How Do the Locusts Know?

You don’t want to miss the locusts. But first:

1. Happy New Year!

2. I flew home on a 37-seat commuter jet yesterday and walked past the nosewheel, where two (count ’em: two) humans were attaching a tow bar to the vehicle that would maneuver the plane out of the gate area. The flight attendant guessed we were about one-tenth the weight of a 767, so my guess is that it would take a Chorus Motor only the size of a grapefruit – not a watermelon – to run this thing around the tarmac like a golfcart. I am hoping one day we make some serious money from these grapefruits. Don’t sell your BOREF.

3. Don’t sell your puts, either:

LEXINGTON, Mass. (AP) — Pharmaceutical company NitroMed Inc. said Thursday that its joint research program with medical device maker Boston Scientific Corp. studying its nitric oxide-enhancing technology will conclude on Dec. 31.

A company spokeswoman said the agreement, which had been in place since November 2001, was scheduled to end. The deal contributed about $1.5 million to NitroMed’s revenue this year, and some $3 million over the term of the deal.

The two firms were researching the use of the technology in connection with restenosis in balloon angioplasty. Restenosis is the closing or narrowing of an artery that was previously opened by a cardiac procedure such as angioplasty.

NitroMed said it plans to continue to explore the use of its nitric oxide-enhancing technology in medical devices.

NTMD ended 2005 at $13.95, down from $22 in July when those of us with money we could truly afford to lose bought puts, betting the stock would go down. Sales of BiDil – Nitromed’s only product – will almost surely continue to rise, but probably not by enough to make the company profitable.

Why would an unprofitable company with a single product that combines two readily available, widely prescribed generic drugs sell for $420 million (30.5 million shares at $13.95 each) when a company with what may be a revolutionary electric motor is valued at $80 million (5 million shares at $16 each)? One never knows, but my bet is that it would make more sense if the market valuations were reversed . . . which would put NTMD at $2.75 and BOREF at $84. Needless to say, if that bet turns out to be anywhere close to right – as it may not! – 2006 will be a Happy New Year indeed.

HOW DO THE LOCUSTS KNOW?

They’re actually cicadas, they come every 17 years, and they do not coincide with the 17-year cycle of the U.S. stock and commodities markets.

But wait – cicadas aside, is it possible there are 17-year cycles in the U.S. stock and commodities markets? (And how come the Jewish calendar has 7 leap months in every 19 years? Oy!)

One of you sent me this:

Data source: CRB Index and S&P 500, from Globalfindata.com

*Negative if adjusted for inflation.

[The Dow closed at 874.12 on December 31, 1964; at 875.00 on on December 31, 1981 – up less than one point in 17 years. The table above shows a 35% gain in roughly the same cycle, but those figures include dividends (as they should). What they don’t include is inflation: that 35% gain would have been a sharp loss in real dollars.]

Do you see a pattern here? Every 17 years or so something seems to switch and you have a period that’s great for stocks but bad for commodities (like soy beans and copper) . . . and then it switches back to a period that’s great for commodities but lousy for stocks.

If you had started with $1,000 in stocks in 1914, then switched back and forth until the end of 1999, your $1,000 (ignoring taxes and inflation) would have grown to $1.7 million – versus $4923 – again, ignoring the ravages of inflation (you’d have had only about $40 in inflation-adjusted 1914 dollars) – if you had adopted the same switching strategy but gotten the cycles backwards.

It’s possible all this is coincidence and silly.

It’s possible that it’s not, but that whatever rational cause underlay the effect will have changed or been outweighed by other factors (or speeded up by the faster pace at which news and capital now flow).

But assuming there’s something to it, the main thing to note is that some significant portion of the ‘effect’ for the current 17 years has already happened. Commodity prices have already jumped a bit since 1999 (oil comes to mind). And stocks have already disappointed. So it’s possible much of the effect of the 17 year cycle, if there is one, has already been felt. (In others words: why the hell didn’t I tell you all this in 1999?) And possible we ain’t seen nothin’ yet.

The conclusions I would draw from the table above are:

(a) As always, it would be prudent to live beneath your means and save as much as you can: you may not be able to count on stock market returns to balloon your retirement fund over the next decade.

(b) It pays to diversify globally. (The figures above are for U.S. stocks.)

(c) Our timber stock (symbol: PCL), up about 50% including dividends since first suggested here in 2003, could still have a bright long-term future. If you haven’t bought any, I think it’s worth a look.

(d) As tempting as it is to take profits on oil stocks (APC is up 67%), I continue to think we should probably hold on.

(e) None of this will have anything much to do with the success or failure of specific speculations like NTMD puts or BOREF shares – so one might still play with them, albeit (all together now:) ‘only with money you can truly afford to lose.’

(f) Nor will it likely diminish the edge you might get by using the ‘magic formula’ investing suggested here a few weeks ago. Coupling that with the power of dollar-cost averaging, you might be sitting pretty 10, let alone 20, years from now.

(g) Vote Democrat. Historically, the stock market does better under Democratic Administrations. (Really. Look it up.)

(h) There is more to life than money. This could be a tough year for the average American household – whose median income, unlike that of CEOs, did not go up 30% in 2004, but rather has been falling in inflation-adjusted dollars in each of the past five years. But if you can arrange things in such a way as to be comfortable, even if you have to scale back some dreams, then you might be pleasantly surprised. To begin with, this glum money outlook could prove entirely unfounded. And even if it’s not, you can have the astonishing fun of enjoying the good things that will come over the next decade, including spectacular sunsets and cool summer breezes; reruns of Seinfeld and new episodes of Boston Legal; amazing new inventions and friendships and children; and the progress that, let us hope, will lead to the better cycle that should begin peeking its hopeful little face through the curtain around 2015.