Profit Perspectives 2002
Terror and Profits: A Brief Retrospective

by J. Christoph Amberger

Osama bin Laden. Harry Potter.

Chances are that these two names will be the only things people remember ten years from now when asked what happened in 2001.

To be sure, I don’t know what could possibly trump watching the World Trade Center towers collapse on live television… as the city around you is locked down, airplanes are grounded, and everyone at the office is listening for the tell-tale drone of yet another rogue aircraft turning itself into a manned missile…

The year 2001 sure kicked off the new millennium with a bang. It marked out the West’s vulnerabilities in blood and in tears. It gave the coup de grâce to one of the longest-running economic booms in U.S. history. It destroyed untold billions in investor equity. And popped what was left of the Internet bubble.

Yet nothing that happened was unpredictable… or unpredicted, as a matter of fact. If you happen to be a long-time reader of Taipan, there were some hair-raising instances of déjà vu, even as the unimaginable became reality.

Like an article by Taipan’s "World Investor," Christian DeHaemer. Back in the February 2001 issue of Taipan, he wrote:

In retrospect, this reads like a blueprint for the future: According to news reports in the immediate aftermath of the September 11 attacks, it appears that al Qaeda and its henchmen did indeed generate substantial gains off their crimes… by shorting airlines and reinsurers as the international markets collapsed.

All major insurers took severe hits, shedding between 10% and 20% in a matter of hours.

European insurers across the board were dumped on the news, with Swiss Re, off 17%, leading the pan-European FTSE Eurotop 100, and UK-based bank Standard Chartered (UK:STAN) shedding 15.3%.

Companies with large U.S. operations such as Dutch insurance group ING Groep (NL:30356, US:ING) and Zurich Financial (UK:ZURN) registered double-digit losses. UK insurers CGNU (UK:CGNU) and Royal Sun & Alliance (UK:RSA) were off 9.9% and 15.2%, respectively. Germany’s Allianz (DE:840400, US:AZ) dropped 13.7%, and Munich Re (DE:843000) plunged 15.5%.

Hog heaven for criminals with short positions based on advance knowledge of the impending attacks…

Crystal ball unclouded

But even more eerily… on September 10, just a day before the attack, I asked Adam Lass, contributing editor to Taipan and the brains behind the WaveStrength™ predictive system that underlies our Options Underground and Q-Wave services, what was in store for the NASDAQ.

I included his response in the Taipan Group’s 247profits e-Dispatch, the daily email letter I write for our Taipan members. It was so uncannily (if coincidentally) accurate that we had the FBI showing up at our editorial headquarters in November:

The very next day, the airplanes slammed into the twin towers. Ambulances did indeed line up on Wall Street. People were indeed jumping from the burning buildings. And the U.S. markets halted trading. When they reopened on September 17, the sharp downward moves were indeed almost as gruesome as what we had witnessed on live television the Tuesday before…

We at Taipan are a hard-boiled crew. You’d have a hard finding an instance when we didn’t call a spade a spade. But to be quite frank: the catastrophe in New York City–with the equally horrific sideshows in Washington and Pennsylvania, any one of which would have qualified as a major tragedy all by itself on any other day!–put us in a moral dilemma.

Could we, as commercial publishers of investment information, presume to write anything that would do full justice to the horror? Or should I send my staff home, leaving things unsaid, and bowing out of the potential embarrassment of saying something grossly inappropriate?

I decided to follow what I consider my duty to you. Taipan, as well as our daily email missive, the Taipan Group’s 247profits e-Dispatch, are all about giving perspective. About giving guidance.

And what good is a guide if he excuses himself when the going gets tough?

Immediate aftermath

The domestic markets had just sprung to life when the scum of humanity killed thousands of hard-working Americans and laid waste to Manhattan that Tuesday morning… and only the quick action of the SEC and the markets’ astute management kept the horror on the ground from instantly metastasizing into investors’ portfolios.

The European markets were not so lucky. When the first airplane struck, the markets were in full swing. Indices fell like lead… oil futures leapt… and the British pound sterling hit six-month highs in extremely volatile trading.

