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FASB Set to Look At Pension Plans - Rick Gagliano @ 08:20 EST

Ticking Time Bomb Set to Explode in 2004
March 13, 2003

News concerning the potential fallout from faulty, though legal, accounting for gains or losses in pension plan funds is finally making its way into the mainstream media,but most individual investors are still unaware of the distortions in earnings caused by the current accounting rules.

Now that the scandalous behavior of these companies is beginning to see the light of day, the Financial Accounting Standards Board (FASB) finally decided to add a project to its agenda that would seek to improve disclosures on pension plans. The Board expects to publish a draft on pension accounting in the latter half of 2003 with the goal of issuing an accounting standard in 2004, which seems to be - as usual with this toothless board - too little, too late.

Under current rules, publicly-traded companies are allowed to estimate returns on investment in these plans. During the go-go 90s, companies ratcheted up their estimates in line with the roaring stock market gains. But, in the first three years of the current decade, in which many stocks have fallen by 40-50% or more, most companies did not adjust their estimated downward.

The most probable outcome of this faulty accounting is a decline in the share price of companies' stock once the disparity is discovered. Firms which estimated gains but actually took losses have a dual-edged sword with which to deal. First, profits and earnings created by these estimated gains have to be reversed; second, the plans have to be refunded from current earnings. This double-whammy is going to slam some companies to the deck, reducing their true earnings over the past three years by 25% or more while putting a strain on current and projected earnings over the next few years.

For instance, suppose a company estimated gains of 7, 8 and 9% in 2000, 2001 and 2002 (not uncommon), when in fact the plan was losing 10, 10 and 12% (being kind here). That means their earnings would be taking a hit in each of those years, depending on how much the estimated earnings contributed to the bottom line. The percentages, turned into dollars, usually add up to billions for larger, well-established firms, so the downside could be severe. With plenty of companies struggling just to keep earning positive, the pension gains served as a buffer and booster over the past three years.

According to Credit Suisse First Boston Corp., had the S&P 500 companies included their actual pension plan losses in their 2001 earnings - instead of their fictional gains - their combined earnings would have been about 69% lower than what was actually reported, lowering the total to $68.7 billion in 2001, from the reported $219 billion.

What this means is that many of the S&P 500 companies' earnings are already grossly inflated, so when buying a stock which has a Price/Earnings Ratio of 23 (still pretty high), subtracting out the fictional gains from the pension plans and then subtracting some more because those plans suffered losses, pushes that p/e up into the stratosphere. Going forward, the plan has to be refunded, and that bites into future earnings. Truth is, some companies haven't grown for three years and aren't going to see earnings gains for maybe two or three more years.

This whole grab-bag of issues surrounding pension plans is going to blow up Wall Street in ways which people barely understand at this point in time. When the truth comes out, it's going to make the Enron and Worldcom scandals look like the antics of 4th graders hopped up on Hershey bars.

Companies guilty of the practice of estimating pension plan gains runs the gamut from financials to manufacturers to services. Looking for the worst offenders, start with the 30 companies which comprise the Dow Jones Industrials. Alcoa, IBM, GE, JP Morgan, 3M, Johnson and Johnson, Eastman Kodak, Du Pont, et. al., all have enormous pension plans and most of them - probably all of them - overestimated returns from 2000-2002. One can likely assume that these companies will also only revise their estimates slightly for 2003, awaiting the new rules from the FASB.

What this is going to do to the market is potentially devastating. Take, for instance, the Dow Jones Industrial Average, whose component companies carry an average price/earnings ratio of about 21, at current prices. Investors considering a possible investment in any of these companies might be well advised to simply double the p/e, based on the potential that these companies may have to restate earnings two or three years back and will be pressured to make estimates going forward.

The problem doesn't stop there, however, it has a cyclical effect and feeds upon itself. As more and more companies 'fess up, stocks will trade lower and lower, and the pension funds, heavily invested in stocks, will further deteriorate. Some companies will default on their plans, some will lower their payouts to retirees, others will simply go belly up completely due to the enormous amount of underfunding and the pressure to pay into the plans becomes simply unbearable.

When this begins to happen, the stock markets will go into a tailspin of unprecedented proportions as huge, supposedly stable companies variously restate earnings, cut benefits and declare bankruptcy.

By now, you're probably thinking that this is a doom and gloom scenario and that I'm being alarmist, but I assure you that this problem is real, it is looming and it will be devastating. Forewarned, as they say, is forearmed.

