Agora Outlook

                                                                                July Expiration                             June 26th. 1998

Davidson’s View

I’m not surprised at the rally we had this past week. There are so many things that say this rally could continue and many things that say we’re just reaching another top.

One thing I don’t see happening is a blowoff rally to start. Mainly because of what the market has to contend with next week. Besides all of the important economic data to contend with (see next week’s economic section) the Federal Reserve policy-makers meet for two days starting Tuesday and there are mixed feelings on what they are going to do. Most analysts expect the central bankers to hold interest rates steady. The Fed raised short-term rates in March 1997, in a bid to ward off inflation, but has held rates steady since then. Some say they won’t raise now because of the Asian turmoil and because they are making concerted efforts to keep the U.S dollar down. If they did raise rates the dollar would likely rally more and bond yields would move lower to at least 5.50%. In 1994 it took a few increases for the market to realize that raising rates was a good thing to ward off inflation. The first time around would probably see the market have a stiff decline right now. On the other hand, there is good reason for a rate increase as the economy is incredibly strong. Even though inflation is near its lowest level ever, the Fed may want to prevent any future inflation. One important thing to take into account is the fact that in 1993 the Federal Funds rate was only 3.50%. After the Fed finished raising and lowering rate repeatedly from 1994-1995 they have held them steady now at 5.50% since raising them a quarter point last year. When you look at it from that perspective, interest rates seem to be neutral. I would suspect that rates will be held steady with the possibility of a warning comment this time after the Fed meeting is finished. I still don’t think the market will rally on the news of no rate increase. If anything, it might sell off, as everyone will be looking to the next meeting. As I mentioned above, I don’t see a runaway rally on its way. In the past 6 months the S&P 500 has gained 21% and the Dow has gained almost 17%. The Nasdaq has gained almost 25%! Strategist John Manley of Salomon Smith Barney notes in a recent commentary that since 1969, every time the yield on the Treasury long bond has fallen 10% below its 52-week moving average, as it did early this year, the S&P 500 has racked up a 22% average total return over the subsequent year. When the yield has been about 8.5% below its one-year average as it is now, at 5.63%, the S&P 500 index rose better than 17%. Such upbeat talk of the links between bonds and stocks spurs a bit of prudent "what-if" analysis, just in case the market is blindsided by suddenly higher rates as it was in 1994. Besides all that, there are too many things for the market to contend with even on top of next week’s Fed meeting and economic indicators. Lower earnings will start to be reported in July. With the slowdown in Asia and currency collapses all over the world, Asian countries are not likely to buy very much so earnings could even move lower. Analysts have now lowered the growth rate for earnings from 10% all the way down to 2%. The market overall is also fully valued. The P/E on the S&P 500 is a strong 28 times earnings. When you look at it, the only thing the market has going for it right now is that bonds are so low stocks are the only place for cash. The public continues to dump money into the market. This past week saw another 8 billion pumped in. Unfortunately, that is a strong reason in itself to see the market hold this level or rally a bit. Wouldn’t you keep throwing money into a market if you had an endless supply of money! Then again, would you?

Economic Effects

Wednesday

Orders for expensive manufactured goods fell sharply in May, a report that surprised economists and offered fresh evidence of Asia's impact on the nation's economy. Orders for durable goods such as stoves, cars and aircraft fell 2.6% in May to a seasonally adjusted $184.3 billion. That was much steeper than the 0.7% decline forecast by economists, who said the report reflected a drop in sales to Asia caused by the region's financial turmoil. The report was a surprise because it revealed that the weakness was widespread. Finally, we are starting to see a slowing of industrial activity, due likely to the situation in Asia. A drop in exports to Asia made the trade deficit hit a record $14.5 billion in April, and economists said they expect that to worsen as Asia's economic problems deepen. This was the first time durable orders have fallen since February, when they dipped 0.9% and it was the biggest monthly decline since a 5.3% drop in December. The market loved the number and rallied on the news since it showed there may be no need for an interest rate increase.

Thursday

Jobless claims jumped by +13,000 for the week ended June 13 caused in part by workers idled by the recent strike at General Motors Corp. The number of people filing new claims for unemployment benefits rose to 327,000, in a week that saw more than 50,000 people affected by strikes in the auto industry. The rise brought the weekly average rate of new claims over the past four weeks, to 322,000, up from 318,750 in the prior four-week period.

The U.S. trade deficit swelled by 9.5% in April to $14.46 billion as the Asian economic crisis took a toll on U.S. exports. This number confirmed the durable goods report. Imports declined a slight 0.9% in the month, but that was not enough to offset a 2.6% drop in exports of goods and service. The April deficit was higher than the $13.4 billion deficit anticipated by economists and suggests that the robust U.S. economy may begin to slow. The U.S. deficit with Japan fell by 6% in the month to $5.41 billion from $5.76 in March and stood at $20.82 billion for the first four months of the year. The U.S. deficit with China jumped by 13.7% in April to $4.28 billion from $3.76 billion in March. The department said the April deficit with China was the largest since October 1997, when the trade gap was $5.2 billion. The widening trade deficit has been the major factor impacting the U.S. economy from the currency crisis that struck Asia a year ago. The figures would look even worse except for the fact that the spreading recessions in Asia have depressed world demand and prices for various commodities. The $14.5 billion deficit was the highest since the government began tracking goods and services on a monthly basis in 1992. For goods alone, the deficit of $21.5 billion was the highest in history. The good news for the market was that the deflator was only 1.1% and the high inventory number reveals that 2^nd quarter Gross domestic Product will be slower. This is why the 5.4% high number could be ignored.

Friday

The University of Michigan’s final consumer sentiment number was released this morning revealing that people are still upbeat about the future for the economy. The reading remained well over 100 at 105.6.

Personal incomes rose 0.5% in May but spending increased at a slightly faster pace as saving declined. The increase in income, to a seasonally adjusted $7.22 trillion, reflected gains in all broad categories, including wages and salaries, which account for more than half of income. Spending, meanwhile, rose 0.6%, to a seasonally adjusted $5.75 trillion. The pattern has been consistent through the year, with spending growth outpacing income growth. It has reduced the nation’s savings rate from 4% of disposable, or after tax, income in December to a 10-month low of 3.5% in May. Spending in May rose most strongly for durable goods, expensive items expected to last three years or longer. It increased 2.9%, the most in 10 months. The market ignored the report today and drifted most of the day.