The Euro bourses gave us a preview of what we could expect if the U.S. markets reopened before investors had a chance to cool off.

Frankfurt’s DAX 30 reversed a 2% morning gain to free-fall as much as 11%, finishing down 8.4% at 4,267.9. The Neuer Markt, Germany’s version of the NASDAQ, dropped 7.8% to 837.5 in late trading. In Paris, the CAC 40 closed down 7.4%… while London’s FTSE 100 closed down 5.7.

Trading was halted in Argentina, Chile and Brazil–with the latter losing nearly 9% in a single day.

In the e-Dispatch of September 11, I wrote:

Overall, we believed that the U.S. markets would feel the immediate effect of the crisis on the day they reopened. On September 13, we wrote:

Pragmatic resolve

In his Nicomachean Ethics, Aristotle defines the moral man as the man of action. (And while Aristotle himself might be inclined to argue, we extend that definition to our female members as well.)

Taking action in this case meant doing what’s best for our way of life. Paralysis, grief, mourning are appropriate and understandable responses. But they typically enforce passivity.

Like thousands of indomitable individuals and businesses all across the free world, the Taipan Group’s editors decided to make "Open for Business" the motto of the hour. This was not about making a buck off other people’s misery. It was about getting back to the basics of a free market society.

Within three weeks after September 11, Taipans all over the world had raised close to US$35,000 in disaster relief donations for the Red Cross. We added another US$5,000 out of our own pockets, and were able to hand over a US$40,000 check to a Baltimore representative of the Red Cross on October 11, 2001, at the headquarters of our parent company, Agora Inc.

I couldn’t help stepping onto my little soapbox for that occasion:

Charity starts in the home

So much for speeches.

The biggest challenge to our team of editors was not coming up with potentially profitable investment ideas. It was to reconcile our ostensibly "vulgar" focus on making money with the somber feeling of mourning and shock that had cast a pall over the minds of people all over the world.

But, before the markets reopened on Monday, September 17, we had given the readers of the Taipan Group’s 247profits e-Dispatch a shopping list of stocks to buy as the markets tumbled. Almost all of them turned substantial profits for Taipans who had the discipline to go against their hearts and obey the dictates of reason.

Here’s the tally:

Blood-and-guts investing

Some people collect guns. Some go for cars. Some for wives. Everyone has a hobby. I guess you could call investing a hobby, too. But if you approach it like a hobby, I guarantee you’ll lose your shirt.

Between 1993 and 1999, the Internet bubble lured more amateur investors into the market than ever before. Most got hooked when the markets soared. And almost all of them had to hand over every penny of their gains… and then some… when the bubble imploded in the early part of 2000.

So why do some win where most others lose?

Because the biggest market losers have no idea how the investment world really works. They’re still trapped in the nice, cozy idea that markets are about logic… rationality… analysis.

But you and I have known all along what the market has been telling us throughout the year 2001:

The investment world doesn’t follow formulas. It is not pretty, moral, compassionate, or forgiving.

And it is not for amateurs. In fact, if investing were easy, it wouldn’t be fun. No challenge. No excitement. And no big profits.

The fact is that real investment–the kind that yields profits worth mentioning–can be as unpredictable as a day on the battlefield. The way General Patton saw it, "War is won by blood and guts alone."

The way we at Taipan see it, Patton would have made a shrewd investor. Because investing to win is all about guts. Competitiveness. The timing and nerve to go for the jugular. It’s also about hunger… the hunger to be rich and beat all the other bastards out there–because if you don’t, they’ll beat you first!

If looking at wholesale slaughter makes you nervous–and I mean the figurative bloodbath we have been witnessing in the markets since the Internet bubble popped back in 2000–maybe you shouldn’t be in the market at all right now.

Successful investing isn’t always pretty. If you win and you make money, it’s because the other guy lost. And if he wins, you lose. The rules change fast. But the plunder–the spoils of the investing war–can be huge…

Most investors are looking at the money they lost this past year, wondering how long it’s going to take to make it all back.