Avoid companies which have pension plans, especially those which are not crystal clear in their reporting (most of the largest companies). If you must invest in stocks, small caps at least offer some degree of safety by being out of the pension plan boondoggle. ----------------------------------------------------------

Feb. 10, 2003
Mutual Funds and the Pension Bomb - Rick Gagliano @ 07:13 EST

An ongoing disaster being hidden by corporations and government

Take a look at the January 27, 2003 issue of Business Week. Oh, you don't have a copy handy? OK, I'll share my insights with you then, and it won't cost you the $2.99 cover price and you won't have to subscribe at the ridiculously low rate of... whateveritis!

First, the issue is embarrassing and foreboding because on the cover is Rich Gannon, quarterback of the Oakland Raiders, the team that just lost the Super Bowl. Gannon himself threw FIVE interceptions. So, at least Business Week is keeping with tradition and fairness. Not only are they giving you losing stocks and mutual funds, now they're pimping potential losing sports wagers (the issue was on the newsstands well before the game was played).

But that is not the reason to look at this particular issue of one of the world's leading business publications. Across the top is scrolled "Annual Scoreboard THE BEST MUTUAL FUNDS." That being somewhat of an oxymoron around these parts, as in, we have the BEST cigarettes or the BEST chemical weapons, and the performance of the vast majority of mutual funds has been utterly and unequivocally a disaster for the past three years, so how could any of them be labeled "BEST" by anybody, much less the crack (or maybe the crack-smoking) staff of Business Week?

Well, those adroit and self-consumed editors outdid themselves with their list. Not only did they offer what, in their minds, constituted the best of a horrid lot of funds, they gave us over 600 of them from which to choose! Joy! Joy! Joy!

Scanning this list of the great, superb and undoubtable magnificent investment opportunities, I found a disturbing and recurring trend, scarily, in the column which seemed to me to be the most important, 2002 Returns. Yes, I want to know how these outstanding funds, run by equally outstanding and brainy Harvard and Yale-type managers, fared over the course of last year. One should be concerned with these things, as the return on capital invested is the path to wealth, no?

The very first fund (Business Week deemed to put them in alphabetic order so as not to be accused of favoritism, no doubt) sent shivers down my spine. The high and mighty ABN AMRO CHICAGO CAPITAL GROWTH N fund was given an overall rating of B+ and a category rating (according to the note: compares risk-adjusted performance of fund within category.) of A. Top marks! And such a catchy name. Surely, I need go no further, as this fund is the one for me! More Joy! Joy! Joy!

But what's this? The ABN AMRO CHICAGO CAPITAL GROWTH N fund showed a percentage return of -19.4% both before and after taxes (No surprise there as you shouldn't be able to tax a loss, though if the trend in the markets continues for long, the Midas minds in the government will find a way to fix that no doubt.). Hells bells! That's just dreadful. Almost 20 percent in just one year. That means you could have done the same, without any muss or fuss, analysis or brain-draining research, and without the aid of this "scoreboard" by just taking a twenty dollar bill for every hundred you wanted to invest and just tossing it out of your car or SUV window as you went careening madly towards investment wonderland (we're still out driving, looking for that place). Geez, Louise, if we had all done that, the highways would have been littered with twenties and there would be no more poverty, homelessness or disease. Or, at least we'd like to think that we put a dent into those problems by tossing money out of windows. Or we could have invested it with the bright young guy who runs that fund, which, remember, got a B+ and an A for grades. Very good.

As I scanned the pages of this sensational scoreboard, I noticed that nearly all of the funds (I believe there were between five and ten that actually showed gains) showed 2002 losses. Horror! People were actually losing money in the BEST funds last year? One shudders to think how people's investments fared in BAD or even THE WORST funds. Frightening! I scanned the list, noting losses routinely in the 15-25% range, some more, some less, but still, overwhelmingly, losses. Magnificent losses, not ordinary, yeah, 5 or 10% losses, but big fat ugly double-digit losses. Well, I'm certainly not recommending Yale or Harvard for business school anymore. These geniuses have managed people's money right out of their hands. They'd be better off stuffing that investment capital into a mattress, putting it into a shoe box or burying it in the back yard of their overvalued home. Some people are actually doing those things. Some people actually bought gold last year. Wise.

