The cover of this month's "Futures" magazine asked the question, "Could the bull be back?" A lot of financial magazines and newsletters are asking this question. In the Futures article it was stated (on the plus side of the coin) that Corporate America's balance sheet " is no longer deteriorating. It has made important strides in cutting its operating costs. So, if sales volumes increase (as data imply), then profit growth should improve. Stronger profits in conjunction with a high rate of depreciation of equipment spells strengthening capital spending ahead."

Yet in the very next paragraph the article goes on to observe that "On the negative side is Household America. Its balance sheet continues to deteriorate as does its employment outlook. For this round of fiscal and monetary policy stimuli to take, the unemployment rate needs to stabilize by the end of the year," the article stated, quoting Paul Kasriel, director of economic research at The Northern Trust Co. Once again, it all comes back to the unemployment rate. But before we get into that, I would note that the two pronouncements made by the magazine article, the one positive and the other negative, is quite characteristic of the whole economic debate raging across the country. There seems to be no clear-cut consensus on which side has greater strength -- the bullish or the bearish outlook. And for every seemingly decisive statement an economist makes in favor of his argument (whether positive or negative) there always seems to be some qualifying remark such as, "but on the other hand..." In other words, no one seems to know which way the economy is heading over the next five years or so.

According to a poll taken by Charles Schwab & Co. institutional group found that 64% of advisors saw economic conditions improving while nearly 30% saw the economy holding steady. Only 27% of the advisors believed that "government action" on corporate malfeasance has improved investor confidence. Fifty-seven percent of the advisors saw a positive market outlook over the next six months while only 3.4% had a negative outlook. A further 35% were neutral or uncertain.

With so few advisors having a negative outlook there is just enough fuel to keep things interesting in coming years. A dearth of negative sentiment usually paves the way for economic pitfalls along the way. But does this mean that things will be totally bad? Not necessarily, especially given that an astounding 35% of advisors have embraced an "economy neutral" posture. I can't remember such a high number of neutral forecasts, and this same neutrality is evident in stock market advisor readings with a large percentage of "hold" recommendations (as opposed to outright "buy" or "sell" recommendations). It is this preponderance of non-commitment that paves the way for a twisty, bumpy ride across the economy for the next few years. In other words, neither rosy nor horrendous, but a mixture of both.

One area that I believe it will be extremely important to monitor in coming weeks and months is the key retail stocks. They should be monitored not only for signs of technical improvement relative to the broad market but also as anticipators of firmness (or weakness) in the economy. This year we've already seen improvements in retail sales, so the "good year" of 2003 is progressing a good rate. But the "bad year" of 2004 is just around the corner, particularly the second half of the year when the 10-year cycle is bottoming. This is what I believe we can look forward to in the economic picture -- a good year followed by a bad year for the next 5-6 years. In other words, a "trading range economy."

What about the all-important U.S. unemployment rate? Shouldn't that concern us right now? Indeed, unemployment concerns are paramount right now and the fear over lost jobs is palpable. Everyone is wringing hands over unemployment, and this is an extremely sensitive issue as anyone who has a friend or relative facing unemployment knows. However, from a contrarian standpoint I find that when everyone is voicing worry over unemployment, that usually means at least a temporary bottom is in and the turnaround process is either well underway or about to begin.

Speaking of employment and the economy, Bert Dohmen, in a recent issue of his Wellington Letter, made a statement worth repeating. He wrote, "A number of pieces in the puzzle are falling in place for a better economic environment. Recently, the non-manufacturing ISM Index showed a strong leap upward to 60.6, which is well above the neutral 50 area. This gives us the highest level since August 2000. The unemployment rate jumped up to 6.4%, but the unemployment numbers usually lag in economic recovery by quite a few months. It takes a while for companies to finally get courageous enough to start hiring again. Therefore, higher unemployment is not negative at this point in the cycle. In fact, if companies stay lean, they are likely to produce much faster earnings growth."

Dohmen makes a good point. I like his use of the term "cycle," and I believe this is the key to interpreting the economic/financial picture for the next few years ahead. The fact is that we are no longer in a long-term bull market, as America has experienced from around the World War II era to approximately the year 2000. As discussed in previous articles here on Gold-Eagle, the last of the major long-term cycles in the 120-year Master Cycle (discovered by Samuel J. Kress) have peaked, so by definition the long-term trend is no longer up. And speaking of the "long-term," because there are no two consecutive "up" years anytime soon (based on the Master Cycle configuration) it completely nullifies any attempt at classifying the next 5-6 years as being decisively bullish or bearish. As Kress recently wrote, "[The] cycles indicate no back-to-back up two years until after 2014/15. Consequently, the longer term of yesteryears must become more of an adept interim trader if gains are to be realized and retained."

So what about the "long-term" (i.e., 1-year outlook)? What can we expect for the time frame between now and about mid-2004? To help us decipher the economic outlook, let's look at some helpful charts (courtesy of BullandBearWise.com, a highly recommended web site for many excellent economic charts).

Our first chart shows the Housing Market Index. This records the survey by the National Association of Homebuilders that tracks single-family housing sales, expected sales and prospective buyer traffic. Note the rounding, bowl-shaped feature of this chart, which shows a rate of change improvement and suggests even further improvement before the next peak and reversal.

Next we have the chart showing Consumer Credit. This shows the Federal Reserve Board's monthly release tracking consumer installment credit used to finance consumption. It measures revolving credit (such as credit cards) and non-revolving credit such as automobile loans and other medium-term loans. Note the overall downtrend that has been underway in consumer debt over the past couple of years. There is no other way to interpret this but bullish, at least in the short-term. It means that consumers aren't as cash-strapped as they have been in past years and have more money for spending back into the economy. Granted, some of this is due to a surge of cash from home refinancing, which represents consumers taking on even more debt (in the form of mortgage debt). But the short-term effects are definitely enough to give the economy a lift.

Finally, and most importantly, we see the graph of retail sales. This chart needs no comment. Since early in 2002, retail sales has been trending upwards, which is a reflection of a turnaround economy.

We've had the benefit of improving economic growth in 2003. This overall positive economy should continue until around the middle of 2004, at which point the effects of the falling 10-year cycle will likely take its toll. Until then, I suggest using this window of opportunity to get your financial affairs in order.

August 12, 2003

Clif Droke is the editor of the Bear Market Report newsletter, a 3-times weekly forecast and analysis of stocks, markets, gold stocks, and equity cycles. He is also the author of numerous books on finance and investing, including the top-selling "Moving Averages Simplified." Visit his web site for free samples of his analysis at www.clifdroke.com