that stock prices in general, as represented by the major stock market indices, might soon reach a high point and that stock prices would likely enter a correction phase sometime between April and May of this year.

Investors who choose not to do their own investment research or who do not possess the skills and/or knowledge to correctly analyze developments in the stock market and the economy can keep up with important developments that could affect the U.S. economy and stock market by regularly reading our weekly Market Commentary or by subscribing to our investment newsletter. On March 26 of this year, we stated that our research indicated that the bull market that began during March 2003 might be nearing an end and that stock prices in general might enter a correction phase during the second half of 2006. We then stated on April 16 that several of the indicators employed by our macro investment model (which has correctly forecast the beginning and end of every bull and bear market since 1970) suggested that the major stock market indices would decline significantly during late May or early June. On May 7, we stated that some major developing under-currents suggested that a market correction of at least 10% would occur by the end of June. Finally, on May 14, we recommended for aggressive investors and speculators to either short the major stock market indices by shorting a broad-based ETF such as those offered by Vanguard or iShares, or by investing in a bear market mutual fund such as the ProFunds bear market funds.

So, while many investment “experts” are now recommending investments in “quality” big-cap stocks, our advice is for conservative investors is to sit on the sidelines and wait for a clear indication that the current “market correction” — bear market — has ended by investing in money market funds. We recommend for aggressive stock market speculators to continue holding their short positions. For those investors who are seeking information or advice on when to again purchase stocks, we recommend visiting our Internet Web site on a weekly basis and to subscribe to our investment newsletter.

In closing, please note that we expect stock prices in general to rebound on Wednesday and Thursday of this week. However, we warn investors that our research indicates that stock prices, as represented by the major stock market indices, will likely trade in a sideways pattern, at best, throughout the end of August. We therefore recommend for conservative investors to remain in cash throughout the next few months.
June 6, 2006

In our previous market commentary on May 28th, we recommended for aggressive investors and stock market speculators to initiate new short positions in ETFs that track the major stock market indices and/or to purchase shares in bear market mutual funds such as those offered by Profunds (if the S&P 500 Index were to rally to 1285). On June 1, the S&P 500 Index rallied to a high of 1286, followed by a high of 1291 on June 2. However, not to our surprise, all of the major stock market indices declined sharply on Monday and Tuesday of this week, with the S&P 500 Index closing at 1263.

Although many stock market pundits and so-called “experts” stated over the past couple of days that no one knows the direction in which stock prices will go over the coming days, weeks, and months, our research indicates that the bull market that began during March 2003 has ended and that a new bear market has begun. (We remind visitors to our Web site that we first forecast on March 28 an end to the current bull market; Click here or scroll down).

While less-sophisticated or less informed investors might be tempted to initiate new long positions in stocks and/or stock mutual funds (or to add to existing long positions), we recommend for investors to exit the stock market immediately and to sit on the sidelines until at least the end of the summer by investing in money market securities. We recommend for aggressive stock market speculators to continue holding their short positions.
May 28, 2006

We expect large-cap stocks, as represented by the S&P 500 Index, to continue to rally over the next several days, with investors seeking a “flight to safety”. However, we expect technology stocks and smaller-cap issues, in general, to renew their declines that began on May 11, 2006.

If a divergence in the major stock market indices does develop in the way that is mentioned above, such a divergence would represent a technical warning sign that the beginning of a new bear market might be near.

If the S&P 500 Index were to rally to 1285, we would recommend for aggressive investors and stock market speculators to initiate new short positions in ETFs that track the major stock market indices and or to purchase shares in bear market mutual funds such as those offered by Profunds.
May 21, 2006

After falling to short-term price-support areas on Friday of last week, several of the technical indicators that we monitor suggest that the major stock market indices will rally over the next several days. However, our fundamental research indicates that stock prices in general, as represented by the major stock market indices, have entered a correction phase that will last through at least the end of August. We therefore recommend for aggressive investors/speculators to hold any short positions in ETFs that track the major stock market indices, as well as any bear market mutual funds that they own. If the S&P 500 were to rally to around 1285, we would recommend initiating additional short positions.
May 14, 2006

Since April 16th, we have been warning investors that our macro-investment model was indicating that stock prices in general, as represented by the major stock market indices, might enter a correction phase during late May or early June. Although the technical components of our model were still in a neutral mode as of Wednesday of last week, the fundamental components of our model were signaling that a market correction could be just around the corner. After last Thursday’s and Friday’s declines in the market averages, stock prices in general look as if they have begun the market correction that our model was forecasting.

We now warn investors that our model indicates that the major stock market indices could continue to decline significantly over the coming weeks. To be more specific, our research suggests that the S&P 500 Index may decline to around 1,245 within the next two weeks, that the NASDAQ Composite Index may decline to around 2,125, and that the Russell 2000 Index may decline to around 708.

Although our research indicates that the major stock market indices might briefly rally before resuming the decline that our model is forecasting, we recommend for aggressive investors and speculators to either short the major stock market indices by shorting a broad-based ETF such as those offered by Vanguard or iShares, or by investing in a bear market mutual fund such as the ProFunds bear market funds.
May 7, 2006

Our research indicates that stock prices in general, as represented by the major stock market indices, may continue to rally over the near term. We would not be surprised to see the S&P 500 Index rise to around the 1,360 level within the next two weeks. However, some major developing under-currents suggest to us that a market correction of at least 10% will occur between now and the end of June 2006.
April 30, 2006

As we mentioned on April 16th, several of the indicators employed by our macro investment model (which has correctly forecast the beginning and end of every bull and bear market since 1970) suggest that the major stock market indices may decline significantly during late May or early June. However, the weight of the evidence is still positive at this time, and the technical indicators that we monitor suggest that the major market indices may continue to rally over the near-term. We would not be surprised to see the S&P 500 Index to rise to around 1,355 between now and mid-May. We remind investors that bull markets tend to end with a bang, rather than a whimper.
April 23, 2006

We are currently updating our macro investment model and are therefore not providing a market commentary for the week ended April 23, 2006.
April 16, 2006

Several of the indicators employed by our macro investment model suggest that stock prices in general, as represented by the major stock market indices, may pull back significantly during late May or early June. We plan to discuss some of these indicators over the coming weeks.
April 2, 2006

Although the major stock market indices are trading at or near multi-year highs, our research indicates that the bull market that began during March 2003 might be nearing an end, and that stock prices in general may enter a correction phase during the second half of 2006. While the financial media has recently been commenting on how the U.S. economy appears to be in a goldilocks status, whereby the economy is not growing at too fast a rate to cause inflation nor at too slow of a rate to fall into a recession, our experience suggests that there are other factors and events developing that might cause the major stock market indices to decline significantly over the next several months.
March 26, 2006

Our research indicates that the bull market that began during March 2003 might be nearing an end and that stock prices in general may enter a correction phase during the second half of 2006. However, with the major technical indicators that we monitor currently being at a neutral level, and equity investors appearing to be in somewhat of a complacent mood, we expect the major stock market indices to continue their recent rally over the coming weeks.

2005 Forecasts

July 24, 2005

In April of 2004, we forecast the major stock market indices to fall precipitously during the first three months of 2005. This forecast, which we reiterated during December and January of this year, turned out to be very accurate. In mid-March, we stated that the time had arrived to exit the market by selling stocks and stock mutual funds. We also recommended for aggressive stock market speculators to sell short stocks and to buy put options on the S&P 500 Index and the Nasdaq Composite Index. This recommendation also proved to be a good one, as stocks in general fell precipitously during the period from March 16 – April 30. During early May, we stated that the time had come for stock market speculators to become more aggressive in “shorting” the market. Although stocks in general rallied significantly throughout the month of May, our research continues to indicate that stock prices in general, as represented by the major stock market indices, will decline over the coming months.
June 19, 2005

The Interest Rate Conundrum — “Why have long-term interest rates not risen along with the rise in short-term interest rates?”

On numerous occasions, stock and bond market “experts”, as well as Federal Reserve Chairman Alan Greenspan, have referred to the negative relationship between the direction of long-term interest rates and short-term interest rates over the past year as a “conundrum”. However, we don’t view this relationship as a conundrum. Rather, we believe that there are some obvious reasons why long-term interest rates have fallen since June of last year, while short-term interest rates have risen.

One of the major goals of the U.S. Federal Reserve is to maintain long-term economic growth and to foster price stability in the overall economy. In an effort to accomplish this goal, the Fed often increases the money supply and decreases short-term interest rates during periods in which the economy is contracting, and it decreases the money supply and increases short-term interest rates during periods in which the economy is expanding at a rapid pace.

Although the inflation-adjusted total output of goods and services in the U.S. — real Gross Domestic Product (“GDP”) — has grown at an average annual rate of approximately 3.3% since 1945, real GDP grew at a year-over-year rate of 5.0% during the first quarter of 2004, and it has grown at a year-over-year rate in excess of 3.7% during each of the past four quarters. Because of this fast rate of economic growth, the Fed has been concerned that the prices of consumer goods and services might rise at a rate that could threaten long-term economic growth and price stability. For this reason, the Fed has increased short-term interest rates eight times since June of last year in an effort to control inflationary pressures. Specifically, the Fed has raised the Target Fed Funds Rate to 3.0% as of 7/19/05, from 1.0% in May, 2004.

Historically, whenever the Fed has raised short-term interest rates several times during a short period of time, long-term interest rates have has also tended to increase for the following reason: When the Fed consistently raises short-term interest rates, it essentially “warns” investors about rising inflationary pressures. Bond investors, who often are persons that rely on a fixed level of income, therefore become concerned that the buying power of their dividends will be diminished by inflation. As a result, they often demand a higher return on their bond investments to compensate for this reduced buying power.

While there has historically been a positive correlation between the direction of short-term interest rates and long-term interest rates, we believe that this relationship has not developed over the past year for the following reasons:

  1. A Competitive Global Economy has prevented businesses throughout the world from passing higher costs onto consumers in the way of price increases. (The prices of raw materials, such as steel, textiles, and oil have increased dramatically since October of 2001, but as a result of global competitive pressures businesses have not been able to significantly increase the prices of its end products – businesses have been unable to pass these higher costs onto consumers in the way of price increases. For this reason, inflation has not yet increased in any significant way at the consumer level.
  2. Increases in Productivity: Although the rate of productivity growth has slowed during the past year, businesses have continued to experience increases in productivity — increases in the output of goods that are produced relative to the inputs required to produce such goods. Hence, even though prices of certain raw materials have increased during the past year, increases in productivity have allowed businesses to maintain their profit margins — profits per each dollar of sales.
  3. The Demographic Composition of the U.S. : The largest percentage of the U.S. population currently consists of persons between the ages of 35 and 65. These persons are old enough to have lived through a period in the past during which the Fed used restrictive monetary policy to curtail the rate of economic growth by increasing short-term interest rates — specifically, during the early 1980s. Having lived through this period, these persons have witnessed the Fed’s ability to prevent large and fast increases in the prices of consumer goods and services — to prevent rapid rates of inflation and to maintain long-term economic growth while fostering price stability. As a result, we believe that these consumers, who happen to control most of the wealth in the U.S. and who have the greatest purchasing power of any age group, are apparently confident that the Fed will be able to stave off unwanted inflation. For this reason, these experienced consumers apparently assume that the rate of economic growth in the U.S. will slow from its rapid rate of growth in the year 2004, and that the Fed will soon stop raising short-term interest rates.

