The Millennium Wave Investor Sentiment Index is a red-hot 84.4, trending up
The Millennium Wave Sentiment Momentum Index is 46.6, trending down
The Millennium Wave Sentiment Percentage Uptrends is 23.75, leaping up!

The Millennium Wave Sector Model has switched into the Rydex Internet fund (RYIIX)

Your outspoken analyst is back from DC and the inaugural shindig. While I was there, I went to Baltimore and met with the editors and publishers of The Fleet Street Letter. They asked me to be a contributing editor and I gladly accepted. The Editor, Lynn Carpenter, is a no-nonsense value oriented stock picker with a solid track record. I asked her if she would share a pick with us or so every month and she agreed to do so, so the Millennium Wave Investor Online is going to be even better! I have always been a big fan of Fleet Street, and am proud to be associated with them.

I will still write my letter as always, but of course, some time in the near future I will tell you how you can subscribe if you want that letter.

Investor Sentiment

Briefly touching Investor Sentiment, the overall Index number just keeps moving higher! As I looked at our short-term numbers this morning prior to market open, I made a bet with my Chief of Research that we see a correction, and sure enough, we seem to be doing so. The S&P is off 12 or so. How far it goes down before it starts back up, though, is not in my charts.

Why am I so happy? Because the Percentage Uptrends is moving - no - it is leaping tall buildings every day. As long as that number keeps going up, the market is going to go up, albeit in fits and spurts. Bull markets climb walls of worry, and there is plenty to worry about. But the market will postpone worrying for a few months.

Wait a minute. I just decided to look at the market. It is turning around and is almost even. I could have to buy the donuts. Oh well.

As long as I see Percentage Uptrends moving up every day I only occasionally glance at the markets. On weeks like this, I get more done, because I worry less.

Trading Opportunity

If there is another big 10% move up after Greenspan's announcement next week, I will be tempted to short the QQQ's for a 5% drop. In and out. 1% stop loss on the upside. 1% trailing stop loss. If you don't understand that, then don't try it. But for the Las Vegas junkies, this might be fun. Although it is possible that we will see the run-up before the announcement and then a sell-off on the actual news. (Wall Street maxim: Buy the rumor and sell the news.) If that is the case, I will skip the trade, as the drop might not be as much.

Greenspan to the Rescue

I just listened to Greenspan's Senate testimony. My first thought was that some alien had taken over Greenspan's body. I could actually understand what he said the first time without having to re-read his testimony 5 times and then have Yardeni interpret it for me. My prediction is that tomorrow everyone will be talking about the "new" Greenspan.

Frankly, I like this new and improved Greenspan. It makes things much easier to predict when you can understand what the man with his hands on the money supply lever thinks.

First, he all but called for a serious tax cut, and gave the Republicans and moderate Democrats a road map as to how to get there. This is a remarkable turn of events. (More below.)

Let's analyze a few points. First, he pointed out that there are a few speed bumps on the road to a zero government debt economy. He mentioned one thing I told you about months ago. US government debt is a huge part of the world economy. There is a serious demand for it. Not everyone is going to want to sell their long term bonds, especially other nations and central banks which use the dollar as the basis for their currency. Greenspan pointed out that it could cost the Treasury a very high premium to entice these foreign governments to give up their bonds. It might take a very long time to get all the US debt in.

Secondly, after we pay down the debt and have surpluses, what then? Do we start buying AAA bonds? Do we buy up all the home mortgage loans? Do we buy the Vanguard Index funds? What do we do with the surplus? This could be a very tricky question. My favorite solution is that we give it back to the tax-payers.

(Sidebar Prophecy: There are funds and governments which absolutely require US government backed obligations, many by law. There is a strong demand for absolute security in a strong currency. You will see all sorts of proposals to deal with this absence of government debt. One will be that when we pay off the debt, the US government should issue bonds which pay 2-3% and invest the money in AAA corporate bonds which pay 5% or 6% and pocket the difference. A 3% swing on $1 trillion is $30 billion, which is nothing to sneeze at. The proponents will argue this money could provide a lot of school vouchers or medicine or even write a check to every tax-payer, as tax-payers would be taking the minimal risk associated with such. Yes, Doug, I know this is not very libertarian, but they will argue that it as an insurance business of sorts.

