By Robert Boshnack, Chairman, Vision L.P. January 5, 2005

Our last year’s special report, "Eye-Opening Stock Market Forecast and Analysis for

2004" proved right on target! Unlike many analysts who forecasted strong gains or big

losses for the market in 2004, we took the middle ground. We cautioned investors not to

expect returns anywhere near the 25% recorded by the Dow in 2003, but rather to expect

a lack luster range bound market producing modest single digit returns closer to around

7%. The market proved us correct, trading in a relatively tight range, with the Dow

finishing the year up 3%, at 10,783.

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not in response to them. They increase the most when earnings first recover. Historically

speaking, the largest market gains tend to come at the start of an economic rebound,

where the market "prices in" future earning gains. This is precisely what we believe

happened in 2003. Most of the gains in last year’s stock market are already factored in!"

"The key to the direction of the market will be interest rates. Historically most

bear markets have been triggered by a reversal in interest rates. We feel that

inflation is still low enough for the Federal Reserve Board to be accommodative

in its monetary policy. Any interest rate increases, we believe, will not occur until

the latter part of the year, and will be mild enough not to spook the markets and

derail the economy. Historically, presidential election years have been positive

for the stock market. We believe 2004 will prove true to form."

As many of our readers know, we believe the history of the stock market can be a very

important guide to its future direction. We believe studying the history of the markets

Why? History is created by the actions of people, and people have generally repeatedly

reacted in a predictable fashion since modern civilization began! People don’t change;

only circumstances and events do!

It is important investors realize that in 2000 we ended one of the biggest, speculative bull

markets in history, where stocks rose to absurdly high levels that were nowhere near

justified by their earnings. Secular bear markets have historically followed ‘super-bull’

markets.

Why, we ask, should we assume the present market cycle will be any shorter than it was

for each of the three bear market cycles described, especially in light of the fact that the

more damaging than all of its predecessors?

years. Fierce rallies are typical in secular bear markets. They serve to convince investors

that the old bear market is over and a new bull market is on the way, eventually providing

fuel for the next big decline, as disillusioned bulls exit the market. For example, during a

27-month span that began in April 1930, there were seven major market rallies. The

average rise was 24%. Even with the rallies, it took the market 25 years to recover to its

As you can see, a closer look at secular bear market historical cycles show long periods

of stagnation and lackluster performance! From 1881 to 1921, a 40-year period, the

market experienced little change. Once the market peaked in 1929, it wasn't until 1954,

25 years later that the market recovered to its 1929 highs. And for 15 years, from 1965 to

There is ample historical data in support of our opinion that stocks are in a secular bear

market and will under-perform for years to come:

Yale professor Robert Shiller, who called the top of the market in his famous book,

In a Barron’s article, "After the Bubble," it was stated: "Nor does history offer any

comfort to today’s stock investors."The last three stock-market manias that ended in

groundbreaking book, "Stock Cycles." Written during the first quarter of 2000,

Alexander's propositions have accurately described the markets since then. Alexander

the probabilities of those repeating, he asserts, is very high. The only statistically

valid, non-random cycle Alexander could find is a 13-year cycle. Since 1800, he shows,

there have been 15 alternating good and bad cycles of 13 years, from periods where

stocks were undervalued to stretches where they were overvalued and back again. In his

model, the year 2000 represented a 13-year peak. There is only a 3.9% probability that

this pattern is random. In other words, Alexander concludes, there is a 96.1% chance

only a 0.3% annual average rate of return.

Now that we’ve presented the stock market’s "big picture," let’s get to the particulars.

created by artificial fiscal and monetary stimulus. A self-perpetuating recovery

requires investment in capital expenditures, growth in both jobs and income and less

reliance on debt. According to economic theorist Joseph Schumpeter, economic

recoveries that are purely a consequence of fiscal and monetary stimulus must ultimately

fail.

The market was propelled in 2003 by a fiscal and monetary steroid-like mix of tax cuts,

highly accommodative monetary policy, record low interest rates and massive mortgage

refinancing. These "market steroids" carried over into 2004 helping to underpin the

market. However, enhancement drugs, as most of us have learned, provide short-term

solutions for optimizing performance, but they also come with long-term consequences.

