Vol. 12, No. 3,009 - The American Reporter - October 19, 2006



Market Mover
AN UP TIME IN A DOWN WORLD

by Mark Scheinbaum
American Reporter Correspondent
Panama City, Panama

Printable version of this story

PANAMA CITY, Panama, Jan. 1, 2002 -- Admittedly the analogy is a corny stretch, but being here in this Crossroads of the World -- at the southern end of Central America and minutes from the northern tip of South America -- has inspired a few reflections on investment themes in the stock market. Investors are also at a crossroads, one laden with both danger and opportunity.

It's the opportunity that interests me. As ships from all nations -- some of which don't speak to each other (such as Taiwan and the Peoples' Republic of China) -- traverse the Panama Canal, I admire the orderly fashion in which global commerce continues, 24 hours per day. Recession or not, basic commodities are still smoothly transported and traded. For many investors, perhaps more so for the "Baby Boomers," the next year might actually bring a bizarre opportunity. This opportunity might not be driven by boom or bust, but rather by stagnation and uncertain economic recovery. A study of the "large cap" literature (Dow Jones Industrial Average, S&P 500-style stocks, investment grade companies etc.) going back 75 years, indicates more trouble could be ahead. Chicago-based Ibbotsen Associates, the econometric mavens, publish charts which reveal that on average one year out of each four is a loser on Wall Street. To maintain a ratio of 1:4 truly crappy years we have to be a bit flexible with our statistics. What about two down years in an eight-year span? Well, that's still 1:4. How about any 12-year period in which we have three terrible years in a row? Still 1:4, right? And what about an unlikely, yet possible scenario of four straight dog years in a 16-year period? Still 1:4. Using the Dow and the OEX (S&P 100 Index) as my guide, I officially declare 2000, and 2001 down years. September 11 probably prevented a "break-even" for 2001, but let's still call it a down year, albeit a slight one. (Yes, in this column we predicted this result on Feb. 1, after reviewing the "January effect.") You will note that since I have never considered the Nasdaq Composite Index a useful indicator for any serious long-term investor, I am not interested in temporal results of penny-stock, tech-laden, manipulated, and ridiculously mispriced OTC components. Many top brokerage analysts are talking about the average recovery time in a "typical recession," which should spark a new bull market in March or April. Since nothing in recent months has been "average" and since equally respected analysts still call for low interest rates and slow earnings growth, they could be wrong. Humor me for a moment by going with this scenario: The Dow Jones Industrial Average and the S&P 100 Index spent 2002 in a "trading range" of between seven and 10 percent up and down, and quite possibly the DJIA will close 2002 down in single digits (in percentage points).

This would mean three technically negative years in a row -- very possible in our ratio formula -- which could cover a 12-year time frame which would easily sustain a strong bull market from 2003 until 2010 or beyond. Some international events could help a long-term global bull market. A few are:

  • Success of the unified physical debut of the Euro currency;
  • a new secular direction in the predominantly Islamic former Soviet republics of Central Asia, many gifted with rich natural resources;
  • a weakened OPEC, coupled with alternative fuels which lower transportation and anti-pollution costs;
  • another leg up in the planet-wide explosion of wireless and satellite communications for the Internet, telephone, and television.
Here's the bottom line for U.S. investors, and particularly those 50-somethings who are finally paying off college bills for kids and taking some equity out of their homes: Three years of wealth accumulation. Since you have an incentive NOT to touch 401k, IRA and other "qualified money" until age 59 1/2 (tax penalties), for a third straight year one can sock away as much blue chip equity money as possible. I looked anecdotally at one of my favorite pension vehicles, Lincoln National/Delaware Decatur Equity Income Fund, going back to 1957. On a rolling average over more than 40 years, this conservative, investment-grade fund has averaged +11% to +15% per year (depending on whether you looked at the numbers in 1998, 1999, 2000, etc.). It would be cruel to ignore the fact that a retired couple in their 80s, with only Social Security checks, $30,000 in Certificates of Deposit, and no pension plan of any kind, are not hurt by low interest rates. Since seniors typically spend more on health-related bills, and these bills rise higher than "grocery basket" items, it's true that some Americans might have a tough year. But the boomers and others who are still employed and scraping some savings together each month, have seen communication, fuel, mortgage, auto, and other costs drop. Those smart enough to have squirreled away emergency money, will not be required to touch any qualified funds at all until age 70 1/2. Those who shrewdly used Roth IRA's to their benefit, or understood the compounding wonders and tax-deferral of non-qualified variable annuities, can keep money untouched and compounding until age 75, 85, and beyond. The benefit of a third down (but not dismal) year is the ability to buy more and more and more and more of the types of quality portfolios which are still trading at historic discounts. Mutual fund, annuity "sub-accounts," and self-directed brokerage accounts that are loading up on International Paper, SBC Communications, Sara Lee, Unum insurance, Burlington Resources, General Electric, Ford, and yes -- I must cave in -- even a few OTC stars such as Intel and Dell -- will be greatly rewarded in five, 10, or 15 years. The "asset allocation" mix has more to do with your own age and goals than with the stock market. Going back to our original 1:4 ratio above, you can see why a brand new stock account for a 14-year-old who will need the money for college in four years, is very different from a portfolio for a three-year-old grandchild, or a single guy or gal aged 26.

A third straight year in the doldrums can keep those investment vessels flowing longer, stronger, and farther, than a big 2002 rally. Would you rather accumulate your core position in Pfizer at $40 per share or $55 per share? If the average cost for your UPS stock is $54 per share would you like to buy more shares at $60 or $70 next year? What if you could buy more at $49? Would you be very upset? Invest wisely and often in 2002. Unless you are requiring income in the next two or three years, or facing unemployment and family emergencies (which many Americans will), count your blessings, and your dollar cost averaging confirmations. You have just had your investment "life" extended a third great year. It's all about choosing well and buying low, holding on and buying more, and selling high. Happy New Year!

Mark Scheinbaum, our regular columnist, serves as chief investment strategist for Boston Stock Exchange Member firm, Kaplan & Company Securities Inc., Boca Raton, Fla., www.kaplansecurities.com

Copyright 2006 Joe Shea The American Reporter. All Rights Reserved.

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