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the dow~ richard russell comments/ first 90% down

  1. Worth posting today because of the implications of the 90% down day last night...


    March 10, 2003 -- I've received a number of e-mails regarding the interview with Steve Leuthold in this Sunday's New York Times. I've exchanged services with Steve for many years, and I have the greatest respect for him. I also exchange services with dozens of other economists, writers, advisors, and a number of these people are bullish and have remained bullish throughout the bear market.

    It's been my custom over the years never to argue with other advisors or writers. My battle is with the markets, not with other advisors.

    To be brief, I believe we are in an ongoing primary bear market. I believe this bear market is far from ended. I believe this bear market will end like all other bear markets in history -- that is, it will end in exhaustion (of buyers) and it will end with blue chip stocks selling "below known values."

    I understand the pressure on many (most) advisors to come up with something constructive. After all, if you believe this is an ongoing bear market, then why the hell would your clients want to keep reading your output about pessimism and bad news? I can understand this attitude and I sympathize with it, but I don't go along with it.

    I write what I think and what I see, and what I see is a primary bear market that is still in the early part of its second psychological phase. In fact, in the Investor's Intelligence poll of investment letters I note that the percentage of bullish advisors is still above the percentage of bearish advisors.

    Yet in Peter Eliades study of investment advisors, he shows that at every important bottom, bearish advisors outnumbered bullish advisors for many months. This process have not even started yet in this bear market.

    I've emphasized that at bear market lows stocks decline to the level of great values or "below known values." For example, at the 1949 bear market low the S&P sold for 5.4 times earnings while yielding 7.5%.. At the 1974 bear market bottom the S&P sold at 7.5 times earnings while yielding 5.1%. At the 1980 low the S&P sold for 6.8 times earnings while yielding 5.7%.

    I might add that at these lows we were dealing with real (not fudged or manipulated or "pro forma") earnings.

    Today the S&P is selling at 28 times earnings while yielding 1.9%. Does this look like a bear market bottom? Does this look like the area where a new bull market is born? Not to this veteran observer, it doesn't.

    So my argument is not with the guys and gals who believe that a new bull market is starting. My battle, as always, is with the stock market. I hope that answers a lot of questions and comments.

    A number of subscribers have asked, "If it looks like deflation, how can you advise holding gold or gold shares."

    Ah, this is a complicated subject. The entire world is in an economic squeeze. Japan, the second largest economy, has just seen its stock market drop to is lowest level (breaking below 8000 for the first time) in twenty years. Germany, the third largest economy, has seen its stock market smash down over 70% while unemployment in Germany is over 10% (as is France's).

    China is exporting deflation across the face of the earth. Currencies are sinking as the various nations compete for export power. There's just too much production throughout the world. These are forces for deflation. As I write, the long T-bond is at a new record high. Would this be happening if the bond market was worried about inflation?

    Business is sagging here in the US, so much so that there is talk of two more .25% cuts by the Fed, one at the March 18 meeting and the second at the May 6 meeting. The Fed is fiercely committed to fighting the forces of deflation. And with the recent "shocking" report on unemployment, the Fed is now genuinely worried that the recession is deepening.

    In other words, the outlook is for more and greater creation of liquidity. On top of lousy business, the Congressional Budget Office is predicting deficits or $1.82 trillion over the next ten years. This is almost guaranteed to erode the purchasing power of the dollar.

    Finally, there is the question of whether the dollar can even survive as the world (and its central banks) continue to the process of diversifying OUT of dollars and as the dollar sinks to new lows against the euro and the yen.

    And how about this from the Associated Press today --

    Moscow -- The finance minister urged Russians not to shift their savings out of dollars yesterday, saying there is no need to worry about the US currency falling dramatically, despite recent declines.

    Russia is the biggest dollar economy outside the US, by some estimates its citizens have tucked away as much as $40 billion in mattresses, closets and shoe boxes. Most Russians keep their savings in dollars because of the instability of the ruble since the Soviet Union's collapse. The Russian government is also dollar-dependent, with most hard-currency reserves held in dollars and Russian ruble unofficially pegged to the dollar. But the dollar has lost ground in financial markets lately against the euro and even the ruble, leaving many nervous about keeping their savings in dollars."