Likewise, "market steroids" amount to no more than temporary band-aids, obscuring

problems that can get even worse when the "band-aid" is removed.

At a conference in Frankfort, Germany last November, Federal Reserve Board Chairman

Allan Greenspan was uncharacteristically candid. He said, "It seems persuasive that,

given the size of the U.S. current account deficit, a diminished appetite for adding to

dollar balances must occur at some point."

Greenspan suggested an eventual desire by foreign investors to cut the risk of holding too

many dollars may lead them away from U.S. assets or lead them to seek higher rates of

return. He warned this would elevate the cost of financing of the U.S. current account

deficit and renders it "increasingly less tenable."

interest rates would have to rise. The government responded late last year by raising

the debt ceiling by $800 billion: Hardly the restraint Greenspan was calling for!

Concerning the ballooning U.S. trade deficit, Morgan Stanley’s economist Steven Roach

states what we believe to be an alarming, but accurate appraisal:

"The day will come when foreign investors simply say 'no' to this arrangement - refusing

to fund America's consumption binge without getting a meaningful concession on the

terms of financing. That's when the dollar collapses, US interest rates soar and the

With the dollar plunging to record lows against the Euro and other currencies; foreigners

are suffering huge exchange losses buying U.S. securities. Foreign buying of U.S.

securities is already starting to decline. We expect the Fed to be forced to raise interest

rates considerably more over time to continue to attract foreigners financing U.S. debt.

Don’t expect much buying from U.S. consumers; they are "tapped out" with the highest

consumer debt, and lowest savings rate on record.

Bill Gross, chief investment officer at California-based Pimco, with $415 billion assets

under management, said the handwriting is on the wall when it comes to a weaker dollar

and higher interest rates.

"There's no doubt that the dollar is on the run and that higher U.S. interest rates are the

inevitable consequence." Dollar depreciation leads to higher inflation and ultimately

forces foreign creditors to question their rationale and indeed their sanity for continuing

purchases of U.S. Treasuries, he added. We agree with Mr. Gross.

for the stock market, and the harbingers of recession.

Two widely followed inflation gauges are flashing warning signals. Near the end of last

year Ned Davis Research’s inflation model hit a 15-year high.

The Future Inflation Gauge from the Economic Cycle Institute is holding firm and shows

no sign of weakening.

The ISM gauge (Institute for Supply Management) continues to hover near the highest

levels in 25 years. This gauge measures on going pricing pressures in the manufacturing

sector.

Adding to inflationary pressures is the highest oil prices in history. Higher oil prices are

not only inflationary, but also take money out of consumer’s pockets that could be spent

on products that support the economy. According to Morgan Stanley’s Roach, "Oil

shocks like the one that may be developing, have an awfully perfect-and perfectly awfultrack

record. They are always followed by recession." Although oil prices declined from

their $55 barrel highs in 2004, we are still in the $40 per barrel price range as 2005

begins. Sustained prices in the $40 range are still significantly higher than in 2003, and

way above historical averages!

We have had one of the biggest monetary and fiscal spending sprees over the past several

years by the federal government in an attempt to spawn higher capital spending and

hiring on the part of businesses; two essential ingredients for a healthily economy. While

low interest rates, tax cuts, and mortgage refinancing had a positive effect on the

economy in 2003 and 2004, the end of tax cuts, rising interest rates, and the slowing of

mortgage refinancing were starting to show their effects towards the end of 2004, with a

slowing of capital spending, less hiring and more firing.

At the end of 2004, it was reported in December that job cutting was the worst in 2 ½

years. Additionally the pace of job creation since the last recession in 2001 has been the

slowest of any economic recovery in the U.S. since the Second World War!

With more people unemployed and less job creation, there is simply less money for

consumers to spend to support businesses; which a record consumer low savings rate and

debt load further compounds! Consumer borrowing and spending excesses of the past

few years have grossly depleted the economy of available resources for a self-sustaining

economy. A plummeting dollar does nothing at all to offset the profound structural

shortfall of savings and capital formation. Rather, it fuels inflation. Consumer borrowing

and spending excesses of the past few years have seriously compromised the ability of

the consumer to support the economy going forward. We expect that weaker than

.

