James Dines Calls A Dow Top, A Palladium Bull Run, And Deeper Tech "Bear Market"
- April 14, 2000
By Chaya Cooperberg (ccooperberg@stockhouse.com)
StockHouse Columnist
<<Market forecaster James Dines may be the first to publicly call the current tech selloff a bear market, and says his buy signal will only come when there is "mass fear." He expects the bull run for blue chips to reach its top before the summer, followed by a steep decline. Right now, Dines is predicting a boom for palladium, and says it could chart the kind of sky-high growth that the Internet group was known for. His top palladium picks include blue-chip Stillwater Mining and Canadian play Pacific North West Capital.
James Dines has made a name for himself in the investment community as editor of The Dines Letter, a financial newsletter that uses technical analysis, fundamental economics and the field of mass psychology to call market tops and bottoms, and herald new trends long before they are publicly recognized.
Using his market theories developed over many decades of investing experience, and laid out in his most recent book Mass Psychology, Dines has concluded that the deep tech selloff that trashed many former high-flying Nasdaq stocks, was indeed a crash. "This is more than a correction," he says. "This is a bear market." He expects it to continue and won't issue a buy signal on high-techs and Internets until there is "mass fear" in the market. The current bull market for blue chips will continue, he says, to hit its top before this summer. "It should be followed by a fairly nasty decline." Dines predicted a spring rally for the blue chips in his last newsletter.
When StockHouse last spoke with Dines in October, he was recommending a portfolio of Internets with a 10% in precious metals. Now, he is extremely bullish on palladium, and predicts a "boom in palladium stocks the likes of which will certainly echo and may even match the rise in the Internet group." In that sector, his blue chip favorite is Stillwater Mining [SWC], and in juniors, the up and coming Canadian palladium producer, Pacific North West [V.PFN]. Stocks he likes for the blue chip rally are General Motors [GM], General Electric [GE], Citigroup [C] and Chase Manhattan [CMB]. In Internets he still recommends the "four horsemen" of his portfolio, Amazon [AMZN], Yahoo [YHOO], CMGI [CMGI] and AOL [AOL]. When the down cycle ends, he expects these and other market leaders to "go sky high and probably above their previous highs."
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StockHouse: You have said before that a market peak always comes with the proliferation of gamblers in the market place, and we've definitely been through a period of "irrational exuberance" for high-techs. Where does the market go from here--are we on the verge of a major market reversal or are we just seeing a correction?
James Dines: I can't use the word market in a situation like this. This is, in fact, two markets. This is a classic two-tier market, and I've seen many of these in my career. The blue chips, we called for the spring rally in my last newsletter, and we are still looking for the continuation of that rally, and it might continue for some time actually. That is the blue-chip rally.
The second market, or the other market, is really in the high technology sector. That is in a very deep bear market. It began when Clinton and Blair made some ill-advisory remarks. It's election time, and the more they give away and bribe people with the wrong money, the more likely it is they keep their jobs so it really triggered a spectacular crash in the biotechs. I might be the only one using the word, but to me 60 to 80% declining in a matter of week or two is a crash and that I don't think is over yet.
"...but basically we're in a bear market."
StockHouse: I haven't heard that word used-it's usually been called a healthy correction. How long do you think the downturn will last?
James Dines: I don't know. I don't work that way. I'm waiting for the mass psychology to change. As you know, in my third and final business book, Mass Psychology, I rely very heavily on it. One of the reasons we sold out of our high tech stocks near the top was because that there were just so many people who agreed with me which was in rather stark contrast to the situation five years ago when I first began recommending Internet stocks and many people didn't even know what it was.
So, yes it was a classic top and it spread to the Internets and is still going on as we speak and fortunately, as I said we did a lot of selling near the highs and the important point to recognize here is that we've ridden out all the declines all the way up. For example, we got into Exodus Communications [EXDS]. We recommended it at 3 and ó on Nov. 3, 1998 and we rode out all the declines all the way out. But this time we got stopped out at $95 for 2433% profit. So I'm looking at this decline as different from the previous corrections we've had all the way up. This is more than a correction. This is a bear market. And it operates under different mass psychological rules that I laid down in my Mass Psychology book.
StockHouse: Have investors realized that the high techs and biotechs are in a bear market yet, as you say?
