Market at Critical Juncture

October 31, 1998

More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray that we have the wisdom to choose correctly -- Woody Allen

A woman who takes her husband about with her everywhere is like a cat that goes on playing with a mouse long after she's killed it. Saki

Thousands of years ago Teutonic fishermen made their fishhooks by having bent pieces of tough cartilage. Sometimes a fortunate one found a piece of metal that he could twist into a hook, which came to be called an angul, from their verb meaning "to bend," and survives today in the English word "angler" for a fisherman. One of the rich river valleys in Holstein, Germany was shaped so much like a fish hook that the district itself was termed Angul. Angul warriors joined other tribes in an invasion of Britain early in the 5th century, conquered it, made it their permanent home, and the name of their tribe was applied to all the conquered. In districts where Roman influence had been strong, natives modified the Teutonic name to "Angle," from whence comes "anglo," but in most sections Celtic influence transformed the word to "Engle. " Over the centuries "the land of Engles" evolved to "England."

In plain English we have called this "The Mother of All Bull Markets," in recent years led by the stocks in our "Internet List" and, while we worried through every temporary decline, we have often written that the Major bull market would end in a currency crisis that would introduce what we called "The Father of All Bear Markets."

Current stock markets cannot be understood without a clear grasp of the principles laid out in our Mass Psychology book. Mass optimism in spring was a Top, Mass pessimism in June was a Bottom, Mass optimism in July was another Top, so our current short-term position is that present Mass pessimism is yet another opportunity to buy. By DITPON.* Indeed, Mass pessimism is now so widespread and intense that the next bear-market rally should be blistering.

We led our loyal long-term TDLrs out of "emerging markets" in 1993, but now that there is a panic over the crashes in Russia and in other nations' stock markets with the Dow holding up, (see below) we have moved on to the understanding that wealthy capitalists in countries with bearish markets have no place to flee other than into American blue-chips, bonds, utilities, Internets and golds. Witness the strength that is already appearing in those US markets, based on considerations that have little to do with earnings or economics, but instead Mass Fear. So there is an outside chance that a bull market could revivify.

As evidenced by some of the gold charts in this issue, golds continue their Uptrends begun at the end of August. Deeply Oversold and undervalued, there is plenty of upside room just getting back to historic realities. For the last 17 years gold bullion has ricocheted aimlessly between around $280-$500, and now we are at the lower end of that Congestion Area waiting for the inevitable Upside Breakout or Downside Breakout we expect the former but are ready for the latter.

As wealthy people worldwide begin to worry about the vulnerability of their paper money, it stands to reason that they would hedge by buying some gold and silver. Indeed, the US Mint's figures back that up, as their sales of gold American Eagles are sharply higher this year. Maybe the devastating two-year bear market is ending. Is it not fascinating that the public is buying the gold that central bankers are selling?

Gold-mining shares are performing better than gold bullion, a trend that we expect to continue. New TDLrs are strongly advised to hedge their portfolios with precious metals shares for the long term, like fire insurance, hoping never to make money on them. Either place an equal amount in each of the ten issues in Supervised List #3 or, smaller investors place an equal amount into Franco-Nevada, Stillwater Mining, Newmont Gold and Pan American Silver. So far, blue-chips are leading the way higher, and the juniors now at rock-bottom levels should join the gold bull market in 1999.

Gold has rallied up toward the 300 area due to hedge-fund covering. The collapse of Long-Term Capital Management (LTCM), ruined by heavy losses in Russian markets, caused central bankers to reflect on risk, and so began calling in the gold bullion that they had loaned to hedge-fund short sellers forcing them to cover.

Since we have long expected gold to come to the fore around the time of the end of "The Mother of All Bull Markets," we are watching golds carefully here. By DIGROC.* We also need corroboration from The Dines Theory* and strength in a wide range of commodities, especially silver. With the price of a gallon of gasoline less than the price of a gallon of yuppie bottled water, oil is bullish, at least short term. Since commodities worldwide are priced in dollars, lower US interest rates that weaken the US dollar would be bullish for oil prices but Greenspan's 1/4-point rate cut was pathetically small. Other commodities are moving in mixed directions.

