Britannia Radio

The Daily Crux Sunday Interview

A major stock market top is approaching...

Crux: Hi David. Could you tell us a little bit about your background and what you do at Charles Nenner Research?

David Gurwitz: Well, I'm the Managing Director of Charles Nenner Research.

I've been working with Charles for over a decade. I'm a JD, MBA, and CPA... But don't hold it against me, because I'm also a composer, a concert pianist, and an ex-baseball and basketball player. I played basketball in Spain for a while in 1976 before working in merchant banking for many years. I actually taught English in Spain as well, so there are about 30 Spaniards who speak English with a Bronx accent!

I was trained by Red Auerbach of Boston Celtics fame, which is another long story, and he taught me to recognize talent. He was one of the best at that.

When I met Charles about 10 years ago, I instantly realized this was one of the most talented, brilliant, funny men I'd ever met in my life. He was consulting for Goldman Sachs at the time, and when I began to understand what he was doing, I said to him, "Why doesn't the world know about you?"

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And his response was classic Charles: "I am famous, it's just that nobody knows it yet."

So that's how we started. I suggested we start a business together, and my job became trying to get more people to learn about the work he was doing. I was able to get some hedge funds to subscribe, and eventually I got The Wall Street Journal to do a piece on him. He made three perfect calls – you can verify all this on our site, by the way – and then CNBC picked him up. The rest is history. So that's the quick background on me.

Charles' story is rather interesting. He was at the University of Amsterdam Medical School, and one of his professors mentioned that lots of people get admitted to insane asylums all around the world at the same time, and they couldn't figure out why. Charles couldn't believe it, and wanted to learn more... so that's originally what caught his interest about patterns, and how he got into the business.

He came to New York about 25 years ago, and watched the financial news. They were saying the market went up and down because of this and that, and he didn't buy it.

To him, the so-called "cause and effects" just didn't add up. So, he started studying old papers like The New York Times, The Wall Street Journal... and he began to uncover cycles in various asset classes. He saw various short-term and long-term cycles based on tops and bottoms in historical prices. He did this all by hand back then, but later hired a computer programmer to do that work, based on what Charles saw, with all sorts of pretty intense analysis, such as Fourier.

Those cycles form the base of the analysis he does. Cycles provide direction, not levels. He also developed a price target algorithm that he uses, along with Elliott wave analysis and his own combination of many other technical indicators. In effect, he tries to provide the big three of direction, level, and price.

Charles is trained as a medical doctor, so I like to use this analogy: If you go to a doctor and say to him, "Something is wrong with my ankle," the doctor will do an exam, take some x-rays or other tests, and make a diagnosis.

What Charles and the staff at Charles Nenner Research do is similar to looking at a lot of x-rays and tests for every particular asset class... stocks, bonds, commodities, currencies, and their particular ETFs, as well as economic indicators like unemployment and interest rates.

He's just amazing at pattern recognition. He's got that natural ability... he's a trained violinist, he's a wonderful singer of many styles, and he speaks seven languages. He's a black belt. He played chess competitively. He even plays ping-pong very well. You know, he's one of those types of people. He picks up patterns very quickly.

With our work you get a completely different worldview that you don't get from anybody else, because Charles doesn't believe the world is random.

Crux: Can you briefly explain the theory behind cycle analysis, as opposed to traditional fundamental, or technical analysis?

Gurwitz: Absolutely. Well, when most people refer to fundamental analysis, they're talking about valuations, P/E ratios, and that kind of thing. Charles believes cycle work is fundamental.

Charles believes that cycles apply in everything, not just the stock market, if you can get enough data points to create the cycles. They're just as fundamental as anything we consider fundamental, but it's our language limitation that keeps us from talking about it properly.

What's a cycle? The word cycle comes from the Greek word for "circle," and it's simply a repeating pattern.

The idea is there are cycles happening for nearly everything on many different and competing time levels... and so they aren't always apparent in the behavior of that particular thing.

