by Martin D. Weiss, Ph.D.
Dear Subscriber,
Now, to help you prepare for tomorrow's webcast, Solving the Timing Mystery Part 2, I am dedicating this issue to the edited transcript of Part 1.
Martin Weiss: We're going to begin today's briefing by traveling back in time to the worst years of the Great Depression. I was not there, but my father was. And ever since I was six years old, he told me the story of those days and how he predicted some of the major events.
A Brief Journey to the Past
The year is 1931. The U.S. economy has contracted a staggering 25 percent. Millions of workers have lost their paychecks. Consumers are hoarding money, delaying all but the most essential purchases.
Every month, more manufacturers, wholesalers, and retailers are failing, pushing unemployment ever higher, intensifying America's economic agony.
President Herbert Hoover could not have dreamed of a more adverse environment to begin planning his re-election campaign — not even in his worst nightmares.
The public and the press demand to know who or what was to blame for this catastrophe. To survive, the Hoover administration would have to give them answers.
But the president knows that just ANY answer will NOT suffice. Only a credible, exhaustively documented, scientific answer could have a chance of restoring the public's faith in his administration and in the U.S. economy.
And so, Hoover turns to a scientist he trusts — a chief economic analyst in the Hoover administration named Edward R. Dewey.
Later, Dewey will create a nonprofit foundation. And with this foundation, he and his successors will continue a 78-year quest for the mysterious forces that drive the economy and investment markets, joined by many of the best minds from Harvard, Yale, Princeton, Oxford, Temple University, Western Reserve, and other globally respected institutions.
The Foundation's mission is championed by men at the very pinnacle of the scientific establishment — Charles Greeley Abbott, the head of the Smithsonian; William Cameron Forbes, the chairman of the Carnegie Institution; and Wesley Claire Mitchell, the founder and director of the National Bureau of Economic Research.
A former Vice President of the United States — General Charles G. Dawes — joins Dewey's Foundation. So does Senator Everett M. Dirksen and Michael G. Zahorchak, Vice President of the American Stock Exchange.
America's greatest industrialists, philanthropists, and investors finance Dewey's quest: Men like W. Clement Stone of AON Insurance ... Clarence Coleman of the Coleman Corporation ... Ned Johnson, the founder of Fidelity Investments ... and Alanson Bigelow Houghton, a distinguished congressman, a U.S. ambassador, and the chairman of the Corning Glass Works.
In the years that follow, the time-tested tools for timing the markets developed by Edward R. Dewey and the distinguished scientists who continued his research are used by major corporations, banks, brokers, and investment analysts worldwide.
Back to the Present
In the next hour, we will see how the Foundation's monumental discoveries can help you make more accurate and profitable "buy" and "sell" decisions — even in today's volatile markets.
The moderator of today's event is Larry Edelson. Larry is the editor of our Real Wealth Report and deserves the credit for introducing us to the work of Edward R. Dewey and to the nonprofit foundation Dewey created.
Larry has more than thirty years of experience working with investment timing tools and has developed his own tools based largely on the Foundation's vast body of research.
And we are especially proud to have with us today the Foundation's top analyst, Richard Mogey.
Richard Mogey is the Research Director of the Foundation and the successor to the distinguished line of three scientists who have held that position since Dewey.
My role today is to do my best to represent you, the investor, and to ask some of the questions you have been asking or would be asking — to be the skeptic and to probe for any deficiencies I may see in this approach. Go ahead, Larry ...
Larry Edelson: Richard, your Foundation is the repository of one of the longest term databases in the world. Its market information goes back as much as 5,000 years. Its scientists and contributors have made the study of this data their life's work. But before you tell us more about their work, first tell us exactly what Dewey and his team of experts learned about the causes of the Great Depression.
Richard Mogey: They learned something that came as a surprise to economists of that era.
Larry: And could also come as a shock to economists of this era!
Richard: Yes. They learned that, back in the 1920s, before the Crash, if any serious researcher had simply examined the historic data coldly and objectively, if any of America's corporate or political leaders had merely dropped their agendas and biases, they could have forecast the Great Depression well ahead of time.
Larry: And they could have done that by ...
Richard: By simply recognizing the patterns of history. Dewey discovered a very simple reality — that in modern, industrialized nations, economic expansions and contractions occurred in regular, oft-predictable patterns.
