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Back in June 1984, after returning from the Market Technicians annual rendezvous, I enthusiastically wrote about a presentation given by Ted Theodore of Morgan Stanley Asset Management on the roles of lateral and vertical thinking in investment management. Here it is, reprinted with Ted’s permission.

Seventeen inches of snow is one view from the North Country. Read on to find a somewhat less pleasant view, a discussion of the farm crisis, including its implications for common stock investors as well as longer term ramifications.

February was a healthy consolidation. Higher prices are expected shorter-term and longer-term. The Major Trend Index continues to register powerful readings. The Early Warning Index of intermediate peaks remains positive, but the margin is narrower than a month ago.

It Feels Good:  For the first time in a long time, equities are more heavily weighted than bonds in our Asset Allocation Models… Wanted: Potential High-Tech Survivors: We want to add about five more names to the potential survivor list and are open to suggestions… Pension Fund Shrink: The dramatic changes now taking place in private pension funds and the investment implications thereof.

The caution flags were taken down in January. This is one of the most powerful looking markets I have seen in my 24 years in the business.

The twelve stocks on the list that we especially recommended were up an average of 19%. Once again, this exercise proved to be an effective trading strategy...of course the overall market did help us out a bit this year.

Our initial May 1984 move into these “Gilt Edged Growth Stocks” has not really been paying off. Herein we re-examine this sector of the market in an effort to determine what is wrong. We did much the same thing a few months ago, concluding these stocks should be good relative performers in 1985. Now we are not so sure and have a “hold” on increasing these holdings.

Bond returns are not expected to keep pace with stocks over the next 6-12 months. Shorter-term we remain cautious toward the bond market, but would become aggressive should it appear Reagan and Congress are coming together on the deficit.

This annual exercise is a critical review of the studies, portfolio shifts, recommendations and market strategies as presented in this publication over the last year or so...both the good and the bad.

On a traditional broad sector basis, only three of the eleven sectors we track recorded positive returns in 1984. Looking at our Conceptual Sectors, there were eight of our sometimes unorthodox stock groupings with positive total returns.

You may recall this publication turned very negative on High-Tech stocks in the late spring of 1983....certainly one of our better calls. In a summer 1983 Barron’s article, we projected a decline of 45% or more. Hell, it was more. Now it may be time to start buying them back. Some of these beaten up stocks will ultimately become established major factors in their fields. Which ones?

It is 1985 prediction time. Wall Street Is filled with hot air. We add to this thermal pollution with our own predictions for the 1985 economy, earnings, inflation, deficits, Interest rates, value of the dollar and the stock market.

While now uneasy about the shorter-term outlook for the bond market, our minimum 1985 target is 10%, perhaps even 8%-9% if the politicians really come to deal with the deficit.

1984's Institutional "dream" portfolio made up of the twenty best performing large cap stock groups was up 20% (excluding dividends) while the aggressive "dream" portfolio was up 33%. The "nightmare" portfolio, constructed of the twenty worst groups was down 49%. See? Things could have been worse…

1985 has started out with a thud.

Not Exactly a Holiday Greeting: I have become even more convinced that the current upside potential in the stock market is quite limited as long as the deficit stalemate prevails…. Throbbing in Minnesota: It is hoped this will explain to clients why the Leuthold Group finds Minnesota such a glorious location for its research operation.

Shorter-term, the decline may continue. Our Early Warning Work registered a negative reading Oct. 30 but is now neutral. At least, a trading opportunity may develop soon. Our focus is on the deficit dilemma. The Major Trend Index continues to read positive, but down a bit from last month.

This issue’s X-Rays and EKGs section takes a hard look at these classy institutional favorites. The conclusion is that 1985 looks like a pretty good year for vintage Growth Stocks, relative to the rest of the market.

Our 1984 target of 11.5% for T-Bonds was achieved. Short-term we don’t know what to expect, but a consolidation or correction would not be a surprise.

We are reprinting this article authored a few months ago by this true legend in his own time. Buffett presents two fantasy plans by which to deal with the current deficit situation, employing them as a device to demonstrate the absurdities and dangers inherent in current policy. Do you want to know why long interest rates remain so high? Buffett explains it and I totally agree.