To use a stock as an example, you won't be able to just look at a price chart and see all the different cycles. Most of the time you may have short-term cycles moving one way while longer-term cycles move another, and so the ultimate effect on price varies.

But when you have multiple cycles topping or bottoming at the same time, the assumption is there's a very high probability that will be reflected in the behavior of the stock. We might find there's a top every 20 weeks, and another every 57 weeks. If we find 30 of these, and they all top next week, then, most likely, it's a significant top. Or, if they are coinciding at a bottom, it is a significant bottom.

But it doesn't matter whether it's stocks, bonds, commodities, currencies, deficits, unemployment, or other economic indicators that he calls also correctly... they all move in cycles.

When you chart cycles, they look like overlapping waves, or a bunch of EKGs on top of each other, each with different amplitudes and distances between peaks. This is all explained on our site - www.charlesnenner.com - in a Bloomberg presentation Charles and I gave a few years ago. You can see charts showing these cycles, which are combined.

I was a baseball player in my younger days, so one of the examples I often use is to imagine someone hits a ground ball to Alex Rodriguez at third base that bounces every two feet. At the same time, someone hits another one that bounces every five feet, also up the third base line. Another one bounces every 10 feet, and another every 20 feet.

If you wanted him to catch all four balls in the glove at the same time, the best chance of that would be when all four cycles lined up, and all four balls were rising or falling together. When you're talking about investing, the highest probability for finding a top or bottom is when several cycles line up.

To give you another example, back in June, Charles was calling for a cycle top in Apple. And all of a sudden the news comes out saying their new phone has problems. Most people would assume that the new phone's problems were responsible for the sell-off. But Charles looks at it differently. He says if it wasn't a cycle top, the stock wouldn't have sold off, and they wouldn't have had a problem. The news, or rather the interpretation of the news, follows the cycles, not the other way around.

The cycle to him is the most important thing in any analysis, because it's the underlying indicator of a large set of numbers. People often ask if we can analyze cycles on something that's only traded for a year, and the answer is no. You only have 12 closing monthly data points... You only have 50 closing weekly data points... You only have about 200 closing daily data points. The 200-day moving average is often referenced in technical analysis because it's a whole year's worth of data, but in cycle work it's not enough. The more numbers you have, the more data points you have, the more valid the math is.

But in the simplest terms, cycle analysis is just a study of the world. We know summer-fall-winter-spring is a cycle; we don't question that. But the fact that other things might fall into these patterns, we don't typically consider. Charles sees cycles as controlling everything.

And he looks at almost everything... equities, bonds, bunds, four currencies – euro, yen, Aussie, and Canadian – and in effect, what the dollar does relates to those four, so he covers the dollar as well in terms of those four currencies. He looks at other currency crosses. He also looks at commodities – crude, natural gas, gold, and silver, and the CRB index – and that's the basic update that we put out three times a week – Monday, Wednesday, Friday.

And then on Sunday, Charles spends a lot of the day looking quietly, calmly, with no markets open, at all sorts of things, and combining cycles.

It's not a two-minute process, because you have to find 30 cycles, and then maybe that combined line doesn't look like the actual price line, so he'll eliminate 10 cycles, so that the combined line with the remaining 20 does look like the price line, and he'll say, "Well, I guess these 20 are the ones in control of that particular thing I'm looking at."

That part of it is as much art as science. He's trying to find the important cycles. It's almost like cooking a stew with a whole list of ingredients and no cookbook. You experiment with different combinations until you find the one that tastes best.

Crux: You guys have been in the news recently for making some pretty serious predictions about the stock market. Can you talk about what Charles sees for U.S. stocks now?

Gurwitz: Basically, Charles thinks the stock market should hold up until the third week of August, but as he has said repeatedly, it could turn faster. The important point is that this should be a major top in stocks for years. Charles thinks the Dow could fall to the 5,000 to 6,000 area.

Now, it's probably not going to be straight down. It will be more like the Japan scenario. It's likely the market will grind down, with several 30% or 40% rallies along the way to keep people guessing. But he doesn't see it coming back for at least four years. It may go down and just stay – look at Japan. It went down and stayed for a long time. That's kind of what he sees for stocks.