Given that more and more U.S. consumers are entering retirement age, many investors are likely reallocating their investment portfolios by purchasing more fixed-income securities, such as U.S. Treasury Bonds. Just like any other product, when the demand for the product increases relative to the available supply of the product, its price will rise. Hence, as the demand for U.S. Treasury Bonds increase, the prices of those bonds increase. Given that there is an inverse relationship between bond prices and bond yields (long-term interest rates), when bond prices rise, long-term interest rates decline.

In our opinion, the factors outlined above clearly explain why long-term interest rates have declined during the past year, while short-term interest rates have risen. We believe that this scenario will continue throughout the remainder of 2005. However, if foreigners do not soon begin to increase their purchases of U.S. Treasury securities, we believe that long-term interest rates will rise during 2006, as foreign investors might demand a higher rate of return on U.S. investments, especially if the U.S. dollar continues to decline.
May 27, 2005

We continue to recommend for aggressive stock market investors and speculators to “short the market” by “selling short” ETFs of the major stock market indices and/or buying stock index put options. Although the market indices have rallied from their lows in late April, they have now run into overhead price-resistance. Our research reveals that the rate of inflation has increased over the past few months and that the Fed will continue to raise short-term interest rates at its next two Federal Open Market Committee Meetings in June and August. With strong indications that crude oil prices will remain above $40 per barrel over the next several months, this “tax” on the consumer is likely to continue to negatively affect the rate of economic growth in the months ahead. Our research also indicates that corporate earnings growth is slowing and that earnings will be lower in the second quarter of this year than during the first quarter.
May 13, 2005

The time has arrived for stock market speculators to become more aggressive in “shorting” the market by “selling short” Exchange Traded Funds (“ETFs”) and/or buying put options on the major stock market indices; (Click Here to access Exchange Traded Funds offered by iShares).

Although most stock market “experts” often state, “no one can accurately forecast the direction of stock prices”, we have accurately forecast every major turn in the market since our founding of this Internet Web site in January of 2001. Listed below are some comments from a few of our market forecasts since October of 2002 – the month during which the latest Bull market began.

Market Forecasts Made by Frazier Research & Analytics

10/17/02Some 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.
11/05/02We 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.
03/31/03We believe that the market averages will rally significantly between now and the end the year.
04/10/05We believe that stock prices in general, as represented by the major market indices, will rise significantly between now and the end of the year due to a positive psychological impact of the outcome in Iraq.
04/30/03We believe that the major market indices will fall precipitously by the end of 2003 as the result of a deteriorating U.S. economic environment.
10/12/03We believe that the coming year will NOT be a good year for stock prices in general and that the major stock market indices will trade in a side-ways pattern for much of 2004.
02/15/04Our research suggests that stock prices in general (as portrayed by the major stock market indices) will decline over the next few months, rebound in the early summer of 2004, and then trade in a somewhat sideways pattern during the second half of the year. Shortly after the Presidential election is over, we believe that stock prices will start to decline.
12/20/04We warn stock market participants that the data we monitor suggests stock prices will fall during the first three months of next year.
03/06/05Many late-stage stocks – stocks of companies in the Steel, Chemical, and Oil industries – are currently reaching new highs, while stocks of growth companies have already topped out and are poised to trade lower in the months ahead.
03/13/05Our research suggests that the time has come to exit the market by selling stocks and Stock Mutual Funds. For aggressive stock market speculators, we recommend shorting stocks and buying Put options on both the S&P 500 Index and the Nasdaq Composite Index

Our current investment recommendation is based on various economic, geopolitical, and psychological undercurrents, as well as the recent action of the major stock market indices. We will comment on some of these factors this coming Sunday.
April 27, 2005

Please note that recent time constraints have prevented us from updating our Web site, as we are in the process of relocating our offices from Florida to Ohio. However, we have continued to monitor the market and to stay abreast of important economic and geo-political developments. We plan to update our Web site in mid-May.

In general, our outlook for the market has not changed since our last commentary on March 13, when we recommended for stock investors to exit the market by selling stocks and Stock Mutual Funds. Since then, the Dow Jones Industrial Average has fallen 576 points and the Nasdaq Composite Index has declined 111 points. Although the majority of Wall Street “experts” continue to say that “no one can accurately forecast the market”, we have accurately forecast every major turn in the market since we founded Frazier Research & Analytics in January 2001.

We continue to stick by our January 16, 2004 market forecast, whereby we forecast the Dow Jones Industrial Average to fall to 9,800 by June of this year, the S&P 500 Index to decline to 1,060, and the Nasdaq Composite Index to fall to 1,750.

So, rather than following the herd of Wall Street “experts”, we are sticking with last week’s forecast that the Dow Jones Industrial Average will fall to 9,890 by June of this year, the S&P 500 will decline to 1,060, and the Nasdaq Composite Index will fall to 1,750. Our forecast is based on several underlying factors that have been developing over the past year, including the rising Federal Budget Deficit, which we expect to worsen further over the next 12 months; the likelihood that both short-term and long-term interest rates will continue to rise over the next four to five months; our expectation that the situation in Iraq will deteriorate further throughout 2005, with a good possibility of a civil war breaking out in the country; and the probability that oil prices will remain at lofty levels over the months ahead.
March 13, 2005

Our research suggests that the time has come to exit the market by selling stocks and Stock Mutual Funds. For aggressive stock market speculators, we recommend shorting stocks and buying Put options on both the S&P 500 Index and the Nasdaq Composite Index.

Although we have not yet comprised a specific list of “short” recommendations, we believe that the following industry groups should be reviewed for “short” candidates:

  • Airline Industry
  • Housing Industry
  • Steel Industry
  • Leisure Industry
  • Commercial Services Industry
  • Industrial Machinery, Equipment, and Supplies Industries
  • Hospitality Industry
  • Consumer Electronics Industry
  • Household and Office Furniture Industries
  • Household Appliances Industry
  • Paper and Paper Products Industry
  • Office Equipment Industry

Our investment recommendations are based on the recent recognition by Wall Street “experts” and the financial media that (1) inflation pressures in the U.S. economy are building, (2) both short-term and long-term interest rates are rising, (3) the U.S. Federal Budget Deficit is worsening, and (4) the U.S. dollar is continuing to decline against other major word currencies.

We have been warning investors about these developing economic currents for over a year. In the 2/15/04 edition of our investment newsletter, The StockMarket Report, we forecast stock prices to begin declining shortly after the 2004 U.S. Presidential Election. On December 20 of last year, we warned investors to be wary of the post-election run-up in stock prices and we forecast stock prices to fall during the first three months of this year.

So, although many stock market pundits and so-called “investment experts” are continuing to say “No one can forecast the market”, our response to these “experts” is “Apparently THEY can’t forecast the market!” We suggest that if these “experts” are unable to outperform the major stock market indices, they should consider lowering their investment management fees or entering a new profession.

We continue to forecast the Dow Jones Industrial Average to fall to 9,890 by June of this year, the S&P 500 to decline to 1,060, and the Nasdaq Composite Index to fall to 1,750.
March 6, 2005

We continue to forecast a major correction in stock prices by June of this year, and we urge both long-term investors and short-term market speculators to not get overly exited about the recent rally in the S&P 500 Index and the Dow Jones Industrial Average. Although these (large-cap) market indices have recently broken up through overhead price-resistance areas, they have done so on light volume, which suggests that institutions have not been participating in the latest market advance. This theory is supported by Investors’ Business Daily’s (“IBD”) Accumulation-Distribution rating, which uses price and volume data over the most-recent 13 weeks to determine if stocks are being purchased (accumulated) or sold (distributed) by institutional investors. The latest Accumulation-Distribution rating computed by IBD was a C for stocks trading on the Nasdaq and for stocks comprising the S&P 500 Index; (A represents heavy buying by institutional investors, while E represents heavy selling).

Meanwhile, the Nasdaq Composite Index, which is comprised mostly of the stocks of growth companies (as compared to the stocks of companies comprising the S&P 500 or the Dow), has continued to lag behind both the S&P 500 Index and the Dow over the past six weeks, and it continues to trade in a sideways pattern. This strongly suggests to us that many late-stage stocks — stocks of companies in the Steel, Chemical, and Oil industries — are currently reaching new highs, while stocks of growth companies have already topped out and are poised to trade lower in the months ahead. A review of our Industry Performance Web page reveals that this is in fact the case, as numerous segments of these industries were in the top 33 percentile of the 197 industries tracked by Investors Business Daily during the week ended 1/31/05. (Note: We will be updating this page on Wednesday of this week).

A review of our “Week in Review” Web page reveals some other important information about the recent action of stocks and the likely direction of the economy over the coming months. Although the employment situation has improved significantly in the U.S. over the past year, we emphasize that “employment” is a lagging economic indicator. Meanwhile, some key leading economic indicators have topped out in the past few months and have been trending lower.
February 27, 2005

We did not provide a market commentary for the week ended 2/27/05.
February 20, 2005

We did not provide a market commentary for the week ended February 20.
February 13, 2005

Although the U.S. economy is still growing at a fast rate and the employment situation has improved significantly over the past six months, our research strongly suggests that economic growth will slow over the remainder of 2005 and that corporate earnings will decline.

Last week, the Federal Reserve Open Market Committee raised its target rate for the Fed Funds rate for the sixth time since June of last year; New Privately-Owned Housing Starts have declined (on a year-over-year basis) for each of the past two months; and the University of Michigan’s Consumer Sentiment Index has been trending downward since February of last year.

Meanwhile, the Institute of Supply Management’s (“ISM”) index of manufacturing activity has been trending downward since January of last year. The ISM’s index of non-manufacturing activity — Service Sector activity — appears to have reached a high in December of last year, falling to 59.2% in January, from 63.9% in December; (the ISM reported that economic growth in the Service Sector was the slowest in January since September of last year).

We note that New Housing Starts, the University of Michigan’s Consumer Sentiment Index, and the ISM index of manufacturing activity are very reliable leading economic indicators.

Recent reports from economists indicate that the demand for oil is expected to remain at current levels or even increase somewhat throughout the remainder of 2005 and into 2006, while OPEC has stated in recent meetings that it does not have any intention of increasing the supply of oil. This suggests that crude oil prices will remain above $40 for the remainder of this year. Numerous publicly traded companies have recently reported that the high price of oil and other commodity prices (i.e. steel prices) had a detrimental impact on their financial operating results during the past two quarters.