Now, back to the title of this tome, which had something to do with pension funds - and you thought I forgot. Well, I didn't. The sole reason I bring up pension funds and mutual funds in the same breath is that they are very similar and like animals. They invest heavily in equities, which, as we now know, was not such a good idea last year. Or the year before. Or the year before that. But looking at this scorecard of the BEST mutual funds, one must raise the following questions: If some of the supposedly brightest guys on Wall Street, managing these funds, lost all that money last year, how come corporations with pension funds are claiming that they made on average 9-10% last year? And the year before that? And the year before that? Isn't it more likely that the pension fund managers are probably not quite as bright as the mutual fund managers and actually LOST MORE? Huh? What gives?

The truth hurts and it's going to be very painful when these pension fund losses begin to get some notice. The corporations that must report to the SEC use estimates of their "gains" on pension fund holdings. Not a single one that I know of has reported a loss for the year, or last year or the year before that, even though the various stock markets have generally collapsed during that time. The truth is that these pension funds are LOSING money, have LOST money and have to be refunded and that means the earnings these companies reported, should there ever come a day that the SEC requires complete and total honesty, should be restated. Barring that, at the very least, these companies will have to spend some of their profits THIS YEAR and NEXT YEAR to repair the damage done to their pension funds, or change the payout structure, or, which is the most likely case, lie about it all, rip off all the pensioners and continue to tell everyone that everything's just fine, until it gets to be such a burden and so obvious that even our diligent horde of financial reporters will stop for a moment from scratching their collective heads and actually start writing about how vast and horrible this problem really is and then, maybe, somebody will tell the truth, or part of the truth, or something that sounds like the truth. Maybe

The problem is that nobody wants to know about these things. They all want profits to be higher, earnings to be soaring, stock prices rising. The opposite of those things is what has been going on and what we are about to experience and it isn't going to be pretty as we head down this particular road. I'd guarantee it, but I'd hate to be right, even though I probably, likely, like 99% sure, am.

The pension fund mess in the nation's largest, oldest and established companies - many of them stocks which are components of the Dow Jones Industrials - is going to absolutely shatter investor faith for a very, very, very long time. It will likely go down as one of the worst financial disasters of all time. The good news - as if there is any from such a catasthophe - is that it will probably signal the beginning of the end of this wretched, seminal, secular bear market. -----------------------------------------------------------------------

Feb. 06, 2003

Why Large Investment Firms' Analysts Can Never Be Trusted - Rick Gagliano @ 08:30 EST
Buy, Sell or Hold? Does it matter?

In 2002, the revelations of misleading and outright false investment recommendations form some of the nation's top brokerages became the focus of investigations, scandals and the general news. Savvy investors, who follow such things, were not surprised that the Henry Blodgets and Jack Grubmans of the world had misled investors. In fact, many stock traders had already been alerted to the tricks of the trade and had been warning others for years. It was not unusual to see on internet stock message boards - shortly after an upgrade or downgrade - notes that bent contrary to what the analysts were recommending.

The prevailing knowledge worked like this: if a stock was solid, but overpriced, and a firm wanted to establish a position in the shares, a downgrade would be issued; conversely, a company with limited appeal, but overpriced - like many of the dot-coms and tech stocks - in which a firm had a position it wished to exit, an upgrade would be issued. In each case, the movement of the stock could be rigged to suit the need of the brokerage in question. So the saying went, "if they upgrade, sell, if they downgrade, it's a buy."

That this would seem so unusual or unseemly is to be naive to the extreme, and that's exactly what most of the individual investors in the late nineties and early part of the new millennium were. To say that most investors in those days trusted analysts or that most investors didn't perform their own due diligence is an understatement of immense magnitude, overshadowed by the dismal results of the past 3 or four years. They talked, many listened, blind to overall financial outlook of individual companies and/or the entire economic landscape.

When the dust finally settles - it's certainly not over yet - the public will have been fleeced of trillions of investment dollars by firms and analysts whose business dictates that they do three things: 1. Protect the investments of the firm; 2. Protect the investments of their largest clients; 3. Encourage trading by everyone else.

It comes as somewhat of a surprise, even to seasoned investors, that these firms don't issue upgrades and downgrades every day on hundred of companies. That would certainly encourage trading. Of course, it would be absurd - almost as absurd as believing them - to issue so many recommendations. But, it also goes contrary to the first two directives of the brokerages. In order to protect the investment of the parent firm, analysts are not encouraged to make their best picks public. It's like a trainer who has stabled a hot horse, ready to race. He knows the horse has been eating and sleeping well, training strongly, and is in the right spot to win the race. The trainer knows, and so do the barn hands. But telling the general public is a distinct no-no because that would only lower the odds, decreasing the eventual payout. The trainer might also instruct the workout boys to breeze the horse slowly, clocking in at less than optimal times, leading the handicappers to believe that the horse is less than fit. The result is that an even-money horse goes off at 3-1, a HUGE difference if you're betting.