Now that the tax cuts are no more, interest rates are rising, more jobs are being lost,

corporate profits are decreasing, mortgage refinancing is waning, and business is slowing

Many investors who are not old enough to remember how the stock market traded before

1980 have a distorted view of how long bull markets should last. This is understandable

since the bull market of 1982 and 1992 lasted 5 and 9.5 years respectively. We have

experienced 16 bull markets over the past 55 years. The average peak in the 16 bull

markets since 1932 was 2.6 years. The current secular bear market rally, which many

refer to as a bull market, was 2.4 months old as of January 2005. This "bull market" is

getting old, and approaching the historical peak of bull markets since 1932.

The Federal Reserve Board raised the discount rate 5 times in 2004. Since 1953, 6 and 12

coincides with the time we believe the market, may begin to experience difficulties.

Since the Dow bottomed in October 2002, it has rallied close to 50%, propelled by

double-digit earnings. We see earnings decelerating more than the consensus, making the

Dow highly susceptible to a substantial decline. The higher the rise the greater the fall!

An excellent contrary indicator to the direction of the market is extremes in investor

sentiment. At the end of 2004, according to the American Association of Individual

We urge investors not to be led astray by the "herd’s" bullish forecasts for 2005! Don’t

be fooled by appearances. The strength the market is exhibiting is a carry over from

"market steroids" that are just about depleted. Stocks are a leading indicator; they tend to

the "market steroids" previously mentioned under "Specifics" in this report underpinning

the market, we believe the on-going cumulative effect of record budget deficits, a

depreciating U.S. dollar, rising interest rates, high oil prices, loss of jobs, and rising

inflation will be insurmountable, and push the U.S. economy into recession sometime in

2006. At some point in 2005, we expect investors to take off their rose-colored glasses

and start to factor in the possibility of recession in 2006. The anticipation of recession

election year cycle. Since 1953 there have been 13 presidential elections, not including

the one that just passed. Bear markets ensued after 11 of the 13 elections. The average

loss during these bear markets was in excess of 20%, and as high as almost 50%. The

period in which we now find ourselves. The second greatest aggregation of bear

markets started in the second year after their respective presidential elections, which

would be 2006. This coincides with our forecast that the market will cross over to the

bear sometime in the latter part of 2005 to early 2006! (It is interesting to note the

As you can see from "Pictorial View of Secular Bear Markets," our forecast is in line

with the historical patterns of other secular bear markets.

We believe we are now in a similar period to the super bull markets, which peaked in

a negative 0.2%. Further, we expect the market will be in a sideways pattern with a

downward bias for many years to come!

If one is to survive and prosper in the coming years, we strongly believe it is necessary to

let facts and logic overcome one’s emotions, realize we are in a long-term secular bear

market and invest accordingly! The long-term historical average of the Dow Jones

Industrial Average is around 7%. Considering the disheartening long-term outlook for

One of the least correlated investments to stocks is commodities. In fact, an important

benefits by including managed futures in an overall portfolio. Additionally the study

shows how managed futures’ best performance periods were in periods of rising interest

rates; a period we are in now! For more details on the conclusions drawn in the study,

Over the last century, we have experienced only five bull markets in commodities, or

one, on average, every 20-30 years. Growing inflation usually sparked the bull markets!

Past performance is not indicative of future results.

The commodities that are receiving the lion’s share of press include gold, crude oil, the

US dollar and the Euro currency. However, a number of commodities remain near

historic lows, presenting a potentially classic opportunity for investors. There are also

several investment strategies available to qualified investors that attempt to capitalize on

the commodity markets, including the limited risk use of buying options. Consult your

Vision affiliated broker for the commodities that look attractive and the investment

strategies that are best suited for you!

This report is issued by Vision LP, a registered futures commission merchant, based upon

reliable sources believed to be accurate. The views expressed herein may differ from

those of Vision LP's brokerage or investment management affiliates, whose investment

policies and outlook may not coincide with those of Vision LP or its officers and

principals. Futures traders should be aware that daily market volatility may cause loss