That’s a tall order.

Consider that a 25% loser requires a 33% gainer just to get back to even. And a 50% loss demands you double your money.

But the beauty of blood-and-guts investing is that you can make gains like this with relative ease… by putting your money into the right kind of stocks at the right time.

Remember 10 years ago, when the Japanese bought Rockefeller Center? Remember the conservative U.S. talking heads yakking about Japanese revenge, a second Pearl Harbor?

Guess what? Tokyo stocks set fresh 17-year lows all through September–even before the terror attacks took their toll on the Nikkei Dow… wiping out all gains made since 1984!

In London on September 10, the FTSE-100 index of the most important companies in the UK dipped as low as 4,500–a far cry from its high of nearly 7,000 in 1999, and well down from its 5,070 value the previous Friday.

British investment guru Tony Dye was even quoted as saying that "shares may not keep pace with inflation for the next five years."

And yet, catastrophic events on a smaller and larger scale create the opportunity for disciplined investors to profit in the face of adversity.

History in the making

But the year 2001 was not only a source of terror and cathartic reevaluation.

We also watched other long-standing predictions playing out. In particular, the slow trickle of details about Osama bin Laden’s ascent to political and military power in Afghanistan reminded me of a phone call I received in early 1997.

Now, being the publisher of Taipan, I do get a lot of phone calls. Vendors, advertisers, telemarketers, members, you name it. But that one particular call sticks in my memory... as a portent of things to come.

I first wrote to you about this in Taipan’s Forecast Issue for the year 2000: my feeling that it might not be long before a whole country could be "bought." It sounded far-fetched just two years ago…

How to buy a country

Now, this is just an imaginary scenario…we’re not advocating dictatorships of any kind–even economic ones, even if they’re beneficial. This scenario is only to point out what may happen in the near future…

Let’s take Namibia. Not only is it among the poorest nations in the world, but it’s also being crippled by AIDS. With 20% to 26% of all people aged 15-49 infected, AIDS is eating away at the pool of skilled workers and managers, and the economy.

Population: 1.7 million.

Size: 318,580 square miles.

Resources: Substantial mineral deposits, including diamonds, copper, gold, zinc, lead, and uranium. Fish and fish products also account for one fourth of all export earnings.

GDP: For 1997–latest figures available–US$3.28 billion.

Okay–let’s look at that. The country has wealth, and a literacy rate of 62% of the adult population. But the country is going to be wiped out by AIDS. A quarter of the adults could die, starting in the next few years.

So let’s say the GDP stays at just over US$3 billion. What would it take to literally buy everything in the country? Let’s see. Bill Gates alone has about US$90 billion. He could probably do it himself.

But let’s say some entrepreneur gets the idea he wants to buy a country. So he posts a notice on an Internet financial bulletin board:

"Partners wanted: buying African country."

Interested investors begin to reply, and some seasoned financial managers. Within 72 hours a fund is registered, word spreads, and within a few weeks eager-beaver investors have deposited US$6 billion. Every publicly traded company is bought out and all available real estate is purchased. Control is secured, and soon after, the fund starts actively buying unlisted properties, contacting owners with offers. Same with businesses.

Is this possible? Who knows. Could it happen? Who knows.

Osama bin Laden did us one better. Substituting religious fanaticism for cash, he targeted an even poorer country, Afghanistan. He made himself indispensable as enforcer and military advisor until he de facto commanded the most aggressive fighting force of the Taliban.

Which only goes to show: The future is going to be full of surprises. Life is going to change more than we can possibly imagine right now.

The terrorist attacks not only accelerated the United States’ descent into recession. Their secondary effects will also have tremendous consequences for developing nations.

Consider, for a moment, the huge outpouring of charitable giving in the immediate aftermath. While the Red Cross and the Twin Towers Fund were awash in cash earmarked for helping the immediate victims of the attack, other charities were reminded of H. Ross Perot’s catch phrase about "the giant sucking sound." Virtually overnight, charity giving focused exclusively on the disaster relief effort.

