the dow~ richard russell comments

  1. 374 Posts.
    Note -- we've received so many new subscriptions over the past two months that our server couldn't handle the load and today our server crashed.

    We got it running again and have ordered a new a more powerful server. It will take two weeks to get the new server here and have it installed. Any breakdown over the next few weeks, and you'll know what it is. It won't be me breaking down, it will be our blasted, over-loaded server.

    January 6, 2003 -- In Hollywood, where they make movies, the time-honored motto is "Nobody knows anything." You spend $75 million making a movie, and you have no idea whether your movie will be a hit or a dog.

    You want to go into another business where "nobody knows anything"? Try fashion. I was a textile designer when I got out of college and out of the Army, and I can tell you that in fashion "nobody knows anything." Each new fashion season, like each new movie, is just another crap-shoot.

    Now there's another industry where "Nobody knows anything." It's called the stock market. The only difference between the stock market and Hollywood or fashion is that in the stock market a lot of people act as if they know something. Unfortunately, they don't. Which is why the record of market gurus and experts is so abysmal.

    The first thing you need in the investment business (beside a modicum of brains) is humility. You need humility because you're going to be wrong a lot. And when you're wrong, it's embarrassing. Robert Rhea, the brilliant Dow Theorist of the 1930s wrote, "The more cocksure the analyst, the bigger the quack." Believe it.

    We're now heading into the year 2003. I read voraciously, and the honest truth is that it doesn't get me anywhere as far as knowing or even guessing which way the market or the economy is going to go.

    My good friend Ken Gammage of the Richland Report here in La Jolla recently published an updated chart of the famous Kondratieff Wave. This was a popular study back about ten years ago (or was it longer?). Anyway, Ken's chart shows that we are now in the "secondary depression" sector of the Kondratieff Wave. According to the chart this period could last for up to 20 years -- comparable to 1819 to 1843 or 1874 to 1896 or 1929 to 1942. Now that's a depressing thought. But don't blame me, I'm only reading what the chart tells me.

    I spent the weekend reading the comments of myriad analysts and strategists, and the consensus, from what I gather, is that 2003 should be a fair year when "growth" in the US will be around 2% to 3%. Very few analysts see a continuation of the rotten economic conditions or the declining stock market.

    The two major exceptions to the optimistic theme seem to be my friend, A. Gary Shilling -- and the brilliant billionaire Leon Levy (interview below). My only comment is that these two guys have been very right so far, which makes their thinking well worth considering. Says Shilling, a consumer-led recessionary dip is probably on the way, and it will spread around the world. "Worldwide deflation will follow."

    Meanwhile, the US government and 47 of the 50 states are running deficits at an astounding pace. The government will try to print itself out of the mess (while running up massive deficits), but the states by law have to balance their budgets. That will include cuts in benefits, higher taxes and a slew of layoffs. The trials of the states will probably more than offset any "stimulants" that Bush will come up with in his coming State of the Union speech.

    In the meantime, the Treasury Dept. has asked Congress to raise the US debt ceiling to $6.4 trillion (that's trillion), setting the stage for fireworks when the 108th Congress convenes.

    The states are also in for lots of fun. The Golden State of California has to deal with a mind-bending $36 billion deficit. Said Assembly Speaker Herb Wesson last week, "If we fired every single person on the state payroll -- every park ranger, every college professor and every Highway Patrol officer -- we would still be more than $6 billion short. " Fancy that. And I'm not even going to talk about the fast-arriving water problems that we have here out here in the West.

    So what's the stock market going to do in 2003? I'll let you in on a secret. I don't know. But wait -- nobody else does either. I do have a suspicion. I suspect that the stock market is going to go down.

    So what do we, as investors, do?

    We look and listen. Look and listen to what? We look and listen to the language of the market. In the end, that's what it's all about. We look and listen to the only expert on the market, which is the market itself. As for the "language" of the market, well, that's what I've struggled to interpret and understand over the last 50 years (44 of them writing Dow Theory Letters).

    Here's what I do know. The greatest bull market in history ended under Dow Theory in 1999 with an "over-throw into 2000. The years 1995 to 2000 experienced the greatest and most incredible speculation in stock market history.
    But by the tail-end of 2000 the fun was over. The great bull market was stone-cold dead.

    Next came the bear market.

