|Thursday February 5, 2004|
Never being surprised in any market
Jim Shepherd's investment advisory service uses a financial model that accurately predicts the long-term changes in the US stock market
including both the 1987 and 1929* stock market crashes. Both inflation and the current descent toward deflation, that was
responsible for the great depression, are measured by the model that has been used to predict both bear markets and new bull markets,
far in ad vance of anything available from Wall Street.
Our Current Outlook
Including: The Model's readings, critical mass, playing bear market rallies, the US dollar, gold, bonds, and possibilities for huge profits going forward.
Opportunities for profit: This service rode the bull market until late 1999 and then locked in huge profits. However, Jim Shepherd believes that in the near future we will experience a period that will offer greater opportunities for profit than at any time in modern history. There is very strong evidence to indicate that a most important change is about to occur in the stock market and those who are not prepared will see a dramatic reduction in their portfolio values. In 1999 after his model issued the sell signal that warned about the approaching end of the "Great Bull Market", Jim prepared some strategies that would benefit from those conditions that he knew would unfold in months to follow. The first of those strategies has rewarded those who implemented it, by increasing their core capital by over 60% since October 1999. In the event that Jim's model reaches critical mass and the cataclysmic collapse that he expects takes place, it will dwarf even the profits that he and his clients enjoyed during the 1987 stock market crash when his strategy brought $millions to those who followed it. See Strategies for Profiting in A Bear Market.
The Model's readings: The model issued a sell signal during the week of October 25th 1999. This was a warning that the bull market, that began in 1982, was approaching an end. The model's readings, with respect to critical mass remain extremely high, and although they have not yet reached levels that would be a warning of an imminent crash, that prospect remains a danger. In spite of what you may be hearing and reading in the financial press, a new bull market is not yet underway. What is really happening is a continuing bear market with lower lows and lower highs. In fact when a new bull market occurs, it will be signaled by Jim's model well in advance and immediately relayed to our subscribers. Why are we so sure about this? Over the last 120 years, the model that Jim Shepherd created during the 1970s has never failed to signal, in advance, a major change of direction of the US stock markets. Correctly predicting even two of those occurrences would involve very high odds but the odds of predicting every single one of them, including both crashes that occurred in that time frame would be in the millions. Jim's model predicted both of these crashes, one during the back-testing phase and one in real time in 1987. Therefore, there should not be any reason to doubt a model with such an outstanding record of success. Model's signals on DJIA graph
Bear market rallies: Since this bear market began early in 2000 it has undergone a series of sharp sell-offs followed by ever-weakening rallies. Each sell-off has taken the indexes to new lows and each rally has established a peak that was lower than the previous high. This is typical of a bear market and under normal circumstances some of the more powerful rallies can be detected beforehand and offer an opportunity for profit. By following some of the technical indicators we can tell when to expect a rally and when to expect it to end. However, the terrorists' attacks on September 11th 2001 changed that strategy, making it a very dangerous one to attempt to pursue. From that time it became impossible to know when a serious geopolitical event could suddenly and unexpectedly throw the markets into a tailspin, making it virtually impossible to exit any long positions in an orderly fashion. The safest way to profit during a bear market is to position your investments so that they will benefit from the ongoing declines, without worrying about the frequent bear market rallies that occur from time to time. Bear Market Dow Chart
Holding positions: A very dangerous strategy has been developing among the vast majority of traders during this recent bear market rally. It has become apparent that traders are sitting on the edge of their chairs and are content to stay in stocks as long as the indexes inch higher (low volume) however, at the first sign of trouble they begin selling stocks in droves (higher volume). It is because of this mentality that the stock market has become even more dangerous than in the early days of this bear market in 2000. When we recognized that this pattern was developing, it allowed us to maintain our bearish stance with confidence, supported by the knowledge that the fundamentals do not support the value of stocks at current levels. And although it is always wise to have an exit strategy in place, it should only be implemented when the fundamentals are strongly in support of using that exit strategy. There has been very strong technical evidence during the latter months of this bear market rally to support the belief that this rally is long past its "due date", not the least of which, is investor's bullish sentiment that is at extremes not seen since just prior to the stock market crash in 1987. VIX Graph
Dollar: In recent months there have been volumes written about the imminent "collapse" of the dollar. First, the dollar is not collapsing, it is only re-trenching after reaching record highs during the late1990s when $trillions of dollars were being poured into our IT bubble. This Dollar Chart clearly shows how the dollar has recently returned to more normal values. Second, as long as the US dollar remains the currency of choice and is used by nations and merchants around the globe to conduct trade, it will remain a strong currency and will not be in any danger of collapsing. Because most commodities are bought and sold in US dollars, the strengthening of many commodities in the CRB index, including gold and oil, can be attributed to the fact the dollar is coming off its highs.