This was the case all over the world. Prior to September 11, for example, donations to the new multilateral Global Fund for AIDS, Tuberculosis and Malaria averaged about US$1.5 billion per quarter. In the months after the attacks, donations were said to have totaled a mere US$3,000.

Meanwhile, an estimated 40 million people all over the world are believed to have contracted the HIV virus. In Africa alone, 28 million people are infected, and 2.3 million Africans died of HIV-related afflictions in 2001–with more than 3 million people expected to die of the disease worldwide. That’s just in one year.

The epidemic is growing faster in Eastern Europe–and especially in the Russian Federation–than anywhere else in the world. Ukraine, in particular, reports sobering figures, with more than 1% of the population infected.

But given its huge population, Asia remains the region where the spread of the disease could have the most devastating effect. In China, where the government recently acknowledged an AIDS problem for the first time, about 600,000 people were living with the disease last year. The number is expected to top 1 million by the end of 2001.

Plagues and people

When populations change drastically, economies change with them. AIDS is rapidly becoming an economic factor. (We have covered it in detail before.) And trends are accelerating.

In some African nations, as many as 25% of all adults may be lost in the next few years… and the death toll is rising. HIV infection was up 10% in one year from 1997 to 1998.

And have you heard that AIDS has been "cured?" Wrong.

While there has been some success in the U.S. with the drug "cocktails" used to treat AIDS, the Centers for Disease Control recently reported that the rate of decline of deaths is dropping. People still aren’t getting tested or treated, and people who are treated are having trouble with the complicated dosages. Drug-resistant strains of the virus are emerging.

There is no cure in the foreseeable future.

China and India–home to over 2 billion people–are now at serious risk. A recent survey of randomly selected households in rural Tamil Nadu in India found that 2.1% of the adult population living in the countryside had HIV. It’s not just in the "sin centers" of the cities… the epidemic will soon be out of control in many places. Rates are rising in Eastern Europe and Central Asia as well. In the Russian Federation, where syphilis rates are up 2,600% in a decade, AIDS will follow close behind.

In Africa, the illness and death of large segments of the working population will cripple economic output. A preview of things to come: in Tanzania and Zambia, large companies have reported that AIDS-related illnesses and deaths cost more than their total profits for the year.

Crisis and opportunity

At Taipan, we are constantly on the lookout for profit opportunities. When we first started writing about the global economic effects of large-scale AIDS infection, the subject was considered marginal.

But Taipan would not be Taipan if we didn’t find a way to make profitable investments in companies that are set to provide relief to the afflicted… and handsome returns to the pockets of investors.

This is why, early in 2001, we dispatched Taipan’s "World Investor" Chris DeHaemer to India. His mission: check out Cipla, an Indian pharma company producing–among other things–low-cost anti-AIDS cocktails for domestic use and export to cash-strapped Third World countries.

Cost is an object

A typical multi-drug treatment or "cocktail" for use as an HIV inhibitor costs US$10,000 to US$15,000 a year in the United States. As one would expect, the governments of most countries with major HIV problems–many of whose citizens earn less than a dollar a day–are perturbed by this. They blame large, transnational drug companies for making a profit on the corpses of their children.

And who can blame them?

But Cipla Ltd., the primary maker of these drugs, can sell AIDS medicines for only US$350 a year. That blows away big pharma’s price!

Cipla can do this because of a unique Indian patent law passed in 1972 that removed monopolies in the drug industry. (It should be noted that recent WHO treaties would rescind this law in 2005.)

Even after big pharma’s AIDS cocktail discount–with a year’s supply selling for as low as US$1,000–the drugs are still three times the average annual salary of a country like Senegal, which has 290 million citizens.

Cipla has experience in India, and in Brazil and Thailand has shown that most of these critical drugs can be produced at costs that put them realistically within the reach of the resource-poor. Cipla is selling these drugs to Doctors Without Borders for US$350 per patient per year. And still this company has a double-digit profit margin.

