The November 8, 1999, report was followed on December 29, just two days before a crash in tech stocks (where the biggest point decline in history was registered by the NASDAQ) by another report, entitled, "A Cautionary Word On Technology and Internet Stocks." In the report, we stated:

"Just as the biting chill of winter is soon forgotten with the warmth of summer, the sweetness of the stupendous gains achieved in 1999 by many tech stocks has caused investors to forget the pain inflicted by huge drawdowns also experienced by tech stocks earlier in the year.

 

"Do you remember the anxiety and fear inflicted on investors by the formidable drop in tech stock prices in early 1999? By the end of May, many big names experienced gut-wrenching declines ranging from 30% to over 50%. And, like many past market freefalls, the downturns happened on the back of good news, catching most investors off guard. It may be hard to remember now, but if you bought shares in Yahoo, Amazon.com, and America On Line at their 1999 highs which occurred by May 25--you would have been down, respectively, 43.5% and 46.9%, and 31.9%.

"Don't think for a moment that if such precipitous declines happened to stocks as popular as Yahoo, Amazon.com, and AOL, history cannot repeat itself, particularly when many tech and Internet stock valuations are now absurdly higher than ever before! For us, it's not a question of whether weÕll experience another violent decline, but when."

CURRENT ANALYSIS AND PREDICTIONS

Like many major brokerage house analysts, we believe the Dow will not repeat its 20% plus returns in 2000, but instead move modestly higher near 12,500, producing a return in the 9% area. Our analysis of still higher stock prices in 2000 is based on the following:

"We believe we are still in the midst of an unfolding technological revolution, fueled by the Internet, where increased productivity and economic capacity will continued to lead to reduced inflationary potential. Helping the technological revolution keep inflation under control, we believe, has been a supply-side revolution that set policy on a course for hard-money disinflation, rejuvenated work, and investment incentives from lower tax rates, enormous efficiency gains from across-the-board deregulation and a burst of consumer buying power from liberalized trade expansion.

• "During the 17-year recovery boom that began in 1983 what the National Bureau of Economic Research has labeled the longest period of prosperity the U.S. during the 20th centuryÑaverage hourly wages increased at a moderate annual pace of only 3.25%. This occurred during a period when more than 40 million new jobs were created, and the unemployment rate descended to 4.2 percent from nearly 11 percent.

• "Many more people worked, produced, and prospered during the past two decades. However, gloomy predictions of ever higher inflation and interest rates did not come to fruition. The Malthusian specter of pessimistic limits to growth and success has been replaced with a Reaganesque scenario of optimism and opportunity.

• "The U.S. economy is being transformed for the better right before our very eyes! We believe this transformation has produced an inflationless growth economy. Reduced inflation means that workers need not demand exorbitant wage hikes as they were forced to do in the 1970s. This is the principal reason why wage rates have been subdued for the past seventeen years and correspondingly, we believe, why the stock market has experienced one of its longest bull runs and biggest gains in history."

top

NOTES OF CAUTION

There now exists an extremely tight labor market, a booming U.S. economy, recovering world economies and rising oil and other commodity prices. These factors are contributing to higher inflation and interest rates, which at this point are only moderate and under control. However, there is the very real risk that the increased productivity due to the unfolding technological revolution that has kept inflation at bay may be overwhelmed, leading to a higher rate of inflation and a spike in interest rates!

We believe this will continue to cause the markets to be perpetually paranoid, lurching back and forth between pessimism and optimism, exemplified by its start for the new millennium. In the first week of 2000, fears of higher rates and inflation led to one of the wildest weeks on record for stocks. We saw the NASDAQ post its single biggest loss ever, dropping 229 points in one day, and the Dow drop 500 points in only two days. Heavy losses were experienced in many stocks, exemplified by Lucent Technologies and Yahoo, which fell almost 30% in the blink of an eye. However, by week's end, the roller coaster went back up with the NASDAQ recovering some of its losses and the Dow making new highs. We believe this extreme volatility is now part of the stock market's investment landscape.

top

REALITY VS. VIRTUAL REALITY

Years ago, people invested in a stock based on sound principles, such as a company's assets, profitability, earnings, balance sheet, dividends, and projected earnings. The quality of a company's fundamentals were the determining factor which led to its stock price rising. This is what we call "reality" investing. In "virtual reality" investing, which we've seen primarily in technology stocks, people are investing in companies without concrete assets that are operating at a loss, have never seen a profit, and aren't expected to see a profit for years; and the stocks of many of these companies have surged in value. Virtually new companies, with no real assets, are now valued more than companies that have been around for many years with substantial assets. Fundamental research has been out of fashion. Simply chasing whatever is hot, referred to as momentum investing, has now become the new "fundamentals."

We may be old fashioned, but at these current, sky-high levels, we don't believe that it's prudent to invest in stocks that have few concrete assets, operate at a loss, and have never seen a profit. In the long run, we believe it's much safer and prudent to invest in companies with substantial concrete assets and real earnings!

To better understand the absurd overvaluation of many tech stocks, think about this analogy:

Your house may be sound and valuable, but it's probably not worth 15 million dollars. In the same vein, many Internet companies are sound and valuable, but their stocks are not worth 500 to over 1000 times earnings!

As is quite evident to most stock watchers, many technology stocks have surged to unimaginable levels in spite of the fact that most are operating at a loss and have yet to realize profits. In a world where technology and its fads change so rapidly it is difficult to predict market directions days in advance let alone months, investing in "techs" and ".coms" seems to us clearly a classic example of "irrational exuberance" carried to the nth degree.

