Inside The Stock Market ...trends, cross-currents, and outlook

The most significant development since the last issue has been the renewed massive downside pressure on the oil stocks. Is it time to finally start bottom fishing in oils?

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The market is again exploding on the upside, about to make a new high. Twenty-three years of on-line market experience provides no operational guidelines for a market like this, even though the amplitude of the move and the volume relative to shares listed is not unprecedented.

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“The Analyst Looks at Baseball” - Several analytical approaches are applied, combining team payrolls, runs scored, games won and attendance in an effort to determine who are the best and worst baseball teams.….”Don’t Always Underestimate the Banks” - Soon banks will be offering their own money market funds. Existing money market funds say they are not worried about the competition. They should be.

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A new nationally distributed newspaper has been born, USA Today. This big gamble might just pay off for Gannett. It is refreshing indeed to see a corporation make a big bet on a high-risk long-term investment, especially in this age of corporate timidity and financial mechanics. Also, Irving Kristol’s remarks at the Western Pension Conference.

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In September the stock market moved sideways, and just as it seemed the underpinnings would finally crack, just as it seemed our expected correction was about to begin, an explosion occurred, on the up side, not the down side.

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Reagan’s change of economic course, leaving the hard-core supply-siders behind, was constructive, and from our standpoint, expected. Predictions for the next two years include significant social security reform, implementation of a somewhat watered down, but still very meaningful flat tax. Federal deficits in 1983 and 1984 will probably turn out to be less than now expected. And in November 1982, the Republicans will lose some seats, but the Old Cowboy will still be able to get his way with Congress when it is important.

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Merrill Lynch was first but the rush is on, stripping existing T-Bonds of their coupons, repackaging and selling coupons and principal separately. While perhaps priced too high for sharp pencil pushers, to us they look like a very good investment. Corporate “zeros” should, however, be viewed very cautiously.

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The S&P 500 futures hedge discussed last month remains because even though chances are the summer lows will stand as the bear market bottom, a correcting decline of 80-100 DJIA points down from the Aug-Sept peaks is expected. This may happen very soon. The recent action of gold is ominous and one or two 120 million+ downside days would not surprise.

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In recent weeks, this writer has again been poking around rural middle America, updating work presented in past issues of this publication for a Barron’s article. Here are some new things I have learned, also a few revised observations, some perhaps not quite appropriate for the Barron’s article. Also, no matter what Janet Norwood and her crew at the Bureau of Labor Statistics say, real estate prices in the real world are coming down.

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As of July 30, the Major Trend Index was marginally Positive, but the Early Warning work deteriorated to a Neutral status. And currently the stock market is very seriously threatening to trigger the Fail/Safe mechanism.

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55 members of Congress are double dippers, getting a government salary check and a government pension check each month. Some think it's unethical, but it's all legal. Names and numbers included. Also, the CPI may soon be understating inflation, but not because a rental equivalent will be substituted for home prices and mortgage costs in January 1983. PPI, however, is understating price declines.

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Skittishly Bullish best describes our attitude. June was disappointing, significantly eroding our analytical work even though the popular averages drifted only slightly lower. The time is coming for the Natural Resource Disaster Area and the Super Sick Cyclicals. It's still too early, but we are sharpening up the timing tools.

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Leuthold Group “Interim Memos” are usually unusual, perhaps three or four per year. But, in the last month, two were sent. We know this has produced some confusion with clients. Herein, an attempt will be made to better explain this publication's current attitude. And, for readers interested in the market trend analytical disciplines, some questions will be answered.

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Down more than expected in May but the Major Trend Index remains decisively bullish. Early Warning Index at +10, -3, combined with sentiment and momentum work leads to a conclusion that current decline may be about over, with market rallying again later in June. Advise accumulation.

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Last issue’s feature on farmland prices and home prices seemed to generate considerable interest. At the risk of seeming excessively provincial, we will again focus on farm problems, including new Department of Agriculture land price data and the reasons why the intrinsic value of farmland may actually be depreciating.

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The crowd is not always wrong and being contrary is not always right. However, maintaining the ability to step away from the crowd is crucial. Our once lonely positive stance toward consumer stocks seems to now be consensus, but that in itself is not reason to now abandon the thesis. It does, however, put us on guard.

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A recent visit to Washington D.C. prompts some thoughts concerning the insularity of the city and the unresponsiveness of government and politicians to the wants and desires of the electorate. The apparent lack of political interest in the flat tax is an excellent, timely example of this.

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The stock market looks great. The Major Trend Index continues to substantiate the new cyclical bull market case. The Early Warning Index of market tops is a cool and comfortable +13, -3.

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A historic look at farmland prices and home prices helps put today in proper perspective. Farmland price levels look especially vulnerable. Considering the high level of leverage now employed by some land owners, the high interest rates and the low cash flow, auction hammers may soon echo through rural America. Home prices are not as vulnerable but declines of 20% in nominal and real dollar values would not be surprising.

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Several clients have requested more information concerning the “Early Warning” Indices, employed by us to provide insight into developing market tops and bottoms. Here is most everything you might have ever wanted to know about that work, and more, including all “signals” since inception.

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