Our favorite pharma fakir

Cipla is India’s second largest pharmaceutical company. It has successfully produced a plethora of generic drugs at a cheaper price for the domestic market, while building an expanding export market. (Among those drugs is the cheap generic equivalent of Cipro, Bayer AG’s blockbuster antibiotic drug that U.S. officials handed out like Halloween candy in the aftermath of the October anthrax scare.)

They have manufacturing sites all over India, and are approved by the FDA in the U.S. and by like-minded bureaucracies in the U.K., Australia, and Europe. The company exports 20% of its output all around the world–and that percentage is expected to grow.

In 2001, Taipan readers were able to make 24% profits on this recommendation. We’re still waiting for a drop in price sufficiently large to provide a second entry point at 1,000 rupees. Thus far, the stock has been too stable for that. (But we provide a daily update on the stock in the Taipan Group’s 247profits e-Dispatch!)

And that’s just the beginning. More and more… faster and faster… the world will divide into two very different parts–the haves and the have-nots. Nations will collapse as small, advanced regions seek to break away from large, backward areas that drag them down.

Success demands new rules and attitudes today. The old ways are dead and gone… buried in the elephant graveyards of outmoded methods of working, investing, and thinking.

There are new ways of getting information. Gateways to the knowledge you’ll need to prosper. This is the promise of the future. And this is what you’ll read about in the pages that follow.

What we say is sometimes unpopular. But honestly: We don’t care. We’re not here to please anyone. And we particularly don’t care about being politically correct. We care about facts. We care about opportunities.

And we care about our future.

Now, let us tell you a little more about what we see happening in the world–particularly in the world of investing–and why it’s going to be more important than ever to have the very best information you can get.

Outlook for the U.S. markets

"May you live in interesting times!"

This ancient Chinese curse inevitably comes to mind when trying to make sense of the events of the year 2001. Can times get any more interesting?

It’s too early to tell: As I write, we still have three weeks to go before the eternal Dick Clark and his crystal ball once again descend upon Times Square.

A quick view of the 7 best and 7 worst performing industries of 2001 may give you a good idea of what lies ahead for us:

After a month of therapeutic penny pinching, American consumers were on the prowl again in October and November, doing what they do best… spending money imagined and real. The Commerce Department announced that they boosted retail sales in October by 7.1%–the biggest one-month gain ever recorded.

And it wasn’t just lapel pins and Chinese-made Stars and Stripes: much of the strength derived from a record 26.4% increase in car sales, boosted by zero-percent financing.

And what goes better with that new car smell than a new Armani suit–notwithstanding you may no longer be employed when you receive your credit card statement. Sales at clothing stores increased by 6.9%, erasing a 5.9% drop in September.

Weak constitution

Despite the outbreak of pent-up compulsive accumulation, however, the U.S. economy remains weak after shrinking 0.4% in the third quarter.

Yet the NASDAQ merrily hopped, skipped and jumped over the grim pre-terror marker of September 10 without as much as a look back.

Indeed, you feel tempted to challenge fate: If this is recession, bring on the depression. If anything, it amazes me how cheap everything still is. One recent morning on my way into work, I was stopped next to a city bus. A sticker advised me that the fare was US$1.35. That’s pretty darn good. Last time I took a bus it cost US$1.15… that must have been in 1991.

And things are bound to get cheaper. Car financing, as I said, is now at 0% interest. (How long can it be until they pay you to take a clunker off their hands?) But the most deflationary factor is the adoption of China into the dysfunctional family of the World Trade Organization.

Because China ain’t going to be competing on quality. It’s going to churn out cheap computers, cheap plastic gimmicks, cheap cars, and cheap refrigerators for the next 5-10 years.

In Canada, consumer prices are falling at a 6% annual rate. In Europe, economic growth is barely positive and consumers are cutting back.

Meanwhile, inflation in the Euro Zone also fell in November, to an annual rate of 2.1%. That’s within spitting distance of the European Central Bank’s 2.0% target. Which means that the ECB now has room for cutting European interest rates.

ECB officials have said repeatedly in recent weeks that euro-zone inflation would fall below 2% next year.

Cheaper and cheaper…

Inflation seems to be a problem of the past. But increasingly, the word deflation is being bandied about by people who should know better.