Next week’s Economic data

This week’s indicators will probably affect market movement, as reports are quite important this week. We start off the week on an easy note with New Home Sales on Monday. Building has been so strong the past year the report will likely be ignored. On Tuesday there is Consumer Confidence. In the past this number rocked the market but there is no real reason for that to happen now as everyone knows the consumer is very confident and expects the future to be great. Last week’s University of Michigan’s consumer sentiment report showed its indicator to be over 100, 105.6. This indicator has been over 100 for more then 3 years. At one time, 100 was considered to be too confident and would cause the market to sell off. Nonetheless, the consumer confidence report shouldn’t move the market. This is also the day that the Federal reserve meets to decide about interest rates and the focus will likely be on that. Wednesday brings the second and last day of the Federal Open Markets Committee meeting so traders will be awaiting their decision at 2:15 p.m. EST. There is also Construction Spending and the National Association of Purchasing Managers report due. The construction number will probably be ignored but the NAPM number will be dissected for evidence of prices paid and any inventory build up. If the number is strong, the market could react negatively, thinking that the Fed would surely raise interest rates because of the number. On Thursday, the most important report of the week is out. We’ll likely see volatility because the market is closed on Friday and people will be leaving for the long weekend so trading will be thin. The report out is the Monthly Unemployment report. Many analysts believe that the Fed gets a peek at the number in their meeting early in the week but they claim they don’t. Because of this, the number could be discounted because whatever the Fed decided to do would have already been done on Wednesday. Another report out though are the FOMC minutes from the 5/19/98 meeting and this could create some movement in the market according to whatever the unemployment number is. We should see volatility return to the market next week for sure regardless of what happens this week.

Technically

The McClellan Summation Index is now moving higher from a deeply oversold position signaling a possible turn in the market to the upside. If the MSI moves back above zero, it will be a good indication of the market to continue higher longer term. The only tricky situation is that the McCellan Oscillator is moving quickly upward and may reach overbought levels before the summation index can really get moving. The ARMS index is giving a sell signal shorter term as the entire rally this past week was from big caps. The advance decline ratio has barely moved. The 10-day ARMS index is also approaching overbought levels. From this indicator alone it is certain that the recent rally we have had will stall a bit. Stochastics and momentum indicators are also reaching overbought levels indicating a possible short-term turn in the market. Even though the S&P 100 and 500 made new highs last week, the Dow is now testing its 50-day moving average where it is hitting resistance again. Summer trading has always seen a lot of volatility but little movement as no one wants to commit to an up or down move because of holidays. The strongest July expiration cycle was in 1990 at 5% but that was after a major correction. The average up cycle has been 3%.

Mclellan Oscillator: +53 -100 oversold +100 overbought
Summation Index: -749

Five day arms: .80 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .91 .80 and below, overbought 1.00 and above, oversold

Bulls: 42.9 previous week 42.1 50% plus overbought/bearish
Bears: 31.1 previous week 31.1 50% plus oversold /bullish
Correction: 25.2 previous week 25.2

Five day Qvix: 20.43 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Program Trades

It was pretty easy filling our call trades this month with the market taking off at the start of the week. We didn’t see any fills on the 580/590 Ultra call so cancel the trade. After it was mentioned in Friday’s commentary we found out there were some people that bought the 500 OEX put to begin the leg into the 505/500 long put spread. Please let us know right away when you get filled for whatever trade so we know what were dealing with. Were looking to get the rest of our put trades filled next week. There will be more information about that in Sunday night’s commentary. Were a little concerned with the push up in the OEX. On a retreat we may close the position and reestablish it further out. The problem was that we were filled to low on the spread. The average price for the sold side was only $2.25 and we were hoping it to be more like $4.00. It will depend on how the market acts next week before we start making any changes.

Current Trades

Copyright © 1998. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.

                                                                                      July Expiration                                                  July 3rd. 1998

Davidson’s View

Ken will be sending out a commentary on Sunday night about how the Globex market is reacting to the overseas markets, especially Japan. In today’s trading Japan’s Nikkei stock index was down –255 points in futures trading. The Japanese currency slid swiftly from around 138 to the dollar in morning trade to settle around the 140 level as finance ministry and government officials in Tokyo unveiled details of the reforms, revealing they were largely in line with market expectations. But, the absence of an announcement on income tax cuts unleashed a flood of yen selling and this is what drove the Nikkei futures down. It will be important to see how Japan opens Sunday night to see if it will affect our market.

Monday

In the month of May, sales of new homes hit their fastest clip in at least 35 years. The surge was fueled by rising incomes and favorable interest rates. Most thought the housing market would cool a bit. May sales edged up 0.3% to an annual rate of 890,000, the strongest pace since the department started keeping tabs on a monthly basis in 1963. Some of this stems from the "wealth effect" of a rising stock market, which has encouraged purchases of second homes. Previously owned homes, as well as new ones, have shared in the sales. Last Thursday existing homes were up 1.0% to an annual rate of 4.82 million units. Analysts noted a number of favorable influences had come together to cause such growth. May was the ninth straight month when sales topped 800,000. The market ignored the number as it was already expecting the number to be strong. It will be important to note any a slowdown in housing as a sell off may mean a recession is on the way.

Tuesday

Consumer confidence reached a 30-year high today hitting 137.6 up from the old 30 year high of 136.3. The interesting part of the report revealed that consumers are planning on pulling in the reins a bit on spending. People remained optimistic that the strong labor market and healthy economic growth will continue in coming months. More consumers said that jobs were plentiful and fewer said that they had trouble finding employment. Fewer people said they were planning to buy a home or purchase a major appliance in the next six months. Fewer said they were planning a family vacation. Those that live in the northern Midwest, Southeast and mountain region of the country were most confident in the economy, while those living in the Middle Atlantic states were least confident.