James Dines: No. I think they're looking at this as a surprising temporary phenomenon. But bear markets are different from regular corrections and one of them is within a framework of an ongoing bull market, but a bear market is a new and different animal entirely. I don't have enough time to go into all the differences, but basically we're in a bear market and now my job is to wait for the next buying opportunity because as the liquidation continues I'm expecting to have spectacular buying opportunities in some of these wonderful Internet companies.
StockHouse: Can you give me a timeframe for when your buy signal might come?
James Dines: No, but the truth is that what I can time is that the Internet itself is going to grow like a weed. In my Mass Psychology book I said that the Internet would create more millionaires than any other invention in history. That was written five years ago and I was actually too conservative. It's more billionaires in history. But, no, the Internet itself will grow like a weed. We're just in the first inning. My subscribers have cash now because we've sold out near highs and now we're waiting for my next buy signal.
StockHouse: What trigger are you looking for to recommend buying?
James Dines: I'm looking for the mass psychology. I'm looking for mass fear. In my Mass Psychology book you'll see the Dines Technology Oscillator and you can see as the decline develops it goes through the whole mass psychology of, "Well, I'll wait until I break even and sell" and the "I can't believe it's this low, I'm going to buy some more." Then finally at some point they capitulate and sell it. That's usually the bottom. I'm definitely going to be using mass psychology to predict it.
StockHouse: So, we're looking at major pain among a large base of retail investors.
James Dines: Oh, I think a lot of them have been hurt already. The biotech group has really left devastation at its wake. I can't believe it's not in the press yet. But, we follow a lot of these stocks and have for years. We started our charts in 1990 on biotech. They've had some phenomenal pressures here. I don't have any example to give you but there are plenty of 60-80% drops, like I said before, from their highs in February. I mean it's been phenomenal.
StockHouse: If what we're seeing right now is a return to value where investors start becoming concerned with fundamentals, it would seem that, in the short term at least, Internets have that kind of momentum-spurred valuations that would keep it top on the "avoid" list. Take a company like Amazon, for example, that continues to post losses with no signs of profitability. Would your buy signal only be triggered by value in those companies?
James Dines: That's a good question. The way I envision the Internet, there has been a storm of companies coming in which a lot of market beginners who have never seen a bear market are in. There are a lot of mutual fund managers that have stormed into the Internet and have no idea what they're really doing and these people are going to be wiped out, especially the ones on margin. And the momentum is really in the other direction. We don't have upward momentum anymore, now we have downward momentum.
But there are a whole lot of Internet stocks that I'm going to be holding no matter what and I call them The Four Horsemen of the Internet. And we got into them at very low prices and I really like the management. I think Amazon [AMZN] is one the most underestimated Internet companies in the world and I think Jeff Bezos is a genius and what he's putting together is the first department store of the future. This is the way department stores are going to look and people who worry about earnings don't grasp that what he's doing is gobbling up real estate such that now that anybody that wants to sell on Amazon would have to pay a huge amount of royalty fees, almost all of which would be profit and those losses could evaporate in a twinkling of an eye. And that was his plan all along. So that's one of the stocks still on The Dines Letter's recommended Internet list.
StockHouse: You would recommend Amazon at these levels though, or wait for it to pull back further?
James Dines: No, I wouldn't hesitate to have that in any portfolio. I'm not afraid if Amazon goes down, I would be ready to buy more as soon as it developed base formation.
StockHouse: What are some of the other names in the Internet group that you believe will emerge as market leaders after the fall-out?
"I think the next big boom that is going to burst on the scene is going to be palladium."
James Dines: Well, there are a number of wonderful companies. I'll tell you my Four Horsemen: America Online [AOL], which we recommended at $3 a share. The second one is Amazon, which we recommended at $4 ó; the third one is Yahoo [YHOO] which we recommended at $76, and the fourth one is CMGI [CMGI] which we recommended at $5 «. So we still have a huge profit on these and I'm content to hold these but if they come down too much they'll be great buys again.