    Bear markets exist for the purpose of correcting the excesses of the preceding bull market. The bigger and more speculative the bull market, the greater the need for correction. That saying, my guess is that this is fated to be one whopping bear market. It's going to be possibly the grand-daddy of all bear markets. At least that's my thinking.

    We've already had three down-years. Only once before in history has the market been down four years in a row. That was during 1929 to 1932. Could that happen again? I think it could.

    Here's how I see the big picture. I'm reasonably certain that before this primary bear market is over, we'll see stocks selling at "great values." That probably means the S&P selling at around 5 to 8 times earnings, while providing a dividend yield of 6% or better. Sound impossible? Stick around -- I think it's going to happen. And remember "the market can do anything."

    What about this year? this year could be a breather -- or it could be a continuation of the downtrend, adding a fourth down-year to the bear market. We'll know more as we go along. But if I had to bet I'd bet that 2003 is going to be another bear year.

    Question -- Just for the sake of argument, let's say that 2003 turns out to be a mini-bull market year. If we do go into a mini-bull market, should we play it?

    Answer -- Personally, I wouldn't. The situation is too "iffy." You'd be putting your hard-earned money into a bear market rally, which is always dangerous.

    I'd rather put my money in an area where the primary trend is bullish. Which is where gold and silver come in. I've been advising positions in gold and silver for the past few years. I continue to advise positions in the precious metals.

    Buy the coins, buy the gold stocks, buy the gold funds, but if you haven't already done so, it's not to late to take a position in precious metals. I think it's going to be long and ultimately speculative bull market in the precious metals.

    Gold has recently emerged from a 20-year bear market. After 20 year of going sideways to down, gold is despised, ignored, mocked -- and thoroughly sold-out. The majority of analysts and certainly the public don't understand gold. They've been brain-washed by central bankers who would rather produce and control their own fiat paper money. The central bankers produce paper currency, and they tell us "this is money." And for many decades a brain-washed public has accepted paper as money. But for how much longer?

    Hey, I can take a piece of purple cardboard and tell you that "this is money." And if all the central bankers in the world agree with me, and the government tells us that purple cardboard is "legal tender" for all debts, then damn it, purple cardboard will be treated as money.

    Until one day people start asking why gold is rising -- and why in hell purple cardboard is sinking against other nations' paper money -- then the trouble begins.

    So say hello to today's fiat currency -- some people are beginning, just beginning, to ask why this junk paper should be called money.

    Thought -- you can still trade your junk paper in for real money -- gold. And you can still swap your junk legal tender for stock in companies that produce real intrinsic money. They're called gold mines. Sounds like an interesting swap, don't you think? Junk paper for real intrinsic money that doesn't become worthless over time.

    But why is this the time to make the swap? It's time because the word is out -- the Fed is manufacturing far too much junk paper. People are beginning to ask questions. And if people continue to ask question, eventually the truth will out. And the truth will spoil the whole rotten central banks' scam.

    The truth is that dollar as not real money. You don't believe it? Then here's the test -- give me the definition of a dollar. The reason you can't is that there is no definition of a dollar. The dollar can only be described in terms of it relationship to other fiat money.

    Oh yes, there used to be a definition of a dollar. A dollar used to be defined in terms of a specific quantity of silver or gold. But today, poor bastards that we are, we've got all our assets denominated in paper for which there is no definition. The awful truth -- the Federal Reserve is pulling off the biggest scam in United States history.

    TODAY'S MARKET ACTION -- Another Watusi (BIG) day. but not a 90% upside day.

    My PTI was up 6 to 5250 while its moving average was 5244. PTI has again risen to its bullish mode.

    The Dow was up 177.92 to 8779.61. The market liked Bush's dividend idea and Utilities loved it.

    Two movers in the Dow, JPM up 2.04 and SBC up 2.31. But 27 of the 30 Dow Industrials were up today.

    Feb. crude was down .98 to 32.10.

    Transports were up 56.77 to 2421.71.

    Utilities were the stars, up 10.07 to 231.27.

    There were 2501 advances and 862 declines. Up volume was 1.11 billion was down volume was 266 million. Up volume was 81% of up + down volume -- not as good as January 2 (which was a 90% up-day) but still good.

    There were 130 new highs and only 11 lows. My High/Low Index was up 119 to minus 7789.

    Total NYSE volume was 1.30 billion.

    S&P was up 20.44 to 929.03.