If such a thing were done, though, it will distort the bond market dramatically. The spread would go away. It will mean AAA corporate bonds would get very cheap, and in effect act as a huge subsidy to the largest corporations (but not a subsidy for their smaller competitors), which is why they will want it. This won't be brought up seriously for 4-5 years, but then watch the drum beats.)

Further, Greenspan clearly said the economy is slowing so much we might see zero growth this quarter. If we had a recession, a tax cut would help us get out of it much quicker.

Then Pete Domenici (R-NM) actually repeated Greenspan's assertions in very clear language. Paraphrasing, it went something like this: "Mr. Chairman, you are telling us that we should delay paying down the debt totally until 2008 or so since we have (the problems mentioned above) and that a tax cut would help minimize the effects of a recession, if we had one." Greenspan said yes, that is what he is saying.

This was important. Domenici has been a debt hawk, and has been skeptical of serious tax cuts. It sounded to me like Pistol Pete has decided to throw in with the tax cut crowd. Since he is chairman of the Senate budget committee, this is big news.

In my 2001 forecast, I told you that if we saw less than 1% growth this first quarter, we should get very worried. The yield curve tells us the recession should not be starting yet. Maybe it is wrong this time, but the serious slowdown could and should be in front of us, if we can use history as a guideline.

If we see another 50 basis point cut next week, and everyone thinks we will, then we should look for the next cut in March, unless Greenspan once again pre-empts and cuts between meetings (a possibility if we see zero growth actually looming in the first quarter).

Why Is Investor Sentiment so High?

Historically, for the last 80 years, the stock market ends up 17% higher 12 months after the third rate cut. Since 1974, the last 6 such series of cuts sent the markets 24% higher 12 months after the third rate cut. (Courtesy Ed Yardeni)

Read that paragraph again. The market is responding to this. Even if we see a recession, investors are betting that it will be brief and the recovery will be powerful as the result of all the rate cuts and a large tax cut.

And there will be tax cut. In my 2001 forecast, I told you Bush would go to Daschle and Gephardt and tell them they would get the blame if the country went into recession and they would not give him his tax cuts. Now Bush can go to them and quote a very clear Greenspan. They will cave. It is one thing to fight Bush. But fighting St. Greenspan is just not something they want to do.

So, that is why we are seeing the large institutions begin to position themselves for this run. They have longer term, steadier money and are willing to suffer the slings and arrows of volatility to make sure they get part of the 24% party. If they miss it by trying to time the market, they will look bad in their peer reviews, so they buy now.

Should you do the same?

Only if you have some type of system that gets you out of the market at the sign of a recession. The average stock market drop in a recession is 45%. We have not seen anything like that, except in the tech sector, and that has not been in response to a recession, but is simply a bubble bursting. I note that yesterday, the NYSE average was less than 2% from its all time high. The only bear we are seeing is in the NASDAQ stocks.

Let me quickly repeat some themes. Investors are switching from growth stocks to value stocks. That is why the NASDAQ is dropping and the NYSE is holding its own. Further, Investors do not think we will have a recession. They think this quarter will be the worst and then growth will resume, presumably because we will see lots of rate cuts, and they also know what happens after rate cuts. They are, for now, willing to wait it out on the value side.

I cannot say this enough. The broad markets will not go down precipitously until investors believe we will see a serious recession. Otherwise, they will see dips as buying opportunities.

I am not convinced this will be the worst quarter. I think the worst could be in front of us. I hope Greenspan is right and things get better from here. But history doesn't tell me that.

How Will We Know When There is a Bottom?

Besides the fact that blood should be knee deep in the streets, which it is not now, there is one simple way to tell. The measure I am watching is junk bond mutual funds. Yes, that's right, those holders of nuclear waste, PCPs and Amazon.com debt. They will be one of my signals, and a very powerful one.

I know I promised you a simple income program a few weeks ago, but in consultation with my attorneys, I need to be very careful in how I present it, because it is something I am going to be doing for clients as well, and when we deal with past hypothetical performance, even if it is with established funds with audited track records, I need to make sure I dot all the "i"s and cross all the "t"s.

Part of that program will be using a trend-following mechanism utilizing high-yield (junk bond) funds. We saw a recession in 1990. Beginning in January and through late February of 1991, junk bonds crossed above their moving averages. Buying junk bond funds in late February and holding them through October of 1992 saw a rise of 58% during that period.