    Russell Comment -- you won't read the above in the Wall Street Journal. By the way, the Russian central bank is diversifying OUT of dollars into euros as is China's central bank.

    So the pressure on the dollar will come from world diversification out of a weak currency, the dollar. And pressure will come as the US has to create more tens of billions of dollar to cover a seemingly endless string of huge deficits running out as far as the eye can see.

    All the above make an "insurance" position in gold mandatory. It may take time before the big moves in gold come to pass, but as I said, the big picture makes holding in gold and gold shares mandatory.

    XAU and HUI have both broken below their 200-day moving averages. With gold, the metal, up today, it's hard to know what this means. My guess is that sentiment towards common stocks is turning so negative that it's even impacting on the gold shares.

    There's no question that large interests who want to protect themselves against a falling dollar will buy the metal. They want the "real thing." They will not be interested in speculating on the stocks. That's my "take" on what's happening in gold shares even as gold rises. In time, however, I believe that this will be corrected.

    Another thesis is this -- Large interests intent on accumulating gold shares as advantageously as possible are manipulating the relatively tiny gold market, with specialists knocking the stocks down. Remember, the entire gold share market is less than $90 billion, or less than a lot of individual Dow stocks. So manipulation could be a factor.

    Do you find yourself hoping that gold "goes through the roof"? Don't, If gold goes through the roof, it will mean that the dollar "goes through the floor," and remember, almost everything you own is denominated in dollars.

    Let's talk about the markets. As I write a few hours after the opening, the D-J Transportation is down 50 points, and if it closes in this area it will mean a new bear market low for the Transports. The October 9, 2002 closing for the Transports was 2013.02, and the Transports, as I write, are below that figure.

    What does that mean? The comparable Dow low on October 9 was 7286.27. Thus, if the Transports close below 2013.02 we'll have a new low in the Transports. But we'll also have a downside non-confirmation in that the Dow has not confirmed the breakdown of the Transports.

    And what does that mean? If this was a bull market I would take this potential non-confirmation as bullish. But since this is a bear market I take the potential new Transport low as a negative. Why do I say that? Because in the majority of cases, a primary penetration of one Average is confirmed by the other, in both bull and bear markets.

    In other words, in a bear market, if one Average breaks to a new primary low, the odds are that the other Average will confirm.

    As I write, the Dow is at 7638. Thus the Dow is still roughly 350 points above its bear market low.
    Today the declining 200-day MA stands at a new bear market low of 8526. The faster moving and declining 50-day MA of the Dow stands at 8163. The difference between the two is 363. This is the widest spread yet on the decline from the January high. It tells us that on a trend basis, the Dow's decline is accelerating.

    Question -- will the Dow confirm the breakdown of the Transports? Why guess -- let's just watch the action, no need to guess.

    TODAY'S MARKET ACTION -- Very strange and unusual day. On preliminary examination based on volume, this was our first 90% down-day (I'll get the official figures tomorrow from Lowry's). But what is so unusual is that although the statistics were awful, volume was very low on the NYSE. This suggests that the market is beginning to show panic indications, but surprisingly few investors were in on the panic. I've never seen anything exactly like today's action. However, 90% down-day usually come in series. Remember that -- they do tend to come in series.

    Today, if a stock was tradeable, it was down -- and that includes the gold shares.

    My PTI was down 6 to 5216 while the moving average was at 5229. PTI remains in its bear mode.

    The Dow was down 171.85 to 7568.18. There were two movers in the Dow today, IBM down 2.20 to 76.70 and MMM own 2.82 to 121.68.

    All 30 Dow industrial stocks were down today. In a bull market, that usually calls for a short-term rally. In a bear market -- well, we'll see.

    April crude was down .51 to 37.27.

    Transports plunged below 2000 and for the first time and also below their bear market low of October. Trannies closed down 59.92 to 1902.56 with rumors or AMR on the verge of bankruptcy. Transports are now down for their sixth consecutive year. I've never seen a major US stock average down for six consecutive years. What does this mean? I don't know, but I'm sure it's NOT good.