For the reasons mentioned above, and for various other reasons that will be stated in the 2/15/05 edition of our investment newsletter, we believe that the “path of least resistance” for stock prices is currently down. We strongly recommend for investors in stocks and stock mutual funds to sell their holdings if the S&P 500 Index breaks down through 1,140 on a big increase in trading volume.
January 30, 2005

Numerous economic developments and geo-political events continue to suggests to us that the “path of least resistance” for stock prices over the coming months is down. However, several technical market indicators suggest that the market will rally over the coming week. For example, short-term oscillators, which compare the price of a stock (or a stock market index) to its average price over a specified period in the past, have recently reached very low levels. When this happens, stock prices tend to rebound, as short-term market speculators reason that stocks are oversold and can be bought cheaply for quick gains.

The percentage of individual investors who are currently Bearish or Neutral in their outlook for stock prices also suggests that a rally is due. According to the Association of Individual Investors, only 26% of individual investors are currently Bullish, while the majority of those investors are either Bearish or expecting a market correction. Ironically, history has shown that the majority of individual investors tend to be wrong about the future direction of stock prices at major turning points in the market.

If stocks do rally over the coming week, we believe that once the major stock market indices reach their over-head price-resistance areas that stock prices will again turn down. We expect the Dow Jones Industrial Average to run into price-resistance at around the 10,715 level, the S&P 500 to reach resistance at around the 1,200 price level, and the Nasdaq Composite Index to run into resistance at around 2,090.
January 23, 2005

Just as we had forecast on December 20 of last year, stock prices in general, as portrayed by the major stock market indices, have been declining thus far in 2005. Both the Dow Jones Industrial Average and the S&P 500 Index have fallen 3.6% from their close on December 31 of last year, while the Nasdaq Composite Index has declined 6.5%.

While many stock market prognosticators often make excuses for their poor investment performance and their inability to accurately forecast the direction of stock prices by stating, “Nobody can accurately forecast the market”, our response when we hear this phrase is, “Persons who use this excuse can’t forecast the market”.

Although we do not claim to always be right in our market forecasts, we have been right much more often than we have been wrong since our inception in January 2001. Visitors to our Web site can click on the links in the table below to review our past market forecasts.

So, rather than following the herd of Wall Street “experts”, we are sticking with last week’s forecast that the Dow Jones Industrial Average will fall to 9,890 by June of this year, the S&P 500 will decline to 1,060, and the Nasdaq Composite Index will fall to 1,750. Our forecast is based on several underlying factors that have been developing over the past year, including the rising Federal Budget Deficit, which we expect to worsen further over the next 12 months; the likelihood that both short-term and long-term interest rates will continue to rise over the next four to five months; our expectation that the situation in Iraq will deteriorate further throughout 2005, with a good possibility of a civil war breaking out in the country; and the probability that oil prices will remain at lofty levels over the months ahead.

Persons who are interested in reading more about our thoughts on the market should email us, by clicking on the icon below, to request a subscription to our Investment Newsletter entitled The StockMarket Report.
January 16, 2005

The major stock market indices continued their downtrend that began on the first trading day of 2005, with the Dow Jones Industrial Average falling 2.1% from its close on December 31 of last year, the S&P 500 Index declining 2.3%, and the Nasdaq Composite Index falling 4.0%. Small-cap stocks, as represented by the Russell 2000 Index, closed out the week down 5.2% from last year’s close. Meanwhile, the number of stocks declining in price outpaced the number of stocks advancing in price by a ratio of 1.3 for the ten-day period ended January 14, while the number of stocks making new 52-week highs versus those making new 52-week lows declined to a ratio of only 3.6 (for stocks trading on the New York Stock Exchange), from a ratio of 25.5 over the previous 10-day trading period ended December 31.

On a positive note, the major market indices are still trading significantly above their respective 200-day moving average lines, after falling near intermediate-term price-support areas.

We are not at all surprised by the recent decline in stock prices, as we initially forecast in February of last year for the major market averages to begin declining shortly after the 2004 Presidential election — See page 4 of the February 15, 2004 Edition of our investment newsletter). This forecast was based on our analysis of numerous underlying factors that we expected to occur throughout 2004 and into 2005, which we will discuss in the first edition of our 2005 investment newsletter scheduled for publication on 2/15/05.

We most recently warned investors of a likely decline in stock prices on the December 12, 2004 “Week in Review” page of our Web site and in our December 20 “Market Commentary”. However, now that stocks have declined to price-support areas and most public investors have turned Bearish, according to the latest polling by the American Association of Individual Investors, several overbought/oversold market indicators suggests that stock prices in general will rally over the coming week.

But, we do not expect for the rally to last for long in light of the following:

    1. Last week’s report by the U.S. Department of Commerce that the U.S. trade deficit rose 50.8% (on a year-over-year basis) to an all-time high of $60.3 billion in November;
    2. Continued threats of terrorism around the world (which could likely increase towards the end of January as the elections in Iraq approach their January 30th deadline;
    3. Oil prices that are on the rise again; and
    4. A lack of serious discussions from Washington on plans to deal with the ballooning Federal Budget Deficit.

We are currently projecting the Dow Jones Industrial Average to fall to 9,890 by June, the S&P 500 to decline to 1,060, and the Nasdaq Composite Index to fall to 1,750.
January 9, 2005

In a traditional style “puppet show”, the U.S. Treasury Secretary John Snow and the Bush Administration continued to promote their non-sense “strong dollar” policy, while the trade-weighted U.S. dollar index hovered near its all-time low of 79.3673 on December 31, 2004. In an interview last week on CNBC, Mr. Snow stated, “We support a strong dollar. We think a good, strong dollar is good for America. It’s been policy, it is our policy, and it will be our policy.” Snow also said that one of the Bush Administration’s priorities is to reduce the Federal Budget Deficit. Yet, Mr. Snow, as usual, did not give any specifics on the Administration’s “strong dollar” policy, nor did he say how President Bush plans to reduce the deficit.

Webster’s Dictionary defines the word policy as “a definite course or method of action to guide and determine present and future decisions; a high-level plan”. Yet, Mr. Snow has, to our knowledge, never identified any specific course of action that he and other members of the Bush Administration plan to implement in an effort to increase the value of the dollar. Hence, we would argue that the Bush Administration seems to not have a “policy” regarding the value of the U.S. dollar. Rather, it (might) have a “preference” for a strong dollar.

Although Mr. Snow has repeated on numerous occasions that “exchange rates are best set by markets” and that the Bush Administration believes in market forces and free capital flows, he stated during his interview on CNBC that, “we want to do things that sustain the strength of the dollar”.

When asked about his definition of the phrase “strong dollar”, Mr. Snow skirted the issue by using ambiguous wording to define strength as “meaning many things”, but he has failed to define “strong” in terms of the dollar’s value relative to other world currencies.

In our opinion, Mr. Snow is a disgrace and an embarrassment to the office which he holds. Let’s get real, THERE IS NO STRONG DOLLAR POLICY. In essence, the Bush Administration appears to not have any particular policy regarding the dollar. This is fine with us, and probably a good thing for the U.S. economy, as history has shown that free market forces are best in determining the value of currency exchange rates. However, the Federal Budget Deficit is another matter entirely, and until something is done to curb the deficit, the value of the dollar will likely continue to decline.

Meanwhile, the first week of trading in the new year wasn’t a good one for investors, as the major stock market indices fell below their 2004 year-end closes. The Dow Jones Industrial Average declined 1.7% for the week, while the S&P 500 Index fell 2.1% and the tech-heavy Nasdaq Composite Index declined 4.0%. Small-cap stocks fell by the largest percentage in the first week of 2005, with the Russell 2000 Index declining 5.9% from its close on December 31, 2004. More important in illustrating the current direction of stock prices was the fact that stocks declining in price outnumbered stocks rising in price (for stocks trading on the New York Stock Exchange) by a ratio of 1.2 for the 10-day period ended January 7; the ratio of declining stocks to rising stocks was even worse for the Nasdaq, as approximately 1.3 times as many Nasdaq-traded stocks fell in price for every stock that rose in price.

On Tuesday, the Federal Reserve issued the “minutes” of its December 14, 2004 Open Market Committee Meeting on interest rate policy. The “minutes” reported that several members of the Committee raised concerns about inflation, the value of the dollar, and a slowdown in the growth rate of productivity. We at Frazier Research & Analytics have been voicing our concerns about inflation and a slowdown in productivity since August of last year.

As we initially forecast in the first edition of our Investment Newsletter on February 15 of last year, stock prices in general seem poised, in our opinion, to decline over the next three months.

We will address these issues further in our upcoming Monthly Market Analysis and Forecast scheduled for publication on January 16, 2005, and we will go into even greater detail, with accompanying charts and statistics on the U.S. economy and stock market, in the first edition of our 2005 Investment Newsletter scheduled for publication in mid- February of next year.
January 2, 2005

There isn’t much on which to comment in regards to the last week of 2004. As we had forecast in our first (sample) investment newsletter on February 15, 2004, the major stock market indices traded in a volatile, sideways pattern throughout much of the year, as conflicting economic and geo-political factors prevented stock market speculators from aggressively buying stocks, yet stopped long-term investors from selling their holdings. The Dow Jones Industrial Average finished the year up only 3.1% at 10,783, while the S&P 500 Index closed up 9.0% at 1,212. In contrast, the stocks that we recommended in our first two sample newsletters rose 52.1%, on average, during 2004. (Our market forecast on 2/15/04 was for the Dow to close the year at 10,500 and for the SPX to end the year at 1,100).

We advise both long-term investors and short-term market speculators to closely monitor the first five trading days of the new year, as history has shown that the major stock market averages tend to perform in any given year in a way similar to how they perform during the first week of the year.

Listed below are the major factors that we believe investors should monitor throughout 2005.

  • The Value of the U.S. Dollar (in comparison to other world currencies)
  • The U.S. Federal Budget Deficit (both in absolute terms and in terms of its percentage of GDP)
  • Oil Prices
  • Corporate Earnings
  • Factory Productivity
  • The Housing Market
  • The Political Situation in Iraq

We will address each of these issues in the first edition of our new investment newsletter scheduled for publication on February 15, 2005.