Why so much? Because everyone hated junk bond funds. The Common Wisdom saw them as nothing more than repositories of Michael Milkin's excesses. (Who sadly didn't get pardoned, while thieving Marc Rich did, but that's another soapbox.)

Junk bonds were written down dramatically. The funds experienced the "China Syndrome", as their assets melted to the center of the earth. Then at the bottom of the recession, someone noted that all the bad stuff had been written off and the bonds which remained were performing bonds from good companies, and the funds shot up like a rocket for 18 months.

Now, I would not trust just one moving average to note the bottom of the market. I will be tracking several different averages using multiple concepts.(As an example, a 15 day average verses a 60 day average, the one day price over the 100 day average and so on.) I want to see the move solidly confirmed, and then we wait a few weeks to make sure we don't get whip-sawed. After that, I will blow the all clear signal and we can go back to worrying about how to manage our investments in the next bull market, which I hope lasts until I retire in 35 years. ( I am only 51.)

By the way, junk bonds have been below their moving averages since late 1997 and getting worse, although there has been some leveling off. I hope that leveling off is temporary. I hope they melt down once again. The worse they get, the more they are stretched downward, the more opportunity we as investors will have for potential profits. While I am not sure, it is quite possible I will end my love affair with 30 year zero-coupon bonds (American Century Target 2025) and decide to switch into high-yield bonds at that time. (They will not be junk then.)

This e-letter will tell you when the junk bonds are turning around. By the way, you would have missed a 10% or more move from the bottom of the stock market by waiting for this junk bond all clear signal. But I bet a lot more shell shocked investors waited a lot longer.

I repeat, if you are long now, as I am, you should have some system in place which will get you out if investor sentiment changes and this market decides to go south. Even though last week I told you I have to be bullish because the data tells me so, I am still wondering whether this may be a bear market rally. We will see. I still think the prudent thing for longer term investors to do, is to wait and see what the 1st quarter numbers tell us. If you miss a 10% move, so what? The risk is to the downside and not the upside. You can get back in the game with a lot more confidence and comfort, letting you sleep at night.

Wall Street Analyst's Advice

I get letters from readers from time to time that say essentially that some big name analyst likes ABC stock and what do I think? I rarely comment on individual stocks, as I time markets and funds, and before I give advice I want to know some details about your personal situations. One size fits all advice about stocks is generally suspect in my book.

But I can tell you what I think about listening to Wall Street Analysts: Don't. Plug up your ears. Ignore them. Walk Away. If you really want to read Science Fiction, try L. E. Modesitt. He tells a better story, and has some thought-provoking moral twists in his plots.

My negative attitude was brought home to me by a recent Fortune article (February 5, 2001). ( By the way, I scan Fortune and read Forbes. It helps me keep in touch with the business world.)

The story chronicles the saga of Mike Mayo, the brilliant and highly respected bank analyst at Credit Suisse First Boston. Up until May of 1999, he had been a raging bull about bank stocks, and of course, bank stocks were going through the roof. Then, in May, he told a crowd of salesman in no uncertain terms to sell banks stocks. You could have heard a pin drop. I believe I actually quoted him in a newsletter I wrote at the time, as I thought it was a good call, and very unusual for a Wall Street analyst to say sell.

Long story made short, he lost his job and is still looking. He lost his million dollar salary and all the perks. Oh, by the way, it wasn't because he was wrong. It was a brilliant call. Bank One, as an example, was down 47% on the day he was fired.

It was because his bosses were losing millions of dollars in fees as banks would not do investment banking business with the firm that said bad things about them.

If you add up the stock analyst's ratings of the top 10 brokerage houses you find that they have 7,093 buy ratings and only 57 sell ratings. That is less than 1% of the total! I will make you a bet that a huge percentage of the 1% of companies they did rate "sell" do not do business with their firms.

In short, analysts are now paid to be cheerleaders. They only downgrade a stock after it is clear the company has announced problems, and then it is from buy to "hold" or from buy to "accumulate" or some other euphemism. What the $^%$^ does accumulate mean if not buy? Where were the sell ratings on Lucent and Xerox?