Same thing with stocks. If an analysts knows a company is about to report record earnings, or new product sales have exceeded expectations, or other such good news, the analyst and his/her firm will be in first, their top clients, next and finally, after the stock has run up 20 or 30 percent, the upgrade will be issued. The stock may run another 10 or 15%, all the while the firm and their top clients are selling their shares to the unwitting public, as the stock gets to a price where it is no longer a bargain or share price movement is near or at the top.

When a stock returns 20 or 30% over a short time, shouldn't the analysts be telling us to sell? Sure, if they had told us all to buy when shares were cheap. But they didn't. They kept that information to themselves, reaped the profits and tacked on more gains when they told everyone in the world to buy. If analysts and brokerages were really honest, fair and transparent, the upgrades and buy ratings would be issued when the share price is low and they would advise clients to sell when the stock has seen significant gains.

However, Wall Street works in mysterious ways, ways that are not kind to small, individual investors. They don't tell the whole story, and while not outright lying about stocks most of the time, they rarely tell the whole story in a timely manner, i.e., one that would be most beneficial to the largest number of people. So, because of the dictates of their business, analysts, unless they are completely detached from companies who buy, sell or own securities, can never fully be trusted. Their first allegiance is to their firm, their last to the general public. As long as brokerages can make more money trading stocks themselves than the commissions generated by encouraging individuals to buy and sell, there will always be a double-edged sword and at least a large kernel of doubt surrounding their practice.

And just today, prior to the merket opening, Merrill Lynch has issued a sell rating on Goodyear Tire (GT). The stock closed Wednesday (02/05) at 3.67. Less than a month ago it was trading for more than 7.00. It's been on a steady decline from 30 a year year ago, and as late as August it was trading in the mid-teens, so why did it take this "analyst" nearly a year to tell everyone NOT to buy this stock and why is he telling us to sell it now that it's lost nearly 90% of its value? Goodyear announced that it was cutting it's dividend (from .12 to zero) two days ago. Didn't the analyst have a clue about this beforehand? Isn't that what he's being paid to do? Analyze? Anyone who hasn't sold by now is either asleep or dead, as well as broke. Is the analyst really doing anyone a favor here? It may be prudent to keep an eye on this one because there's probbaly a good chance that Merrill will be buying soon. Around and around we go.

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Jan. 03, 2003

Where Dare the Markets in 2003? - Rick Gagliano @ 12:54 EST
Practical Investment Strategy for the New Year

If you're one of the lucky few who have any investment money left after the last three years of declines on the major indices, you may be getting a very loud message from the markets as 2002 draws to a close. With the majority of prognosticators/strategists still betting on index increases for 2003 (most of them have been wrong 3 years in a row) why should be believe them now? For instance, chief U.S. strategist Steve Galbraith of Morgan Stanley predicts the S&P to go to 1,050. Tobias Levkovich, Salomon Smith Barney's senior institutional equity strategist, sees the S&P hitting 1,075 by the end of 2003. Abbey Cohen expects the Dow will end 2003 at 10,800 - a nice 27% rise. And Ed Yardeni puts it at 10,500. The S&P closed on December 31, 2002 at 879.82, and the Dow closed at 8,341.63, so these expert strategists are looking for a rise of more than 15%. Quite impressive, but, probably wrong again.

More talking heads will be trotted out on CNBC and other financial networks over the next few days, offering their advice to investors. Most of them will predict rosy rises for speculative stocks. The truth of the matter, what three consecutive years of losses on the major indices should be telling astute investors is this: THE STOCK MARKETS ARE NOT A SAFE PLACE FOR YOUR MONEY! Add a ditto for stock and equity funds, where most of your retirement/pension/401K money is parked, and get ready for another year of woesome returns overall.

A 4th consecutive year of decline on any major index would be unprecedented, but we live in truly extraordinary times. Not even during the Great Depression, after the bust of 1929, did the Dow Jones Industrial Average (the oldest of the major indices) turn the trick of 4 consecutive losing years. So, predicting an upturn would seem to be indicated as a safe bet. But we've seen safe bets come and go, and there's nothing safe about investing in equities in 2003.

Not convinced? You say you need proof, reasoning, rationale? Well, here's just a smattering of interrelated reasons why stocks in general are not good buys:

* Corporate profits are still in the dumper, underperforming despite ever-lower expectations.