Why are we bullish on gold? Here are some of the reasons. Gold adjusted for inflation is as equivalently cheap as it was when it was $100 in 1976, before it soared to $850. Central bankers usually sell at bottoms, and they have been selling. Plus, bearishness is at record levels, which is typical of low points. Physical demand for gold is strong, gold mines have been selling forward in the futures markets, and there are huge short positions out that could conceivably spark a buying panic when gold finally turns up. As proof that these mining shares are coming down to underpriced levels, the initiation of mergers and acquisitions show that gold mining managements themselves are beginning to understand the values available at these low-priced markets. A mistake is a lesson on its way to being learned.


The young always have the same problem how to rebel and conform at the same time. They have now solved this by defying their parents and copying one another. Quentin Crisp

Twenty-three million households now access the Internet, and each year another 4 to 7 million more connect. Web users worldwide should triple to 328.5 million by 2002 and sales of products to businesses and consumers are expected to soar 13-fold to $425.7 billion from $32.4 billion this year. Blue-chip General Motors is planning to go into competition nationwide with the various online auto-buying services that have been changing the way Americans buy new vehicles and revolutionizing the automotive business. Customers nationwide will get an Internet price for the specific vehicle they want, find the machine in dealer inventory and arrange a test drive. Keep in mind our 1994 prediction that "the Internet will redefine every business in the world."

The news leak that started Clinton's troubles was by a Matt Drudge posting on AOL, and the Internet was the medium that released the Starr Report, easily coping with the phenomenally heavy traffic worldwide. We also expected the Internet to turn politics topsy-turvy: voting on the Internet will start with the 6-million Americans overseas, and politicians' positions will be laid bare for voters to study. Personal computers might be given away free just as are cell phones, in order to sign up Internet users, predicted Marc Andreessen of Netscape. The money will be made on providing Internet services, and maybe that's what the bear market in PC makers is trying to tell us: the death of the PC and consumer-software industries. Andreessen learned this the hard way after competitor Microsoft began giving away its Internet Explorer browser free, forcing Netscape to do the same with its own pioneering Navigator browser. This would also be bad news for Intel, if complexity were passed "upstream" to supercomputers.

The recommended way to invest in the Internet is to place an equal amount into all no exceptions of the stocks in the list entitled "Internet Recommendations." Small investors may place $500 into each stock, for a total investment of $11,500, with the unflinching intention to hold for at least ten years, by which time the Internet should be one of the world's biggest growth industries, doubling up on any substantial declines. Here are specific comments on some of the recommendations:


When teenagers dance, they don't talk and they don't touch. It's like having been married for 30 years.

When we flashed our Major "Sell" signal on Japan's Nikkei in 1989 at 38,000, their businesspeople were revered and respected worldwide, so it was under- standable that TDLrs thought we had taken leave of our senses. Significantly, we were most concerned about their banks, which we observed had loaned to the hilt on bloated real-estate prices, and we were getting bearish on their real property partially because it was so out of whack with values in the US.

Back in 1989 Japan estimated its problem loans at $200 billion, at which we scoffed and said that it was closer to $2 trillion, an estimate that we still stand by. Japanese banks also hold huge positions in stocks that are down substantially, and that have not yet been "marked to market," which means that perhaps even we are being too optimistic! Now that Japan's Nikkei 225 Average hit a low at 13,406 on 30 Sep 98, the chickens are coming home to roost. Standard & Poor's warned this month that problem loans in the Japanese banking system could be equivalent to as much as 30% of the country's entire Gross Domestic Product nearly double official estimates, and "possibly over $1 trillion."

We can see no way for Japan to get out of this banking crisis without doing something radical, such as wiping out all shareholder equity and nationalizing the banks, supplying capital out of its huge reserves. However, this would extirpate enough assets of the banks to precipitate even more bankruptcies, forcing non-performing borrowers into bankruptcy. One could easily envision a nightmare scenario and all-out crash in the world's second-largest economy, but we see no other way out. Nor do they, apparently, as Japan is urged to jump off what it sees as a skyscraper by American pressure unsurprisingly deluding itself as a "scapegoat." The Clinton Administration has pressured the Japanese "to do something" so often, that Americans themselves are ironically getting blamed for what is happening! By DINOPA.