    Nasdaq was up 34.21 to 142129 on an expanding 1.52 billion shares.

    My Big Money Breadth Index was up 10 to 702.

    March Dollar Index was down .49 to 102.37. March euro was up .61 to 104.44. March yen was up .56 to 84.28.

    March Nikkei was 30 to 8790.

    Bonds were lower with the March 30 year T-bond down 8 ticks to 110.01 to yield 4.98%. March 10 year T-note down 8 ticks to 113.07 to yield 4.06% (not that bad).

    Feb gold was up .50 to 352.21. March silver was up a fraction to 4.91. April platinum (a tiger) up 7.30 to 606.80. March palladium up 3.40 to 244.95.

    Gold/Dollar Index ratio up 2.10 to a new high of 343.90.

    XAU down 1.36 to 78.15. HUI down 1.13 to 149.55.

    Gold advance-decline line down 7 to 1154.

    AEM down .24, AU down .55, GFI down .30, GLG up .09, HL up .27, HMY down .43, NEM down .87, PDG down . 07, SLGLF up .02.

    STOCKS -- My Most Active Stock Index was up 11 to 196.

    The 15 most active stocks on the NYSE were -- TYC down .66, HD up .49, MO down .35, JPM up 2.05, GE up .73, VZ up 3.57, SBC up 2.31, MOT up .72, EMC up .42, C up 1.44, Q up .55, AWE up .62, PFE up .27, AOL up .50, XOM up 1.97.

    Few more -- GM up .95, DCX up .76, FNM up 1 .35, MER up 1.53, AIG up 2.02, SO up 1.70, ED up 2.15, TE up .42, KSE up 1.58, D up 2.92, DTE up 2.31, CSCO up .29, DELL up .56, KSS down .69, WMT up .19, COST up .41, TGT up .10, SBUX up .35, GS up 2.62.

    VIX was at 27.41 today and option-writers are feeling calmer.

    McClellan Oscillator is at plus 153 today meaning that the market is now overbought.

    CONCLUSION -- I can't tell whether this is a "blow-off" based on news or whether it is something more substantial. It has the look and feel of a sudden, new-oriented bear market surge, but I could be wrong. Give it and me time.

    Dow still below its 200-day moving average, which stands at a new bear market low of 8968. But Dow is now above its 50-day MA, which stands at 8556. So let's cool it, and just see whether the market is taking a breather or whether the market really means to go higher.

    I'll tell you one thing for certain -- US deficits and debts are "out of control." The Greenspan Fed is allowing the M-3 money supply expand by the hundreds of billions. It's almost surreal. The debt ceiling (very quietly) will now have to be raised again, this time to $6.5 trillion. And we're not even at war yet. And in case you didn't know it -- war's are EXPENSIVE. Even preparation for war is expensive.

    The Achilles Heel of this market and this economy, as I've said many times before, is the dollar. Which is why gold was up today even in the face of a 177 point rise in the Dow. Note also that the Gold/Dollar Index ratio rose to a new high today.

    Final comment -- Sometimes I think I should have picked an easier business.

    See you tomorrow --


    And some interesting stuff below --

    Subject: Gold Play

    I know you have listed several gold stocks in the past that may be worth investing in and you recommend buying many of them to diversify and ride gold bull market but I would also suggest to fellow subscribers that they take a look at the Dundee Precious Metals Fund. It is a closed end fund that trades in Toronto which invests mainly in Canadian gold companies. The great part about it is that it closed Friday at a 24% discount to net asset value. In 2002 net asset value increased 55%. The manager also recently announced they would be buying back shares to try to close the discount. I view it as a simple way to buy a diversified portfolio of gold shares at a large discount to net asset value. Just thought I would pass along the idea. Keep up the good work. (Name withheld).

    It was great seeing you and the girls yesterday (as always). You looked pretty good, healthier looking than I remembered from before.

    Lori bought me a new Ford Ranger right before Christmas. We'd been shopping them for months before; she knew the market real well, knew just what I wanted, and she enjoys closing the deal more than I do. Anyway, $18,100 MSRP, and she got it for $12,100. Brand new 2003. This is the extended cab XLT model, fancy wheels, CD player, air, power windows. Twelve thousand bucks! And they had lots of trucks at the same price. We were talking about the last truck I bought: a brand new Chevy S-10 in 1983. I remember it was a steal back then at $7500. Think about it: 20 years later and I'm only paying 61% more, PLUS that old truck didn't have air, power windows, a CD player, or airbags for Chrissakes!

