Of Special Interest ...examining a significantly timely topic

For over 10 years, The Leuthold Group has been sending out a list of year end trading suggestions. In November and December we go “bottom fishing” for stocks that are overextended on the downside. When year-end selling pressures lift, these selected Issues typically rebound nicely Into January or even February.

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Stocks are now in the high 40%-45% of the historical valuation distribution range. This is not cheap, but neither is it expensive. Based on our Benchmarks work, it now appears we can expect average performance for the stock market from today’s levels over 1, 3 and 10 year time horizons.

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Our gold stock holdings can be viewed almost exclusively as a defensive bear market tactical measure. But we are troubled by recent price action in the underlying metal. When viewing the price of gold against currencies such as the Swiss Franc, weakness is far more obvious.

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As often noted in these pages, as far as stock prices are concerned, investors’ perceptions are often more important than reality. Political focus on the Ethical Drugs will take its toll on drug industry P/E’s, even if nothing ever comes of it.

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While the three month earnings momentum work does not look at all encouraging, there was a glimmer of hope in June. In looking at the individual monthly data, earnings reports released in June were relatively good.

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In recent months we have been increasingly impressed by the improving relative performance of consumer growth stocks. This month a four stock package of consumer growth stocks was introduced as a formal portfolio sector.

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A month ago, this work appeared to be giving some support to the “soft landing” thesis. But the earnings reports published in April provide a more negative message.

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This month, we are featuring a chart appearing regularly in Jim Floyd’s Quantitative Themes quarterly publication. About 20% of The Leuthold Group’s clients are subscribers to QT, but we thought the other 80% might find this study of interest.

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The January issue included our set of traditional economic and market predictions for the New Year.

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For a number of years, we have used Jim Floyd's computer to isolate stocks most likely to score the largest gains from early December through the end of January.

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What happened to the "January effect" this year?

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Self examination can be good for the soul, so each year time is taken to look back over the preceding year or so, critically reviewing the significant studies, portfolio shifts and recommendations appearing in this publication. Including the good....and the bad.

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In November, we had a number of clients inquire about the current status of our earnings momentum monitor, so we have again decided to publish an update of this work. Just a cursory glance at our Advance/Decline chart is all that is needed to see that the earnings momentum is slowing dramatically.

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The recent results of this work clearly show that the corporate earnings momentum is slowing. In the second quarter of 1989, there were 2867 up earnings reports versus 1982 down earnings reports for a ratio of 1.45. This ratio matches the lowest ratio registered in this limited historical study.

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In terms of stock screening, companies selling far below book value raise a red flag and deserve very close critical scrutiny. However, when book value is used in combination with other value considerations it can be helpful in recognizing undervalued stocks.

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Are we going to see a “soft landing”, a “fly by”, or a recession? This work may ultimately provide some clues.

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An increasing number of brokers and institutions are focusing on “Ecology Technology”. On a global basis, environmental problems are being recognized and increasing amounts of public money is being dedicated to addressing these problems.

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A preview of our new U.S. inflation histograms, soon to be regular features of our quarterly Benchmarks publication.

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Aussie bonds appear to be a very attractive investment. But what effect will a falling (or rising) Australian dollar in a variety of interest rate environments have on U.S. investors who buy Australian bonds?

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Last month we presented this original indicator of earnings momentum. At that time, we commented that our quarterly reporting periods might be warped and perhaps misleading. This month we have readjusted the quarterly reporting periods so they now better track the traditional calendar quarters.

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