Crux: How about the other asset classes you mentioned? What does he see for Treasury bonds and interest rates?

Gurwitz: Bonds he sees also going down in value over the next 30 years, based on the 60-year high/low/high Kondratieff cycle for bonds. However, for the next several years, after a sell off, he sees a bullish bond market. You have to remember that he was calling for a top in the 10 Year at 4% many months before it happened.

Regarding the Kondratieff cycle, here is the quick thinking. It's 2010 now and rates are low. In 1980, we all know rates were high. In 1950 they were low. In 1920, they were high. In 1890 they were low, and during the Civil War they were high.

So there's an approximate 30-year half-life in a cycle of interest rates. Based on that, rates should be going up until 2040, and there's almost nothing we can do about it.

I'm not saying rates will start rising next week, but that's the big trend.

Crux: How about gold, silver, and commodities?

Gurwitz: Charles thinks gold is headed much higher over the long-term, but not yet. He thinks we're going to have deflation first, and inflation down the road.

He's been saying for a while to be careful about gold. He recommended calls on gold stocks last October, which was a great call, and got readers out when gold hit $1,225, which was close to the high for the year. He avoided the final up and down moves, but it was pretty close.

He doesn't recommend trading it right now. When it gets to a bigger low he's going to go crazy long gold again, but he's not ready to do that just yet.

It's a similar situation for silver and crude oil.

Interestingly, the cycles for grain commodities are up, and we're seeing strength in them now. He was saying many months ago that grain would begin a huge bull market this summer and fall, and now you see the Russian grain field fires. Again, cycles determine the news. Charles has data going back hundreds of years in the grains, and the cycles suggest they're starting a big up trend that should last for years.

It's going to be interesting times.

Crux: Besides grains, does Charles recommend being long anything right now?

Gurwitz: For U.S. investors, he's recommending certain currencies. He wants to own the Aussie and Canadian dollars, because he thinks they'll be strong against the dollar.

The euro is an interesting story. He actually recommended readers sell the euro at around $1.50, well before the Greece story, and he rode it down to $1.22, and then to $1.18, before calling for the current short-term rally. He believes the euro will weaken more before beginning a year plus rally.

He's waiting to short natural gas and the equity market. Charles is very patient, with very few trades. He prefers fewer winning trades to more trading.

Now, some of our clients are long-only funds, meaning they need to be in stocks, and they can't short them. That's not a strategy we endorse right now, but we're doing our best to accommodate them. So Charles has found some individual equities that should hold up well as the major indices fall, and many of them are surprising.

IBM is one of them. Best Buy is another that looks good, which many people would find surprising I'm sure. ING is another.

Toyota. It's really interesting, the long-term cycles for Toyota look good, and there have been some recent articles that said that the lawsuits, vis-à-vis all the engine problems, were actually driver-based. I'm not saying that will be the ultimate result, but cycles would seem to suggest that may be the case. Again, it seems that cycles, as defined by Charles, determine the news.

Lennar is another one that counter-intuitively looks good longer-term. AGU, Agrium, and all the grain stuff should be up a lot.

Alcoa is long-term positive. ConocoPhillips looks great, but it doesn't bottom until the fall. It's the same thing with the CRB commodities index. This fall could be a good buying opportunity for the commodities stocks.

Crux: Any closing comments?

Gurwitz: Well, like I mentioned before, if anyone is interested in learning more about what Charles does, they can check out the material on the website,www.charlesnenner.com. And if they're interested in taking a look at the research, they can email through the form on the site and we'll put them on a distribution list. They can follow the research for a little while, and get comfortable seeing the style.

Sometimes it takes a little while for readers to fully understand, since this entire set of algorithms and concepts is quite different from what's discussed in the financial news. So we welcome everybody to come and take a look if they're interested.

Crux: OK, sounds good. Thanks for talking with us, David.

Gurwitz: My pleasure. Take care.