| How good is Helicopter Ben? The moment of truth has arrived. Will government actions be able to save the financial markets from falling apart? At Churchill, we find it valuable to look back at the history of the market to help guide us. Viewed through a historical perspective, the current stock market is behaving much like it should given where it is in its cycle. We believe the market is currently not only in a Cyclical Bear Market decline, but has also been in a Secular Bear Market (longer term) for most of this decade. The dramatic news being trumpeted in the financial press is all symptomatic of the unwinding process that comes at the conclusion of long Secular Bull Markets like the one we experienced during the 80s and 90s. It is also, of course, what sets up the next great opportunity. But the down cycle does require time to run its course. The struggles of the markets have been driven by a myriad of bad fundamental news leaving investors worried about the future. At the root of the problem is the fact that the Central Bankers around the world, who control our economic destiny, have been trapped by conflicting economic trends. We have had inflation risk led by oil and commodities and deflation risk led by the financials and housing problem at the same time. Because of this, the Central Bankers have not been able to address the inflation problem by raising rates without further fueling the housing problem, and vice versa. While the European bankers have been tightening, our Federal Reserve lowered our interest rates from 5.25% to 2%. The current situation presents one of the most challenging economic environments since the 1930’s. Thankfully, the level of sophistication today makes it unlikely that we will have to worry about a repeat of the 1930’s, but we are facing some very serious economic obstacles. In response, our Federal Government and our financial leaders have taken bold action to address the financial crisis that came from the collapse of the housing bubble. Most recently, the Fed stepped in to take over Freddie Mac and Fannie Mae in an attempt to shore up mortgage lending. Certainly Ben Bernanke, Chairman of the Federal Reserve, has been living up to his nickname as “Helicopter Ben.” He said in a speech dated November 21, 2002 that if necessary he would travel around the country throwing money out of helicopters. Unfortunately the Fed is finding it has no magic pill for the problems. Prior to its bail out of Freddie and Fannie, it had cut interest rates eight times in the last year, moved to expand its securities lending program, and aided in the bail out of Bear Stearns. However, none of these actions have yet stopped the problems.
In the two previous Secular Bears of the modern era there were at least three Cyclical Bull Markets against the Bearish background. However, the problem with Secular Bear Markets is that the rallies that occur within them tend to not last too long. Because of this, we are expecting that the next buying opportunity will not be the “buying opportunity of a lifetime” like those that came in April of 1942 and July of 1982. Instead, we are anticipating a rally where money can finally be made over a period of six to eleven months. We believe the Secular Bear Market that we are presently in started in January of 2000 and that we are now in the second half of its cycle. During the second half of the two previous Secular Bears there were periods where money could be made, but it was very important that sell disciplines were kept in place. The positive news in the search for a bottom is that the market troubles have managed to push one of our sentiment indicators to a Bearish extreme. The Advisory Sentiment is a contrarian indicator that tallies the Investment Advisors who categorize themselves as bullish or bearish. Extremely bullish readings are bearish and extremely bearish readings are bullish. We have now reached a bearish extreme that qualifies the Bear Market for a bottom. This is bullish, BUT keep in mind that it can get much more extreme as it did in the 1970s. Also, we will need confirmation from our other indicators. Additionally, it appears that international efforts are being made to help the fundamentals. Our research is showing that the Chinese business leadership is addressing the crisis of the collapse of the world consumer that we alluded to in our June 27th letter. Their plan appears to be to spend a significant amount of their liquid assets that they have saved from their boom years to have the consumers in their country begin to move towards the consumer life of the free world. China also appears to now have enormous inventory of grain which should continue the unwinding of the commodity bubble and lower inflation throughout the world. The rise in commodity prices has been a major problem as businesses have seen their costs increase, but are unable to pass the costs along to consumers who are tightening their belts. Not a good scenario for the bottom line. Energy in particular will surely be a point of interest in the upcoming American election, all the way from getting oil from Alaska and from coastal areas to what modern technology might be used to reduce our dependence on foreign oil. In the mean time, it does appear that the American consumer has finally reached the “enough” point in regards to oil prices and has been significantly altering their purchasing habits. Miles driven in the country have been dramatically dropping over the past few months. It does look that the commodity bubble is now easing. For Churchill Management to start buying in the stock market for our Premier Wealth accounts we would need to see confirmation from our Technical indicators to tell us that we are in a bottoming process. To date the market has not had a typical cleanout that usually takes place at the end of a Cyclical Bear Market. Most of the major averages and breadth indicators remain in major downtrends. As we get confirmation from the Technical side, we expect to be major buyers of common stocks & ETF’s, hopefully the new leadership, to take advantage of the “Buy Zone.” While the market remains in high risk territory, we remain in the safety of cash equivalents as we have been all year while on the lookout for the next low risk buying opportunity. As of now, we would expect that buying opportunity to begin some time in the fourth quarter of 2008, and if not then, certainly some time in 2009. Bottoms of markets can be tricky to time and painful if called too early. Our indicators have had a strong history of letting us know when a low risk opportunity is at hand. Until we get the confirmation from our indicators, we will continue to approach this market with discipline and caution. We will keep you informed. CHURCHILL MANAGEMENT GROUP
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