As Taipan’s investment philosophy is result oriented–we really don’t care if we’re in a bull or bear market, or inflation, stagflation, or deflation, as long as we’re making money!–I asked Bill Bonner for his insight on the matter.

Here’s his take on it:

Death of value?

I think what we’re witnessing at this point on the curve is a partial departure of the very concept of "value" from vast layers of the market.

This may indeed be the most long-lasting legacy of the 1990s–a decade that discounted long-term commitment and profit in favor of Beanie Babies, click-throughs and "eyeballs."

I remember speaking to college kids whose ambition was to work hard for five years, and then retire as dot-com multimillionaires to devote the rest of their lives to snowboarding and saving the rainforest. (In what order I never understood…)

Then there were 21-year-old internet "marketers" who had never heard the term return-on-investment… and accordingly were blowing through multimillion dollar advertising budgets faster than Marlon Brando absorbing a ham hock… without a hope of achieving even 10% of breakeven.

It didn’t matter. Because the concept of profit didn’t matter. And after 5 years of being conditioned to forget about profits… will their expected absence from corporate balance sheets matter to investors anymore?

One of the greatest erosions in perceived value actually occurred with the proliferation of auction sites and consumer search vehicles… especially in areas like antiques and collectibles, where scarcity (low, scattered, hard-to-pinpoint supply) and high demand had always made for high perceived value.

Say you’re looking for a rare 1st-edition book. In the good old days, you’d have to painstakingly build a network of dealers and auction houses that in good, old-fashioned capitalist self-servingness would leverage your buying interest against that of the two or three other people on the face of the planet who were interested in the same title. And why not? You were willing to pay almost any price.

Today, you type in a title in a book search database, and frequently end up with a dozen copies priced competitively by dealers located from Minnesota to Milan, from Alabama to Auckland. And none of them will move.

Because demand is still made up of just you and your two or three rival collectors. One of them is dead. The other broke. And you already bought the book a year ago…

Hidden strength

It is no secret that American consumers have saddled themselves with debt not seen in nearly 15 years. And they’re falling behind in their payments. Last month, Standard & Poor’s estimated that over 5% of credit card holders are now late in making their card payments–up 1.4% from a year earlier.

And yet, personal spending rose 2.9% in October–for the biggest one-month increase ever!

Delinquency rates on mortgage loans, especially those high-risk loans backed by the Federal Housing Administration, were 11.3% for the third quarter, up 0.57% from the second quarter, while the VA loan rate for delinquencies rose 0.48% to 8.11%.

In the face of this compound adversity, the most surprising phenomenon is the overall resilience of the markets. Since they cratered on September 21, the Dow is up 11% and the NASDAQ 16%.

Bill Bonner commented:

"Over the long run, the stock market cannot stray too far from the underlying economy. Investors are paying for earnings, after all, and earnings go up or down along with everything else."

It makes perfect sense… at least in that perfect world contrarians dream of, where the market rewards merit based on earnings.

But like life, the markets are blatantly unfair. In fact, they’re unfair most of the time. Because a growing undercurrent in the markets is not driven by value, merit, or earnings.

It’s driven by greed and speculation… the mercenary desire for unearned riches. Riches that do not materialize from solid companies paying 1% dividends on good earnings. Riches that materialize virtually out of nothing, with little merit other than being right about anticipating what the mass of speculators will anticipate…

Unemployment

One culminating point for such short-term speculation is the monthly release of unemployment data. We believe that unemployment in the U.S. will end up somewhere in the vicinity of 7% once the Christmas business of 2001 wraps up and businesses resume cutting costs.

Unemployment, in our opinion, is an ambiguous indicator at best. Because it has emotional undertones.

But every employer, at some point in his or her life, arrives at the insight that laying off employees isn’t the worst thing that can happen to a company. Sure, it is painful and unpleasant. But in most cases, you realize within the first week that most of the work gets done without disruption… that productivity rises… and that it is easier to achieve profitability once again…

The same experience is permeating the U.S. economy right now: productivity–the amount of output per hour of work–increased at an annual rate of 2.7% in the July-September quarter. That’s up from a 2.2% growth rate in the second quarter, the Labor Department reported.