    Utilities were down 4.40 to 196.26.

    There were 816 advances and 2473 declines. Down volume was 94.5% of up + down volume -- well over 90%, but I'll depend on Lowry's for the points (for a 90% down-day we need over 90% points down too). But this is panicky-type action, no doubt about it.

    There were 79 new highs and 258 new lows. My High-Low Index was down 179 to minus 8438 -- this is a new Index low for the bear market.

    Total NYSE volume was only 1.21 billion shares.

    S&P was down 21.41 to 807.48.

    Nasdaq was down 26.92 to 1278.37 on 1.21 billion shares.

    My Big Money Breadth Index was down 10 to 638,

    March Dollar Index was down .15 to a new low of 97.95. March euro was up .30 to a new high of 110.38 March yen was unch. at 85.51

    March Nikkei was at a new bear market low (lowest in 23 years), down 165 and cracking 8000 to 7970. All European stock markets were down.

    Bonds higher. The June 30 year T-bond was up 13 ticks to 115.11 to yield 4.65%. June 10 year T-note was up 11 ticks to 116.16 to yield 3.57%. Long AAA munis now yielding the same as Treasuries for the first time since the mid-1970s.

    April gold up 3.90 to 354.80. May silver down 8 to 4.68. April platinum surging up 19.30 to 702.90, a record. June palladium was down 3.60 to 242.65.

    Gold/Dollar Index ratio zig-zagging up and well above its 50-day MA -- to 362.33.

    Gold advance-decline line down 19 to 1070.

    XAU down 2.48 to 64.96. HUI down 6.01 to 119.53.

    ABX down .40, AEM down .48, DROOY down .24, GG down .48, HMY down .74, KGC Down .38, NEM down .80, RGLD down 1.05.

    I'll repeat my old adage from the '70s, "Gold, gold, you're making me old."

    Actually, I said put up to 10% of your assets in gold and gold shares. If half in gold and half in shares, your only down 3 to 5% of your total assets. In this market, so far, that's a bargain. Gold has been up the last two trading days with the gold shares down. This can't be sustained. We're seeing a panic out of ALL common stocks.

    STOCKS -- My Most Active Stock Index was down a full 15 to a new bear market low of 91.

    The 15 most active stocks on the NYSE were -- CE (Concord EFS) down 2.03 to 8.32, FNM (Fannie!) down 4.15, IPG down .43, GE down .59, EMC down .39, F down .23 to 6.99, NOK down .27, C down .89, GLW down .24, NT down .88, PFE down .60, MO down .27, XOM down .33, AOL down .20, SBC down 1.22.

    Few More -- GM down .43, DCX down 1.32, GS down 2.34, AIG down 2.55, MER down 1.51, MCD down .32, WMT down .99, COST down .79, MRK down 1.17, CAT down 1.01, DIS down .54, DELL down .78, SO down .43, ED down .98, KSS up .22, SBUX down .43, LEN down 1.15, KBH down .98, EBAY down .44, MSFT down .61, CSCO down .23.

    VIX was down 2.20 to 37.85 as fear heighten among the option-writers.

    McClellan Oscillator, after peaking its head up above zero, drops down to negative territory again to minus 73. Ugly looking structure.

    CONCLUSION -- A nasty day, with the market clearly on the edge of panic. The low volume was very strange. It was as if not many were in the market today, but those that were in the market were panicking.

    Insurance companies "took it on the chin" today, which I find ominous.

    As for the potential war against Iraq, I can't see Bush backing out now. He's unbelievably committed -- this despite almost the entire globe being against the war except for Bulgaria (Blair is now hesitating).

    The US ties with Europe are fraying, and the US looks increasingly like "the loose cannon of the world." So be it, I continue to think that Bush will "go in," no matter what. He's listening to God, not the rest of the world.

    What worries me is that "In bear markets, whatever can go wrong will go wrong." I wonder whether Bush is aware of that little aphorism. So far, plenty is going wrong.