In my stock market world, I wake up every morning and ask myself, "At today's prices, do I want to own my stocks?" Forget whether I have a profit or a loss. Is the stock a good buy at today's prices. If it is not, then I sell it and buy something that is. Waiting for a bad stock to get back up to where you bought it to avoid a loss is a rookie game. Bad stocks don't move back up.

Do not get caught in the trap of listening to Wall Street analysts. They are paid for their ability to talk you into buying and holding the stocks of companies from whom their firms gets millions of dollars in fees. Look for independent advice. If I wanted to tout a stock, and I owned it or got money from the company and did not disclose such every time I so much as whispered their name in a bathroom, the SEC would (very rightly) be all over my young derriere. But somehow Wall Street analysts can get away with this because of some loopholes in the rules. It makes my blood boil.

Value stock picks coming your way!

I have talked Lynn Carpenter of The Fleet Street Letter into giving us a great value stock every month or so. She makes a fetish of finding under-valued stocks with low P/E ratios and which have good stories and also have some good future potential. And she only gets to keep her job if she keeps making good calls. I like listening to people whose performance is linked to their well-being. Wall Street analysts know they lose their jobs if they get negative, so they just keep spouting the party line and keep their jobs.

Rydex Sector Switch

As of Friday, we are switching from Electronic Services (RYSIX) into Rydex Internet RYIIX. We lost 2.93% on the last trade, which lasted three whole days. 5 out of 7 trades since we began on December 14 have been losers, and 5 out of the last 6. We are down 15% on those last 6 trades. I hate this current switch, because I bet it loses money as well. I actually have a VERY SMALL amount of personal money following this program to see how the switches go, if there are any problems in execution, etc. But still, I don't like to lose money. I just have trouble getting any enthusiasm for the dot.com sector today. We have seen as many trades in the last three weeks as we normally see in three months. That is why I caution you NOT to use this system today. It is way too volatile. We are going to wait until the markets settle down some before we actually put some real cash to work. But we can learn a few things. Rydex Electronics dropped from #1 to #5 in just one day, thus moving us out of the fund. Rydex Technology is now #2. In fact, many of last month's dogs are now vaulting to the top. Bio-tech, last year's darling, is at the bottom. There is a lot of movement of cash in the markets, and it is not just one way.

Knights in White Armor

You have heard me mention a group called Knightsbridge International which does major relief work to areas of the world many relief agencies can't get to. Now, CNN has done a two-part segment on them. You can view it on the web at: http://cnnfn.cnn.com/services/fnonair/video/bu/012101.html

(It works on my AOL and Microsoft, but Netscape wants a video plug-in) I urge you to see the type of work they do, and then consider sending a check to them. Sir Ed Artis is the crazy man who rescued 43 nuns in Rwanda bluffing his way in on a "Vatican" passport of --well let's just say -- interesting origin. One of my all time favorite stories. This was during the height of the Rwandan war a few years ago. Sir Ed went to Cambodia last month with millions in donated food and medicine and once again ran his credit card bill up getting even more food and drugs into refugees hands. We keep telling him not to, but he sees people starving and dying and he just does what he can. Not being overly dramatic, many people would die if not for Sir Ed and his friends. Consider sending Knightsbridge a tax-deductible donation to Knightsbridge, P.O. Box 4394, West Hills, California, 91308-4394. He needs to cover his $14,000 American Express overdraft before his wife sees it. No one gets a salary at Knightsbridge. All the money goes directly to saving people's lives, just like you see in the video on the web site.

Election Contest

Millennium Wave Investments is pleased to announce the winner of the electoral college contest. Rich Blumenthal, a mechanical engineer from Mission Viejo CA, came the closest to the final tally -- 271 for George W and 266 for Al Gore. Rich guessed it would be 275 to 262. We have sent Rich a $50 gift certificate from Amazon.com to reward his successful prognostication. Thanks all who participated. For those who didn't win, better luck in 2004. I am sorry it took so long. We had to fend off my lawyer friend Adrian Van Zelfden who threatened to sue me because he meant to write 271.

And then there were the pregnant chads.

Well, the market is down slightly now. Maybe I will win the bet.

Your Grateful It Is Friday Analyst,

John Mauldin

P.S. If you like my letters, you'll love reading Over My Shoulder with serious economic analysis from my global network, at a surprisingly affordable price. Click here to learn more.

• Alan Greenspan
• Bonds
• Investor Sentiment
• Recession
• Stocks

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