Gold: Gold remains in a 23-year bear market that began after the metal peaked at $890 per ounce in 1980. Gold's current price is only the latest in a series of successively lower highs that have convinced many investors that a new bull market for gold has begun. However, after collapsing from its peak in 1980, gold has gone through a series of rallies, each one weaker than the preceding one. In 1981 it rallied back to at $750, 1983 to $540, 1988 to $510, and in 1995 to $400. This current rally has only taken it back to around $410 and can be attributed to two main factors. First, gold is priced in US dollars and because the dollar has declined from record highs, it has given the appearance, to Americans at least, that it has been increasing in value. However, to investors in Europe, Japan, Australia and Canada, where currency values have appreciated because of the return of the dollar to normal values, gold has not experienced any substantial increase in value. Secondly, the world has undergone a series of geopolitical events that have increased the anxiety levels around the globe. These types of events always create a slightly more favorable environment for gold, but should not by themselves be considered a fundamental reason to own gold as a major part of an investment portfolio. Gold has traditionally been used by investors as a hedge against inflation, so when the economic environment is slowly creeping toward a rate that is so low it is threatening to cross the line into deflation, it is hard to believe that gold is sensing a return of rampant inflation.
Bonds 101: Bonds can be extremely good investments at the appropriate time. Treasury Bonds are fixed maturity instruments---that is, they have a defined and finite lifespan. In the case of the 10-year Treasury Note, that lifespan is 10 years from the date of issue. Treasury Bonds have two components of value: 1. the face value of the Bond is the amount the Treasury Department guarantees to pay you upon maturity; 2. the coupon attached to the Bond which produces income over the life of the Bond. This coupon pays a fixed amount of interest every six months. If you purchased a $100,000 Treasury Note with a coupon rate of 4.5%, at auction, with a maturity of 10 years it means that in 10 years you would be guaranteed to get back your original $100,000. Additionally, you would receive, every six months, half of the coupon rate of the Note, in this case 2.25%. This is your yield and if you held the Note for its entire lifespan, it is easy to see that your annual yield would be 4.5%. However, before you decide that Bonds are some boring, devoid-of-potential-for-capital-gain instrument, let us assure you this is not the case. If you hold a Bond with the aforementioned 4.5% coupon rate and interest rates in the open market decline, your Bond will appreciate in value. Why? Because if others are only able to get, say, a 3% coupon rate on a new purchase, your Bond would have to be worth more since you are getting 4.5%.To give you a concrete example of how Bonds increase in value as yields decline, let us look at the recent Treasury auction of the week of November 10, 2003. At that auction the 10 Year Note with a coupon rate of 4.25%, maturing November 15, 2013 had a yield to maturity of 4.36% at a price of 99.116 (per $100). If, in the near future, the yield to maturity on this Note should fall 1% to, say, 3.36% (due to many factors that we have discussed), then the price on this same instrument would be 107.5 (per $100) for a percentage gain of 8.46%. We use this example of a ten-year note because there have not been any 30-year Treasury Bond auctions since they were suspended in 2001. However, investors are still able to buy 30-year Treasury Bonds on the open market and because of the additional time to maturity the price reaction as interest rates decline is even more dramatic than in the case of the 10 year Note. Remember also, that the example above is a real instrument and in addition to the capital gain as noted above, you would still receive interest at the rate of 4.25% paid semi-annually. Using a recent case of the 30 Year Bond that closed on March 21, 2003 with a yield of 5.02% [price 109 and 2/3rds], by June 16th the yield had dropped to 4.23% with a gain in price to 124, a gain of 13%.
Hidden dangers: Jim believes that at some time in the near future the stock market will experience a complete collapse that will be exacerbated by two relatively unknown but very serious considerations. The first is the record debt levels of consumers, businesses and governments that could turn a small problem into a disaster. The second is the $trillion dollar derivates market. Leverage in the financial arena has grown so large over the last few years that there is no doubt it will be the major contributing factor to the stock market meltdown we anticipate. More and more risk has been taken on by fewer and fewer large institutions, and as this leverage unwinds, Jim believes it will cause impossible strain on some of the largest banks and brokerages in the world. We have already seen the extremely negative effects of relatively minor problems compared to the potential risks now in place. The Long Term Capital problem that developed in 1998 threatened the stability of several large financial concerns and yet, the potential losses now dwarf the fallout from Long Term Capital. There was, as of the end of December 2002, more than 100 trillion U.S. dollars in notional value outstanding in interest rate derivatives. (Notional value is the total value of the underlying trade) This sum is almost unbelievable, and you can be assured that at some point in the not-too-distant future, the fallout created by the unwinding of this leverage will spell disaster for the stock market and for some of the large institutions involved in this very risky business. Yet, as you know, all you ever hear from the mainstream media about this risk is an occasional reference to a comment by Alan Greenspan or Warren Buffett.
Join us and prosper: It is Jim's contention that one of the finest buying opportunities in our lifetime will soon be upon us, both on the short and long side. In fact there are likely going to be several excellent opportunities during a more contracted period than in previous bear markets. It will be absolutely essential for the safety of your capital that you have a guide to navigate the turbulent waters that lie ahead. Doesn't it make sense to join us and begin experiencing the fantastic growth we have enjoyed over the past 22 years? See Investment Results. Remember, very few make money consistently in the stock market. Emotions and enormous pressure from both the media and brokers result in most investors bouncing in and out of investments, often at just the wrong time.
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Although the above information is accurate, it may not represent Jim Shepherd's current investment advisory recommendations. In the event the model issues a new signal, whether it's a new buy signal or the issuance of an imminent crash warning signal, that signal will not be made available to non-subscribers for a minimum of six weeks and probably longer depending on circumstances.