    Bottom line: good for us, but how can Ford be making any money???? I don't think they're the guys that will be bumping up their dividends to raise the market average level to 3-4% :)

    Catch ya later,

    Subject: For Richard

    This morning (Saturday) I went to the library to see if I could borrow a copy of Ferdinand Lips' Gold Wars:...They had no copy, so they searched the web and found that only 1 library in the entire United States had one!! Can you believe it? The publisher is a little obscure, it's paperback and I could easily buy it from Amazon, but all the same, how little interest there still is in gold. Amazing.

    Question: Why do you always quote a futures gold price rather than the London fix? Could you comment on that in your remarks. If I want to know today's price I have to go to another site (like where the current trading action is visible on their home page), and that seems a little silly.

    I deeply appreciate your daily work. It is so satisfying every day to be able to read your thinking that cuts through all the contradictory mud in the world to get at the truth. Thank you so very much.

    Art Jacob

    Russell answer to the above -- Yeah, I know there is not much interest in gold -- yet. Forget London, the price of gold is set by the futures here in the USA. London just tries to adjust to the futures price, and Feb. gold is now the place to look.

    The Big Saturday Interview

    I Always Believed I Could Make Money With Money - Forbes 400 Member Leon Levy
    By Larry Connors
    January 3, 2003 8:00 PM ET

    When I was a young man growing up in New York City, I could never imagine that anyone would pay me to do anything. I did not do particularly well in school, I am easily distracted, and I have always been forgetful - not the list of personality traits likely to appear in a help-wanted ad for any profession. Still, from the age of thirteen, when I invested in the stock market $200 that I had received as bar mitzvah presents, I always believed I could make money with money. This turned out to be true.
    --Leon Levy, "The Mind Of Wall Street"

    I had the honor of interviewing Leon Levy in early December, 2002. Mr. Levy has had an illustrious career on Wall Street as founder of the very successful Oppenheimer Funds and partner of Odyssey Partners, a hedge fund that over it's 15 year history, put together one of the best and most consistent records in history. This success has made Mr. Levy a member of the Forbes 400 for many consecutive years.

    First, I will tell you that if you are reading this interview in order to learn the trading secrets from one of the masters, you will not find it here. Mr. Levy is old school. And, old school doesn't show their hand. This means they play a game of possum. They tell you nothing they don't want you to know (in fact, I edited the times he imparted to me such wisdom as "if you like a stock, you buy it, and if it goes down, you sell it.") But, Mr. Levy was kind enough to share some gems. Read into his words and you find some secrets. And the biggest secret he was willing to share was how he obtained his returns. They came from hitting home runs. Outsized gains from a few positions. Risk 25-100% on a position in order to make 10, 20 and 30 times that number. These are not trades. They are longer term holds that appreciate over the years. When you look at many of the most successful "larger" hedge funds, that is the way they play. They take a small piece of the portfolio, make many investments that they feel can explode in price and then reap the rewards when they do. It's a fairly risky way to go about investing/trading. Mr. Levy was humble enough to point out he's had many, many losers along the way. In his book "The Mind Of Wall Street," you'd think he had nothing but losing investments in his career as he spoke about them in great depth. But, even though the losing investments tend to be more colorful, I believe Mr. Levy was making a point. His point was that even the very best professionals make mistakes, sometimes big mistakes. But these mistakes can be overcome, by finding winning investments that overcome those mistakes. And how do you do that? Simple. It's risk/reward. It's getting into positions that can and will potentially lead to gains that far outweigh your initial risk. When you correctly do that you end up with returns like Leon Levy has achieved over his 50 year history on Wall Street.

    As you know, there are many ways to make money on Wall Street. Leon Levy's way is certainly one of them. I hope you enjoy and learn and profit from this interview:

    Larry Connors: I just finished reading your book. It's extremely well written. I congratulate you. I also congratulate you on the success you've achieved over your career.

    Leon Levy: Well thank you very much, Larry. If you want the real story, it was mostly luck.

    Connors: How's that?

    Levy: Oh, there's luck in life, in business and everything else.