Larry: In regular waves — CYCLES!
Richard: Exactly!
Martin: I want to ask you the same question I asked Larry when he and I first began discussing this many months ago: If the pattern was so predictable, why did the Crash of '29 and why did the Great Depression come as such a shock to virtually everyone?
Richard: For the same reasons they're surprised by the economy's devastation today:
First, because no one with any influence was looking back at this historic data. And second, like today, even some of the smartest people in the world often believed only what they wanted to believe — that good times go on forever. But take a look at the pattern Dewey first saw in the 1930s.
We don't have the exact chart he was looking at, but if you go back to 1789, 140 years prior to the Crash of '29, here's what you see.
This is the rate of growth and contraction of the U.S. economy (black line) with an important cycle Dewey discovered — a major peak in the economy hitting regularly every 20 years (red line).
The actual peak came a bit earlier, sometimes a bit later. But the overwhelming bulk of the decline coincided almost exactly with the decline predicted by the cycle.
Larry: Can we focus in on the 1900s?
Richard: Sure. The 20-year cycle predicted a major peak in 1906; and sure enough, the economy began weakening in 1906.
The 20-year cycle then predicted another major peak in 1926. And that's precisely when the economic growth began to slow down. The key point is that the huge decline of that era coincides almost perfectly with the decline predicted by this cycle analysis.
With this research, someone living in the 1920s could have known not only that the economy would decline in the late 1920s, but also that the decline would be one of the worst in history.
Richard: By looking at the 60-year cycle in the economy (blue line in chart). This blue line predicted a Great Depression in the economy. It predicted that the Great Depression would hit its ultimate, rock bottom in the mid-1930s. And it predicted that, after the Great Depression, the economy would enjoy a massive, long-term boom for years thereafter.
Larry: All this was evident in the cycles Dewey saw in charts like these.
Martin: Imagine that! Imagine how the lives of so many people could have been so different if only they had some of this knowledge at that time in this format.
Larry: And imagine how the lives of people today could be so different if they had something like this before.
Richard: Just look at their 401ks!
Larry: But let's go back to the period before the Crash of '29. If I were sitting right here — in the 1920s, I could have looked at this chart ... and I concluded that a massive economic decline was imminent, I would have been absolutely correct.
Richard: Yes. Absolutely.
Larry: This is huge. Yet if we were living in the Roaring '20s, with the euphoria all around us, we would have had a tough time believing that a Great Depression was around the corner.
Martin: And an even tougher time convincing others!
Larry: Just based on one indicator — one chart?
Richard: No. The data Dewey discovered also predicted the collapse in consumer spending, a force that was vital back then and even more so today.
With just one exception in the late 1800s, the cycle declines coincided with the actual declines in consumer spending. Look how closely it matched the decline in the 1920s and 1930s!
None of these indicators are perfect. There's some variation, as always, but despite major wars that you'd think might disrupt the cycle, the periodicity — the time between each cycle — was quite consistent.
Larry: Bottom line, if I were an investor in the late 1920s, I could have simply looked at these economic charts and deduced that since the U.S. economy was due for a major downturn, it was time to take my money off of the table.
Richard: Well, if you had used strictly economic indicators, you probably would have taken your money off the table too soon. But you could have done a lot better if you also looked at the pattern of history in the stock market itself.
Martin: Then why didn't anyone do that?
Richard: We don't know if anyone did or not. All we know is that, even if they did, the overwhelming majority of investors paid no attention to them. The key is that anyone trying to predict the next big stock market cycle would have needed to look back beyond just the recent ups and downs. They would have needed to compile a composite of the Dow and other stock indexes in the U.S. and the U.K. going back to the late 17th century. And that's the type of analysis Dewey conducted.
From the 1700s through the 1920s, there were five major booms and busts; and at this point, Dewey saw several cycles. He saw the 20-year and 60-year cycles we talked about for the economy. Plus, he saw a shorter term, 40-month cycle, known today as the Kitchin cycle.
Most important, he saw how the cycles could have predicted the Crash of '29. That, combined with the economic cycles I showed you a moment ago, is what could have allowed you to truly pinpoint when to take your money out of the market — shortly before the Crash.