The National Association of Purchasing Management (NAPM) index of New York area current business conditions fell to 57.5% in June from 58.4% in May. The manufacturing conditions index also fell, registering 54.5% in June from a reading of 54.9% in May. A reading of more than 50% indicates growth. Although the second-quarter pace of NY-area activity got off to a slow start in April compared to the first-quarter average performance of 56.0%, activity improved dramatically in the last two months of the quarter.

Wednesday

Ending 22 consecutive months of growth, manufacturing activity slowed down last month because of the economic turmoil in Asia and additional signs that economic growth generally will continue to slow. The National Association of Purchasing Management Index fell to 49.6 in June from 51.4 in May. A reading over 50 indicates growth. Economists had expected a reading of 51 on the NAPM index. The fallout from Asia’s financial crisis dominated member concerns the NAPM reported. Overall, the economy remains strong and largely inflation-free, with Asia's pronounced slump-tempering growth in exports and price pressures.

Separately, the Conference Board reported that its index of leading indicators was unchanged at 105.2 in May. It is unlikely this lull in the leading index is a precursor to an economic downturn even though seven out of the 10 indicators fell in May. The indicator is broad based and accurate in its readings.

Construction projects fell 1.5% in May, its largest drop since January 1994. Analysts had expected construction spending to rise only 0.4% in May. May's decline was the first since a 0.6% drop in November 1997 and the largest drop since January 1994, when the rate fell by 3.0%. Construction of new houses fell 1.1% in May to $203.8 billion. The housing sector has been extremely strong this year, helped by low interest rates and rising household incomes. The market for the most part, ignored the economic reports today to concentrate on the ending of the Federal Reserve meeting where they decided to leave interest rates alone for now.

Thursday

The General Motors strike slowed job growth in June, pushing the unemployment rate up to 4.5% from a 28-year-low during the two previous months. Despite the increase, from 4.3%, the seasonally adjusted unemployment rate remained well below the 5% rate of a year ago. It was still quite low by recent historical standards. There were 205,000 jobs added compared to 309,000 in May. Most of the gains came in services. Manufacturers cut 29,000 jobs, the fourth decline in five months and the worst since March, 1996. This reflected drops in industries either facing competition from Asian imports or loss of export sales to Asia, including apparel, textiles, paper products and electronic components. The reports this week confirmed the entire week’s indicators that the economy is slowing down. It also relieves any pressure from the political front that the Fed might want to tighten here. Payrolls fell by 6,000 in the auto industry, reflecting the June 5 strike at General Motors. The report hasn’t yet registered the impact of subsequent shutdowns. In a separate report jobless claims rose +24,000 to 390,000 because of the GM strike, the highest level since March 1997. The four-week moving average for claims rose to 350,250, up from a revised level of 337,250 the week before.

In two other signs of softness, the average workweek for workers edged down to 34.6 hours from 34.7 hours. Average hourly earnings rose just one cent, to $12.74. It was the smallest increase since February 1996.

Factory orders weakened across the board in May and shipments dropped again as the nation's industrial sector faltered under the drag of weakening Asian exports and overstocked inventories. New orders fell a sharper than expected 1.6% to a seasonally adjusted $333.02 billion in May. This was the biggest drop in 1-1/2 years since a 1.8% decrease in December 1996. Some factors slowing factory orders may prove temporary, such as the strike that has idled General Motors Corp. plants across the country. But others, especially developing recessions in crisis-racked Asia but also a huge buildup in first-quarter domestic inventories, are expected to be a burden that will slow overall economic growth in the second half of the year. Orders for all types of durable goods, from cars to appliances that are intended to last three years or more, were down 2.4% in May to $184.55 billion after a 1.5% rise in April. Since the unemployment report came in with good news, the market took it as neutral and went back to worrying about the U.S dollars rise against the Yen. The Federal Reserve released their minutes from the May Federal Reserve market open meeting and it revealed that there are now two governors willing to raise interest rates. The market ignored the release however as Asia has shown signs of slowing even more since then.

Next week’s Economic data

With only one report that could have any effect on the market the market will probably trade mostly on technical factors. Wednesday has wholesale trade figures which are really not important at all but since the week is very slow it may give traders something to look at. Thursday has weekly jobless claims out and with the GM strike, you can expect this number to be strong. Friday has the only important indicator of the week out. The Producer Price Index will help to reveal if there is any inflation beginning at the core level. Of late, commodities have been on the rise so this indicator could have an effect on the market if it is strong. It will have to be quite strong, though, as other indicators have proven to show a slowing of inflation.

Technically

The McClellan Summation Index is still moving higher from a deeply oversold position signaling the market could continue to the upside. The only tricky situation is that the McCellan Oscillator is moving quickly upward and may reach overbought levels before the summation index can really get moving. The advance/decline ratio has improved a little but not as much as the NYSE index has climbed explaining the near overbought situation in the oscillator. The ARMS index has moved back to neutral but the advance decline ratio has not confirmed the new highs in the S&P 100, 500. This could easily push the indicator back to overbought levels if the a/d line turns down again. The 10-day ARMS index is very close to an overbought level taking into account last weeks rally. Longer term Stochastics and momentum indicators have also started to turn down. With the market sitting at the top of its recent trading range and far above its 50-day moving average it may be finding resistance here.

Mclellan Oscillator: +146 -100 oversold +100 overbought
Summation Index: 89

Five day arms: .96 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .88 .80 and below, overbought 1.00 and above, oversold

Bulls: n/a previous week 42.9 50% plus overbought/bearish
Bears: n/a previous week 31.1 50% plus oversold /bullish
Correction: n/a previous week 25.2

Five day Qvix: 19.25 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Program Trades

10 days to go to the July expiration and the Ultra put trade is the only put trade we have been able to fill so far. Premiums on puts have been collapsing as the market has been rising the past two weeks and the volatility index has dropped indicating more call buying then put buying. We may not be able to get into any long puts this month as the program won’t register a trade unless there is a decent percentage of success. With the S&P 100 & 500 moving straight up off of June’s expiration we almost have to place put trades above the June expiration and that would be to much of a risk in case the market collapses. We could place a short trade if we get a good correction happening. Although the market has moved up we don’t have any worries for the 1165/1170 SPX call trade or the outright sell on the 1180 call but the 560/565 OEX call trade is a little under pressure. We will be analyzing the levels of the indexes this weekend to see what we might do with the 560/565 trade.