    Fannie Mae and Freddie Mac both got hit hard today. St. Louis Fed Governor Pool stated that both of these government-sponsored institutions are under-capitalized, and any trouble in this area could be a threat to the housing industry as well as a threat to the whole US economy. Russell Question -- what prompted a Fed governor to come out with this statement at this time?

    Saying adios for today,

    Russell


    Gretchen Morgenson in Sunday's New York Times heads here column, "Economy Can No Longer Count on the Consumer." She notes that two key barometers are in trouble -- sales at chain drug stores and a decline in growth in Wal-Mart stores that are open a year or more.

    The Russell opinion is that consumer are now starting to pull back on their spending. I believe housing is topping out, and the used car market is extremely weak. What frightening consumers are (1) their own towering debt, but more important (2) pink slips, lost jobs, and rising unemployment. Consumers are finally figuring it out -- in the face of raging bear market, the thing to do it to STOP SPENDING.


    The e-mail below is from an old friend, and a guy who has followed gold closely for many years. I asked him what he thought of the gold action and this is his reply --

    They've done much worse lately than they "should" have, and that's
    troubling. With gold flashing the all clear a few weeks ago @ $380,
    most mining stocks had powerful basing patterns and looked like they
    were ready for lift-off. Gabelli's (excellent) gold fund actually made
    new multi-year highs. But it all turned out to be more like
    Challenger's 1986 ride. As you see, some are still in pretty good shape
    (GG, KGC), while some look so-so (BGO, HL, NEM), and others look
    downright ugly (CDE).

    MOST LIKELY, they're making us sweat, before the next leg up, which
    finally takes out that triple top resistance around 90 in the XAU. But
    in the meantime, I'm not very happy about the situation, and remember
    ALL the nasty disappointments with gold over the last 23 years. What do
    you think?

    Strebbie,



    Below is the latest from Morgan Stanley's Steven Roach. He's writing some of the best stuff coming out of Wall Street these days. Praise be Stevie.

    Global: The Failure of Central Banking

    Stephen Roach (New York)


    The European Central Bank has blown it again - easing by as little as
    possible in the face of an increasingly treacherous economic climate. Yet
    this action should not be viewed in isolation. It is emblematic of a deeper
    problem that has afflicted central banks over the past dozen years: While
    the monetary authorities experienced great success in taming inflation,
    their record in tempering the perils of deflation borders on abject failure.
    The Bank of Japan has led the way. The risk is that the Federal Reserve and
    the ECB are now following in its footsteps.

    Incrementalism doesn't work in combating deflation. That was one of the key
    lessons that the research staff of the Federal Reserve drew in a widely
    noted paper published last year (see Alan Ahearne, et. al., "Preventing
    Deflation: Lessons From Japan's Experience in the 1990s," Federal Reserve
    Board International Finance Discussion Paper No. 729, June 2002). Yet that's
    precisely the approach now being followed by the ECB. The 25 bp easing of 6
    March is but the latest case in point - it is only the sixth easing in two
    years, bringing the cumulative reduction in the Euroland policy rate to 225
    bp since May 2001. Yet the European economy is now in very serious economic
    trouble. With fiscal policy effectively hamstrung by the Growth and
    Stability Pact, Europe needs all the greater flexibility from monetary
    policy. Lacking in domestic demand and largely dependent on external demand,
    a rising foreign exchange value of the euro makes aggressive monetary
    accommodation all the more imperative. Unfortunately, that has not been the
    case.

    But there's an added wrinkle to Europe's conundrum. Germany, its largest
    economy, is probably already in recession. Unfortunately, Germany has
    entered this recession with only a 1% inflation rate, implying that it
    wouldn't take much of a contraction to tip fully one-third of the Euroland
    economy into deflation. Yet there doesn't seem to be much leeway in the
    rigid EMU policy framework to give Germany special treatment. That's
    precisely the problem. For a nation whose current structural dilemma goes
    back to the uneconomic terms of German reunification in 1990 - a one-for-one
    exchange rate between the high-productivity West and the low-productivity
    East - some policy flexibility is essential. Yet focused on backward looking
    gauges of pan-European inflation that were still flashing an estimated 2.3%
    y-o-y increase in February 2003, the ECB's latest incremental move suggests
    that it remains wedded to its formulistic approach of targeting price
    stability in the 0 to 2% zone.