CMGI is a magnificent company. David Wetherell runs it, he's a genius. He's putting together another new type of corporation. See a lot of people don't grasp that; they're so stuck in the 20th century. They're stuck in this paradigm of comparing the Internets with everything in the 20th century whereas in fact you've got to go back to the 15th century, the development of the Industrial Revolution or even of the opening up of the first libraries to each other after the Dark Ages. This is a multi-century development and that's why so many otherwise bright people completely missed this Internet boom. We were so lucky to have caught it right at the beginning and that's why they call me the "original Internet bug" is because I realized that this was going to change, was going to redefine every institution on earth, was the phrase I used at the beginning. And these corporations, these Four Horsemen are absolutely in a new class by themselves.
StockHouse: What are you buying right now?
James Dines: Well, I tend to get into booms very early and that's when the real bargains are available. I think the next big boom that is going to burst on the scene is going to be palladium. Here is a metal that very few people have ever heard of, primarily because it's never had a bull market before. Most people have no idea what it's used for or which companies produce it. It's actually used to make the catalytic converter of automotive vehicles and you cannot build a car without it, especially as vehicle emission regulations worldwide become stricter and stricter and the new sports utility vehicles use even more palladium, the demand for it is phenomenal and growing.
I first turned bullish on palladium itself at $150 per ounce five years ago. It recently got above $800 an ounce and it's the only commodity in the world that got that kind of a bull run and it remains completely unnoticed and that again is a typical display of mass psychology. The public simply does not see new bull markets when they begin and that always means that we're in the early stages of it.
And the supply situation on palladium is terrible, I mean, Russia produces 65% of the world supply with the remainder coming out of South Africa but it's all by-product. The Russian supply is a by-product supply of nickel and the South African supply is a by-product of gold and platinum. So, the world is approximately two million ounces short a year to fill demand and that has been filled out of Russian stockpiles. Nobody knows how big these stockpiles are, how long they'll last, but rumors are that they're running out and if they do, I wouldn't be surprised to see palladium jump to jaw dropping levels, actually, because the automobile makers have to have it. And if they have to pay an extra $50 a car for palladium, they'll do it and pass the cost on to the consumer.
There is going to be a tremendous rise in the price of the metal and you're going to see a boom in palladium stocks the likes of which will certainly echo and may even match the rise in the Internet group.
StockHouse: What are one or two names that are best leveraged to an increase in palladium prices?
James Dines: We are now publishing a major report on palladium stocks and again, we're so early in the boom that very few people know who they we are. I can't give you my whole list because that wouldn't be fair to my subscribers, but I will say that the blue chip in this area is going to be Stillwater Mining [SWC] on the American Stock Exchange. We first recommended that at $11 « and it is now only up to $40, which I don't think, even begins to represent the true value of the product. They've got great ore deposits in Montana and it's one of the only two pure palladium producers in the Americas. The palladium report we're now coming out with covers nine, ten, Canadian palladium stocks. One of them is an actual producer, the rest are low priced penny stocks in Canada. There is a huge boom.
StockHouse: So there are many valuable penny palladiums in Canada right now?
James Dines: There are. It's a penny palladium boomlet! And in fact there is one of them that I bought at 40 cents last summer and is now up to $4. So there is a tremendous bull market and, you know, making 10 times your money on a palladium stock is just as good as making 10 times on an Internet stock. There is a tremendous opportunity there and we're still in the early stages of a palladium boom. You'll be hearing a lot more about that in the next couple of years, I suspect.
StockHouse: Have you heard of Pacific North West Capital [V.PFN]? Is that one of them?
James Dines: That is one. That's the one I bought.
StockHouse: The "Dines Wolf Pack Theory," outlined in your book, basically states that stocks within the same group tend to move together. Are we looking at a rebound for all the other metals then?
"We are right in a down cycle in the technology area and that has yet to spill its guts and splatter on the sidewalk."
James Dines: I'm impressed that you've been studying my work. Yes, that was also in the Mass Psychology book. Yes, the Wolf Pack Theory works because companies in the same industries tend to be regulated by the same economic factors and the way they use that is to buy laggards in a group that is moving together. And the metals, if you'll note, have been stronger for some time although we have been getting a weakening in the last few weeks here in copper and a few others. Generally that's true, but in this particular case palladium is a special metal.
First of all, it's a precious metal so normally it would tend to move with gold, silver, platinum, rhodium, osmium, etc. However, this is an industrial use and there's a very special circumstance. I've never seen anything like this before. The Russians really control the market with 65% of the production. All they've got to do is stop releasing reserves and the price is going straight up. And that's because there simply is not enough.