    Connors: Your humbleness comes through in the book. Obviously, it's not that easy to achieve what you've done. Again, I commend you for this. Let's talk about your background before we get into your investment philosophy.

    Levy: OK.

    Connors: Maybe we can start right from the beginning. One of the things I noticed is that your father played a major role in your life and in your thinking. I know your book is dedicated to him and it seems that a great deal of his work found its way into your own thinking. Can you talk about that?

    Levy: I certainly can. My father was interested in economics because he heard President Taft -- that's long before our time -- give a a talk at Cooper's Union, before World War I. After Taft finished talking, a fellow raised his hand and said, "Mr. President, what do you do if you can't get any job and you're a skilled mechanic and you've got three kids?" And Taft said, "God knows. I don't." Then my Dad went home and figured if the answer were in books, Taft would be likely to know it.

    He was a very skilled mathematician -- that's what he studied at City College, the class of 1901. He asked, "Why do people hire other people for work?" To make a profit. "Where do these profits come from?" And he figured out a series of equations, if you will, which included all the sources of profits, and he published them in a book called Economics As An Exact Science. Like me, my Dad had no academic training, no degrees, nothing. So nobody paid any attention to it.

    That's also my background. I never studied business. Although I taught business at City College, and that's a story in itself... I used to work with my father and I helped collect securities. And whatever I learned in business, he taught me. I taught at City College for a while and then I got a job as a trainee at a firm that no longer exists and probably no one remembers, called Hirsch and Co. Then I met some salesmen at Hirsch and Co. called Max Oppenheimer and two other German fellows. They were refugees from Mr. Hitler and they started their own firm and they asked me to join them as a partner.

    To give you an idea of the importance of this firm, I was head of research. But if Goldman Sachs printed a report, say, on the Rio Grande railroad, I'd call up and ask for a copy, saying I would send over my messenger. I was 26. Then I'd put on my raincoat and go over to Goldman Sachs and I'd say, "I'm Mr. Levy's messenger. Do you have a copy of the report?"

    Connors: (Laughs)

    Levy: That's completely integrated operations. In the beginning, I wrote all the research reports. I was a financial journalist at the time -- I wrote for Barron's and Financial World and so forth -- but I was Oppenheimer's research department. I was head of research and chief bottle washer and all that sort of thing.

    Connors: And the rest is history.

    Levy: Yes. And the rest is history. I did start the Oppenheimer funds, and by the way, I just resigned as the head today. I felt 45 years is probably long enough.

    Connors: I'm sure we'll read about in the papers tomorrow.

    Levy: Or Monday, I think they intend to release it. It was all on very, very friendly terms.

    Connors: Congratulations. Let's move onto your investment philosophy. One of the things you wrote is: "Most people believe that markets are driven primarily by economic factors and that psychology plays a minor role. I take the position that markets are driven by both psychological and economic factors."

    Levy: I do believe that.

    Connors: Can you discuss a little bit about what your belief is of psychology, and the role that psychology plays in the markets?

    Levy: Sure. Assume a news event takes place. For example, we get into a war with Iraq. Is that good for the market or bad for the market? I can't give you an answer right now. We have to wait and see how the market starts to react. And then once we see, we get some feeling, and we'll have more of an idea as to whether it's a positive for the market or a negative. But most events can go either way. I noticed before World War II, every time there was a war scare, the stock market would go way down. When we finally got into the war -- not when we got in -- but the war started in September 1939, the market zoomed up. I don't know how you could have figured that out. It was a psychological event. People sold before the war on the war scares but when the war started, they bought.

    Connors: And...

    Levy: And I think there are many news events that are rather like that. It depends on the public's interpretation of the same event. It can be different at different times.

    Connors: How do you take advantage of that?

    Levy: Well, you can only take advantage once you have a feeling that this is what's going to happen and then you sell the stocks you want to sell, or buy the stocks you wish to buy. But you have to act with the psychology.

    Connors: Let's use the example of the war with Iraq. Do you go in there with a premonition that, for argument's sake, it's going to be bullish because in previous events we've gone to war and markets have taken off as we've gone into war?

    Levy: Yes, you have an intuition.

    Connors: And you see that just the opposite is happening. We go to war and in fact it's not selling off. Does that change everything for you or do you become more aggressive at that point to the short side?

    Levy: Well, I think it depends on the event, the mood of the market and other things which are going on at the same time. I don't think that you can tell. But you can have a gut feeling or an intuition.

