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Plus: Calandra on the Dow, small-caps and gold

By Thom Calandra, CBS.MarketWatch.com
Last Update: 10:33 AM ET May 19, 2003
SAN FRANCISCO (CBS.MW) - Here are comments from the investors who follow Thom Calandra's StockWatch, and some answers where appropriate:

Donn Canzano, a certified financial planner, is excited about the new gold exchange-traded fund headed for the New York Stock Exchange. (See: New gold paper to boost demand for metal.) "You may be missing the potential big reason why this is likely to be a big winner," Canzano says about the proposed fund from the World Gold Council. "Stock brokers will finally have a way to make commissions on gold. This is an easy sell in a market with very few compelling stories to drum up commissions."

Jeff Gelgisser wonders, "I have read your column for quite a while and I believe it was you who has referred to a number of market strategists who make calls on market inflection points, such as Michael Burke, Woody Dorsey, Paul Desmond and others (Steve Hochberg, Ian McAvity, Richard Williams, Joe Duarte, Nick Guarino to name a few). I have found it to be very difficult to get information about the track record of these people regarding the accuracy of their market calls and I was wondering if you have an opinion on this. That is, who is right most often?"

If Gelgisser had asked that question at the Las Vegas Money Show, he'd have received at least three dozen different answers. Even the services that track some of these market timers, such as Timer Digest and Hulbert Financial Digest, don't always agree on who's winning the most, and losing the most. But the digests are a good starting point for those who are serious about handicapping the market handicappers.

Of course, there are those, on Wall Street and Main Street, who say it is foolish to try to "time the market." Getting in and out of investments on a moment's notice is no sure path to profits, but it easily could turn you into a raving lunatic.



One way of getting the most out of a selection of market timers (and strategists, for those who prefer a different name for their occupation) is to focus on the strong points of each service.

I look at stuff from Richard Williams at Summit Analytic Partners, for example, for insights into the software stocks. (Williams says a crash in software stocks may soon follow the growing trade deficit and cascading dollar.) I check with Paul Desmond at Lowry's Reports for signs of selling pressure or buying demand in the finicky stock market. I go to Joe Duarte for his comments on energy stocks and geopolitical trends. George Muzea at Muzea Insider Consulting Services is just about the best for reading the tea leaves of executive buying and selling patterns. And so on.

Gary Fox asks, "Do you still believe the Dow is headed towards 4,000? I for one think the market is artificially inflated for Bush's re-election. The dividend tax cut for the rich is the most absurd piece of legislation I have ever seen. There is no way to put a value on stocks today. P/E has no meaning anymore. CEOs and their corporate buddies continue to steal from their companies via stock options, bonuses, pensions, etc."

Yes, I still do see devastation for the shares of most large companies, those with market capitalizations above $10 billion. Can the Dow Jones Industrial Average and the other major equity indexes lose half their current value? Yes.

But in total candor, I have to say the Dow is unlikely to reduce itself to half its current level by this summer. So much for trying to time the big-caps.

My larger point, as I have pointed out in this space and in subscription service The Calandra Report, is that individuals will benefit by steering clear of anything that sells for 25 times or more coming earnings and instead focus on America's smallest companies. Why pay 22 times the profits some MBA-trained analyst at an investment bank expects for that Dow-traded stock? Not when you can own a stock with zero Wall Street expectations and a Main Street business, albeit largely on the Internet, that's growing sales by 30 percent and more each quarter. See: Why small stocks will surge, March 31.

The small-cap rally, documented in this space and in subscription service The Calandra Report, is leading investors to the companies that may lead their fledgling industries in the next five years. See: More signs of the coming small-cap rally.

Earlier this spring, we detailed a dozen or so small companies whose growth rates were triple and quadruple their price-earnings ratios. Many of those companies' shares have risen 30 percent or more in the space of two months, and most remain on The Calandra Report's Focus and Recommended Lists.



I am convinced some of these companies -- in software distribution, nerve-disorder drug development, Internet marketing and electronic financial transactions -- will triple their stock-price levels, regardless of any damage that comes to the Dow and S&P 500. Indeed, in the upcoming issue of The Calandra Report, due out later this week, I will point to a $60 million company whose shares I fully expect will count themselves among the year's biggest gainers.

Are there some large companies I am looking to for growth? At present, there are two, one of them in the defense and aerospace industries and one in capital equipment. Largely, however, I see stale P/E ratios of 25 or more taking their toll on the companies that constitute the Dow and S&P 500 indexes.

As for gold, I see one development that could drive tremendous investment demand for the metal, and that is the proposed exchange-traded fund that will trade on the New York Stock Exchange. The so-called QQQ of gold is a highly tradable form of paper gold will serve as a proxy for North American investors who always have wanted to own bullion in their portfolios, but never dared mess with the physical nightmares of buying the metal. See: New gold paper to boost demand for metal.

I expect that once Gold Equity Trust (GLD) begins trading on the NYSE, with the blessing of federal regulators, daily money flows into gold purchases will rise by 100 percent in the course of several weeks.



Already, there are those who say the presence of a gold ETF (exchange-traded fund) in New York, with its actual gold stored in London, will send not just small investors, but also hedge funds and mutual funds, into the once forbidding world of gold ownership.

As John Hathaway at Tocqueville Gold Fund (TGLDX) pointed out to me, natural-resource mutual funds will jump at the chance to sidestep the labyrinthine rules that limit physical gold ownership in their portfolios.

Gold Fields Mineral Services, a tracker of bullion trends, estimates 22 tonnes of gold investment by individuals in North America for 2002. That was down about 10 percent from the previous year. An SEC-sanctioned trading vehicle for gold -- one that eliminates concerns about insurance and storage fees -- easily will send gold past its $390 high for this year.



When all is said and done, I expect the tiny world of gold mining stocks to rise sharply as well on the heels of the new gold ETF. There are some who say the XAU (XAU) index of gold mining shares could rise to 100 this summer from its current level of 73. I have even higher expectations.

I envision the XAU at some point testing its February 1996 highs of 155. Some of the best gold mining companies, among them Iamgold (IAG), which relies on mine royalties and chooses to book half its corporate treasury in actual gold, will double and double again in price. The exploration stocks, an even riskier group than the gold producers, will outpace even those sizeable gains.

Feverish trading in gold mining stocks will come on the heels of a groundswell of support for a metal whose returns are trouncing those of the S&P 500 over the past three years. (There is a 55 percentage point gap between the gold price and the S&P 500 since May 2000.) Helping gold's case, of course, will be the sliding dollar, which is sending investors worldwide into currency alternative of bullion. I see no reason why gold cannot rise to $600 or more an ounce from its current $357 once investors become aware of a stock-exchange proxy for actual physical ownership.

In the long run, $600 will be far too cheap a price for a metal that is slowly replacing the dollar as a preferred reserve in the vaults of trade-surplus producers such as China. But I get ahead of myself.