Forbes:
Adviser Q&A
>>The next leg of the gold bull should be spectacular. Our buy point on the XAU index is 78.90; once it reaches that, I'll go long. But we're not anywhere close to that now, and I expect that number to be adjusted down. Sometime in the fall we should see the next leg unfold.<<
Prospects Good For Gold
Missy Sullivan, 08.02.02, 3:00 PM ET
Talk about a crash course in crashing markets. Curtis Hesler earned his broker's license in 1973, the very day the stock market peaked before an ugly two-year slide. Now editor of Professional Timing Service, the Missoula, Mont., native said he appreciates the lessons of that bearish period--specifically, how to navigate the commodities markets when stocks go south. Apparently they were lessons well learned. According to the Hulbert Financial Digest, Hesler's timing portfolios, which trade Rydex funds and a limited number of equities, have gained an average of 15.9% year to date, while the Wilshire has lost 19.53%. His biggest success of the year? His Rydex Gold portfolio, which shot up 41.4%. Formerly a broker for Piper Jaffray and a business professor at the University of Montana, Hesler took over the editing of Professional Timing Service in 1984 from Larry Williams, who had originated the letter in the 1960s.
Forbes: This has been a horrible year for timers. The stock market has been oscillating so unpredictably. Have you been able to benefit from the rise and falls?
Hesler: The only significant signals have been on the short side. The only real buy-side action we've had has been in the metals.
How do your timing systems work?
The details are proprietary, but I can say that our timing models are based on price. We look for broad market movements. We started in the 1980s timing when to get in and out of mutual funds. When the Rydex funds came along, we focused on them since they were specifically aimed at market timers: no loads, no trading restrictions--plus, they were very predictable and easy to track. More recently I developed a similar system called Nasdaq Fast Tracker, for the Nasdaq 100. I use it to time trading in and out of the Rydex OTC fund.
But many of our readers told us that they want to trade individual stocks, hence our new Hyperion model. Again, it's an intermediate-term timing model based on price--not a day-trading kind of model. When it catches a move, it will stay with an equity for months. The most interesting examples I can point to this year are the metals stocks. Companies like Newmont Mining, Gold Fields, Agnico Eagle, Apex Silver and Pan American Silver are among the few that have had buy signals and done well during the first six months of this year. I particularly like Gold Fields and Agnico. And while they're all currently on sell signals, when the buy signal hits, it will be time to go long.
You're predicting in your recent letter that the dollar will get bailed out of its current slump, causing gold to weaken. Is this a dip to buy on? Do you see another gold high ahead?
Absolutely. This is definitely a dip to buy on. We bought in late December and sold June 7. Our sell point was extraordinarily good, netting us over 41%. And since we sold, the Philadelphia Gold and Silver Index [the XAU] has fallen from 78.75 to below 60.
Now, if it follows the historical model, it needs to fall back even further before it takes off again. Back in the 1970s, gold followed an almost identical path, and there was a pullback of four months. I don't think we'll pull back for quite that long, so I'm trying to make a bullish case that this is a pullback to buy into. The next leg of the gold bull should be spectacular. Our buy point on the XAU index is 78.90; once it reaches that, I'll go long. But we're not anywhere close to that now, and I expect that number to be adjusted down. Sometime in the fall we should see the next leg unfold.
You have a signal called the Annual Asset Allocation Model. What are your current allocation recommendations?
We do our allocations once a year, at the end of October, reassessing which asset class offers the best risk/reward. We chose October because it is often a time of bear market lows, which makes it a good time to start buying. This model recommends just one class of assets: either stocks, bonds or what we call inflation mode, which marks a shift to tangible assets like commodities or real estate. The signal is all or nothing.
All or nothing? What about diversification?
We do trade lightly in other assets through the year, but this model really guides our outlook. I don't buy into the theory that we should have half our money in stocks and half in bonds. Because they can both go down. Hey, look at the theory that falling interest rates are bullish for the stock market--that's bunk. The reality is what we've seen in the last two years: falling interest rates coupled with a bear market on Wall Street. I like to put all my assets in one basket.
So what happened last October?
The signal went from bonds, where it had been for the last few years, to inflation mode.
You are predicting a nice three-month midterm election rally this fall. Do you think your asset allocation model might switch to stocks come October?
Wouldn't that be interesting? But I don't think so. Once these things fall into place, once tangibles become attractive over other asset classes, they tend to hold for quite a while. But that doesn't mean that stocks won't become relatively attractive, simply because they're still overvalued relative to bonds and tangibles.
Don't these asset allocation signals reflect a specific point in time? If you think this rally is only destined to last for a few months, how can the signal be valid for an entire year?
Bear markets tend to last longer and stay in place for a period of time. The most likely time for the bear market to end, based on historical data, would be 2006. It could potentially be another four years before stocks become attractive. P/E multiples are still relatively high; we're looking at attacks on earning on all fronts. Those multiples are going to come down. Just as we overshoot on the upside, we also tend to undershoot on the downside.
But with tangibles, just as with equities, you need to follow some kind of timing model. You can't just buy and hold. That's why I just put the Morgan Stanley REIT Index on my Hyperion model. Because while I'm bullish on tangibles, I'm really nervous on real estate. If there's a real estate bubble and it pops, I want a tool to monitor that.
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