Say it Again: Even now it is still not too late to sell!

That means: Sell all stocks, including all stock mutual funds, except oils and oil service stocks.

For sell financed and more sophisticated investors only, sell short IBM, Ebay, Microsoft and Cisco.

Last Friday the NASDAQ 100 stock index and the SP 500 index both completed weekly downside key reversals, thereby confirming the continuation and ever deeper entrenchment of this NEW bear market.

Many important stocks completed their bear market rallies and turned back down again at their declining 25 day moving averages. Among these stocks were Microsoft, Cisco, Ebay and IBM, all of which now qualify for short sales and for which we are making recommendations to enter accordingly.

One of the things we have found rather alarming in the past week is the number of people who believe so stubbornly that they should hold their stocks for the long term, and that they are bound and determined not to turn into short term traders. This, of course, is a normal manifestation of popular sentiment after a long bull market and, indeed, it explains two characteristics of market action that might not be readily apparent. It explains how it is that stocks got pushed to such absurd valuations in the first place. The ignorant and unwary masses came to believe as an article of religious faith that you could always make money in the stock market in the long run, and that you should buy the dips and never sell. The extension of this belief is that there is in due course an equal and opposite reaction when the bear market becomes entrenched. Having not gotten out anywhere near the top, the process of taking pain and getting back out of the market is a relentless process that takes a long time to work off. The greater the excesses of the preceding bull market, the longer it takes to cleanse the market.

Many people are still expecting no more than a few weeks of down market or perhaps a few months as a worst case scenario. However, that is not the experience of bear markets of earlier times. It seldom happens that bear markets take less than 18 months to run their course from top to bottom and it can take several years. The Japanese stock market peaked in 1989 and now, eleven long years later, it still has not ended.

Given the immensity of overinevestment in many areas of the world economy,. it is entirely possible that the new bear market in US stocks could take much longer to run its course than seems remotely possible to most people now.

There are two major areas of the world economy which are almost certainly in serious trouble. The first is the telecom industry. The second is the auto industry.

First telecoms. Most of the world's major telephone companies are way overextended financially even before they really get under way with the next stage of equipment modernization that is planned and which appears to be essential. Fact is with a downturn in the global economy, the planned expansion will likely no longer be necessary on the planned scale. In the meantime many suppliers to the infrastructure of the telephone and internet industries are already experiencing a significantly slowing of orders and, worse, are having to finance much of their sales by extending credit to customers unable to obtain regular financing. This house of cards is in the process of unraveling. In the process, it is likely to bring down many apparently solid suppliers. Many a company like JDS Uniphase, Cisco and Dell as well as apparently strong ones like Corning, might not even survive a major contraction in orders. Even if they do survive, the price of their stocks could easily decline by at least 75 percent from here and possibly as much as 99 percent FROM HERE.

If this seems extreme, note that the great Digital Equipment Company's stock (later taken over by Compaq) declined by 90 percent during the roaring 1990s when most computer stocks were soaring. Recently we have seen the price of Lucent decline by approximately 75 percent, from $84 to 20 and, of course, it is still resolutely defined as a bear market. There is nothing magic about the $20 level to stop this relentless decline, which could easily take the stock down by a further 75 percent to the $5 level. Note too that Lucent is a great and powerful company and not by any means a fly-by-night dot.com.

Anecdotal evidence is now coming in that the Internet is approaching some kind of semi-saturation. Almost everyone with money in the developed world is now online and each incremental subscriber is now harder won than in the past. For all practical purposes, the US market has reached saturation. Worse, the number of hours per week spent online in the US is significantly down on what it was as recently as a year ago, and there are reports that the volume of emails sent has actually declined.

Now back to the auto industry, which could be replaying the movie first seen in 1929. Most auto industry stocks appear to be trading at modest multiples, especially considering that Ford and GM in particular have such strong balance sheets. The trouble is that there is immense overcapacity in the industry worldwide. The arrival of much higher energy prices than prevailed as recently as a year ago must impact the sale of new SUVs, the most profitable area for the industry. Worse than that is that at some point, and probably about now, the demand could fall away hard. No one thought there was any limit to demand for cars in 1929. But there was. Once everyone had a car, or two, who could afford to pay for them, manufacturing output turned down. Once manufacturing output turned down, the entire economy backed up, taking profits and stock prices down with it.

The confusion over the US presidential election is only the catalyst that has set off latest leg of the decline which was already well under way. That is not the underlying cause of the latest leg down in stocks.

The cause of the decline in stocks, first and foremost, is that we have been witnessing the classic bursting of a market bubble. For a time too much money was chasing too few stocks, just as too much money was chasing too little gold and silver in 1979. The higher the market went, the higher the market could go. It was fueled by a universal belief that you could expect annual returns above 20 percent to go on forever, even as the economy was expanding at a rate no more than 6 percent in its most bullish quarters. Rising prices not only attracted an almost limitless flow of new money, it also attracted money borrowed in order to buy stocks. An apparently virtuous circle continued to drive stocks like Cisco and Nortel to multiples far above a hundred. People were prepared to buy a stock and to wait a hundred years just to get their money back on the assumption that it could go on earning at the current rate. If growth continued at an annual rate of 50 percent for the indefinite future, then of course it would all turn out fine in just a very few years.

Remember though the story of IBM in the 1970s when that was the Microsoft or the Cisco of its time. If it had continued to grow as it was then growing, by 2000 the company should have had sales in excess of the Gross National Product of the entire world. You can see in hindsight both that it did not happen and that the very idea of that happening seems ridiculous. Remember too that IBM ran into severe business difficulties, and that the stock went into a protracted bear market from which it began to emerge only a half dozen or so years ago.

Apart from overvaluation, years of overinvestment have led at last to a real slowing in profits and profit forecasts even as many parts of the economy, including consumer spending, continue to boom. Those investors who have been around for a while will know that once profit growth slows, it can turn negative. That is to say that companies that were once very profitable and growing fast can actually start turning in losses.

It's one thing to own a stock with a price/earnings multiple that represents real profits. A previously astronomical price/earnings multiple derived from a factor that is now a minus quantity can lead to a contraction of most of the price of the stock from where it once traded.

Until now the US economy has been the locomotive pulling the rest of the world along through good times and, often, conspicuously less good times. A crisis here or another one there has led Alan Greenspan to prime the pumps with easy money to save Asia, Latin America or errant hedge funds from disaster. The money, of course, has ended up fueling the US economy and especially its stock market. Now there are new threats to the world financial system, from Argentina and from Asia. Defaults occurring in parallel with a slowdown in the US economy that is gagging on itself could lead to a general implosion.

Although this may all sound extremely pessimistic, which it is intended to be for the near term, the important thing now is to conserve capital so it's available to buy stocks at great prices when the probabilities again turn favorable. Right now that prospect is not even on the radar screen, and it's unlikely to be for a long time. But that time will surely come in due course.

In any case, we continue to recommend retention of oil and oil service stocks. One flip side of our bearish attitude toward stocks generally is that oil prices are not likely to decline all that far even when the current squeeze eases. Oil company stocks and oil service stocks are priced for oil prices at $20 and $25.

Stockscom