A Better Strategy

A reader asked, "If the Nasdaq stocks are still going up…why don’t you tell readers to buy them!?"

And, yes, a smart trader might buy the Internets…and might make some money on them. But he should realize that they are like a pack of cards in which nearly every one will turn out to be an Old Maid. He is probably more likely to lose than to gain. A better strategy, for the long-run, was suggested by Dennis Gartman in an interview in "Barron’s" last month.

"I think we have entered a bear market," said Mr. Gartman, echoing the view with which DR readers are very familiar…and probably a little fatigued. But few people have realized it. Which is just the way a bear market is supposed to work. "Nobody should be able to anticipate a bear market," he said, "or a bull market. All one should be able to do is say within two or three months of a turn, that it appears to be taking place."

Most stocks have been in decline for more than a year and a half. And still there is no popular recognition that we are in a bear market. But…this is an extraordinary bear market. In fact, the market is unusual almost every way. But it is not completely without precedent. Gartman notes that the broad market began going down for months in advance of the `73-`74 bear market. "Now," he says, "you’re seeing the Microsofts and Intels of the world beginning to break trendlines. The definition of a bear market begins [with] a market where each high is lower and each low is lower. This market is acting that way."

Gartman is moderate and measured in his outlook. (Maybe he should drink more. Or drink less.) He says that going back to the middle of the 18th century, the average bear market decline has been 31%. That leaves him the expectation of Dow "trading closer to 7,500 than to 10,000."

If he’s right…the bear market may not be as catastrophic as I imagine. Most likely there will be a crash in the high tech sector. Most Internet stocks will disappear. Day trading taxi-drivers will begin paying attention to where they’re going. People will cancel their most extravagant plans, save money and play out their lives on a more modest stage.

This sober perspective is made possible by Gartman’s view of the world economy. There are three major economic areas…Europe, Asia and America. They are all doing well, he says. But the growth is not trouble-free.

In America, the labor market is far too tight, he believes. There are Help Wanted signs up everywhere. People are offering bonuses just to attract minimum wage laborers. The cost of labor is going to go up…like it or not. And the economy is going to slow down — for lack of labor. Rising labor rates, and falling economic activity, mean — for the first time in years — consumer prices should rise. The inflation rate should nearly double in the next 12 months, he believes.

Japan, meanwhile, is experiencing a tentative recovery. But a huge problem looms — the disappearance of the Japanese themselves. Economic growth requires people. And capital. Financial capital. Japan, with among the world’s highest savings rate, has plenty. But it is running out of human capital. In fact, it is the first and only major country whose population is actually shrinking. Immigration has helped prevent a decline in population in most European nations…and it has provided the United States with a significant population boost. But the Japanese do not, by and large, allow immigration. I can become French if I want…if I work on my French hard enough, I may eventually even be able to pass myself off as a Frenchman. But I will never pass myself off as Japanese. With fewer people, it will be very hard for Japanese economic growth to be anything other than sluggish.

Their only hope, Gartman believes, aside from allowing immigration…is to reduce the yen. "Over the next several years, Japan has to see something closer to 175 or even 200 yen to the dollar…rather than 110," he says.

Another big problem in the Far East is China. China needs 9% growth just to keep unemployment under control. But it’s only growing at about 5%. The most likely move will be for the Chinese to devalue their currency next year.

The European picture is a bit more obscure. My neighbors believe the 35-hour workweek will put them at such a disadvantage that they will not be able to sustain it. But the sorbet will freeze in hell before France repeals such an important bit of social legislation. The only way it might make it work is by stimulating rapid growth. This fundamentally inflationist policy may dominate all of Euroland…though it is too early to tell how it will play out.

So what do you do with your money? Gartman believes the age of equities is about to be replaced by what he calls "the age of owning stuff." After 20 years of being bearish on gold, Gartman has turned in his claws. "I’m not bearish any longer," he says. "One of the first rules of trading is, when something doesn’t go down on bearish news, [the Bank of England’s gold sale] you probably shouldn’t be bearish any more." What’s more, after the big run up in gold in September, "gold still hasn’t retraced." In fact, it seems to be strengthening…slowly.