2004 Forecasts

December 26, 2004

President Bush recently stated, “the policy of my government is a strong-dollar policy”, and he promised that his administration will cut the U.S. Federal Budget Deficit in half by the year 2009, which should help to strengthen the value of the dollar relative to other world currencies. Mr. Bush has also promised to continue with his tax-cutting initiatives, to “complete the mission in Iraq”, and to change the way in which the U.S. Social Security System is funded. There’s no wonder that Mr. Bush easily won the 2004 U.S. Presidential Election. Anyone who can deliver on all of the above promises surely deserves to be our country’s President. The problem is, we seriously doubt that Mr. Bush will be able to deliver on all of his promises. Rather, in our opinion, Mr. Bush’s comments regarding the dollar and the deficit are nothing more than pure rhetoric. (Note: We do not consider ourselves to be Democrats or Republicans. Rather, we like to think of ourselves as independent thinkers who focus on objective facts. Thus, we have no politically motivated goal of criticizing President Bush and his economic policies. In fact, we praise Mr. Bush for many of his tax-cutting policies).

The Federal Budget Deficit has grown to $412.6 billion this year, from $374.8 billion last year and $157.8 billion in fiscal 2002. During each of the previous four years from 1998 through 2001, the U.S. Government maintained a budget surplus. More discouraging, however, than the absolute size of the current Federal Budget Deficit is its percentage of the nation’s Gross Domestic Product.

During economic recessions, governments often spend more money than they receive from tax revenues in an effort to stimulate the economy. In thirty-three out of 104 years since 1900, the U.S. Government has operated at deficits. However, in only eight years during the period from 1900 to 2002, did the Federal Budget Deficit exceed more than 3.0% of the country’s real GDP. Four of the years during which the Federal Budget Deficit exceeded 3.0% of GDP occurred during the early 1980s — when the country experienced two recessions. During the early 1990s, the U.S. again operated at budget deficits in excess of 3.0% in an effort to stimulate the economy and to bring it of the recession of August 1990 – March of 1991. However, an important point concerning the budget deficits during this period is that the deficit began to shrink considerably within two years after the end of the recession. This is not the case with the current Federal Budget Deficit. Rather than shrinking, the budget deficit has been expanding over the past two years, and currently stands at 3.8% of real GDP, even though the most-recent economic recession ended in November 2001.

Earlier this month, the Bush administration announced that it will increase the number of troops in Iraq to 150,000, from the current level of 138,00. Recent reports out of Washington also indicate that shortly after being sworn in for his second term in office, Mr. Bush plans to seek Congressional approval for an addition $80 billion in emergency funding to help pay for the cost of troops in Iraq and Afghanistan. This will push the total military costs thus far for the “War on Terror” to over $230 billion.

With the rate of GDP growth expected to slow next year, according to many economists, and the Federal Government’s plans to continue funding the “War on Terror”, we are very curious to learn how the Bush Administration plans to cut the Federal Budget Deficit.

Adding to the problems mentioned above are President Bush’s plans to overhaul the way in which the U.S. Social Security System is funded. Under Mr. Bush’s plan, employed persons would be allowed to divert approximately a third of their Social Security payroll taxes into stocks, bonds, or other investments; (under the current system, this money is used for funding Social Security payments to existing beneficiaries). Thus, under President Bush’s plan, the necessary funding for Social Security benefits would need to be made up by additional government borrowing or spending cuts.

In closing, we wish Mr. Bush and his Administration good luck with their plans. However, we warn stock market investors to not give much merit to all of the political rhetoric concerning the value of the dollar and the Federal Budget Deficit.

We will address these issues further in our upcoming Monthly Market Analysis and Forecast scheduled for publication on January 15, 2005, and we will go into even greater detail, with accompanying charts and statistics on the U.S. economy and stock market, in the first edition of our 2005 Investment Newsletter scheduled for publication in mid- February of next year. A few of the important economic and geo-political factors that we plan to discuss are listed below:

  • Oil Prices Quoted in U.S. Dollars — If the value of the dollar continues to decline, OPEC will likely continue to cut its oil production in an effort to maintain the current dollar price of oil
  • New Homes Sold Fell 12.0% in November, following last week’s report that New Home Starts fell 13% in November
  • Terrorist Threats Continued Problems in Iraq and in Saudi Arabia

December 20, 2004

Many stock market pundits appear to be currently focusing on the recent past, in our opinion, rather than analyzing the factors that will likely affect the economy and stock prices in the months ahead. As a result, investors who get their information from the mainstream media have become very complacent in their attitudes towards their portfolios and in their outlook for stock prices in the coming year. This is a situation in which stock market participants sometimes become trapped, as they tend to base investment decisions on their perceptions of the world rather than on the underlying factors and events that will likely shape the investment environment in the future.

Given that the S&P 500 Index has increased 52.1% since its low in October of 2002, and the Nasdaq Composite Index has risen 90.7%, we are not surprised by the complacency of investors. However, we warn stock market participants that the data we monitor suggests stock prices will fall during the first three months of next year.

Commodity prices have been rising steadily since January of 2003, as is illustrated by the Producer Price Index for Consumer Goods, while oil prices have been above the significant $25 price level since April of 2002. The price of West Texas Intermediate Crude Oil has been above $30 since October of 2003, and above $40 since July of this year. (The price of oil is very important because of its extensive use in industrial societies. According to Fed Chairman Alan Greenspan, high oil prices have curtailed U.S. GDP growth by 0.75% this year). As a result of high and rising commodity prices, the Federal Reserve began raising short-term interest rates in July of this year, after maintaining the target Fed Funds Rate at 1.00% since July of last year. Homebuyers quickly reacted to the first interest rate hikes by curtailing their purchases of news homes. However, new home sales rebounded in September and October, as interested purchasers rushed to buy before interest rates were raised further. Homebuilders also reacted to the initial increase in short-term interest rates by increasing the number of homes they built. But, the latest figures from the U.S. Department of Commerce released last week show that New Private Housing Starts, an important Leading Economic and Stock Market Indicator, fell 13.8% during November from the same period a year ago.

Meanwhile, Corporate Profits have fallen during each of the past two quarters, on a sequential monthly basis, as the rate of increase in Productivity has declined significantly.
August 8, 2004

In mid-February of this year, we forecast the major stock market indices to decline in price for the period from March through May, to rebound in the early summer months, and then to trade in a volatile sideways pattern during the second half of 2004. We were forecasting a substantial decline in stock prices following the U.S. Presidential election in November; (refer to our 2/15/04 investment newsletter). Thus far, our forecast has been very accurate. However, a substantial decline in stock prices seems to have already begun, as the S&P 500 Index has fallen 7% to 1,064 (as of Friday’s close), from a recent high of 1,144 on June 23.

We are not at all surprised by the volatile sideways trading pattern that developed over the first half of this year, given the competing economic and financial factors that were present during this period. Although many of these factors are still present, our research indicates that the positive factors will begin to dissipate over the next several months, while the negative factors become more prevalent.

The Recent Past

A few of the positive factors that we mentioned in the February 15 edition of our newsletter were low interest rates, high levels of consumer confidence, a strong housing market, robust retail sales, and rising corporate profits. Since then, both short-term and long-term interest rates have risen, retail sales have slowed, and both consumer confidence and corporate profits look as if they may have reached a high point.

Of the approximately 300 closely-followed, economically-sensitive companies that we reviewed in the month of July, 92% reported improved operating results for the second quarter of 2004, as compared to the same period a year ago. This is the highest percentage of companies that have reported improved quarterly operating results since the fourth quarter of 1999. Given that (1) short-term interest rates have recently been at forty-year lows, (2) companies have been aggressively cutting costs, and (3) productivity levels have been near all-time highs, one should not be surprised by the substantial increases in corporate profits over the past several quarters.
The Current Situation

However, interest rates are now rising, companies have little room left to cut costs further, and the rate of increase in factory productivity is falling. (Factory productivity fell to 5.2% in the first quarter of this year, from a high of 8.2% in the third quarter of 2002). For these reasons, we believe that the majority of publicly traded companies will report a decrease in operating results during the third quarter of this year. If corporate profits do decline as we are forecasting, stock prices will likely fall significantly during the first quarter of 2005.

While many of the positive economic factors affecting stock prices seem to be peaking, some of the negative factors are getting worse. Oil prices continue to rise, as do many other commodity prices, leading to a rise in inflation at both the producer and consumer level. During the past two months, numerous companies reported that even though their revenues rose substantially during the second quarter, they were unable to report a profit due to large increases in the costs of basic materials. Meanwhile, threats of terrorism continue to be reported throughout the world, and there has been little improvement in the situation in Iraq.

The U.S. consumer has been very resilient over the past several years and has largely been responsible for the country’s strong economic growth, but this trend is now beginning to change. For each of the months from January through May of this year, 83% – 94% of retail chain stores reported an increase of at least two percent in their monthly same-store sales, as compared to the same period a year ago. However, only 62% of chain stores reported an increase in same-store sales for the month of June. In July, this percentage dropped to 47%. Meanwhile, Real Personal Consumption Expenditures declined on a sequential basis during June for the first time since September of last year.

The most worrisome situation, in our opinion, is what seems to be a topping housing market. Although sales of both new and existing homes in the U.S. are still at very high levels, New Privately-Owned Housing Starts have been trending downward over the past six months. More importantly, Building Permits for New Privately-Owned Housing Starts, a reliable leading economic indicator, fell 8.2% in June as compared to the previous month. Meanwhile, the Conference Board’s Index of Leading Economic Indicators also fell in June – the first time it has declined since March of 2003.

While the employment situation has improved significantly over the past twelve months, several indicators suggest that it won’t get much better from here. The latest employment report from the U.S. Department of Labor showed that Non-farm Payrolls rose by only 32,000 in July, after rising by 78,000 in June. The number of additional Non-farm jobs has declined in each of the past four months, after reaching a high of 353,000 in March of this year. Meanwhile, the Four-Week Average of First-Time Claims for Unemployment Benefits has stabilized over the past four weeks, after reaching a low of 336,000 in the week ended July 4; (the Conference Board’s Index of Help-Wanted Advertisements fell to 38 in June, from a high of 40 in February). The most-telling indicator of future employment may be the Average Weekly Hours Worked by Manufacturing Production Workers, which fell to 40.5 in April, from a high of 40.9 in December; (this is the latest data available). Industrial Production also declined in June, as did the rate of Capacity Utilization for all industries combined.
The Near-Term Forecast

The factors mentioned above clearly indicate that, in our opinion, economic growth in the U.S. is slowing. Some investors may argue that the recent slowdown will not cause stock prices to decline, because the slower rate of growth could allow the Federal Reserve to implement an accommodative money supply and interest rate policy. Although we believe that the Fed won’t continue to raise the Fed Funds Target Rate over the next several months, we also believe that the Fed won’t lower short-term interest rates. This opinion is based on persistently high oil prices and the rapid increase numerous raw materials prices over the past several months. More importantly, we believe that there is little chance the Fed will increase the money supply at a rate fast enough to stimulate the economy. (We note that the rate of growth in the M2 money supply has slowed significantly over the past year, falling to 4.4% as of the end of June, from 8.1% in August of last year). Given the recent slowdown in the economy, accompanied by increases in commodity prices, we would not be surprised to see a period of stagflation like that of the late 1970s develop over the next six months.

