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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.

From a shorter-term tactical standpoint, we have lit the caution light for both the stock market and bond market. However, there are some possible post-election developments that would be cause for changing this somewhat defensive stance and once again becoming totally committed to stocks and bonds.

The DJIA and S&P were unchanged for the month while the unweighted indices declined one or two percent. For two months in a row now, equities have lagged far behind bonds. There were however some groups and sectors that performed pretty well in October.

Several clients have requested information as to the components of the Early Warning Index. We have no secrets....well, not very many, so here are the tools we use to help in identifying intermediate stock market tops.

Examining our early warning inflation tools, we currently find few indications of an inflation resurgence. Only the CPI momentum work is somewhat disturbing. Herein we review this work, and also discuss the inflation outlook for 1985. In a strong economy, inflation could run to 7% next year, but the serious inflation danger lies down the road.

The pre-election target of 11.5% for T-Bonds was essentially achieved. Now the market looks overextended and a period of consolidation or correction is expected in November. Ultimately though, the upward move is expected to continue.

How High the Moon? How much longer can the strength in the dollar continue?.....Change in Outlook For “Value Stocks? Not really. Several months ago, this publication expressed concern over the growing popularity of “value” investing, reducing portfolio emphasis. Then in this issue we added three new “value” stocks to the portfolio. What’s going on?

From a portfolio performance standpoint, the stock market fizzled out in September. The market averages posted small losses for the month and those who were anticipating another surge on the bright side were sadly disappointed.

After the explosion of two months ago the stock market has gone nowhere. What is wrong with it? Well, I think it may be having some supply/demand problems.

Jim Floyd has just run new computer screens for the Consumer High Growth sector, Regional Bank Double Plays, the Undervalued & Unloved issues and the Growth Stock Bargain Basket. There are many changes. Each of these screens is discussed with all additions and deletions noted.

We look for higher bond prices by the end of October, once the Treasury financing is out of the way. Pension fund lock-up buyers remain a strong positive factor. But what is really needed is some post-election indication of political fiscal responsibility.

For several years now, this publication’s focus has been on long 20-year bonds, while many clients owning bonds maintain average 6-7 year maturities. Herein, we compare future performance of long and short bonds over several time horizons in a variety of projected interest rate environments, including projected parity levels for the stock market.

Back to the Basics? We think individual stock analysis is becoming increasingly important… Tax Simplification Coming Soon: The 1984 additions to the tax laws (over 1300 pages) may be the last straw… A Potential Shortage in Treasury Bonds: I know this sounds absurd. However, in the upcoming financing, the Treasury is for the first time offering a 20-year bond that is callable in five years.

The Major Trend Index is positive, but not as robust as a few weeks ago. The Early Warning work is okay, giving no indication of an impending major or intermediate market top.

This move now appears to be a “second” leg, not an extraordinarily large bear market rally and not a new cyclical bull market.

Too many institutions are playing the sector rotation game. Typical portfolio turnover has increased considerably, and popularity has rotated faster than the rotary engine in a Mazda RX7. For the last year or so, our own sector strategies have been undergoing a change, becoming increasingly narrow. This is a significantly different approach than the broad economic sector approach that is now so popular.

A month by month listing of both conceptual and conventional model portfolio sector holdings, January 1982 to date.