Larry: Or you could have done what Martin's father did — profit from the market decline itself.
Richard: Yes. But if you think that's impressive, take a look at what the stock market cycles were saying in 2007!
Larry: When Wall Street was having a grand party ...
Richard: Yes, when the Dow was making new all-time highs at 14,000 ... and when most investors expected that party to continue forever. This is what we saw — and what anyone else could have also seen had they merely bothered to look at our chart. An obvious peak in the cycle in September 2007!
Martin: And you had this chart before the fact or after the fact?
Richard: Three years before.
Martin: Can you prove that?
Richard: Yes. We emailed a similar chart to our members in 2004. Then, we updated it and posted it online in 2007. This chart was shorter term oriented. But it showed the same cycle and it made the same forecast of a peak in September 2007.
Martin: Where online?
Richard: Barron's online.
Larry: Just before the bear market began, right near the highest peak of all time.
Richard: Yes.
Larry: So an investor who had $100,000 in Dow stocks at their peak in 2007 could have simply looked at this chart — right there on Barron's online — spotted the coming decline, sold near the top, and kept all or most of his $100,000.
Richard: But someone who held on to his stocks until the recent low would have lost about 55 percent of his money or $55,000.
Larry: And still another investor could have bought an inverse ETF on the Dow at that time, and more than doubled his money. So you're talking about one investor ignoring the cycle signal in your chart on Barron's online winding up with $45,000 in his account versus another, paying attention to your chart on Barron's and walking away with over $200,000 — all thanks to the work of Dewey, the people who came before him, and the work of your Foundation.
Richard: Provided people pay attention to what we have to say.
Larry: Richard, what never ceases to amaze me is how much data, how much brainpower, and how much serious, disciplined research has gone into this over the years. And what amazes me even more is how little attention the establishment in Washington and on Wall Street pays to this material today. Why do you think that is?
Richard: I don't know for sure. One reason may be simply that we have not done a very good job of publicizing our ideas. We are scientists and researchers. We are not marketers. Another reason may have something to do with our big-picture conclusions.
Our big-picture conclusion is that virtually all the cycles of history, going back thousands of years, are now coming into alignment and predicting a perfect storm — a cataclysmic crisis in the global economy like none other in centuries. And like their counterparts of the 1920s, the powers that be don't believe what they don't want to believe.
Martin: Or they think they can prevent it, that they're bigger than cycles.
Richard: Which is even worse. They discard the conclusions. So they discard the science and the data that support the conclusions.
Martin: This is a topic I'd like to explore in depth in Part 2 of this series.
Larry: I'd love to as well. But Richard, what I think would be more important at this juncture would be to give our viewers a fundamental sense of why these cycles exist and why they are so regular.
Richard: That takes us beyond the realm of economics to the very nature of our existence.
Cycles exist in all aspects of our universe. Every physical science fully recognizes cycles and studies them meticulously. The entire universe is driven by regular, rhythmic patterns: The pulsation of distant stars called pulsars and the rotation of our galaxy; the rotation of the Earth around the sun dictating seasons, the rotation of the Earth on its axis creating sunrise and sunset; the phases of the moon dictating the ebb and flow of tides; and the countless ways the human body and our entire society have internalized these cycles in culture, behavior patterns, and possibly even in our DNA.
Larry: Science recognizes this. Why don't investors?
Richard: Chiefly because investors are so subject to crowd behavior. So it's hard for most investors to step outside of the crowd and to recognize how they are being affected by the crowd behavior.
Larry: This is probably the most fascinating aspect of your work, and I know your Foundation gathers contributions from scientists in all fields — not just economics. But let's bring this discussion back to practical solutions that many investors have asked me about.
In essence, their question is: Does this cyclical behavior strictly drive the broader economy and stock market? Or does it also drive individual investments along their own paths, each with a unique cycle? And if so, can you use cycles to predict the tops and bottoms of individual stocks?
Richard: The answer is both. Step number one in our analysis is always to study the cycle pattern for the broader economy and stock market. Step number two is to look at the cyclical pattern of sectors, each of which has its own typical characteristics.
Larry: Such as an infrastructure cycle, a construction cycle, a technology cycle.