Various technical indicators also suggest that stock prices will continue to trade sideways, at best, over the next several months. Both the Dow Jones Industrial Average and the S&P 500 Index have closed below their 200-day moving averages since July 21. The technology-weighted Nasdaq Composite Index has closed below its 200-day moving average since July 6. Meanwhile, the internal strength of the market has also been deteriorating. For the period from July 21 to August 6, the ratio of advancing stocks to declining stocks (“A/D” ratio) for stocks trading on the New York Stock Exchange was 0.86; the A/D ratio for stocks trading on the Nasdaq Composite Index during this same period was even lower at 0.77. Both the Dow and the Nasdaq broke down through major intermediate price-support lines on Friday of last week, while the S&P 500 closed slightly above a major support line.
Current Recommendations

With oil prices at all-time highs, and OPEC announcing on Tuesday of last week that it lacks the capacity to increase production in the short term, we believe that the path of least resistance for the market is currently down. For this reason, we recommend that risk-averse investors “sit on the sidelines” until more positive economic data is released, and we recommend selling stocks that have broken down through major price-support lines. For aggressive investors, we recommend reviewing some of the major steel producers as potential “Shorts”. We will comment more on this in our next investment newsletter, which we plan to publish later this month.
February 29, 2004

In the February 15, 2004 issue of a newsletter that our firm’s President, David N. Frazier, writes on behalf of Rubin Investment Group, Inc. — The Rubin Report — Mr. Frazier stated that his research suggested that stock prices in general (as portrayed by the major stock market indices) would soon begin to decline. Since then, the Dow Jones Industrial Average has fallen to 10,584 (as of 2/27/04), from 10,628. During this same period, the NASDAQ Composite Index has fallen to 2,030, from 2,054.

Mr. Frazier gave the following as his reasons for forecasting a decline in stock prices:

  1. Interest rates would soon begin to rise,
  2. Consumer confidence might be topping, and
  3. Oil prices might continue to rise.

Since then, consumer confidence has in fact fallen, with the University of Michigan’s Consumer Sentiment Index declining to 94.4 in late February, from 103.8 in January, and oil prices rising to $36.18 (as of 2/27/04), from $34.51 (on 2/13/04). Meanwhile, the Consumer Price Index rose to 2.0% in January, as compared to the same period a year ago, primarily as a result of higher oil prices.

During the past two weeks, the following economic news was released on the Housing Market:

  1. New Private Housing Starts fell to a seasonally-adjusted annual rate of 1.903 million units in January, from 2.067 million units in December.
  2. New Home Sales continued to trend downward, after reaching a high in June of last year. (Although sales of new homes have been declining for the past seven months, the number of new homes on the market is currently at its highest level in eight years).
  3. Existing Home Sales fell 5.2% in January, as compared to the previous month.

Several other negative economic statistics have also been released during the past two weeks. First-time Claims for Unemployment Benefits rose to their highest level since late December 2003, while manufacturing activity slowed in both the Chicago area and the Philadelphia area. Cash Inflows to Stock Mutual Funds have also declined in the past two weeks.

On a positive note, Non-Defense Capital Goods Orders Excluding Aircraft rose in January, after declining during the previous two months, while the Conference Board’s Index of Leading Economic Indicators continued to rise in January.

We believe that the factors outlined above strongly suggest that the “path of least resistance” for the major stock market indices is down. Therefore, we caution investors to be careful with their equity investments going forward, and we suggest that investors consider taking some capital gains that might have been earned during the past year.

2003 Forecasts

October 31, 2003

Since late June of this year, we have been forecasting the major stock market indices to trade in a sideways pattern. On June 18, when the Dow Jones Industrial Average (“DJIA”) closed at 9,294, we predicted that the market averages would fall significantly by the end of June and then trade in a sideways pattern for a few months. On June 19, the market averages did begin to decline, as the DJIA fell to a low of 9,041 over the next two weeks. Throughout the month of July, the market averages traded sideways, as we had forecast, but they then began to climb. Although we have been very leery of the advances in the market indices over the past two months, numerous economic statistics and money flow indicators that we follow now suggest that the market averages will continue to rise in price through the end of 2003.

We believe that the Dow Jones Industrial Average will trade above 10,000 within the next two weeks.

We will provide more commentary (and supporting statistics) on our current market forecast later during the week.
October 12, 2003

During the past few weeks, several economic and stock market indicators have improved significantly, suggesting that the U.S. economy is starting to improve. Included among those improvements are increases in some reliable Leading Economic and Stock Market Indicators. Although these market indicators have proven, in the past, to be very reliable in forecasting the future direction of the major stock market indices, we believe that the following factors should not be overlooked by persons who are interested just as much in preserving their investment capital as in earning capital gains:

  1. Oil prices are continuing to rise
  2. The U.S. Federal Budget Deficit is continuing to rise, and we believe that it will worsen further in the coming year, as a result of the U.S.’s involvement in Iraq.
  3. The U.S. Dollar is continuing to decline

 

Oil Prices

On Friday of this past week, West Texas intermediate spot oil prices closed at $30.73, while both Natural Gas prices and Heating Oil prices also continued climb. (Our research indicates that whenever oil prices stay above $25 for extended periods of time, the U.S. stock market tends to perform poorly).
Federal Budget Deficit

The Congressional Budget Office is currently estimating the U.S. Federal Budget Deficit to grow to $374 billion for the fiscal year ended September 30, 2003, from $158 billion last year. Given that the U.S. is currently paying for the reconstruction of Iraq, and is spending large sums of money in keeping military troops in the country, we believe that the budget deficit could grow even larger in the coming year. This could place significant pressure on the level of interest rates in the U.S., which we believe could curtail any continued improvements in the economy going forward.
A Declining U.S. Dollar

Foreign investors in U.S. Treasury securities have continued to increase their holding of such securities over the past 20 years, as these investors have viewed the U.S. as a “safe haven” for holding their investments. (Foreign investors held approximately 70% of the total U.S. Public Debt as of the latest report on foreign debt holdings issued by the U.S. Treasury Department in June of 2002). However, if the U.S. Dollar continues to decline, relative to the Japanese Yen and the Euro, we believe that foreign investors may begin selling their U.S. Treasury holdings. This could cause interest rates in the U.S. to begin rising substantially, for the reasons discussed below.

When the value of the Dollar declines relative to a foreign currency, the return on investment earned by a foreign investor in U.S. Treasury securities will decline, as that person (or government) must convert any U.S. Dollars received (from selling their Treasury securities) into their own country’s currency at a higher exchange rate. For this reason, when the Dollar continues to decline, relative to foreign currencies, there is the possibility that large foreign investors in U.S. Treasury securities will become concerned about their return on investment and decide to exit the U.S. Treasury market.

Given the fact that foreign investors were largely responsible for financing U.S. Government expenditures over the past decade, if those investors were to exit the U.S. Government Debt market, the U.S. Treasury might would need to raise interest rates substantially to entice other investors to purchase its debt offerings. A subsequent tightening of the money supply and an increase in the general level of interest rates in the U.S. would then likely have a very dampening affect on equity prices (stock prices) in the U.S. (An example of what could happen to stock prices if foreigners were to begin selling their U.S. Debt holdings is illustrated by what happened on June 23, 1997 after the Prime Minister of Japan at that time, Ryutaro Hashimoto, suggested that Japan might need to sell some of its large U.S. Treasury holdings — the Dow Jones Industrial Average fell by 192 points in one day).

Since January of last year, the U.S. Dollar has been declining, relative to the Japanese Yen and the Euro. During this same period, the price of Gold has been rising, as investors in Gold have apparently been considering the possibility of foreign investors exiting the U.S. Treasury market, and a subsequent rise in the general level of interest rates in the U.S. (The price of Gold has risen to $373.40, as of 10/10/03, from $325.95 at the official ending of the war in Iraq on 4/14/03. Gold prices were $271.10 at the beginning of 2001).
Conclusion

Please note that we do not believe in some “Gloom and Doom” scenario for the U.S. economy and stock prices. However, our experience suggests that investors should be aware of the affect that the foregoing events could have on the economy and stock prices going forward. As we have been stating for the past several months, we believe that the coming year will NOT be a good year for stock prices in general and that the major stock market indices will trade in a side-ways pattern for much of 2004. For this reason, we continue to recommend for investors to be leery of any continued advances in the major market averages, and to not get caught up in a potentially “frenzy” investment environment.
September 25, 2003

Since mid-May of this year, we have been warning our clients, and visitors to our Web site, to be leery of any continued advances in the major stock market indices, as the Stock Market Indicators that we follow have been suggesting that the U.S. economy is not improving in any significant way and that many stocks appear to be approaching over-valuation levels.

In late June, we forecast the major stock market indices to begin declining in price and then to trade sideways for several months. Although the market averages did not decline in June, they have traded in a sideways pattern for the past three months, and both the Dow Jones Industrial Average and the S&P 500 Index closed today at almost exactly the same level they were when we made our last major forecast on the market on June 18, 2003. During the past two days, the major stock market indices have incurred significant corrections, and the indicators that we follow suggest that stock prices in general will continue to fall over the next couple of weeks. So much for all of the recent hoopla promulgated by the “experts on Wall Street.” As we like to say on occasion, “the show must go on”.
August 19, 2003

Not much seems to be changing in the Investment Brokerage industry, as “analysts” who promote their firms’ investment banking deals, rather than make sound investment recommendations, continue to be compensated highly for their questionable, if not fraudulent, activities. Yesterday, the Wall Street Journal reported that Jack Grubman, the former Citigroup research “analyst” who was fired for reportedly producing fraudulent research reports, is still collecting $50,000 per quarter from his former employer as part of a $33 million severance package. Citigroup is also providing Mr. Grubman with an office. I guess the old adage “crime doesn’t pay” is true unless one wears $2,000 suits and work on Wall Street.

In a related story, Deutsche Bank AG’s Asset Management subsidiary was found by the SEC to have originally cast its votes against the recent Hewlett-Packard / Compaq Computer merger. But, when the subsidiary learned that Deutsche’s investment banking division was working for Hewlett-Packard on the merger and would receive $2 million in fees, it changed its vote in favor of the merger. Once again, another Wall Street Investment Banking and Brokerage firm has demonstrated, in our opinion, that it has little interest in its individual investor clients.
August 6, 2003

Since our last Market Commentary update on 7/20/03, some positive economic news has been released, which we outline below. However, the latest economic news is mixed, as some negative news has also been released over the past two weeks. More importantly, even if the economy does start to improve, we believe that the major stock market indices will continue to trade sideways, at best, because many stocks are currently overvalued, in our opinion — the P/E ratio for the S&P 500 is currently 33, which is significantly above its long-term average of approximately 12. For these reasons, we continue to recommend for stock market participants who are concerned abut protecting their financial wealth to “sit on the sidelines” until more positive economic data is released or until the major market averages pull back substantially in price.