* Consumer spending, the fuel of the economy over the past three years, cannot continue to support the economy independently and indefinitely.

* The housing and refinancing boom is nearing bubble stage and may bust if employment continues to lag.

* Global tensions involving Iraq, North Korea and terrorism continues to deflect speculation and corporate investment.

* Gold has breached above $325/oz. and shows no sign of weakening.

* Government defecits, debts and spending are ballooning beyond the scope of budgets, straining credit markets.

* Corporate and personal bankruptcies are at or near all-time highs.

* Rampant credit and money supply expansion is nearing a crisis stage, causing the dollar to devalue against other currencies and gold.

* Deflation is real in some segments of the economy despite the best efforts of the Federal Reserve governors to keep it in check.

* The United States is, and has been for some time, the world's largest debtor nation.

* China, for the first time since 1949, is allowing ordinary citizens to own, buy and sell, gold.

* Business capital spending is stagnant and has been since 1999.

* Unemployment remains high and new job creation is nearly nonexistent.

* Average price-earnings ratios of stocks which make up the Dow, the S&P 500 and the NASDAQ are still abnormally high.

* Fixed rate investments (bonds) have sunk to near ZERO real rate of return or below.

* Consumer confidence is horrible.

* The manufacturing segment of the U. S. economy is in a depression.

There's more, mostly bad, news and signals around, but the examples above should be enough to give any investor pause. Indeed, risk aversion remains very high as 2002 draws to a close. Additionally, analysts are still touting stocks - it's their job - even though there is no compelling reason to buy most publicly-traded securities. Equity fund managers are watching net outflows continue unabated.

The current rage is, and will be, stocks which offer dividends. In 2003, you'll see analysts recommending such stocks as safe and reasonable, especially if the Bush administration forges ahead with plans to kill the capital gains tax on dividends. Some companies will surely announce dividends for the first time, hoping to boost their share price and cash in on the rush to some supposed quality.

The trouble with a strategy of buying stocks which offer a dividend is that while such companies may look attractive with yields of 6-8-10% or even higher, such gains can easily be wiped out by a decline in the share price. Such a decline boosts the yield, but erodes the underlying capital. Caution is always advised when dealing with a new Wall Street darling investment idea.

So, what's a small investor to do and what is one to expect from the coming year? Where should one park or risk one's money in such an environment? These questions are not easily answered and while everybody's investment goals are different, we all face underlying forces of inflation (now tame), deflation (probable) and taxes (inevitable). Here's a rough guideline for a relatively safe portfolio with the premise that most stocks will continue to be bad investments:

* Cash, short term notes (40%) - since nothing is really safe in this environment, you'll want to have plenty of liquidity with cash on hand to provide both stability and flexibility. A nice horde of greenbacks is always nice to have for short-term plays in options or market swings.

* Stocks (15%) - while we don't want to be heavily invested in equities, we also don't want to be totally out of them, either. With limited long-term exposure, one should be looking for companies with growth potential; strong, stable management; squeaky-clean, understandable accounting; no or low debt; a P/E under 15 and a fair share price. Avoid value plays, as intrinsic value is relative and difficult to find these days. If you choose carefully, you should be able to find a few winners in a sea certain to be full of losers and drowning stocks.

* Fixed income (bonds, munis, mortgages) (10%) - Either inflation, deflation and/or taxes will erode returns on these kinds of investment vehicles, making them a zero-sum game. Besides, most investors have no clue how to invest in these instruments, so they are best avoided. A no-load tax-sheltered bond fund may provide a safe haven and a possible pop.

* Gold, gold stocks, gold funds (35%) - Despite the gains in gold in 2002, the rally seems to have legs and a diversified gold investment should easily produce a 20% gain in 2003.

While the above portfolio may seem radical, let's remind ourselves that most investment advisors weigh their portfolios heavily toward stocks and bonds and away from cash and commodities (gold). But after witnessing or participating in the spectacular losses in equities over the past three years, strong cash positions now, in hindsight, look very, very good.

So what about the markets for 2003? One word: DOWN. I won't say exactly when, but before the year is out the major indices will see these bottom points or lower: DOW: 6350; NASDAQ: 925; S&P 500: 675.