Current Trades

                                                                                           July Expiration                                                   July 10^th 1998

Last week there was an interesting article in Barron’s so we thought we would publish it here for you to read.

By Neil A. Martin

If you're worried that the bull market is about to peter out, you might want to talk to Harry S. Dent. Ten years ago, Dent was predicting that the Dow would go to 10,000 by the year 2000, and now he is predicting that it will double to 21,500 and maybe even quadruple to 35,000 over the next decade due in large part to a booming world economy. Dent's optimistic predictions may seem hard to swallow right now, what with stocks in the U.S. looking fully valued and the American economy increasingly threatened by Asia's meltdown. But it helps to remember that Dent's seemingly outlandish forecasts of a decade ago were also greeted with considerable skepticism. In the late 1980s, as Dent was preaching about "a great boom ahead" for the U.S. economy and stock market, the more popular futurists were naysayers like Ravi Batra, whose Great Depression of 1990 was scaring people silly with its thesis about an impending economic Armageddon caused by greed and overconcentration of wealth in America.

Dent strongly disagreed, supporting his case with analysis of demographic trends, forecasts of Baby Boomer spending habits and a review of historical economic cycles dating back 3,000 years. Dent predicted a soaring stock market, falling mortgage rates and the resurgence of the United States as the world's pre-eminent economic power. He also predicted the decline of Japan's economic juggernaut. Perhaps most surprising, he forecast that the U.S. government's annual budget deficit would disappear by 1998.

"It was kind of tough to get the message across at the time," Dent told Barron's in a recent interview at his Oakland, California, townhouse, which he shares with his wife and three children. "And while a few people thought some kind of recovery in the economy and stock market might be possible, no one expected a balanced budget. But here we are in 1998 with the government worrying about what to do with budget surpluses."

Most of Dent's predictions, along with the formulas upon which they were based, first appeared in a small, self-published book that Dent put out in 1989. It was called Our Power To Predict: Revolutionary New Tools for Predicting Our Economy and the Future of Business. The pamphlet-sized "training manual," as he called it, evolved from a series of lectures Dent gave in the late 1980s to business executives around the country who wanted help spotting emerging economic trends. While the book was never commercially published, it was widely circulated and it quickly established Dent's reputation in the business community as a savvy economic forecaster.

Three years later, in November 1992, Dent further refined his theories in a book entitled The Great Boom Ahead: Your Comprehensive Guide to Personal and Business Profit in the New Era of Prosperity. This tract forecast a new age of prosperity that would emerge in the 1990s and extend into the next century. The book quickly became a best-seller and has sold more than 300,000 hardcover and paperback copies worldwide, prompting one reviewer to christen Dent as "one of the world's most prescient economic prognosticators."

Buoyed by the success of his past predictions, the 45-year-old forecaster is back now with another book, The Roaring 2000s: How To Achieve Personal and Financial Success in the Greatest Boom in History. It has been on the business best-seller lists of the New York Times, The Wall Street Journal and BusinessWeek since its publication in April.

Dent's new book picks up where his earlier tome left off and pushes his boom scenario even further.

The world, according to Dent, is on the verge of the greatest economic and stock boom in history. "The sudden emergence of information technologies along with the peak spending years of the massive Baby Boom generation, the largest in history, will usher in a new era of prosperity and sweeping changes," Dent says. The confluence of these two will ignite a period that Dent characterizes as "the most exciting boom period since the Roaring Twenties."

The engine that is driving this great boom is an aging Baby Boom generation, 40 million strong, which will move into its peak spending years between 2008 and 2010. Boomers will turn in their sports cars for more luxurious vehicles. They will buy different products than they did in the 1990s: Toys, baby-sitters and aerobic classes are out; trade-up homes, health care and investing are in.

"The fundamental generators of change in any economy at any time in human history have been the new generations," Dent says. "From the time of the ancient Greeks, up through the Roman Empire, the Renaissance, the Industrial Revolution and into the current century, new generations have brought with them different values, tastes and spending habits, which in turn generate new cycles of boom-and-bust."

Generally, these waves of development have stretched over 80-year periods, from start to boom to bust. "The last time we saw such a boom period was during the Roaring Twenties, when the Henry Ford generation of consumers, augmented by a massive immigration wave, reached their peak years of earnings, productivity and spending," Dent says. "At the same time, new technologies, industries, products and services suddenly burst forth and, seemingly overnight, automobiles, electricity, telephones and new products such as Coca-Cola, became affordable consumer items. This confluence caused high economic growth, unprecedented 5% average gains in business productivity, a zero rate of inflation, along with rising savings rates and falling debt ratios," he explains.

Dent argues that what happened in the Roaring Twenties will be repeated, though on a much broader scale, in what he calls the Roaring 2000s. A dramatic expansion of the economy will be triggered by the Information Revolution, which will move fully into the mainstream, chaperoned by the rapid adoption of personal computers, computer appliances of all kinds, and, of course, the Internet.

"Internet usage by consumer households by 2002 will fundamentally change how and where we live and work," he says. "It will create a new economic surge that features a huge array of customized goods and services at increasingly affordable prices, and usher in nothing less than the greatest boom in history and an unprecedented opportunity for investors and entrepreneurs, great buys in real estate, and a wealth of high-quality lifestyle choices for people who anticipate these changes. We will see such rapid and exciting changes as we have not seen since the dizzying pace of the productivity revolution unleashed by the assembly line in the early 20th century."

As Dent sees it, a spending spree by American Baby Boomers will propel stock prices strongly upward, with the Dow hitting at least 21,500 by the year 2008, and possibly much higher. "We are projecting a peak as high as 35,000," Dent says, admitting that "it may sound outrageous, yet it is the same 16% average annual gain the stock market has had since this bull run started in 1982, and that's not counting dividends, which would add 18%, and that means you would quadruple your money every 10 years."

The current bull market is just a prelude to an even bigger bull market, one that will be fueled by rising personal earnings, technology-generated productivity gains and, mostly, "Baby Boomers who are going to flood the markets with investment dollars," Dent says.