POSITIVE DEVELOPMENTS

  1. GDP rose 2.3% in the second quarter, as compared to the second quarter of 2002. Orders for Durable Goods increased 7.9%.
  2. Non-Defense Capital Goods Orders Excluding Aircraft rose 9.7% in June, as compared to June of 2002. Orders were up 1.7% compared to the previous month.
  3. Worldwide sales of semiconductors rose 10.4% in the second quarter, as compared to the second quarter of 2002. Sales rose 3.2% versus the first quarter of 2003.
  4. The Institute for Supply Management’s Index of Manufacturing Activity rose to 51.8% in July, from 49.8% in June.
  5. New Home Sales rose 4.7% percent to an annualized rate of 1.16 million units —  a new record.
  6. The Four-Week Average of First-Time Claims for Unemployment Benefits fell by 11,750 to 408,750 during the latest week. This is the fourth week in a row that the Four-Week Average of First-Time Claims has fallen. Initial Claims fell by 3,000 to 388,000.
  7. The Conference Board’s Index of Leading Economic Indicators rose for the second month in a row to 111.8 in June from 111.6 in May.

 

NEGATIVE DEVELOPMENTS

  1. September Crude Oil  Futures closed at $32.22 on 8/05/03.
  2. The Conference Board’s Consumer Confidence index fell to 76.6 in July from 83.5 in June, while the University of Michigan’s Consumer Expectations Index fell to 83.7, from 86.4.
  3. The Federal Reserves’ Beige Book of Economic Conditions reported that Consumer Spending was “lackluster” in June and the first half of July. Additionally, Auto Sales were reported to be weak in many districts and auto inventories were above desired levels.
  4. The Average Weekly Hours Worked of Manufacturing Production Workers fell to 40.1 in July, from 40.3 in June. Total Non-farm Payrolls fell to 129.870 million in July, from 129.914 million in June; and from 130.790 million in July of 2002.
  5. All three of the major U.S. auto manufacturers reported decreases in sales for the month of July, as compared to July of 2002.

July 20, 2003

We continue to stand by our forecast that the major stock market indices will fall during the next few months and then trade sideways, before sustaining their upward movement. Since our last bi-monthly Market Update on 7/06/03, the Dow Jones Industrial Average (DJIA) has risen a mere 118 points to 9,188 from 9,007, the S&P 500 Index has risen to 993 from 986, and the Nasdaq Composite has risen to 1,709 from 1,663.

During this two-week period, the latest reading on the Industrial Production Index, a reliable Coincident Economic Indicator, fell 1.0% from its year-ago level, while the Unemployment Rate rose to 6.4% from its June reading of 6.1%; (a year ago, the Unemployment Rate stood at 5.9%). The Four-Week Average of Continuous Claims for Unemployment Benefits rose to its highest level since April of 1983.

Some other important economic statistics and political events that have come available since our last Market Commentary update are as follows:

  1. The Producer Price Index less Food and Energy fell 0.3% in June, as compared to June of 2002.
  2. Industrial Capacity Utilization remained at a recessionary low level of 74.3% in June.
  3. Total Business Inventories rose at a faster rate than Sales during the latest reported month of May, as compared to the same period a year ago. (In the Factory Sector, Sales actually declined from their year-ago level).
  4. Items 1-4 above indicate that demand for good and services is not improving, and that it might actually be declining.
  5. The White House’s Office of Management and Budget (“OMB””) raised its estimate of the fiscal 2003 Federal Budget Deficit to $455 billion, from its estimate in February of $304 billion. The OMB is projecting the fiscal 2004 deficit to rise to $475 billion.
  6. President Bush’s latest approval rating has declined 8% to its pre-war level of 55%, as Mr. Bush has begun to face criticism regarding his policies in Iraq. Separately, a federal appeals court ruled that Vice President Dick Cheney and the energy task force that he headed in 2001 must reveal which industry executives helped formulate its recommendations for national energy policy, or else make a more specific case for executive privilege.

Recent economic statistics and political events support what we have been telling our Private-Account clients since mid-2002 — that over the next few years, the U.S. economy and stock market may perform in a way similar to the way it did in the period from 1974 to the end of 1979; (refer to the chart below). If such does occur, we believe that the major market averages could continue to trade in a sideways pattern through the end of 2006.
July 6, 2003

Our Market Indicators continue to suggest that the U.S. economy is not improving in any significant way and that the major stock market indices will soon fall. Since our last Market Commentary on 6/18/03, the market averages have traded in a sideways pattern, while a contrary Investor Sentiment Indicator that we follow has turned strongly bearish. During the past three weeks, numerous economic indicators have been released that point south for the market:

  1. The Industrial Production Index fell 0.8% in May, as compared to the same period a year ago. This is the second monthly decline in a row.
  2. New Housing Starts fell 1.1% in May, as compared to the same period a year ago.
  3. Non-Defense Capital Goods Orders Excluding Aircraft fell -0.1% in May, as compared to May of 2002.
  4. The Conference Board’s Index of Help-Wanted Advertising rose slightly in May to 36, from 35 in April, but remained significantly below its year-ago level of 44.
  5. The University of Michigan’s Consumer Sentiment Index fell to 89.7 in June from 92.1 in May, while its Consumer Expectations Index fell to 86.4 from 91.4.
  6. The Personal Consumption Expenditure (“PCE”) Index rose at the lowest rate of increase in 38 years (except for September 2001, when the 9/11 terrorist attacks skewed the price of Property and Casualty Insurance).
  7. Real Construction Spending fell 2.1% in May, as compared to May of 2002. Spending on Non-residential Buildings fell 10.2%, led by a 25.7% decline in spending on Industrial Buildings.
  8. The Average for 30-year Fixed-Rate Mortgages rose to 5.23% in the week ended June 27, as compared to 5.10% the previous week.
  9. The Four-Week Average of Continuous Claims for Unemployment Insurance rose to its highest level since April of 1983, while the Unemployment Rate rose to 6.4% in June — a nine-year-high.

June 18, 2003

Although the market averages have continued to rise since our last Market Commentary on 5/15/03, the indicators that we follow still suggest that the major stock market indices will fall significantly by the end of June. Yesterday, the latest report on New Housing Starts revealed that this reliable Stock Market Indicator declined 1.1% from its year-ago level, while the Industrial Production Index fell for the second month in a row. The majority of the Leading Economic and Stock Market Indicators on which we rely were “in the red” during the most-recent quarter ended March, 31, 2003 and various other market statistics that we follow continue to suggest that many stocks are substantially over-valued at this time; for example, the PE ratio for the S&P 500 Index is currently at 36, as compared to its long-term average of 12. For these reasons, we maintain our recommendation for stock market participants who are concerned about protecting their financial wealth to sell their holdings that have run-up significantly in price during the past several months and to “sit on the sidelines” until more positive economic data is released or until the major market averages pull back to some major price-support areas.
May 15, 2003

A review of the latest economic and stock market indicators that we monitor reveals clearly that the U.S. economy is not improving in any significant way, and suggests to us that the major stock market indices will soon begin to fall.

Just as we had projected in our last Quarterly Market Analysis on 2/15/03, the moment the war in Iraq ended, the major stock market averages began to advance rapidly in price. Since April 14, 2003, the day that U.S. commanders ordered two aircraft carriers to leave the Persian Gulf, the Dow Jones Industrial Average is up 3.6%, the S&P 500 Index is up 6.1%, and the Nasdaq Composite Index is up 10.8%. However, the majority of the Leading Economic and Stock Indicators that we follow are currently “in the red”, meaning that they are indicating deterioration in the economy and a likely subsequent decline in stock prices. Each of the following Leading Indicators have worsened during the most-recent quarter ended March 31, 2003:

  1. The Index of Leading Economic Indicators
  2. The Interest Rate Spread between 10-year Treasury bonds and the Fed Funds Rate
  3. Building Permits for New Housing Starts
  4. The Average Weekly Hours Worked by Manufacturing Production Workers
  5. The Average Weekly Claims for Unemployment Benefits
  6. The University of Michigan’s Index of Consumer Confidence and its Index of Consumer Expectations
  7. The Institute of Supply Management’s Purchasing Managers Index

Additionally, the majority of the Other Economic and Stock Market Indicators that we have been tracking for the past twenty years indicate that the economy is not improving and that stock prices will soon fall. Although some of these indicators are lagging economic indicators, meaning that they tend to not turn upward until several months after an improvement in the overall economy, several of them reveal the current state of the economy, while others illustrate the degree of economic and stock market stimulus prevalent at a given time. For example, the Year-over-Year Change in Real Personal Consumption Expenditures has declined during each of the past two quarters, while Industrial Capacity Utilization was below its year-ago level during each of these quarters. More importantly, our research indicates that the rapidity at which the Federal Reserve has been increasing the money supply during the past year is not at a fast enough rate to have a stimulant affect on the economy, especially when considering the recent rate of decline in the velocity of money.

On a positive note, Corporate Operating Results are showing some signs of improving, and persons are starting to invest again in Stock Mutual Funds, which will obviously add some liquidity to the equity markets.
PROJECTIONS

We believe that the major market averages will continue to appreciate in price over the next several weeks, due to the huge turnaround in investor psychology resulting from the recent success of the U.S. military in Iraq. We also believe, as we stated back in February, that political rhetoric leading to a likely passing of the Bush Administration’s Tax Plan will have a positive affect on the financial markets over the next several weeks and that the consequences of new tax deductions, lowered capital gains taxes, and a possible elimination of taxes on corporate dividends will lead to an upswing in the market averages towards the end of the current year. However, given the prevalence of negative economic factors and high stock valuations present at this time, we believe that many stock market participants will soon begin to recognize the potential for a fall back into an economic recession, and that they will therefore begin selling their stock positions in early June in an effort to retain profits earned recently on their investments.

We are projecting the Dow Jones Industrial Average (DJIA) to fall to 8,400 by the end of June, the S&P 500 Index (SPX) to decline to 910, and the Nasdaq Composite Index (COMP) to fall to 1,500. Our year-end 2003 forecast of 9,500 on the DJIA and 1,000 on the SPX remains unchanged at this time.
May 15, 2003

We believe that the current investment environment is a “Fools Market”, meaning that (in our opinion) only poorly-informed, ill-advised persons are investing aggressively in diversified stock portfolios at this time. Although numerous stocks have advanced sharply in price over the past several weeks, the Market Indicators that we follow suggest that stock prices will soon fall.

