Considerations and Observations for 2002

Following is a random list of observations, notes and predictions we have made in the initial days in 2002, which we feel are adequate considerations for the overall market environment in the months ahead.

1. The top-performing mutual funds for the first three quarters of 2001 will likely be repeat performers this year. They are, in order of performance, as follows:

Rydex Venture 100 (RYVNX), Rockville, MD; $66 million in assets; "no load" (no sales charge); $25,000 minimum; up 94.40 percent.

ProFunds UltraShort OTC Investor (USPIX), Bethesda, MD; $54 million; no load and 1 percent load versions; $15,000 minimum; up 92.44 percent.

Rydex Arktos Investor (RYAIX), Rockville, MD; $64 million; no load; $15,000 minimum; up 62.05 percent.

ProFunds UltraBear Investor (URPIX), Bethesda, MD; $55 million; no load and 1 percent load versions; $15,000 minimum; up 51.76 percent.

Potomac OTC/Short (POTSX), Alexandria, VA; $3.3 million; no load; $10,000 minimum; up 50.87 percent.

Leuthold Grizzly Short (GRZZX), Minneapolis; $6 million; no load; $10,000; up 50.04 percent.

Rydex Tempest 500 (RYTPX), Rockville, MD; $83 million; no load; $25,000 million; up 49.89 percent.

2. We agree with Bud Kress of SineScope (15 Phoenix Ave., Morristown, NJ 07960), who wrote in a recent letter, "Investors who have failed to sell at the previous two opportunities now have their last chance to realize the decades of accrued gains. Traders who made purchases subsequent to last September's bottom should also realize their gains"

3. The Dow Jones Transportation index has met ultimate resistance at 2800 and will likely be unable to overcome this formidable obstacle. The 2800 level, called the "Berlin Wall" by many market technicians, has been a benchmark psychological level for the past year and it is from this level that the huge 800 point drop was seen last autumn. The fact that the Transports have formally topped is an important indication that our scenario for a first quarter broad market top is in place and unfolding on schedule, since the Transports typically lead the Industrials by a few weeks.

4. The Sept. 11 WTC disaster was much more than a cause of personal and economic loss; it was also a product of K-wave deflation. History shows that most "hot wars" and international acts of aggression are perpetrated during the "hard down" phase of the 55-year K-wave, that is, during the final few years before the bottom. Not only will WTC and its aftermath severely hurt the U.S. economy, but a major retrenchment in the airline industry is already apparent. A large number of airlines are aggressively promoting drastically reduced rates with seemingly no takers. Business and personal travel is way down and likely to remain down for some time. This is reflected in the Dow Jones Transportation index and is failure to rise among the critical 2800 level.

5. What has happened to Vice President Dick Cheney? He must surely be considered the most evasive V.P. in White House history as his media presence has been almost zero in recent months. Can you remember the last time a top leader was invisible like this in time of war? It is widely known that he has serious heart problems and it is likely that he is being "kept under wraps" for health and stress-related reasons. But what was the point of having him run as Bush's V.P. when these problems were known? Could it be that his services were required in the area of international oilfield development, particularly with respect to the U.S.-led Caspian Sea oil project?

6. It is quite interesting to note the growing number of analysts, newsletter writers, and even bullion sales companies, that are going publicly bearish on the yellow metal after years of touting its investment value. One prominent example is the well-known numismatic firm that promotes a book which argues that gold is caught in a massive "bear trap" and argues against a gold bull market happening anytime soon. Another example is a prominent financial analyst who loudly proclaims that "silver is dead." Yet another voice in the growing "Gold Market Bears Club" are the perennial gold market bears out of Gainesville, GA, who have been down on the metals for years and maintain that gold is going below $200 before it formally bottoms. To us, this strongly confirms from a contrarian perspective that gold has definitely bottomed and its meteoric rise will definitely begin this year.

7. Stock market cycle expert Michael Jenkins recently made the following instructive comments: "Of course like in the early days of the 1900s, the bull cliques needed to feed the masses logical reasons to make stupid investments, and so the 2002 reasoning will go something like this: 1. There is a floor under the market because of rates so we can't go back to the lows, so don't sell, just buy more on dips. 2. There is a ceiling above due to valuations, so don't expect too much but just hold for the long term and wait for earnings to catch up. 3. The average recession is 11 to 15 months and it started last spring and will be over any day, but the market starts up three months early so it's too late to sell. 4. The bankruptcy of Enron, the collapse of Argentina, the devaluation of the Japanese Yen and the global terrorist wars are all good things because that's when you want to buy when there's "blood in the street. My conclusion from the above is: 1. We will go to new lows, 2. Valuations will even get higher at those lows as the economy worsens, 3. This recession will last 2 to 3 years, and 4. The big bankruptcies and wars are just starting. Also, the trillions of dollars on the sidelines will disappear as people spend it to live, not invest it. The real truth is that there's a reason for any argument and market go up and down for irrational and emotional reasons, not logical investment ideas.

Manipulation is also reaching an extreme with almost no commissions anymore to pay brokers for legitimate work. Why do you think Goldman Sachs brought Speer Leeds with the largest ECN network last year along with a major options house and commodity operation? Could it be they have the largest proprietary capital trading operation and they need to know what the other traders are doing? On many active days now the NASDAQ QQQs trade well over 100 million shares of volume and now they're listed on three exchanges. That's pure index trading and it has nothing to do with investing or earnings per share. Our markets have become huge gambling casinos and to think the economy or Fed actions are really relevant is to miss the point as to why the big brokerage firms recommend stocks to buy or sell each day."