    Connors: If the market reacts opposite to that intuition, what happens?

    Levy: You're wrong. But again the market will tell you fairly early how it's going to react and then you take it from there.

    Connors: And how do you react? How have you reacted in the past when you're wrong? Are you out immediately?

    Levy: Well, sometimes you run immediately, and it depends on the whole circumstance, the economy, how you see these things affecting economic practice and you have to make the best judgment you can make. The odds are not 100, or 90 or 80, but they're something over 50, maybe, if you have a lot of experience. No two experiences are ever the same and this is where your discretion comes into play.

    Connors: You mentioned you had given some money to a hedge fund manager who proceeded to lose, I think it was 98% of its value, and you mentioned one of the stocks that he was buying in the hundreds that found its way down to $2.

    Levy: Yes. Right.

    Connors: And he was still rationalizing his decision to be in the stock. This is a gentleman who obviously meant well but along the way, price ultimately dictated... it overruled his belief system. Do you claim at the same time that price will ultimately overrule your belief system?

    Levy: Well, I think price and the action of a security is one of the elements that goes into the decision making. Now we have to say that this fellow is a little bit of a fool. And I know because he used to work for us and he seemed to be a perfectly sensible, fine fellow. But he obviously had a problem. He couldn't adjust to different conditions and I think a trader has to have the ability -- or an investor I should say -- has to have the ability to adjust to being wrong. In other words, you can't be too stubborn. You must have a certain degree of flexibility as to what's going on.

    Connors: Yes, I fully agree. Your performance with your fund -- especially the hedge fund -- is extraordinary. Did you find that the performance was straight line, or...

    Levy: No, we had ups and downs. Every day was another day... but it wasn't a straight line.

    Connors: Obviously more ups than downs...

    Levy: Well, the record speaks for itself, so apparently yes. I mean in my life -- and I was in the markets for 50 years -- the ups were better than the downs

    Connors: Were the ups from hitting home runs or a lot of singles?

    Levy: Well, my nature -- and now we get back to the personal psychology -- I like to be a long term investor. Maybe it comes from laziness. I don't have to make too many decisions. But I like long-term concepts anyhow.

    Connors: So for you, your performance came from hitting home runs?

    Levy: I would say I made more home runs than most other fellows who were in the markets. And I traded less.

    Connors: The home runs were more than enough to overcome the losing trades.

    Levy: Correct.

    Connors: If you were to give advice to people who were just starting out today, what would you tell them? The markets have obviously changed over the last 45 years and you've had an influence in the change of the marketplace...

    Levy: The markets have changed, but I don't think psychology changes that much.

    Connors: Please explain that.

    Levy: I think that people are still motivated by fear and avarice. And sometimes they are more fearful and other times they are more greedy.

    Connors: And if you were to give advice to somebody who was just starting out today, would you tell them to learn the psychology of the markets first?

    Levy: Well I would tell them that's terribly important and they ignore that to their own detriment.

    Connors: Did instinct play a role in your success?

    Levy: Oh yes, there is instinct. But then what is instinct? It's really all of your past experiences put together and somehow -- we don't exactly know how the mind works but you make some decisions based on everything that's happened before.

    Connors: Another question... you talked about getting out of a position. You say, "If I found myself in a position worrying about a stock and I have learned from bitter experience and decide to sell, not to sell a small part but to sell, for example, a third or a half." How does that come about? Do you basically make a commitment to walk away from your decision?

    Levy: What you're saying is I'm beginning to question the decision. And it takes so much energy to change one's mind that if you're going to change your mind, you may as well do it for a meaningful amount. I mean, we're never sure of anything in the market. I don't know if anybody could buy a security and be certain it's going to go up or do what it's supposed to do. So, you then say that if I decide to take a position, then change a position I have thought a great deal about, I want to be sure I make a major change. It's like treating it with a BandAid to sell just a little bit... you might think you've done something, but you haven't. So if you're going to do something, you might as well do something that's going to have some meaning.

    Connors: Great advice. Let's talk about your market outlook. You've been pretty bearish for the past few years.

    Levy: Right.

    Connors: What would make you change your mind?

    Levy: Well you know my family are economists. They run the Jerome Levy Forecasting Center up on Mount Kisco which is run by my nephew, David Levy. His work is probably more analytical and less psychological but if he sees corporate profits trending upward, and I should add he doesn't see that now, he sees them going down... I would be inclined to become more optimistic as far as economics is concerned.