On 2/15/03 in the Market Projections section of our Quarterly Market Analysis, we forecast that the major market indices would rebound following the end of the war in Iraq and that the market averages would rise sharply by the end of 2003. On April 10, we reiterated this thought and stated that the major market indices would rise significantly due to a positive psychological impact of the projected outcome in Iraq. We continue to believe that the market averages will rally towards the end of this year, mainly as a result of a likely cut in both income and capital gains taxes. However, the underlying economic factors that ultimately determine stock prices have, for the most part, not been improving; and stock prices as a whole are currently overpriced (in terms of the PE ratio on the S&P 500 Index, relative to its long-term average).

Today, the latest figure for the Industrial Production Index, a very reliable coincident economic indicator, showed a decline of 5% from the previous month (and a decline of 4% from the same period a year ago), while Total Capacity Utilization declined to the lowest level since June of 2002.

The number of persons continuing to collect unemployment benefits are currently at their highest level since June of 2002, Oil Prices are still above $25 per barrel, (which tends to be associated with slow periods of economic growth), and the core rate of the Producer Price Index declined during the latest month, illustrating the current lack of manufacturing investment demand. Yet, stock prices continue to rise.

Given the weak underlying economic environment, we strongly recommend for stock market participants concerned in protecting their financial wealth and in maximizing their investment gains to sell any stock positions that have recently risen substantially in price, and to sit on the sidelines over the next several weeks, as we believe that most stock prices will soon pull back from their current levels.
May 5, 2003

As we regularly tell our Private Advisory Clients, we strongly recommend for stock market participants (and investors in general) to ignore most of what they hear from Wall Street “analysts”, and to always consider the source of any investment advice. An excellent example of this recommendation was presented today while we were listening to an “analyst’s” comments on CNBC. The Chief Investment Officer of State Street Securities stated, “Sixty percent of [publicly traded) companies have reported earnings above [Wall Street analysts’] expectations, and the [earnings] guidance isn’t that bad.”

Here is an interpretation of this “experts” comments: Sixty percent of the companies that have reported their quarterly operating results for the first quarter of 2003 have reported profits (excluding Interest Expense, Taxes, Depreciation Expense, and Amortization Expenses — “EBITDA”) that were higher than the forecasts made by Wall Street stock promoters; and, company forecasts of profits for the second quarter of 2003 is not bad.

There are a few important points that stock market participants interested in making money should understand about the foregoing comment:

  1. Whether or not companies reported profits that were above the forecasts of Wall Street stock promoters is of little importance. More important, is whether or not the overall operating performance of companies improved or deteriorated.
  2. Although many companies have reported increases in both EBITDA and Net Earnings (Profits after the inclusion of Interest Expense, Taxes, Depreciation Expense, and Amortization Expenses) for the first quarter of 2003, our review of the operating results of hundreds of companies reveal that many companies were able to report increases in profits only by cutting expenses, rather than by increasing revenues. At some point, companies need to increase sales to improve their profits.
  3. We do not advocate investing in companies whose “guidance — [earnings forecast] — is not that bad”. Rather, we recommend investing in companies whose sales and earnings are expected to grow at a rapid rate. The comment made by State Street’s Chief Investment Officer regarding companies’ earnings forecasts is no different, in our opinion, than suggesting that a person should buy a poorly manufactured automobile (such as a Chevrolet Astro or Pontiac Grand Am) because the manufacturers of those automobiles are expecting mechanical improvements at some point in the future. (Each of these automobiles were rated by Consumer Reports as autos to avoid for the years 1995 – 2002 because of their poor mechanical reliability).

Lastly, market-savvy investors should consider the following: 69% of the stock mutual funds managed by State Street Securities under-performed the S&P 500 Index for the 10-year period ended 12/31/00. And, of the four funds that outperformed the S&P 500 during this 10-year period, two of those funds have under-performed the S&P 500 during the past two years, while the other two funds have performed about the same as the S&P 500 Index.

The comments outlined above confirms, in our opinion, that investors should always consider the source of any investment advice.
May 4, 2003

Upon our initial review of the latest available Economic and Stock Market Indicators that we regularly monitor, we do not like what we see.

We warn stock market participants to be leery of any advances in the major market indices over the next few weeks, as we believe that stocks are rising at this time primarily as a result of the current psychology resulting from the U.S. military’s recent success in Iraq. Although stocks could continue to rise over the immediate future, we believe that this is not a time to be aggressively buying most stocks; (of course, there are generally some profitable stocks to buy in any market environment, but we caution stock market participants to be very careful in purchasing stocks at this time). Aggressive risk-takers may want to even consider shorting some stocks or buying Put Options on a major stock market index if the market averages increase much more from their current levels.

We will comment more on this subject in our upcoming Q1 Market Analysis later this week.
May 1, 2003

Well here we go again — the “experts” on Wall Street were forecasting an improvement in Construction Spending, Non-Farm Productivity, and the Institute of Supply Management’s (“ISM”) Purchasing Managers’ Index for the most-recently reported periods, yet these “experts” were wrong again. Each of these key economic measures deteriorated during the most-recently reported periods. We can’t help but wonder who these “experts” are!
April 30, 2003

Contrary to what most stock market “experts” are currently saying, our review today of the Leading Economic and Stock Market Indicators that we follow confirms to us what we have been telling our Private Advisory Clients over the past several months — we believe that the major market indices will fall precipitously by the end of 2003 as the result of a deteriorating U.S. economic environment. (We will post the Q1 ’03 Update of our Leading Economic and Stock Market Indicators to this Web site tomorrow).

Our indicators strongly suggest (to us) that the recent advances in the stock market have been the result, primarily, of a short-term psychological reaction by many stock market participants to the positive outcome of the war in Iraq. However, once the major financial media begins revealing the deterioration in U.S. economic statistics (that we noticed several months), we believe that most market participants (so-called “investors”) will “run for the sidelines” by selling recently purchased stock positions. As a result, we believe that the major market indices will decline towards the end of 2003, if not sooner.

We will comment further on this subject in our upcoming Quarterly Market Analysis once we complete our review of the Other Major Economic and Stock Market Indicators that we regularly monitor.
April 10, 2003

Below is a brief update on our outlook for the U.S. economy and the stock market for the remainder of 2003 and early 2004.

We believe that stock prices in general, as represented by the major market indices, will rise significantly between now and the end of the year due to a positive psychological impact of the outcome in Iraq. Specifically, once U.S.-led coalition forces gain control of Iraq, and weapons of mass destruction are found in the country, we believe that President Bush will be praised by both international political leaders and the majority of U.S. citizens for his “right” decision on attacking Iraq and “freeing the Iraqi people from the ‘horrible’ dictator Saddam Hussein”.

As a result of the praise that we believe Mr. Bush will receive, we believe that he will then have a relatively easy time in getting most (if not all) of his economic stimulus plan passed by Congress. This will lead, in our opinion, to positive comments from numerous Wall Street “analysts” and other “market prognosticators” who will likely be covered extensively by the major news media. Due to the “positive” comments made by the majority of these “experts”, we believe that most stock market participants will then begin purchasing stocks in an aggressive way, and that many of these “investors” will do so in the usual way — by doing little to no homework. As a result, they will not be aware of the underlying negative economic factors that have been developing during the past several months.

We believe that these negative economic factors (and continued decreases in corporate operating results) will become the major topics covered by the news media towards the end of 2003, and that most stock market participants will react to these developments by selling many of their stock positions towards the end of the year. As a result, we believe that the major market indices will decline significantly in early 2004.

Throughout this period, we will likely hear numerous investment “experts” make comments on Fox News, CNN, and CNBC stating that “no one saw this coming”.
March 31, 2003

Although the major market indices pulled back during the latest week, as media headlines began to state that the war in Iraq will likely take longer than initially expected, we continue to believe that the market averages will rally significantly between now and the end the year – (see our latest Market Analysis written on 02/15/03). Since last Monday, the Dow Jones Industrial Average (DJIA) pulled back from a high of 8,522 to close today at 7,992, and the NASDAQ Composite Index (COMP) pulled back from a high of 1,400 to close at 1,341; (the COMP got as high as 1,426 the preceding Friday, 3/21/03). Our indicators suggest that the DJIA will likely fall to around 7,800 within the next two days and that the COMP will decline to around 1,320.

To go on record, we at Frazier Research & Analytics (“FRA”) have felt (since the beginning of the war) that the Iraqi conflict would last for approximately six weeks. Given that the war is only ten days old as of today, and that U.S.-led military forces are currently within 50 miles of Baghdad (according to reports on CNN and other major U.S. news broadcasts), we can’t help but wonder what the major media means when they report that “the war looks as if it may last longer than originally thought”. Our response is, “thought by whom?” — were there “experts” who thought the war would last less than ten days? We doubt it! Such, of course, depends on who is considered to be an “expert”.

We at FRA in no way consider ourselves to be experts on military matters, but we can’t imagine why any thoughtful and intelligent person would reason that a major military conflict could take less than a few weeks to resolve. Yet, the major market indices rallied dramatically during the first few days of the war, as market-savvy traders covered their short positions and shortsighted market participants became overly optimistic about the outcome in Iraq. However, now that the media is reporting, “the war may go on longer than originally anticipated,” most market participants are “running for the sidelines” and selling recently purchased stock positions.

We at FRA are not the least bit surprised at the recent activity in the stock market, given that “fear” and “greed” have always been major factors affecting stock prices. However, once the war in Iraq does end, which we continue to think will happen by the end of April, we believe that the same group of optimistic and “greedy” market participants will return to the market, leading to another rebound in stock prices, as the major media outlets will likely become more positive in their interpretation of the war.
March 18, 2003

We are forecasting the major stock market indices to pull back tomorrow, after two days of advances. Our analysis suggests that the rise in the market averages over the past two days has been the result, primarily, of traders covering their “short” positions in response to the now (almost certain) attack by the U.S. and its allies against Iraq to disarm the country of its weapons of mass destruction.
March 6, 2003

In our Q4 and Year-End Market Analysis, we stated that the employment situation in the U.S. was continuing to deteriorate and that Retail Sales appeared to be worsening. Today, the Four-Week Average of First-Time Claims for Unemployment rose to the highest level since 12/28/02 and numerous retailers reported a decline in same-store sales for the month of February. (Although weather conditions in the eastern part of the U.S. were partially responsible for the deterioration in same-store sales, we do not believe that this factor alone accounted for worsening sales results).

On 10/08/02, we stated that we felt the economy would dip back into a recession within six months. The likelihood of such occurring during the second quarter of 2003 now seems to be very possible, given the worsening employment numbers and falling retail sales.