What would a sudden correction or, perish the thought, prolonged breakdown in investment do to Dent's timetable for prosperity?

"If the market were suddenly to drop below 7,000, that would break the upbeat trend and indicate that something was breaking down in the world on a global basis that we don't understand," he says, adding quickly, "But we don't believe that will happen."

Even when the U.S. boom begins to wind down after the year 2020 and the economy starts to contract, "demographic bulges" representing tens of millions of "new consumers" eager to buy and invest will create "mild booms" in Europe and Asia, including Japan, Dent says. He also predicts the U.S. will experience its next great population migration and real-estate boom as people move in droves out of the suburbs to the "exurbs" and to attractive small towns. And lastly, Dent sees traditional "top-down" corporate hierarchies being replaced by corporate networks that operate "from the customer back." As for "re-engineering" and "restructuring," Dent considers them merely words that largely preserve the status quo.

"We are on the threshold of a new economy, and the pessimists have been proven wrong," Dent claims. "The stock market has been recognizing something for many years that economists have not."

As might be expected, not everyone shares Dent's unbridled optimism. He has been criticized for being too optimstic and reaching "unwarranted" conclusions based on flawed research data. One recent reviewer of his latest book, The Roaring 2000s, characterized Dent's analysis as "unoriginal, overstated and simplistic."

To his credit, Dent is the first to admit that not everything he has forecast has come to pass. "I underestimated the strength of the stock market boom, which started even earlier than I predicted," he says, "and the economic slowdown of the 1990s turned out to be much worse than I had originally believed."

But he fiercely defends his methodology, which he says was developed over the years by charting the history and characteristics of inflationary "waves" that date back to ancient Greece. "We have been predicting trends for a long time and enjoy high credibility, and I would match my research against anyone's," Dent snaps. "I'm not going to apologize for coming up with conclusions and a view of economics that people can understand."

If demand for his thoughts is any indicator about his credibility, Dent is surely a man worth hearing out. He is typically on the road five days a week spreading his gospel at conferences sponsored by investment groups, brokers and private companies. He makes as much as $16,500 for a keynote address or a two-hour presentation of his theories.

"Harry and Jeremy Siegel, author of Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies, are two of our most popular speakers," says Jim Salners, national sales manager with AIM Distributors, a subsidiary of Amvescap, which hires Dent regularly for seminars and conferences it co-sponsors with other members of the investment community.

"Harry's first book attracted our attention because we agreed with it," says Salners. "Harry was one of the few people at the time who was predicting a Dow of 10,000 by the end of the decade, and he has been basically right on."

As for taking an overly simplistic approach, Salners believes this is one of Dent's strengths: "His is a basically a common-sense and demographic approach to economics that really rings true to clients. They understand it."

"The typical economist blows away listeners very quickly with numbers and statistics, facts and figures. Whereas Harry, whether he is right or wrong, has a very understandable and clear approach to his material. On top of that, he has been right for the better part of the past seven years."

So, what does Dent recommend to investors eager to capitalize on the coming economic boom?

For all his knowledge, Dent is not a stockpicker. He believes it is more productive, and ultimately more profitable, for the average person to select a group of mutual funds rather than try to pick from thousands of different stocks. Thus, he recommends purchasing mutual funds that invest in four different types of stocks: big-company stocks, especially those with a strong global presence, plus technology, financial services and health care.

Whatever else it has done, waxing serious about the future has paid off handsomely for the native of Columbia, South Carolina. With two best-sellers, more than 1,000 conference and seminar appearances over the past five years, Dent estimates his net worth at around $3.5 million and growing. He recently purchased 25 acres of hilltop property on the Caribbean island of Culebra, a U.S. possession near Puerto Rico, where he plans to eventually move his forecasting operation. He also operates the H.S. Dent Foundation, a non-profit organization based in Burlington, Vermont, which is active in educational and charitable activities.

Although Dent is hoping to expand his personal wealth into the $50 million-$100 million range, his easy-going manner suggests he has no burning desire to become super-rich. Instead, whenever he retires, he says he would prefer to concentrate on philanthropy, principally in education and environmental causes.

"I would like to do something worthwhile for my family and the community," Dent says. "I don't believe in greed." Yet another sign of his wisdom.

Davidson’s View

The market has been mostly whipsawed to the upside in the July expiration cycle. This month has been a rough one for us spread traders as the market has had quite a steep rise. We were unable to get any of our Long put trades filled this past month and were very fortunate to get the Ultra put 1025/1020 trades on. The one thing I have noticed is that the overall rises are getting steeper and steeper percentage wise. As of the high on Thursday the Dow and S&P indexes have risen 6.3% and 8.5% in 19 trading days. Considering that the indexes used to be up only 10% a year, that is incredible! So far, this year the S&P 500 is up +20%, S&P 100 up 23% and the Dow is up +16%. Maybe we’ll be up 40% on average by the end of the year. Many analysts are talking about a repeat of the 1987 blowoff and this could be true the way the market is rallying now. There has been bad news in the past that the market has been able to shake off from economic woes in Asia to inflation worries. One thing that hasn’t changed since this rally started in 1990 is that there has always been incredible earnings growth. Earnings are the keys to any company’s strength and if you don’t have the earnings you can’t expect to have higher stock prices. Unless of course, you’re an internet stock! They don’t have to have earnings to have $200 stocks! Next week we’ll be into second quarter earnings reports full swing and First call has already cut 2nd quarter earnings from 2.3% to only 1.5%. At the start of the year, 2^nd quarter earnings were supposed to be around 13%. The main reason they have lowered them is because there have been more earnings warnings and now Dupont, J.C Penny and Hersheys have all given warnings. The problem that Chuck Hill is stating is that even though the market has appeared to discount the lower 2nd quarter earnings, the market was looking forward to still seeing a strong 3rd quarter. Were now starting to see lower earnings revision for the third quarter. I know it sounds strange but with these numbers the market may be entering a blow off stage rally that may have a dismal end. Institutions like to ramp up prices before a good correction so they can then continue on an upward basis. The best example of this was the 1987 crash. The market blew off to the upside to peak in August and then saw the low in October never broke the uptrend line started in 1982. If we ever break that long-term uptrend line this market would be in trouble for years. The S&P 500 would have to fall to around the 500 level for that to be of concern and right now that’s a long way away.

