Monday, June 12, 2006


We welcome two new investors. Both of these investors recently spent a few nights at Kingston Plantation, Myrtle Beach. It is easy to recruit new members. after they spend a few free nights at the beach. The good news is that membership has great value even if you never go to Myrtle Beach.

Ned Davis Research.

Ned Davis offers high powered research at It is expensive stuff ($25,000 per year for the full version and $4,800 per year for the abridged version) but all prices are relative.

On June 7, 2006 he posted an Institutional Hotline report on "Sentiment at Fidelity". I am not allowed to send out copies but I can share some of the thoughts presented.

Fidelity operates 41 sector funds. The Ned Davis report is that an unusually large amount of money has been put into energy and energy related funds. A large amount has also been invested in Gold funds. At the same time, growth funds are sitting at record low relative ownership!

Sometimes it is hard to know when to run with a stampede and when to be a "contrarian". Once a bottom is made and momentum takes over, one should never stand in the way. Stocks can run a long way past fair valuation and they can drop a long way below fair valuation. One should remember that the public is always wrong at the "extremes".

Over that the SentimentTrader web site, Jeff's focus is on "smart" investors and "dumb" investors. Boy have his numbers recently changed. Suddenly, smart investors are very confident and dumb investors are scared. About a month ago, the numbers were inverted. As many of you know, I prefer to be in the market at almost all times. I may switch from being very heavy in stocks to very heavy in bonds but I seldom hold a lot of cash. The long term evidence is that those who ride the "bucking bronco" all the time, generally do better than those who try to jump in and out of the market. Indeed, I have seen individuals hold back from investing when stocks are low and then jump in time and again near a market top.

Mark Hulbert runs a service that tracks the results of investment advisors. I have read his work for many years and time and time again, he has shown that it is a mistake to try to time the market. Friday, Gary Shilling was a guest on Kudlow and Co. Shilling projects that the US will be in a recession by year end. The fact that Shilling's opinion is far from the "blue chip" consensus opinion does not make it wrong. Indeed, John Maynard Keynes accurately stated that in questions of Economics, the majority is always wrong.

The majority believe that energy is the place to invest; wrong. The White House Economic Forecast which is consistent with the "blue chip consensus" follows:

2006 Real GNP 3.6% Inflation rate 2.9% Unemployment 4.7%
2007 Real GNP 2.9% Inflation rate 2.3% Unemployment 4.8%

Since the majority is wrong, what is the right answer? My forecast is between that of Gary Shilling and the majority. I believe GNP is going to slow considerably over the next few months (we will soon find out that it has already slowed since last quarter). However, it is a long way from 2.9% GNP to negative GNP. For just one quarter, we might see real GNP of 1% or so. Big housing companies have already seen 30% declines. Big cars, trucks and SUV's are in a sales slump. The US economy is not going to show strong growth with housing and autos in the tank. My guesstimates follow:

2006 Real GNP 3.0% Inflation rate 2.4% Unemployment 4.9%
2007 Real GNP 3.5% Inflation rate 1.8% Unemployment 4.7%

The above guesstimates hide the idea that the slowdown will be sharp and short. The key question for investors is what will be the lowest quarterly GNP number. Should GNP drop to 1% and should inflation rates respond, long bonds would see a huge market rally. All projections go out the window if the Iran/Iraq situation were to improve dramatically. The resulting decline in oil would boost GNP and lower inflation at the same time! The above projection also hides the boom I see by the second half of 2007. If GNP gets knocked down to 1% in 2006, it will have to make impressive progress in 2007 to reach an average of 3.5%.

The numbers from Ned Davis suggest growth stocks are out of favor and ready to take off. The projections for the economy suggest that one should avoid growth stocks and hunker down for the long pull. The other way that the majority could be wrong would be if a deal is made with Iran soon. The real GNP could jump to well above projected rates.

Are we all confused now? Like I said, I don't believe in trying to play the short term moves. I know the public is avoiding growth stocks like the plague and is piling onto energy and other value style stocks. My stock of the week web site has enjoyed great performance by buying good value. We are staying fully invested. In our largest accounts we have purchased T-Bonds on margin but other wise we are fully loaded in big names.

Welcome again to the new members. Those members who have not been to Myrtle should invite their golfing buddies and take a trip. I hope you will all remember to share this information with your friends, family and associates. If you have questions, let's talk