    Therein could lie Europe's biggest pitfall. From the start, the European
    Monetary Union has been framed around the "one size fits all" credo. In
    other words, what's good for Europe is presumed to be good for Germany. This
    approach may work fine under most circumstances. But when deflationary
    pressures emerge in the largest economy in the region, all bets could be
    off. At such extremes, Germany's dominant share in the Euroland economy may
    well require precisely the special treatment that the ECB refuses to offer.
    To do otherwise may well risk a contagion of German deflation quickly to the
    rest of the region. Consequently, in an effort to set policies for the
    region as a whole, the ECB may be neglecting not only the biggest link in
    the chain, but also the weakest. To be sure, the outcome is hardly known
    with precision. But the risks of a German-led deflation in Europe are now
    rising. In my view, incrementalism under those circumstances may well be a
    recipe for disaster.

    But this is not just the tale of an ECB policy blunder. The world's other
    two major central banks are equally guilty. Not only did the Bank of Japan
    set the stage for Japan's wrenching post-bubble workout by tightening
    monetary policy after Japan's bubble popped in late 1989, but it also failed
    to ease aggressively once the full extent of the ensuing shakeout became
    evident. Nor was America's Federal Reserve an innocent bystander to the
    asset bubble of the late 1990s. By championing the miracles of the New
    Economy, Chairman Greenspan sent a powerful message to investors that the
    Fed not only believed in keeping its hands off a rapidly growing US economy
    but that it also felt that equities were fairly valued relative to the
    perceived secular improvement in underlying economic fundamentals. While the
    Fed has since eased in 12 installments of some 525 bp over the past two
    years, most of that rate reduction came in 2001. Indeed, as the case for
    deflation has actually gained credibility during the past years, the US
    central bank has slipped into an increasingly incremental policy mode -
    cutting the federal funds rate only one time in 2002 by 50 bp.

    There could well be a deeper meaning to all this. I have long suspected that
    central banks are guilty of having fought the "last war" - namely, inflation
    - for all too long. As the monetary authorities succeeded in squeezing
    inflation down to extremely low levels, market interest rates were quick to
    follow. That produced valuation support for equities that was then
    reinforced by the perceived interplay of a major technological breakthrough
    (i.e., the Internet) and the productivity-led saga of a New Economy. In
    other words, under certain circumstances, inflation targeting can spawn
    asset bubbles. As inflation all but vanished from the scene, the stars were
    in perfect alignment for just such an outcome in the late 1990s. The failure
    of central banks was to stick with an old target for too long and not
    recognize the need to shift their focus to a new target. By fixating on the
    narrow construct of CPI-based inflation, the authorities overlooked the
    perils of deflation that arose from a broader inflation of asset markets. My
    guess is that history will not treat that oversight kindly. Should the world
    continue to slide down the slippery slope of deflation, a reworking of
    central bank mandates could well be in order in the not so distant future.
    I must confess that this thought always pops into my head when I visit
    Singapore. And I was there again last week. Several years ago, I had the
    opportunity to see first hand the battlefield remnants of the fall of
    Singapore to the Japanese in early 1942 - billed as Churchill's most
    devastating military defeat. The image that forever haunts me is that of the
    heavy artillery fixed in massive concrete bunkers pointed in precisely the
    wrong direction - aimed at the sea, where Lt General A. E. Percival was
    convinced the attack would come from. The Japanese, instead, came from the
    north - through the swampy Malay peninsula, and the seemingly impervious
    citadel of Singapore fell in a matter of days. A 1968 book by Noel Barber
    provides the best account of this military blunder of monumental
    proportions. Its title - Sinister Twilight - speaks all too well of a
    similar strategic blunder made by the champions of an earlier era, the
    world's major central banks. Like Percival, they too may well be guilty of
    having fought the old war for all too long


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