Now, this has begun a mad scramble in the mining industry and of course, the Canadians are in the forefront of it. Most mining people around the world are still asleep on the subject but the Canadian, especially the Sudbury area and the Thunder Bay area, I think there are some very good selections in there and I cover that in my report. The answer is that normally the metals tend to move together, they've been getting sloppy lately, but palladium is absolutely unique and there is just nothing else like it in the world.
StockHouse: What is your portfolio makeup like right now, what other sectors do you like?
James Dines: We have shifted considerably out of the Internet space as more and more people have gotten bullish on it and gone crazy on it. And we've shifted on the palladium and cash with the [10%] hedge in gold, so my portfolios are pretty conservative right now. Although we are going to be recommending something in the organic food division in the next Dines Letter that will be coming out next week because I feel that more and more people are becoming aware of the dangers of herbicides, fungicides and pesticides. So, there are stocks that I would recommend right now. I'm sorry that I can't give you the name of that, but I've got to give it to my readers.
StockHouse: When you do issue the buy signal on Internets again, do you expect them to have the same sort of momentum that we have witnessed? Or have we seen the end of those astronomical stock performances?
James Dines: Oh, I think there will be more performance because now people are aware of them. They have seen how they can move and I think the next bull market by the Internets are going to go sky high and probably above their previous highs. So, I'm looking for a tremendous bull market in the Internet. It's not over yet, the Internet, we're in the first inning. In all of China there are only an estimated 10 million people on the Internet and we've got over a billion more to go. India is just coming on stream; Africa is yet to be heard from; South America is beginning to get into it. No, the Internet is going to grow like a weed but the stocks themselves are a function not just of that growth but also of mass psychology. And that, of course, has its cycles. We are right in a down cycle in the technology area and that has yet to spill its guts and splatter on the sidewalk.
StockHouse: It does seem to have the ability to go much, much deeper if the average retail investor hasn't clued into the extent of this downturn, as you say.
James Dines: That's correct. And there is another very important factor and that is margin. I am bitterly against buying on margin. And that is because that is the only way they can force you to sell. Usually beginners do it and get tempted by it and I think a lot of them have purchased stocks on margin with money that was destined to pay their taxes on April 15th in the States. I think they're in for a real problem and, of course, forced liquidation forces you out of these wonderful Internet companies at prices that are way too low. But it does give us the opportunity to buy at those prices. And that's what I'm really waiting for, a gusher of margin liquidation and that will give us the downward momentum that will finally create the next buy cycle for us.
StockHouse: We are hearing that there is going to be large amounts of consolidation among technology companies. One analyst has said that only 25% of companies will survive. Do you share that sentiment?
James Dines: I don't know the exact number but I think the prediction is absolutely accurate. You're already seeing it with a company like Cisco [CSCO]. People want one-stop solutions. When I was a kid you used to have grocery stores in this specialty and that specialty and then, of course, the supermarkets came into being and they sold all kinds of things. So that's what's going to be happening here. I think Cisco grasps that. That's another brilliant management. They grasp it and every time they see something that's needed they just acquire it and I think you're going to see a huge number of acquisitions and consolidations. That was one of my predictions in my forecast issue and another one is that the dinosaurs are finally going to wake up and start acquiring some of these Internet companies especially as they get beat down. Because they've simply missed the boat entirely and they don't have the time to develop themselves and they have plenty of money. They're stupid and rich and the way that'll get into the Internet is simply acquire it. But yes, there will be huge numbers consolidations. There is certainly not enough room for all these companies.
StockHouse: What's your expectation for the timeframe of this blue chip rally we're seeing? Will it continue until we see the high-tech, the Internets come back, and the flow of cash moves between the two again?
James Dines: That's a tough question. I don't really work that way. I don't know the future, I wait to see how things evolve and develop. I've got a target for the Dow to make its top sometime before this summer and it should be followed by a fairly nasty decline.
StockHouse: What blue chips do you like right now?
James Dines: I think there is a whole range of them. I think GM [GM] is a good one and they've got a really nice chart. General Electric [GE] is another good one, very bullish up trend. I think Citigroup [C] and Chase Manhattan [CMB] I think is a good one. There are a lot of real good blue chips out there and powerful upturns.
StockHouse: Thank you very much for your time Mr. Dines.>> |