Since a war in Iraq seems likely to occur within the next few weeks, we believe that the Dow Jones Industrial Average will fall to 7,300 over the next few days, and that the NASDAQ Composite Index will decline to 1,260.
February 15, 2003

In January of last year, we projected that the major market averages would be quite volatile throughout year 2002, and that the market indices would trade in a side-ways pattern, as our analysis indicated that the worst was not yet over the U.S. economy. In August, we stated that the fraudulent actions of CEOs at numerous U.S. companies were largely responsible, in our opinion, for the on-going Bear Market, and that stocks might behave in a way similar to the way they did during the period from 1973 to 1975. Since then, we have been projecting for the market averages to continue trading in a side-ways pattern, given a deteriorating employment situation, a slowdown in Retail Sales, and indications that Corporate Profits will continue to decline. We stated on October 8 of last year that we expected the economy to dip back into recession within six months. Since then, the employment picture has worsened further, the number of retailers reporting and increase in same-store sales has declined, and corporate operating results have deteriorated. Adding to this bleak economic climate, the geo-political situation in Iraq has had a dampening effect on the U.S. stock market, as many investors have chosen to stay out of the market until the possibility of the U.S. going to war in the Middle-East is more certain.

Although the investment environment is currently dominated by negative economic and geo-political factors, we believe that once the situation in Iraq is resolved, the U.S. financial markets will improve dramatically and the major stock market indices will advance sharply by the end of 2003. In the sections below, we present our analysis of the U.S. economic environment, and we outline our projections for the stock market for the remainder of 2003.
February 14, 2003

Today, United Nations’ representatives from France, Germany, Russia, and China told the U.N. Security Council that they prefer to give U.N. weapons inspectors more time to decide whether or not Iraq has destroyed its weapons of mass destruction. Chief Weapons Inspector Hans Blix said that weapons of mass destruction have not yet been found in Iraq, and that access to requested sites has been provided promptly. El Baradei, the chief Nuclear Inspector, told the council that inspectors have found no evidence that Iraq has resumed its nuclear weapons program.

Because of these developments, we believe that the likelihood of the U.S. attacking Iraq during the immediate future, without the support of the other major nations referred to above, has been greatly diminished. We see this as a major “positive” for the stock market in the short-term, as a war seems to be less likely at this time. However, we do not claim to have any insight into what the Bush Administration may eventually decide to do regarding the Iraqi situation.
February 11, 2003

Not to our surprise, the “news” media is up to their old tricks in making inaccurate comments to the public (in their apparent efforts to gain viewers).

Today, a taped speech by what was reported to be Osama bin Laden was aired, whereby the speaker urged Muslims not to co-operate with the United States against Iraq and to resist “the Infidel”.

The speaker urged Iraqis to stay strong against a U.S. attack and to blunt the force of an aerial assault by “digging large numbers of trenches.”

He went on to say “We advise about the importance of drawing the enemy into long, close, and tiring fighting; taking advantage of camouflaged positions in plains, farms, mountains, and cities.”

Later in the tape, the speaker stated that “the enemy is terrified about urban warfare “because they will have big casualties.” He also said that “”we stress the importance of martyrdom operations against the enemy ….”

However, the speaker never stated, nor indicated in any way, that Osama bin Laden and terrorist organizations have been working with Saddam Hussein, or that they are linked in any way. Yet, various televised news programs, which we prefer to refer to as “TV Shows”, stated that “a link has now been proven between Iraq and terrorist organizations,” and that “Osama bin Laden called on Iraqis to carry out suicide attacks against Americans”. (What the speaker actually said was “we stress the importance of martyrdom operations against the enemy …).”

U.S. Secretary of State Colin Powell told a Senate panel that “bin laden, or who we believe to be bin Laden” … “once again speaks to the people of Iraq and talks about their struggle and how he is in partnership with Iraq.” (No where in the taped recording did the speaker comment on how he was “in partnership” with Iraq).

Please note that we at Frazier Research & Analytics are not attempting to propagate any particular political viewpoint concerning the Iraqi situation. Rather, our interest is in following economic, demographic, and political events in an effort to determine how those events might affect future stock prices.

Given the apparent propaganda currently being spread by the Bush Administration, and the typical inaccurate comments on (and interpretations of) political events presented by the mainstream “news” media, we believe that the rift which has already been developing between “leftist” thinkers in America and “right wing” advocates will widen and that more and more Americans will show a lack of support for U.S. military attacks against Iraq.

If such a scenario does develop, and other political leaders around the world continue to argue against a military attack, we believe that the Iraqi problem will be left unresolved and that investors will react to such an uncertain outcome by “staying out of the market”. We also believe that businesses will continue to delay capital expenditures until the geopolitical front is clearer.

For these reasons, we are now less confident in stock prices rising anytime soon. Rather, we believe that the major stock market indices will continue to decline over the coming weeks. As we stated on 01/29/03, we are projecting the Dow Jones Industrial Average to fall to around the 7,500 level, and for the S&P 500 to decline to around 800 in the coming weeks. Additionally, we are now concerned that President Bush will not be able to garner the political support for his economic stimulus plan, and that the economy will continue to suffer.
January 29, 2003

Last night in his State of the Union Address, President Bush indicated that he will call for an attack on Iraq in the coming weeks to dispose of Saddam Hussein and Iraq’s weapons of mass destruction.

Between now and an assumed attack, we are projecting for the major market indices to decline in reaction to investors’ “FEAR”  and the uncertainty of any military consequences of an attack. Our indicators suggest that the Dow Jones Industrial Average (DJIA) will fall to around 7,500, and that the S&P 500 Index will fall to around 800 in the coming weeks. We are projecting for the market indices to then trade sideways for several weeks until the short-term military consequences of an assumed attack are made public.

However, once Saddam Hussein is removed from power, we believe that financial markets throughout the world will begin to advance, with the U.S. markets leading the way. By early April, we believe that stock prices will begin to rise rapidly, as we are projecting that much of the uncertainty in the geopolitical arena will dissipate.

We believe that the success of U.S. military efforts against Iraq, that we foresee, will greatly increase the American Public’s view of President Bush, which will then allow him to persuade Congress to pass his economic stimulus plan. Big tax cuts and the possible elimination of the double taxation of corporate dividends will then lead, in our opinion, to a continuance of rising stock prices throughout the remainder of year 2003.
January 27, 2003

In today’s nationally-televised presentation of Chief U.N. Weapons Inspector Hans Blix’s report to the United Nations Security Council, we observed the following: every time Mr. Blix made comments that seemed to suggest that Iraq is complying with the requests of weapons inspectors, the market indices rose in price, while every time that he made remarks suggesting that Iraq has not destroyed its weapons of mass destruction, the market indices declined in price.

Mr. Blix commented that Iraq has not complied with numerous Security Council resolutions, and that the country’s political leaders have not been forthright in helping the Security Council determine whether the country has destroyed its weapons of mass destruction. He noted that many questions remain to be answered, including questions about Iraq’s development of missiles and chemical and biological weapons.

Given the reaction of the financial markets today, we believe that market participants will continue to focus on the Iraqi situation and the likelihood of a U.S. military response within the next few weeks. We would not be surprised to hear President Bush call for a strike against Iraq tomorrow night in his State of the Union Speech.
January 16, 2003

Today, the U.N. Weapons Inspectors in Iraq found 11 empty chemical warheads at an ammunition storage area in Baghdad that were reported to be in excellent condition. This finding suggests that Iraq has not destroyed its weapons of mass destruction. We believe that the media and the Bush Administration will likely focus on these findings during the next several days, and that the major market indices will soon begin to decline precipitously.

2002 Forecasts

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.

  1. 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.
  2. 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.
PROJECTIONS

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.
2002 Forecasts

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:

  1. Industrial Production, a very reliable coincident economic indicator, turned down in August.
  2. New Housing Starts, a reliable leading economic indicator, have declined during each of the past three months.
  3. The Four-Week Moving Average of Unemployment Benefits has risen for each of the past three weeks, while Help-Wanted Advertising has declined.
  4. 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.
  5. Oil Prices have risen from $19.71 per barrel in January to $29.83 as of last Friday (9/13/02).
  6. Consumer Expectations for the future, another reliable leading economic indicator, have declined during each of the past four months.
  7. 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.
  8. A majority of the Federal Reserve districts reporting for the latest Beige Book reported a slow-down in business and manufacturing activity.
  9. 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%.
  10. The nation’s third largest less-than-truckload carrier, Consolidated Freightways Corp., recently announced that it will discontinue operations due to economic conditions.
  11. 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.
  12. 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.
  13. 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

To subscribe to our Market Alert service, whereby we notify you via email of updates to our Market Analysis and Market Commentary pages, and of significant events affecting the stock market, click on the following link and complete the Subscription Form: Market Alert Service.

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.
CONCLUSIONS

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

To subscribe to our Market Alert service, whereby we notify you via email of updates to our Market Analysis and Market Commentary pages, and of significant events affecting the stock market, click on the following link and complete the Subscription Form: Market Alert Service.

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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

Event

Performance of the DJIA

Date

1 Day After Event from 3 Months Before Event

3 Months After Event

1 Year After Event

Germany Invades Poland

09/01/39

1.40%

6.10%

-6.00%

Korean War Begins – Crossing of 38th Parallel

06/25/50

1.60%

5.70%

14.70%

Castro Takes Control of Cuba

12/09/58

8.90%

8.00%

18.80%

Berlin Wall Constructed

08/13/61

4.50%

1.30%

-17.20%

Cuban Missile Crisis

10/22/62

-3.30%

21.00%

33.90%

South Vietnam’s President Diem Overthrown

11/02/63

7.40%

4.70%

16.90%

President John F. Kennedy Assassinated

11/22/63

3.50%

7.20%

19.60%

First U.S.Combat Troops Sent to Vietnam

03/08/65

2.70%

-0.60%

2.90%

6-Day Israeli-Arab War Begins

06/05/68

10.00%

0.80%

2.30%

Soviet Union Invades Czechoslovakia

08/20/68

-0.70%

8.60%

-6.20%

Shah Pahlevi of Iran Overthrown

01/16/79

-4.70%

3.10%

3.70%

Beginning of Iranian Hostage Crisis

11/04/79

-4.00%

7.70%

17.30%

Soldiers Fire on Students in Tiananmen Square

06/04/89

9.10%

10.60%

18.30%

Iraq Invades Kuwait

08/02/90

4.50%

-11.30%

7.00%

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:

  1. 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).
  2. 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).
  3. 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.
  4. 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.
  5. 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.

Analyst/Investment ManagerFirm
Ralf AcamporaPrudential Financial
Robert DickeyRBC Dain Rauscher
Richard DicksonHilliard Lyons
Bernie SchaefferSchaeffer’s Investment Research
Louis NavellierBlue Chip Growth Letter
Bill O’NeilWilliam 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:

  1. Product Sales were down for the quarter (as compared to year-ago sales).
  2. 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).
  3. Although Product Sales declined, Cisco’s Manufacturing Costs of producing its products rose.
  4. 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).
  5. 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:

  1. 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.
  2. 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

Country

9/30/01

12/3/01

Canada

7.1%

8.0%

Japan

5.1%

5.6%

Germany

7.9%

8.0%

 

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).
Conflicting News

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%.
Conclusions

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.