Richard: Good examples! The third step is to drill down to each individual company, which can have its own cyclical pattern driven by its special history, its natural long-term swings from aggressive to conservative business practices, by the R&D cycles, and more.
Larry: What I find so intriguing about this is that you can tell me what the expected cycle is for each and every stock or commodity for which there's historical data. And that cycle forecast is a tool I can use every day to help me time my "buy" and "sell" decisions.
Martin: It's not perfect.
Larry: Of course not, Martin. But the study of cycles adds a major dimension to timing — not just in the long-term horizon like we saw a moment ago, but especially with short-term trading. Richard, last time we spoke, you said you would bring some illustrations. Can you go through those with us?
Richard: Sure. I have three recent examples here that we've been tracking. First, consider Apple Computer. If you had started in 1997 and you began investing with $10,000 trading this stock based on its cycle pattern, you could have turned $10,000 into $363,729.
Martin: I assume that performance comes with risk of loss.
Richard: Of course.
Martin: When did you discover this cycle in Apple? Was it well before that period or are you using 20-20 hindsight?
Richard: We found it in the 1980s and we first published our findings in 1988. I also want to clarify that I used a 2 percent stop. So if the stock fell 2 percent below the entry price, we would count that as an exit point.
Larry: Hypothetically, let's say I bought Apple on November 19, 1997. How much could I have made?
Richard: Actually, your first trade would have been a loss. You would have lost about $2,800, leaving you with only $7,194 in your account. But you would have recouped that loss in the next trade. Going forward, you would have had 17 losing trades and 38 winning trades.
Larry: Can you give us some other examples?
Richard: Aeropostale, a big national retail firm. In this stock, we discovered a nine-week trading cycle — and it's been so consistent, you can almost set your watch by it. If you had you invested $10,000 in the stock back in June 2002 and if you had bought and sold on every cycle turn — today you could have turned $10,000 into $69,208. 39 trades, with 12 losers and 27 winners.
Or consider Green Mountain Coffee Roasters, where cyclical analysis could have transformed $10,000 into $337,849!
Larry: Despite the worst economic crisis since the Great Depression!
Richard: Yes, despite the worst crisis since the Great Depression.
Larry: All of the results we've shown so far are without any reinvestment of profits, taking 100 percent of your profits OUT of a hypothetical account after each and every trade, and setting that cash aside. But I've worked with Richard to show how much you could have achieved with reinvestment of profits after each trade.
Martin: That's truly aggressive and high risk.
Larry: It is, and we are not advocating that approach. But I just wanted to give our viewers a sense of how powerful this form of trading could be.
Martin: Only in theory. Because in the real world, it might not be feasible to trade the large quantities of shares you'd have to trade as you build up a larger and larger position in the shares. Nor would you want to put that much money into just one stock.
Larry: Correct. But I want to convey the idea that if you did want to grow your positions with some portion of your profits, you could have done a lot better.
Martin: That's fine. As long as we don't raise investor expectations to lofty heights.
Larry: Agreed.
Martin: What about broker commissions? Have you taken them out?
Richard: No. That varies from broker to broker.
Martin: How representative are these examples?
Richard: They're not representative of the entire universe of stocks because we've selected stocks with high volume, good capitalization, high relative strength, and consistent cycle patterns. But they are fairly typical of those stocks that meet those parameters. I didn't pick them for how much profit they'd make. I picked them based on those objective criteria.
Martin: Plus, everyone should understand that short-term trading may be too aggressive for some investors. My next question: Is this real money or is this hypothetical?
Richard: It's hypothetical. Our Foundation is a non-profit research organization. We are not trading advisors. And we do not issue buy/sell signals.
Larry: But I do, and in recent months, I've been using the Foundation's work.
Martin: How do you use it?
Larry: I don't use it as my exclusive indicator. I have not tried to trade stocks in and out like Richard has illustrated with these examples. But I have used it to help me time market decisions I am already considering based on my fundamental and technical analysis.
Martin: And how has it helped you?
Larry: So far, I am extremely pleased and I believe my subscribers are as well. May I give you some specific examples?
Martin: Go ahead.
Larry: Back in March, I felt China's economy was about to spring forward again. Then, when I ran some studies using the Foundation's work, it confirmed that the Shanghai Composite Index would bottom in mid- to late March. Since U.S. investors cannot buy the Shanghai Composite, I use FXI, which is the U.S.-based exchange-traded fund that tracks a portfolio of similar Chinese stocks.