His prediction: "Gold prices are probably going higher…very close to $400 per ounce." But like Buffett and Gates, Gartman is also looking at silver. "I am looking for relatively pure silver plays like Pan American Silver and Apex Silver Mines…" he says.

The simple investment strategy for the coming months: Sell stock on rallies. Buy gold (and commodities) on dips. Until tomorrow…

Bill Bonner
November 24, 1999

P.S. Thanksgiving is not a holiday in France. The kids will be in school. I will be at work. So, I’ll write. My feelings will not be hurt, however, if you choose to ignore tomorrow’s message in favor of a full frontal assault on turkey and stuffing.

Best wishes.

In Today’s Daily Reckoning:

*** Quiet day on Wall Street
*** Boomers are no longer the biggest group
*** Is gold beginning to move?

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

*** The Dow fell 93 points. The S&P and the Nasdaq were off a little, too.

*** Bonds…utilities…oil…they were all down a bit.

*** It is a quiet, stealthy bear market…with only 40 new highs on Wall Street against 295 new lows.

*** But gold rose to $298.

*** I am puzzled over the various money supply figures. Some measures show a huge increase in new credit. Others — such as numbers in the current issue of "Barron’s" — suggest that the rate of growth in the money supply has topped out. M1…M2…M3…MZM…M&Ms…MMMM…I wonder if anyone knows what’s going on…

*** "Things you expect to happen usually take longer than expected," said Doug Casey, "but once under way they tend to evolve more quickly than you expected." That has been our experience… http://www.douglascasey.com

*** Dan Denning, from our financial research team, reports that 10 Fortune 500 companies were hit by a new computer virus called W97/Pelissa last week. Dan also thinks that his Japanese virus-fighting company recommendation is going to soar.

*** In fact, many of the shares in the Far East are getting a boost — following the news that China will be admitted to the WTO. Pohang Steel is up 149% since we recommended it. But it still has a P/E that is only half the S&P.

*** Dan was feeling rather proud of himself…because the REIT his team recommended just announced its 82nd consecutive quarterly dividend increase. It’s yielding a comfy 10%.

For information on the "Fleet Street Letter," in the U.S. call 1-800-433-1528, or outside the U.S. call 410-234-0691 and ask for code 3472.

*** Our other Dan, Dan Ferris, is a trader. He trades commodities. Right now…he, too, is riding high, he says…with big gains in cocoa (up 285% since 11/8), crude oil (up 168% since 11/10), unleaded gas (up 203% since 11/10) and Brent crude (up 166% since 11/10). If you’re interested in trading…you can contact Dan at dferris@Agora-inc.com to receive his "Free Trading Ideas."
*** Today is the 140th anniversary of the publication of Darwin’s "Origin of the Species." People have been arguing about it ever since. The latest argument concerned man’s oldest ancestor. New finds in West Africa challenge the well-known "Lucy" hypothesis of East African origin.

*** In Afghanistan…five thieves had their right hands and left feet cut off. The punishment was performed at a football stadium…before a crowd of thousands.

*** Meanwhile, the Church of England is going to ask new members to state their racial origin. This follows the finding of a mathematician working for the metropolitan police that the Anglicans practice "institutional racism"…as evidenced by the numbers.

*** And the boomers are no longer the largest generation in America. They delayed having children so long that they actually amplified the generation born after 1980. There are about 77 million boomers, born between `47 and `64. The next generation is small…with 60 million born between `65 and `80. But the following generation, born between `80 and `99, has 80 million members.

*** I saw an interesting investment Strategy in "2000 and Beyond…Profit Perspectives for the New Millennium" from Taipan’s Chris "The Hammer" De Haemer. He’s targeting companies that cater to well-off baby boomers and racking up some substantial profits. In fact, you’ll find over a dozen of the Taipan group’s best picks on videotape.