Productivity rose as businesses cut workers’ hours by 3.6%, the largest drop in hours since the first quarter of 1991. Output declined at a rate of 1%, the biggest decrease since the first quarter of 1993.

Recession is here to stay

The Federal Reserve reports that output at the nation’s factories, utilities and mines fell by 1.1% in October… and that’s on top of a big 1% decline in September.

The ongoing 13-month stretch of declining activity marks the longest period of falling industrial output since 1932. And if you ask me: I don’t see an end to it!

Operating capacity sank to 74.8% in October, the lowest level since June 1983. The overall economy shrank by 0.4% in the third quarter, and we expect an even bigger decline in the current quarter.

In other words: The recession is here. It is real. And spending on Sony Playstations over Christmas can only do so much to reverse it.

After avoiding the "R-word" for nearly a year, it’s now official. Not only that: the National Bureau of Economic Research announced that the United States entered the recession IN MARCH–after an uninterrupted expansion lasting exactly 10 years.

A recession is commonly defined as at least two consecutive quarters of declining GDP. Now, according to the government, the U.S. GDP shrank at an annual rate of 0.4% in the July-September quarter. (Estimates for the current quarter put shrinkage at 1.5%–and there are expectations for negative activity in the first quarter of 2002.)

By pegging the beginnings of the recession to March 2001, the numbers crunchers are actually giving the markets breathing space: unless the current recession runs far deeper and far longer than its 1991 predecessor, we already have 2 full quarters under our belt. And that means we might be more than halfway through! And the turnaround might be just three months away.

"Might," of course, remains the operative word!

Overall, we remain suspicious. And we’re in good company with that attitude. The International Monetary Fund (IMF) just updated its economic forecast, significantly lowering its estimate for growth in the United States next year.

But even they still expect an economic rebound in the U.S. economy. The IMF also dramatically cut its forecast for Japan, the world’s second-largest economy, predicting it would contract by 1.3% following the 0.9% drop this year.

With reduced growth prospects in the world’s two biggest economies, the IMF pegged its expectations for global growth at 2.4% for 2001 and 2002.

Mood magic

For the time being, the market appears to have absorbed all the bad news there is. Unfortunately, the economy hasn’t quite followed suit.

Reportedly, there is a "strong consensus" among scholars that stock market returns over the next decade will be below average, maybe only about 4% above the rate of inflation. This kind of "real" after-inflation return would be well below the historical 7% and just a meager percentage point above the 3% you get now from government-issued, inflation-protected securities.

Despite all the negativity, I believe there are major factors that will come to the aid of the U.S. economy. Among them is the fact that American consumers are still willing to spend money… at record levels… when it comes to spoiling their children. Any country that can spend US$100 million in a single pre-holiday weekend to watch Harry Potter isn’t a case for the poorhouse yet.

But it’s not just movies. When Taipan’s microcap specialist Brian Hicks recommended Jakks Pacific back on August 1, he did that with the Christmas toy business in mind. In November, JAKK made intraday highs of US23.84–that’s a 26% gain over our initial recommendation… and a 90.72% gain over our recommendation to buy more on September 17!

Finding good, rock-solid companies to invest in is key to surviving the next year in the markets. While the markets currently appear to have detached themselves from the gloom that has cast a pall over the U.S. economy, this is certainly not the time to forget the lessons the past 18 months have taught us about the sporadic gravitational pull of reality.

But the fact is that any market movement spells an opportunity to make or take profits. You don’t need extended bull markets to make money. Movement is the key. And the ability to spot entry and exit points is the catalyst that translates opportunity into real gains.

We will make sure that you sail through 2002 with most of your investments–and profits!–intact.

Every recession hold the seeds of the next boom. Every market correction–like the terrifying free fall we experienced from September 17-24–represents an opportunity to buy cheap. This was the lesson of the 1991 recession. And it is already shaping up to be the lesson of the current one.