Richard: The red line on this chart is the Foundation's forecast. The black line in the chart is the actual stock price.
Larry: Right. And as you can see right here, it signaled a bottom in mid-March.
Martin: So that was the time to buy?
Larry: Based exclusively on the Foundation's cycle work, yes. But I waited for a confirmation. I waited for the market to break up through its downtrend line, which happened about a week later. To me, that confirmed the cycle low, and that's when I published a buy recommendation on FXI. End result: The FXI is now up over 46 percent — in just two and a half months.
Here's another example: the gold stock, Goldcorp.
My work, along with the Foundation's, showed a breakout due in late March, followed by a re-test of lows in late April. See that spike on the chart, where I've drawn the arrow.
That's where the cycle low in January was confirmed, and that's where I recommended Goldcorp. After a little zigzagging in April, the stock is now up almost 22 percent, in less than three months.
And then there's oil, where the Foundation's work helped me peg the low for oil back in late March/early April. I used this chart to position my readers in an oil ETF. And that ETF rose by more than 30 percent, also in less than three months!
Martin: Did you recommend leverage in those cases, or just stocks and ETFs?
Larry: Those were just stocks and ETFs. I also recommended options in similar instruments, and naturally, those did even better. I use cycle analysis as a market timing tool. I don't use it to tell me what to buy or sell. Nor do I use it to tell me how far the market will move. I just use it to help me answer the all-important question of WHEN! But that's precisely the missing piece I need.
Martin: So you don't recommend using it in isolation from other analysis.
Larry: No, I don't. But don't underestimate its importance there either. The Foundation's work provides an overarching, unifying theme that can cast a whole new light on virtually all economics and technical analysis.
Martin: For stocks.
Larry: No matter what I'm investing in — stocks, bonds, commodities, currencies — and no matter what economic indicator I'm looking at — unemployment, GDP, leading indicators — unless I know what cycle we're in and unless I know at what stage of the cycle it is, I feel lost, a ship without a compass.
Richard: So before you start investing, you should always ask those two questions:
What kind of a cycle is this? It could be a long-term cycle, a medium-term cycle, or a short-term one. And ...
• Where are we in this cycle? Near the beginning, in the middle, or near the end?
Larry: It's a total paradigm shift for most investors. For years, they've been told about fundamental analysis and technical analysis. And for years, although helpful, those tools alone have not been helpful enough. Now, by adding this third dimension — this timing dimension — you're on track to solve the part of the puzzle that fundamental and technical analysis alone cannot solve.
Richard: As Edward R. Dewey said, "All science that has been developed in the absence of cycle knowledge is inadequate and partial."
Larry: Exactly. But by combining fundamentals, technicals, and cycles, you can get the whole picture. You can figure out WHY a stock is likely to make a move ... you can judge how FAR it's likely to go ... and often most important, you can get a good reading on WHEN it's likely to move.
Martin: Last week you told me that, in this
event, you were going to review the Foundation's record for each of the major markets — gold, stocks, bonds, etc. So before we run out of time, can you focus on them?
Larry: Absolutely. I've put together a short list of some of the most outstanding calls in other major markets. Here it is:
• Soybeans: Giant top in June 1973
• Silver: Historic high, January 1980
• Crude oil: Historic high, March 1981
• Interest rates: All-time high, September 1981
• Stocks: Big bottom, August 1982
• Stocks: Great Crash of 1987
• The massive bull market in stocks between 1995 and 2000
• The February 1999 low in oil
• The June 2001 low in commodity prices
• And as we said a moment ago, the September 2007 high in the stock market!
Martin: Can you give us some illustrations of the practical value of this for investors?
Larry: Are you kidding? Do you want me to tell you right now how much money you could have made if you caught those huge moves?
Martin: I get the point. But I assume there were some false calls as well.
Richard: Of course. Now you're talking about error metrics, and that's something we take very seriously. It's a critical aspect of our analysis and the continuing development of our software tools.
The first type of error is when the timing is off. The cycle bottom or top does come, but it comes sooner or later than expected. That's usually not a big problem.
The second issue is when we predict a major turn and only get a minor turn. That's also not a serious problem.
