The Daily Reckoning PRESENTS: Eric Roseman predicts a mini-bull for gains of 35% to 50% in 2003 - in the context of a wider secular bear market. "Buy-And-Hold" surely doesn't work anymore, but can you still make money - "nimble and quick" - as the global economy founders?
OLD WORLD, NEW WORLD
by Eric Roseman
The consensus is bleak - and not just for the U.S. economy. I recently returned from a nine day visit to Europe. Bankers in Copenhagen and Zurich believe that the U.S. dollar will continue to struggle going forward, but at the same time, they're not particularly excited about the Euro, either.
European GDP growth is slowing this
fall. Germany, Europe's largest economy, is barely expanding her economy,
accompanied by rising unemployment. The country is the key to Euroland
economic vitality, at 36% of GDP. But you certainly wouldn't get that
impression from her stock market: The Frankfurt DAX is down a dizzy 57%
from its all-time high back in March 2000. Earnings are
generally poor, the rising Euro is hurting exporters and companies are
not spending capital.
The only good news in Europe is that stocks are generally much less expensive than Wall Street. But again, the consensus here in the Old World is that corporate earnings projections are still too high and that 2003 will not be particularly good for European companies.
Both the U.S. dollar and the Euro are like two drunks after a big night of partying. They walk in tandem, occasionally stumble, intoxicated by spending, sluggish growth and deteriorating trade balances. But in a relative world, Europe is indeed healthier, still harboring a positive trade-balance and current-account surplus versus massive deficits for the United States on both scores. The Euro is simply a better currency at the moment.
The key word here is at the "moment."
Europe is now embarking on a huge spending spree after the worst floods in over one hundred years delayed tax cuts in 2003 for several countries, including Germany. This is not bullish for personal consumption, but might give the economies a short-term boost because of billions in government outlays.
Bonds are still favored by some heavyweight money-managers over here, though durations have been cut to lower from these levels.
And what about stocks? The advisors I spoke to were generally avoiding equities. Values, however, do remain in the emerging markets. The big money to be made over the next few years will generally not be in common stocks. With the exception of short-term trading opportunities, the bulk of profits will come from foreign currencies, alternative mutual funds, gold and commodities. You'll also make good money betting against U.S. stocks.
In August, after flirting with a summer rally, global stock markets failed to rebound and ended the month flat. Usually following a dramatic decline in values (such as in July), equities would stage a big recovery the following month. Remember last October? Though the Dow and S&P 500 Index are up 15% since the July 23 lows, they both ran out of gas just over a month ago.
This is going to be a bad decade for most common stocks, similar to the 1966 to 1982 bear market. During that period, and adjusted for inflation, the Dow did absolutely nothing for 16 years. That doesn't mean we'll have the same boring market this decade, but it is extremely fundamental to understand what possibly lies ahead in the 2000s.
After a stock market bubble has burst, it can take years for the public to return en masse, years for stock prices to recover and years for domestic and international stability to re-emerge. During bear markets, the economy turns sour; the government gets bored and decides to make war. They also print their way out of misery, discontent and ultimately, invite Mr. Inflation as a consequence of stupid policies. That is exactly the scenario unfolding around us today.
Take a good, hard look around you...Does 2002 feel or look anything like 1999? In the space of just three short years, the world is a completely different place. We just finished the greatest bull market mania of all time, in 2000. And now, I hear some pundits predicting a new bull market, starting in 2003.
While this is dangerous thinking, what we are likely to experience in 2003 is a huge mini-bull market in the context of a secular bear market. From 1966 to 1982, stocks did enjoy some terrific gains - but these profits were wiped out by big spills in between, and of course, by inflation. But you earned fat gains in 1975, 1976 and 1978.
Over the next four-to-six weeks, you could try very speculative index-based trades. Notice how I said "trade", and not an investment? That's because the "buy- and-hold" mentality we enjoyed over the last 20 years is finished. If you don't get out with nimble but quick profits in this mess, you'll get clipped by the bear. It's that simple.
Sometime, very soon, I'm looking for a strong BUY signal on the stock market. We're not there, yet. But that day is coming. I'm betting that most of 2003 will be a superb year for global equities. Yes, I realize you may want to have my head examined. But in a secular bear market, the bull visits, but just for a short while. His goal is to take as many suckers as he can to the cleaners, making them believe the bull is REAL.
But I don't plan to stick around for that to happen. If I'm right about 2003, we're looking at 35% to 50% profits by Christmas next year.
Sound bold? Maybe off the top?
Yeah, I'm pretty alone on this call, and that makes me feel quite confident.
The indicators I follow continue to be extremely bullish for the stock market near-term. All the key ratios I track are flashing BUY. I'm just standing by and waiting because September is statistically the worst month for stocks - even worse than infamous October.
We're going to see a rapid acceleration of these trends over the next 12 months. It is very important that you diversify, diversify, diversify...and stay tuned.
Regards,
Eric Roseman,
for The Daily Reckoning
P.S. In August, the gold stocks were the best performing stock market
constituents, up an average 15%. We did very well last month with a few
mining shares that were in the midst of a big sell-off earlier in June
and July. Those who followed my advice are easily ahead about 20% by now.
I'm currently telling my members to continue to sell the U.S. dollar, buy gold stocks, buy commodities, avoid most bonds and continue to carefully add to your value-based stock positions. And if you're able, move a portion of your IRA overseas or purchase an offshore variable annuity to invest in hedge funds.
Editor's note: Eric N. Roseman is the President of a Montreal-based investment
consulting firm specializing in offshore portfolio management. The firm
currently manages $27 million in assets from individual investors and
private organizations around the world.
Mr. Roseman also sits on The Sovereign Society's Council of Experts and is editor of The Global Market Investor.
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