Washington is not to blame: it recommended last year that Japan not raise its national consumption tax, which TDL agreed was a mistake at the time. Worse, Japanese officials have lied so often, and have underestimated their financial problems so consistently, that they have little credibility abroad. A dangerous despair has begun to creep into the Japanese public, as they dimly begin to perceive that the problem might be worse than even they had expected. We are implying that Japan's huge reserves are largely in US dollars but what if the US dollar caves in? That's a question nobody else in the world has yet begun to ask. And they will.

Nor should US banks be too smug, as the Federal Reserve and the Federal Deposit Insurance Corporation have increasingly begun to warn of a "noteworthy and measurable" decline in American standards for mid-sized companies and real-estate lending. Worse, banks have sustained unknown trading losses during the financial turmoil in currencies, especially in eastern Europe and Latin America. Credit-card lending would also be at risk to an over-indebted public during an economic downturn. TDL turned bearish on US real estate back in January.

But the biggest nightmare of all, nowhere near the headlines yet, is in the "derivatives" markets, which represents liabilities of trillions of dollars that are unregulated, unregistered, unreported and unknown. Derivatives are financial creations involving options, futures, swaps, caps, etc. According to Barron's, the Comptroller of Currencies' latest report pegged the notional amount of derivatives in the portfolios of US-based banks at $28.2-trillion in the second quarter, 95% of it in the nation's eight largest banks, and the off-balance-sheet credit exposure to derivatives of these banks at 243% of their risk-based capital. That's just in the US, as Japanese banks have a derivative exposure equal to four times Japan's GDP. The bottom line is that the US banking system is at risk because of loans collateralized by sky-high real estate prices, just as are Japan's banks. It might be wise to reflect on that.


Health food makes me sick. Calvin Trillin

For decades we have warned TDLrs about the poisons lurking in the air, water and earth. Painfully slowly the public awakens to them, especially to areas that have "cancer clusters," now already sporting the fancy moniker of "eco-genetic epidemiology." We are interested in the $21-million study of elevated breast-cancer rates in clusters on Long Island but we are skeptical that they will locate the true cause because all of us are immersed in a sea of poisons everything from the dreadful chemicals used in dry cleaning our clothing to breathing the befouled air emanating from automotive exhausts, that we have covered over the years in this column.

When we wrote about "mad cow" disease we were concerned that the practice of feeding diseased foods to animals would backfire on all of us in foods other than beef. Now the UK Government has a new health scare: a BSE expert warned that the disease could be present in sheep. We aren't ready to give up our lamb chops yet because we eat organic meat only, but TDL did run a feature warning about farm-raised fish* that are fed the same kind of offal that infected cattle. At that time we worried that our loyal TDLrs would be ingesting fish containing subtle poisons.

Fish from San Francisco Bay were reported on September 10th to contain dioxin and PCBs ten times more concentrated than in the general food supply. The report by the Communities For a Better Environment said dioxin accumulates in fat and can cause cancer, birth defects and a variety of other ailments, so that those who eat such fish on a daily basis are exposed to "as much as 30 times more dioxin than the already-dangerous general population level." Any TDLr who lives near an oil refinery, or medical-waste incinerator, should reflect carefully on whether there might be seepage into their water or air. Governments are in what we call "dioxin denial," usually saying small amounts can't hurt, but it is among the most poisonous substances on earth and it cumulates.

If you have no idea what your farm-fed fish were fed, eating salmon for its heart-healthy omega-3 fatty acids also has a risk. According to Health Magazine (Oct 98) farmed salmon contain as much, if not more, saturated fat as omega-3s. Other farmed fish such as trout and catfish also contain more saturated fat than the ones you'd catch yourself. Conclusion: eat fish only caught in the wild, preferably of the deep-sea varieties, not in bays. Try Halibut, for the heck of it.

Gold is the world’s oldest and most known currency.