After the market closed on Friday, Applied Material (AMAT) announced that earnings would fall short of expectation. Several other semiconductor companies indicated that business remained weak due to slowdown in Asia. Next week may start with a bang anyhow as the elections in Japan finish Sunday night. If the overseas markets don’t like the results we will probably start lower Monday morning. We will send out an e-mail late Sunday night to let you know how Asia’s markets are faring.

Monday

The National Association of Purchasing manager’s index fell to 61.5 in June from 64.0 in May. The index's price measure slipped to 46.0 from 48.0. For the first time since September, the business activity index in non-manufacturing dropped, which means that while it's still growing, business activity is not growing as quickly. The expectation is that the economy would not grow as strong in the second half. Asia's ongoing economic crunch so far has affected U.S. manufacturing more than the service sector. Purchasing executives polled by NAPM in June said lower energy costs, as well as Asia's troubles, had led to lower prices paid by service-sector firms. The market liked the prices paid index falling, as that is non-inflationary and that the economy is slowing just right. The overall market turned from being down to moving higher on the day from this report.

Thursday

Jobless claims fell slightly during the week ended July 4,but economists cited distorting factors such as the GM strike and the Independence Day holiday and warned against reading too much into the decline. Claims fell to 392,000 from 393,000 claims the week before. The four-week average moved to 370,500. Analysts were expecting an increase. Some were looking for increases as high as +50,000, but there are so many distortions in the figure that it wasn’t an accurate barometer.

Friday

The most important number of the week came out today but had little effect on the market. Inflation at the wholesale level fell 0.1% in June as a second big jump in drug costs was offset by falling energy prices. The Labour Department reported Friday that the June decline in its Producer Price Index, which measures inflation before it reaches the consumer, fell for the fourth time this year following gains of 0.2% in both April and May. The decline was led by a 1.7% drop in energy prices, the eighth decline in the last nine months. Drug costs, which had soared a record 10.7% in May, were up again in June, rising 3.2%. The overall price decline was in line with economists’ expectations. It supported the view that inflation still poses no threat to the economy buffeted by an Asian currency crisis that has cut into U.S. exports and subjected American manufacturers to increased competition from lower-priced Asian goods. Through the first six months of this year, wholesale inflation has actually been falling at an annual rate of 1.5%. The news has been almost as good at the consumer level, where through May; retail prices were rising at an annual rate of just 1.5%. That is even better than the 11-year-low of 1.7% turned in during 1997. Excluding the volatile energy and food categories, the core rate of inflation at the wholesale level was up 0.2%, matching the gains in April and May.

The core rate was a little stronger than expected. The direction of the core inflation has been moving upward the past few months after running at zero for 12 months. It’s not a real problem in terms of inflation but from the Federal Reserve’s point of view, with unemployment at a 28-year low and the PPI core rate moving higher, there’s no question they may stick to a tightening bias even if they never act on it. The market liked the numbers out this morning and originally popped up on the release but in the end lost its gains to technical matters.

Next week’s Economic data

The Consumer Price Index report is out on Tuesday. This number could have more of an effect on the market than the PPI number did if there are any signs of inflation. This is unlikely, however, as the inflation rate has been so good this year. Retail sales are also out for the month. If this number confirms the overall retail chain store sales number out last week showing slowing sales, it could be taken seriously by the market and we would see another sell off. Wednesday has Business Inventories and Import & Export Prices. These numbers will be significant to the market they will reflect possible inflation or even worse, deflation. The business inventories number will help to reveal how slow things could be getting in the economy by showing if there are unsold goods. The number will also show if companies are stockpiling, hoping that the future will see strong sales. Thursday has weekly Jobless claims, Industrial Production and the Philadelphia Federal Reserve survey out. The industrial production number will be the most important number because with a slowing economy, manufacturers will continually have to make sure workers are being productive enough to keep costs low. This week’s numbers are not that important so it being an expiration week there will be more of a focus on that.

Technically

The Mclellan Oscilator reached an overbought +150 level on Thursday and has now turned down. Usually the oscillator moves to a –100 level before we see an oversold indication given. The Arms indexes remain in neutral territory not really giving any idea of where the market could move next week. Overall indicators such as stochastics, momentum and relative strength have all turned down indicating the market is struggling at this level and needs to move down before new highs can be made. Bridge Data shows that only 50% of the S&P stock components are trading above their 26-week moving average. So far, there appears to be a dichotomy in the stock market and unless it changes, the current rally may not last. If there is any week that the market could see a downturn it would be this one because it’s an expiration week. Longer-term indicators are mixed. The bull/bear consensus is starting to reach an overbought level once again but the volatility index continues to move lower meaning the rally could continue longer term.

Mclellan Oscillator: +83 -100 oversold +100 overbought
Summation Index: 392

Five day arms: .89 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .93 .80 and below, overbought 1.00 and above, oversold

Bulls: 47.1 previous week 44.9 50% plus overbought/bearish
Bears: 30.6 previous week 31.4 50% plus oversold /bullish
Correction: 22.3 previous week 23.7

Five day Qvix: 18.22 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Program Trades

Were now into another week of expiration. This summer seems to be flying by. Our short sells and Ultra trades are still showing a high degree of success probability for the coming week. The program indicates the 1180 level on the S&P 500 only has 7% odds of being there on expiration. The 1025 level of the 1025/1020 Ultra put trade, only has 2% odds of being seen. The turnaround on Friday now has the S&P 500 .65 points away from our sold 1165/1170 long trade. Because of this it has lowered the program numbers to a 77% success rate. We will watch the market closely at the start of the week to see how it acts around the 1165 level before we make any changes to our trades. The other Long trade we have on is the OEX 560/565 July calls. This trade is under pressure. We have been waiting for a small pull back here. Some people got out of the trade with an average loss of $2.00 by doing a $3.00 buy back debit spread. For the others that are still in the trade we will continue to monitor the OEX’s action. We do expect to see a downturn in the market next week on expiration pressures and technical factors listed above.