The third type of error, which can hurt unsophisticated investors, is what we call a "cycle inversion." The timing is accurate. And a major turn does happen around when we expect it to.
But instead of a top, it's a new bottom; or instead of a bottom, it's a new top.
Larry: The market moves, but the wrong way. Even there, though, I find the Foundation's forecast still has value because it helps me pinpoint when the move is likely to begin.
Richard: Yes, and that's especially helpful for more sophisticated trades, such as in options trading, straddles, spreads, etc.
Larry: Richard, given this remarkable track record, everyone watching this presentation, ourselves included, is anxious to get some of the Foundation's current forecasts. Let's look forward a little bit.
Richard: I'll start with stocks. Our short-term cycle work is showing U.S. stocks are due for a correction to begin right now. Our big-picture cycle work, like I said earlier, is predicting the perfect storm and a huge bear market in stocks.
Martin: That's in sync with my thinking.
Richard: I know it is. But let me show you something that may not be in sync with your views.
Martin: OK.
Richard: Our medium-term work shows that, after a correction, stocks will stage a rally that could continue until year-end.
Martin: I can see that plainly from this chart. But do you really think stocks could go that high?
Richard: No.
Martin: So you don't believe your own chart?
Richard: I didn't say that. It goes back to what Larry said earlier. This work is very helpful in telling you when a market bottom or top is likely. It should not be used to tell you how high or how low it will go. It's good at picking turns. It's not good at picking price targets.
Martin: That's your medium-term work. What's your long-term outlook for stocks?
Richard: After a failed rally, you'll see another three-year bear market taking us into new lows, and hitting rock bottom in 2012, which comes with our perfect storm scenario.
Larry: Fascinating. Let's talk about the dollar.
Martin: This is extremely important. The future of our entire country revolves around, or can be measured by, the future of the U.S. dollar.
Richard: For years, the Foundation has been predicting a major decline in the dollar beginning in 2001 ...
Larry: Which is when the dollar began a big slide.
Richard: Right, and ending in 2013. In other words, we're looking at a massive 12-year decline in the dollar that still has three more years to go. The only good news for the dollar is that we think it will eventually recover after this massive decline.
Larry: Although I have seen these charts many times before, no matter how often I see them, it's always intriguing to see the future drawn out with such precision. We all know we cannot predict the future. We all know we have no crystal ball and this certainly isn't one either. But still, it gives us something far more concrete to hang our hat on than we're used to having. It helps you visualize the probability of future market moves.
Richard: As long as you don't let the precision of the charts fool you into thinking it's written in stone ... as long as you remember the error factor.
Martin: Gentlemen, I appreciate your frankness regarding the errors and regarding some of the limitations of this analysis. But despite any limitations, I am convinced it is an extremely helpful, sometimes absolutely essential, timing tool.
Now this brings me to one of the most exciting announcements we've ever made in the 40-year history of my company:
Weiss Research has just acquired the exclusive distribution rights for all of the Foundation's economic and financial data going back thousands of years, and for all of the research or tools built on that data.
And two months ago, we kicked this project into high gear. The experts and principals of the Foundation flew to the Weiss Research offices, and all the Weiss Research experts flew in from across the globe. We held one of the most amazing workshops and most intensive learning experiences of a lifetime. Now, we are finally getting ready to make it available to our members.
Larry: Congratulations, Martin. This is a major coup for Weiss Research and for you personally. No one else has the access you have to this data and analysis on the markets, on thousands of stocks, hundreds of commodities and natural resources, like you do now. And given the crisis the world is experiencing, the timing couldn't be better.
We have the obvious failure of establishment economics to predict this crisis. We have the failure of technical black boxes to make money, even for supposedly sophisticated hedge funds. So under this dark cloud of uncertainty, you and we now have what it takes to help provide better clarity of vision for investors and traders.
I think our readers are anxious to start using this missing piece of the puzzle to gain a big strategic advantage in the markets.
Martin: And that's exactly what we're going to do next. But we've run out of time today. So on Tuesday, June 30, we're hosting Part 2 of Solving the Timing Mystery to show you how.
© 2009 by Weiss Research, Inc. All rights reserved. 15430 Endeavour Drive, Jupiter, FL 33478
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