The question that remains is when will these numbers become reality, but that's really a matter for market timers, options players and side bettors. If I had a crystal ball to gaze into, it's entirely possible that I'd see a scenario like this: The markets stage a soft rally to open the year but that's quickly snuffed out by war in Iraq, trouble in Venezuela and rising oil prices with a market bottom sometime between late February and mid May. A rally commences in June, and the markets rebound or trade sideways until September, then begin to fade. By November, a new bottom has been put in, the pundits once again announce the bottom is IN and out trot the analysts on the cable shows and in the financial press calling for a monstrous rally in 2004. Then again, I don't have a crystal ball, and I could be completely incorrect, but, not as incorrect as the many strategists calling for Dow, Nasdaq and S&P rebounds.

Overall, as we have seen and as I will show, the true, final, unequivocal bottom has not yet been put in on the major indices. The markets are bound to retest the lows put in during the October 2002 rout. A final bottom may be put in at some point in 2003, though the probability of that occurring is only around 25-30%. We're in a multi-year bear market which still has excesses to spin out and quite a few major changes in the economy would have to occur in a short time for a bottom to form and make stocks a good investment once again.

As a guideline for tracking market movement, one need look no further than the venerable Dow Jones Industrial Average (DJIA), which is currently in the throes of a long-term primary bearish trend. This primary trend will remain in place until a break-out occurs, which will be documented as follows: After a short-term bottom is put in, a rally occurs to push the average to a point above the most recent high and the average stays at that point and falls no further than 5% below that point for 3 months.

To illustrate, let's look at the Dow during two important recent intervals. First, the huge decline brought on by the tragedy of 9/11, and the subsequent rally. All figures are closing prices. The Dow had been in a downtrend, albeit a slight one, for well over a year, beginning with the all-time high reached on January 4, 2000, at 11,723.00.

On March 14, 2000, the Dow reached a new interim low of 9,811.20 and rallied back to a high of 11,310.60 on September 10, 2000. Not a new high, so the downtrend remained in place. On March 22, 2001, a new bottom was put in at 9,389.50. By May 21, it had rallied to 11,337.90, marking a price above the previous high. But it failed to maintain the 5% three-month threshold, declining to 10,690.10 on June 14 and continued to drift lower until reaching its low point of 9,605.50 (still above the previous low) on the fateful day of September 10, 2001. The confluence of events dropped the Dow to an interim low of 8235.80 on September 21 and another rally commenced, with many market observers calling the bottom as the average raced back to 10,635.30 on March 19, 2002. Once again, the index had failed to reach the previous high (11,337.90) and the inevitable slide commenced, culminating in a massive sell-off to close July 23, 2002 at 7,702.30.

Now we enter the second critical phase of the market trend. After seeing the declines of July and blaming them on corporate scandal and corrupt analysts, the market stage some remarkable rallies in August, 2002, but topped out at 9,053.60 on August 22. By October 9, the Dow had slipped once again below the previous bottom, to close at 7,286.27.

Again, a rally ensued and again, pundits began calling the October washout the absolute bottom. This (and the previous) rally was decidedly short-lived, lasting a scant 35 trading days, ending at 8931.68 on November 27, 2002, once again short of the previous high, and therefore insignificant to the long-term trend.

Dow theorists adamantly stick to these and other rules and guidelines as they have been tested and analyzed and never effectively refuted. Primary trends are very difficult to break out from and the current bear trend has a tight grip on this market. To call for an end to the bear market, the Dow needs to put in a new bottom above 7,286.27, break above 8.931.68 and stay above 8485.10 for 3 months. If that occurs, we can call a new bull market and get back to buying equities.

However, since the last three rallies have failed to surpass the previous highs, this scenario seems difficult and just so much wishful thinking by long term bulls. The contrary, albeit unpopular, view that we are in the midst of a long term secular bear market which may stretch into 4, 5, 6 years or longer, seems to become more plausible with each passing day and every little tidbit of bad or uninspiring economic news.

In 2003, you'll hear the word reflation being bandied about on the airwaves and in the financial press. Essentially, what reflation means is that the Fed, or the underlying central bank, is printing more money, expanding the supply. With reflation, or more money coming into the market, the idea is that people will spend, or improve demand. If the reflation results in savings however, instead of spending, the opposite is likely to occur - deflation. Right now, both have equal chances, but, without any significant expansion in corporate profits and capital spending, the latter, deflation, has the upper hand. There's significant risk to investors at this time and answers will not be forthcoming until at least the beginning of the 2nd quarter of 2003.

While the argument that the bear market has exceeded all expectations, there are equally plausible arguments that it is only in mid-term and will continue. Therefore, my recommendation is to avoid stocks generally and buy gold and gold-related issues with gusto.

Money & Investing,

Mar. 13, 2003,