Current Trades

Agora Outlook

Davidson’s View

The Dow finally managed to take out its previous high of 9211.84 and joined the other indexes to close at a new high. So far, in this earnings period, 162 companies in the S&P 500 have reported earnings, about 60% exceeded estimates, 16% fell short and the rest were in-line. Overall earnings are up 2.3% from the year earlier. One positive note is the fact that, despite weakness in Asia, lack of pricing power and rising labor costs, companies have found a way to deliver earnings in-line or above consensus estimates. At the current reduced rate, S&P 500 earnings in the June quarter could come in at $11.70, above the $11.48 expected before the earnings reporting began. Currently, the S&P 500 is yielding a P/E of 29. Historically, such a P/E would call for a topping of the bull market. Right now, stock prices are being pushed higher by liquidity. Money continues to flow into U.S. financial assets from overseas, as the U.S. economy continues to grow at a robust pace. About $6.3 billion was added to stocks last week, up from $4.8 billion from the prior week. Strong money flow could push stock prices higher and expand the price multiple even more. The only thing that no one is recognizing is that these are reduced earnings forecasts. Chuck Hill from First Call says he is getting warnings that 3^rd quarter earnings are starting to come in so the future may look bleak. Traders are ignoring all this, however, and are looking even further out as earnings are expected to be strong for 1999. The only problem is that Asia is just starting to slow down, so why would earnings start to go up that fast.

Great earnings led the market higher and now momentum and denial may move it into a blow off period, which it now appears to be in. In 1987 it was easy to tell that the market was blowing off to the upside as everyone was incredibly bullish, but this market is still not skeptical enough. By the looks of the bull/bear consensus we could be on our way. 52% bulls were reported this past week. This is a contrarian indicator. With the amount of public knowledge in today’s market I personally wonder if we’ll ever see anything much higher than what it is now.

This year has now proven itself to be in a blowoff mode as were now up 29% in 7 months from expiration to expiration this year. When you look at this month’s percentage expiration chart you can see the market is breaking into new ground on explosive upside moves. We have yet to see a down month this year. In 1987 we saw a 27% explosive move in 6 months. Percentage wise, this is now the first year ever that has seen three expiration cycles of 6% plus moves. The faster and higher the market goes right now the more likely we’ll see a bad turn in the market as the advance decline line is not following. I am now putting our system on crash alert so we’ll be going for high premiums on spreads until this is over. Historically, if the market is going to peak it will do so next month. All we can do is wait and see but for now I’m glad I don’t own stocks!

Tuesday

The consumer price index (CPI) rose by only 0.1% in June after a gain of 0.3% in May. For the first half of the year, inflation ran at a 1.4% annual rate, compared with an 11-year low of 1.7% for all of last year. Much of that performance was attributed to energy costs, which have fallen during five of the past six months. That performance has been more than tame enough to keep the Federal Reserve from raising interest rates. The central bank has left benchmark short-term interest rates unchanged since March of last year and is expected to remain on the sidelines for some months to come. The core rate, excluding food and energy, also rose 0.1% in June, compared to a 0.2% gain in May. Economists had expected both rates to rise 0.2%. U.S. retail sales rose by 0.1% in June after a revised gain of 1.2% in May. Economists had expected the overall rate to rise 0.4%. Consumer spending, which had been powering the economy in the early part of the year, showed signs of slowing in June with retail sales edging up a mere 0.1%. The slowdown, which was in line with expectations, reflected outright declines in sales at department stores, hardware stores and service stations and only a small 0.1% increase in sales by auto dealers. These are good numbers for bond investors as they suggest the economy is on an even keel and inflation is not a problem. Stocks also seemed to like the idea of the mixed numbers and rallied on the news.

Wednesday

Unsold goods on the shelves of U.S. manufacturers and retailers fell in May for the first time in nearly two years, while total sales barely rose at all. Total business inventories slipped 0.1% to a seasonally adjusted $1.066 trillion after a revised 0.1% rise in April. Economists had expected inventories to rise by 0.3% in May. Retail inventories plunged 1.0% in May, matching their largest decline since December 1995, after a 0.2% increase in April. Manufacturing inventories edged up 0.1% after a 0.4% rise in April, while wholesale inventories rose 0.6% in May following a 0.6% decrease. The inventory-to-sales ratio, a measure of how quickly existing inventories would be drawn down at the current sales pace, and thus a gauge of consumer demand, was steady at 1.38 months’ worth in May. The economy appears to be slowing itself down so there may be no need for the Federal Reserve to lift interest rates. Because of this, both bonds and stocks rallied on the news.

Thursday

The General Motors strike sent output at the nation’s factories, mines and utilities down in June at the steepest rate in five years. Industrial production fell 0.6%, matching a drop in May 1993, the Federal Reserve said Thursday. There hasn’t been a steeper decline since the index fell 0.9% in March 1991, the last month of the 1990-1991 recession. However, most of the decline was attributed to an 11% drop-off in automotive production. Outside of the auto industry, the performance was lackluster. Output at factories other than auto, trucks and parts plants rose just 0.1% in June following a 0.1% decline in May. The overall drop was larger than economists expected from the GM strike alone and fit with the notion that Asia’s economic turmoil is slowing the U.S. economy by knocking down demand for U.S. exports to the region. Though bad news for manufacturing companies and their employees, the production decline could be seen as a favorable development supporting continued low inflation. It pushed the operating rate at industrial firms to 81.6% of capacity, the lowest in five years and down from 82. 4% in May. Economists attribute some of the drop in output to businesses’ desire to reduce the huge inventory of unsold goods that developed during the first three months of the year as export sales plunged. Despite the overall weakness of June’s report, there were areas of strength. Industrial equipment production shot up 2.2%, with strong increases for construction machinery, farm machinery, and computers and other office equipment. Semiconductor and clothing output also rose.

Jobless Claims fell sharply last week. That reflected the fact that most striking General Motors workers had filed claims earlier. Claims fell to a seasonally adjusted 336,000, a four-week low, after hitting 394,000 during the two previous weeks, the highest since March 1996, during the last GM strike. Four-week average was 371, 250.