Remember the biotechnology mania of 1991-92? Of the 101 biotech companies that went public, only 44 are still trading! And what about Iomega, the disk drive maker touted by investors in early Internet chat rooms? Like many other high-tech flyers, its price exploded, soaring from $0.20 to $27 a share, only to plummet 85% to a little more than $4.

The 500% to over 1000% appreciation of many tech stocks, we believe, has placed the entire technology sector on even shakier ground. We predict that increasing competition will cause many of today's high-flying technology stocks to suffer the same onerous fate as occurred to over half of the supercharged biotech stocks that went public in 1991-92.

We believe investing in tech stocks which have primarily gone up on momentum, have few concrete assets, operate at a loss and have never seen a profit is about as risky as one can get and is the equivalent of building a house built with straw. Eventually that house will fall down!

top

RISING INTEREST RATES

Right now, the U.S. is short of workers, not jobs. With a 4.0 unemployment rate, we have one of the tightest job markets in history. The market already has a one-half-percent increase in rates built into prices. But if the economy doesn't slow down, we believe interest rates will rise more than 1/2% which can greatly darken the outlook for stocks. This is a very  serious concern. Virtually every bear market since 1962 has been caused by rising interest rates.

OVER VALUATION

According to Morgan Stanley Dean Witter's analyst, Barton Biggs, as indicated by Morgan Stanley Dean Witter's valuations model, stocks are overpriced 45% to 50%. With the S&P selling at over 31 times earnings, the index is nearly 100% over its historical norm. Add to that tech stocks like E-Bay, selling for more than 1000 times earnings. This gargantuan overvaluation of stocks, when the market does correct, or worse yet, goes into a bear market, can set stocks up for a punishing decline of historic proportions.

top

HISTORICAL PRECEDENT

Indices tend to have poor performance following record gains. For example, in 1915 the Dow set the best record of any stock index, rising 82%. The next year, it fell 4%. The Russell 2000, after jumping 39% in 1989, fell 21% in 1990. With the NASDAQ beating the Dow's record performance of 1915, rising 85% in 1999, there is plenty of room for history to repeat itself.

OUR BIGGEST CONCERN

As we enter the new millennium, our biggest concern is investors' dangerously inflated, unrealistic expectations on market returns. In 1999, we were part of a once-in-a-lifetime event, witnessing the NASDAQ's biggest gain ever in the history of the stock market. We also saw the S&P 500 during the 1980's and the past four years, respectively, producing double and triple its average performance. (Including the sharp declines of the 1930s and 1970s, and the booming years of the 1980s and 1990s, the S&P 500's average return since 1928 is only 11%.)

1999's stellar returns in the major indices are misleading and have masked what can be an historic warning. Did you know that even though the NASDAQ produced a record return in 1999, only 65 out of 4,815 stocks accounted for 99% of its gain and about half, 2,254 stocks, were down an average of 32%? And did you know that even with the gains in the 500 stocks that comprise the S&P 500 Index and over 7,000 stocks that make up the Wilshire 5,000 Index, more than half the stocks of both indices were down?

The only other time in history we can remember such narrowing leadership, and so few stocks performing well, while so many performed poorly or languished, was in the early 1970's, before one of the sharpest drops in market history. Those were the high-flying years of the "nifty-fifty." Back then, a select few stocks, like Polaroid, had unimaginable stretched out valuations, like many of our high-flying stocks today.

The general consensus before the bear market of '72-'74 was that the "nifty-fifty" could only go higher. Consequently, drops in Polaroid and the rest of the market were viewed as buying opportunities. (Sound familiar?) As the nifty-fifty dropped, investors continued buying. But something happened that didn't happen for many years. The nifty-fifty continued dropping until investors all tried to "get out of the same door at the same time." What resulted was a "waterfall decline," where the market's bubble burst and the Dow plunged approximately 48% in 1972-1973, with Polaroid losing almost 80% of its value! It took around a decade before stocks recovered to make new pre-crash highs.

As we move into the new millennium, we believe we should heed the lessons of the "nifty-fifty" stock market bubble and other bubbles before, in that no matter how seemingly attractive a market can be, that market can't continue to inflate indefinitely without one day witnessing its bubble burst. And there has never been a market yet whose bubble didn't eventually burst! Yes, it would be a great story to tell our grandchildren that we participated in the greatest bull market in history and profited handsomely. But it could be one of the most ironic and saddest stories to have the legacy of ignoring history, throwing caution to the wind, and suffering the consequences of being caught in perhaps the biggest market bubble in history, when it breaks, with no protective investment strategy!

top

CONCLUSION

While we are bullish, our enthusiasm is tempered by a perpetually paranoid and volatile market, nervous about tight labor markets, stretched out valuations, rising inflation, and higher interest rates. Under these conditions, we must face the reality that, even though the market can go higher, we are under the constant threat of its bubble bursting!

Many believe this is one of the most risky periods ever for stock investors. This is no time for complacency. Although many prominent analysts are predicting only single-digit returns, no matter how high their predictions could be, we strongly believe it's not worth the risk of being exposed to the bubble bursting in the market! We believe the most important question investors should be asking themselves is what investment strategy do I have to capitalize on market volatility and potentially protect my portfolio from adverse market reactions? The best investment we have to offer that addresses this question is the Dynamic Stock Index Presidential Portfolio (DSIPP). It is comprised of three professional trading advisors utilizing unique proprietary trading systems, each operating completely independent from each other.

Spearheaded by Max Ansbacher, famous financial author, TV personality, and money manager, the DSIPP's advisors stand ready to perform in virtually every market condition, whether the stock market rises, falls, or even moves sideways! We doubt you have ever seen an investment which is better equipped to potentially capitalize on today's volatile stock market and, at the same time, add profound diversification to your overall investment portfolio!

top