    Connors: So, what would make you change your mind about the market? Would it be psychology combined with those corporate profits? Do you want to see those corporate profits rising and money pouring again into the marketplace from investors?

    Levy: Well I like to see corporate profits rising and everybody very negative. You would have to think that's positive because then everybody can change and become positive. But if everybody began by being positive as they were a few years ago, well, there's no room -- if all the money that's going to be invested, speculated in the market, is committed, then you have to be pretty negative.

    Connors: Are we getting anywhere near levels of pessimism in your mind, where they should be at these levels?

    Levy: No.

    Connors: You believe that some of the better opportunities are in some of the smaller nations. I believe you favor Russia and a couple of other countries.

    Levy: Well, that's a long-term view and that has to be intuitive as much as anything else, but I think that countries which have much cheaper labor markets and highly intelligent people who speak English -- like India or China or Russia -- are probably... and Russia certainly... are going to be good places to invest.

    Connors: How do you go about creating a portfolio knowing how much risk you should be taking in any position?

    Levy: Well, what I did in Russia -- and I don't think any one person's strategy necessarily applies to everybody -- but in Russia, I knew a portfolio manager who ran a fund and I thought it was he was very straight and very able and knew his field very well, so I took a major position in Russia through him.

    Connors: Are you more aggressive managing other's money than you are managing your own?

    Levy: Well I like to treat all money as though it was my own money because I think everybody cares as much about... you care about $1,000 as much as I do. I do think you have to refer to what you would do yourself. I never liked the idea of buying a stock that I wouldn't buy for myself.

    Connors: Is there some point if your position starts moving against you, let's say you're 20% down, or 30% down, that you say, "Uncle. No more. I need to get out of this."

    Levy: Well, if that happened, let's say I owned something. Let's even say Russia, since we started talking about Russia. And I would figure if it went down 20%, gee, there may be something out there that I don't know. There's always something you don't know. And I would probably start lightening up.

    Connors: So price will dictate your action.

    Levy: Yes, but with one caveat. If it's caused by some event that I think is silly. In other words, it might be a reason why people get very discouraged about Russia and I think that reason has no merit whatsoever. I'd probably want to buy more.

    Connors: So you really are taking each position and taking all the pieces together and making decisions along the way. There's nothing mechanical about the approach.

    Levy: I think you put it very well.

    Connors: I'm glad we were able to get to that point. Many successful traders and investors use a fixed formula for going about making their decisions. For you, your fixed formula is a combination of psychology and corporate profits. And then from there you use your experience to guide you on the proper way to proceed with the position.

    Levy: Yes, exactly.

    Connors: I greatly appreciate your time, Mr. Levy.

    Levy: Thank you very much. It's been a pleasure talking with you and I appreciate it.

    Connors: Thank you. I wish you the best of luck.

    My thoughts:

    First, as I mentioned in the introduction, he's old school. He's sly as a fox. And he's not going to show his hand beyond what he wants to. But, he was kind enough to share a handful of things with me which will ultimately impact my own viewpoint of the markets and my own trading. Some of these are:

    1) His unparalleled performance has come from hitting home runs. He risks X to make many times X. He claims he's just lazy and just doesn't want to do the work to get out of a position (I could see him smiling through the phone as he was telling me this.) The bottom line is, he does substantial homework before making a decision and if his analysis is correct, he makes many times what he originally risks. If not, he aggressively gets out and looks for other opportunities.

    2) The early major move from a historic event many times is the beginning of a much larger move. This information will be key if and when we go to war with Iraq.

    3) Psychology of the markets has played a key role in his success. In his words, not applying it to your own investment decision-making process would be a detriment to your performance.

    4) Rising corporate profits combined with bearish sentiment will lead the next bull market and likely every bull market in the future. On the opposite side, declining corporate profits combined with bullish sentiment precedes bear markets. You only have to think back to Intel missing their numbers in the summer of 2000 to fully appreciate this.

    5) Even the best are many times wrong. But, what they do very well is walk away. They don't let stocks drop 98% on them.

    6) Leon Levy has parlayed a stake of $200 into a net worth which makes him amongst the wealthiest people in the country. He is the epitome of someone who has learned how to correctly "make money with money."
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