Friday

The trade deficit soared once again in May to a record $15.75 billion as the deepening economic troubles in Asia helped push U.S. exports down to the lowest level in 15 months. The trade deficit for May was 10.3% higher than the April imbalance of $14.27 billion, underscoring that the fallout from Asia’s currency crisis will be more severe for American manufacturers and farmers than first forecast. Some economists believe that

the U.S. economy slowed dramatically in the just completed April-June quarter with the most pessimistic saying that output may have actually contracted, something that has not happened since the 1990-91 recession. The big drag on growth is coming from the swelling trade deficit, which is robbing U.S. manufacturers of sales in Asia and also opening them up to increased competition from Asian products made more competitive by the sharp currency devaluations in the region. For the first five months this year, the trade deficit is running at a record annual rate of $156 billion, 42% higher than last year. The Clinton administration, concerned that the swelling deficit could lead to a backlash in this country, has been ratcheting up the pressure on Japan to do more to contain the crisis by boosting its own economy and thus providing a market for Asian products. So far, the pressure has not worked. Japan is now in its own recession, the worst in 50 years. After his party suffered a stinging rebuke from voters in parliamentary elections last weekend, Prime Minister Ryutaro Hashimoto announced his resignation, setting off a leadership scramble that could further delay government action to deal with the economic slump. For May, the deficit with Japan narrowed by 8.5% to $4.95 billion, the smallest imbalance since January. For the year, the deficit with Japan is running 18% above the same period a year ago. The deficit with China rose by 8.3% in May to $4.63 billion, the highest level since last October. In his recent trip to China, Clinton warned that the Chinese will have to do more to lower their barriers to American products before the United States will drop its opposition to China joining the World Trade Organization.

The deficit with the 15-nation European Union narrowed to $1.67 billion in May, down 49% from the April deficit as imports of European cars and chemical products fell. But the deficit with Mexico rose by 19% to $1.52 billion, the largest gap in a year. The widening overall deficit in May reflected a 1.2% drop in U.S. exports of goods and services, which fell to $76.23 billion, the lowest level in 15 months. The market completely ignored this heavy report and concentrated on the expiration today. A point to remember is that one of the factors that led to the 1987 stock market crash was the rising trade deficit. After the crash, every time the deficit showed that it was rising, stocks sold off.

The University of Michigan's preliminary July index of consumer sentiment fell to 104.8 from a reading of 105.6 for the final June index, financial market sources said. The current condition component fell to 113.4 in the preliminary reading for July from 115.4 in the final June survey, they said. The consumer expectation index rose, with the preliminary July reading at 99.3 versus 99.2 for the final reading in June. This number didn’t help to lift bonds at all today. It appears that bonds are focusing on technical factors right now sincen this number and the trade deficit numbers should have been good news for them.

Next week’s Economic data

This is a very quiet week for indicators. On Tuesday there is Housing Starts. This number can be weak or strong but it won’t have much of an effect on the market at this time. Thursday has weekly Jobless claims. Last week’s number was low due to the GM strike and this week’s number will not likely affect the market.

Technically

The McClellan Oscillator is continuing to fade and may be indicating a correction is on the way if it continues to slip. The Arms indicators are remaining neutral. The bull/bear consensus is now signaling an outright sell on the market. It is now over 50% bulls. Anything over 50 usually means there will be some type of correction. 55-60% bulls usually signals the market is destined for more than just a correction. In April of this year there were 54% bulls and the market corrected. In December 96 Bulls were 56% and the market corrected. The volatility index is steadily moving lower. It could either mean that the rally will continue longer term or the market is peaking. Normally, when the volatility index comes off of a peak high and moves lower it means that the market has finished correcting and is moving into a rally mode. Unfortunately, the market is not coming off of a low but is hitting new highs. Last year when this happened the market peaked and saw a 10% plus correction. Indicators appear to be saying that we could have a correction but we may not be finished hitting highs yet.

Jerry Favor has been quite accurate in this entire upward move. One of his indicators is called the Bradley psychological indicator. It has been very accurate the past 60 years. It called the 1987 market top 2 days before the crash occurred. It is now saying that an all time high should be set, plus or minus a couple days, on July 24^th. Mr. Favors also says that if the market can continue to make new highs a week after the 24^th the Dow could go to 9859, plus or minus 292 points, intraday into August. His other indicators are saying that there will be an all time top made in September. If you’re interested in following Mr. Favor’s comments and others, go to http://www.marketweb.com/

Mclellan Oscillator: +65 -100 oversold +100 overbought
Summation Index: 1070

Five day arms: .89 .80 and below, overbought 1.00 and above, oversold
Ten day arms: .88 .80 and below, overbought 1.00 and above, oversold

Bulls: 52.0 previous week 47.1 50% plus overbought/bearish
Bears: 22.0 previous week 30.6 50% plus oversold /bullish
Correction: 24.0 previous week 22.3

Five day Qvix: 18.00 10-15 bullish, low volatility 15-40 bearish, high volatility

MARKET CLOSES

Program Trades

This has been a very rough month for trades. Since January the market has been extremely volatile to the upside, seeing a 29% straight increase this year alone. (Ken is covering this more in his section.) We had no short trades on at all this month but there was an outright sell trade placed yesterday for $6.75 that will be considered a short trade for the August expiration cycle because it does not qualify for a Long, Ultra or Outright short sell. We took the biggest hits on our long trades with an overall loss of $3.50 between the OEX and SPX trades. The reason the loss was so big was that we were unable to get any Long put trades placed. We are only allowed to raise the Long trade levels to a certain level before we have to just leave the trade. With the market rallying it was impossible to get in a Long put trade as put spreads and premiums were too low for a decent trade. It was impossible to even get in a Short put trade. Our Ultra and Outright short sells are considered our safest trades and they proved themselves correct this past month. The Ultra trades fared the best this month as we still received a full 10% profit from our put trades. We did have to buy back the call trades as we were getting nervous with the market’s upward spiral. The Outright Sell trades this month ended up even as we had a full profit on puts but we had to buy back the call trade because of the market’s upward move.

Current Trades

Copyright © 1998. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.