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| "THE PAST IS PROLOGUE" - Nov. 7, 2005 |
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"THE PAST IS PROLOGUE"
Gordon B. Lamb
American Asset Management Group, Inc.
November 2005
(c) Copyright 2005, Gordon B. Lamb,
All Rights Reserved
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Foreword
I am delighted to bring readers the following guest article on the stock market. It is authored by client, Gordon Lamb, president of American Asset Management Group, Inc. of Rockville, Maryland. The biographical sketch found at the end of the article bears ample witness to Gordon's extensive vocational experience and accomplishments. -- Doug Gillespie
NOTES: (1) I am very appreciative to Ms. Nancy Stevenson, associate contributions editor, for her help in coordinating, editing and assembling this article.
(2) Would you like to be advised directly of future GRA guest material? There are many good items on the schedule, and we would be happy to do so. Just send your name and e-mail address, either to Doug Gillespie at gsrdr@aol.com, or to Doug Gillespie at the website's "Contact Us" link. -- DG.
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What's up with this stock market? This is the question most often asked when a market trades in a narrow range for an extended period of time, as we have seen this year. There is no real answer to this question, only guesses.
The question reminds me of an article I wrote over three years ago entitled,
"Those That Ignore The Past Are Doomed To Repeat It." (It and other writings appear in the "AAMG's Past Market Views" archive section of our website.) As was said in that piece, no one can guarantee anything in any market. As students of the market, and those charged with investing other people's money, we must look back in time and compare similar periods to see what lessons we can learn and how we can take advantage of them to make money. This we will try to do here.
From our studies, we have concluded that we are in a secular bear market that was born in January of 2000. From studying past secular bull and bear markets, we have found that there are cycles that move in the opposite direction to the secular trend.
As an example, in the last secular bear market from 1966 to 1981, we saw four reversals of the secular bear. In the secular bull market of 1982 through year-end 1999, there were only two years where the Dow Industrials ended the year with a loss. Since we are in a secular bear market let us see what we have learned from the past.
We know from the research done by Crestmont Research in their study entitled, "Secular Bull and Bear Markets Profile," that of nine secular movements, four were bull markets and five were bear markets. The average number of years that the bear roamed Wall Street is a little over eleven years. During the sixteen years that comprised the last bear, there were opportunities galore to profit during the four bull cycles of that period. In fact, nine of the sixteen years were positive years for the DJIA and in six different years, the Dow equaled or exceeded the high of 1966, the first year of the bear market.
On a yearly basis, the market showed many double-digit losses, yet the Dow showed only an 11.8% loss for the total secular bear market. These type markets become a stock picker's market, not a buy and hold market.
Market history also has taught us two additional things. First, price-earnings ratios always narrow during a secular bear market and second, Consumer Price Index inflation always expands.
If we look back at the two longest bear markets, 1901 - 1920 and 1966 - 1981, we find that in the first, the PE decreased from 23 times to 5 times while the CPI index went from minus 2% to +16%. In the second, the PE stood at 21 times in 1966 and dropped to 9 times in 1981, while the CPI was at 3% at the start of the period and ended at 10%.
Obviously there is much to learn from studying the past. Applying it to our advantage becomes the real challenge. This becomes important because as we look at our present situation, we find many similar patterns between the past and the present.
The first bear market of the past century started with three down years followed by two up years. A high, double-digit PE gave way to very low ones in the 20th and last year of the bear. In the market from 1966 to 1981, the same phenomenon occurred. In both markets, the inflation rate started at a low rate and increased, as the market got "longer in the tooth."
We are in the sixth year of this secular trend. The first three years were down with the third year reaching the low water mark up to now. Then, the next two years were up, but only recaptured about 70% of the total 2000 to 2002 decline. Here in the sixth year, the bellwether measures are either down or close to being down for the year (at the time of this writing), although hope abounds there will be enough strength to pull them into positive territory by year-end.
So where are we? How do we invest in this kind of a market?
Reaching back in time, we know that the first cycle was down and ended in 2002. We know that the first reverse cycle, a bull cycle, started before year-end of 2002 and began to fizzle out early in 2005. So we strongly suspect that the DJIA is at or past the top and headed down for the second bear cycle within the secular bear. That answers the "where" question; now for the "how."
Here is where the reader is going to have to do his/her homework. What have been the strong sectors in this first bull cycle? Will they continue to be bullish during a down move? There are sectors and individual stocks that will move counter to the primary trend; you just have to search them out.
A clue to this mystery can be found in a recently published book by Thomas L. Friedman of New York Times fame. Published by Farr, Straus and Giroux, the book is entitled, The World Is Flat.
Friedman tells his readers about the global supply chain and all about future services and manufacturing. This is paramount if an investor is to match investment opportunities to where these goods and services are coming from in this flattening global environment.
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Gordon B. Lamb - Biographical Sketch
Gordon Lamb is founder, president and CEO of American Asset Management Group, Inc., an SEC-registered investment advisory firm located in Rockville, Maryland. AAMG works primarily with accounts of an institutional nature.
Mr. Lamb was educated at the University of California at Berkeley and at the University of Maryland. He also has taken graduate courses in finance and banking at the University of Pennsylvania's Wharton School of Finance. Currently, he lectures on numerous financial and investment subjects at the University of Maryland, American University, George Mason University, as well as for several civic and professional organizations.
During his 39-year career, Mr. Lamb also has had substantial mutual fund experience. He served as president of the Dividend Growth Fund, the Laser and Advanced Technologies Fund, and a Laser-related money market fund.
He also has chaired the investment committee of a commercial bank and served six years as commissioner of the Maryland National Capital Park and Planning Commission, where he directed that organization's investment funds. During Mr. Lamb's tenure with the MNCPPC, he was responsible for establishing the employees’ retirement system. This system subsequently became a model for independent agencies throughout the state of Maryland.
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