the dow~richard russell comments

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    I'm posting this today 'cos RRs PTI index has finally crossed over into bearish territory. Lots of other good stuff as well.

    Also of note is the move up by gold this AM as the $US has apparently weakened significantly since the close of US markets..

    .August 5, 2003 -- Back to the present.

    This is good! From the front page of the Wall Street Journal we read, "Momentum appears to be picking up for corporate growth. Earnings including items, rose 63% in the second quarter among companies tracked by Dow Jones that reported as of Friday."

    This is good! From today's Financial Times, "Top CEOs Express Growing Confidence. Survey shows that upbeat executives are gearing up for increases in capital spending and acquisitions."

    But is this good? From the front page of today's New York Times -- "Surge in Rates Threatens Star of the Economy. Washington: If cheap mortgages have kept the economy afloat, the economy has just sprung a leak." Higher rates ". . have abruptly stalled plans by thousands of homeowners to refinance their homes at even lower rates than they already enjoy. This pace of home loan financing has fallen by half over the last several weeks, according to bankers and analysts."

    All of the above plus a million other items is what the stock market is attempting to digest and make sense out of. And that's just the near-term business picture.

    But there's another much larger picture. To simplify that picture, let's say that world forces of deflation (too much global production) are pitted against the money-creation abilities of the Federal Reserve.

    To put it another way, you can say that the Greenspan Fed is now battling the effects of the bursting of the greatest financial bubble in recorded history.

    What's the Russell take on this? My take is that the harder the Fed battles the natural forces of correction, the greater inequities and excesses the Fed will build into the US and the world economies. So ironically, while the world is struggling with the problems of too much production and too much debt, the Fed by its actions, is building ever-more foreign production and ever-more US debt.

    The ultimate aftermath of what we're seeing, in my opinion, will be one of the most vicious and costly bear market conclusions in history. Of this I'm convinced. Of course, the big question and the unanswerable question is -- TIMING.

    Question -- Russell, we've already had three years of massive bear market losses? Are you saying that we face more losses ahead?

    Answer -- I'm saying that at this point stocks continue to be wildly overvalued. Before this bear market is over, stocks will be selling at drastically undervalued levels. To get there, we will experience losses that will boggle your mind. Based on dividend yields, I predict the Dow will ultimately sell near or even below 3000. That's based on a Dow that will provide a dividend yield of around 6 percent or more before this bear market is over.

    Here's a question, and it's one that I haven't yet clarified in my own mind -- is the stock market now dealing with the economic picture over just the next month or the next quarter or even the first quarter of 2004? Or is the stock market with its amazing ability to discount the future -- is the stock market now dealing with the big picture, which is out-of-control US budget deficits and oncoming US unfunded liabilities which will be beyond any ability of the US to finance or fulfill?

    Is there an answer to that question? My answer is that if you listen to CNBC you are thinking about next quarter's earnings and "a penny less or a penny more than expectations."

    But I believe that big money is thinking far ahead. It's thinking of 2005 and 2008 and 2010. It's thinking of family money and its thinking of its children's future and the future of corporate American and even the future of America itself.

    So I believe that the stock and bond markets are operating on two different levels. The first level is "next quarter's profit" level. The second level is the "How do we survive what's coming up?" level."

    Let's talk for a moment about human psychology. I wrote a few days ago about my belief that people in the US are either consciously or unconsciously worried about their lives and about their kids lives and about the nation. We're now living in a country that we're told is under siege by terrorists bent on destroying "our way of life" We're losing jobs in masses to foreign nations. And most people see the items that they use daily increasing in price.

    Despite what their government tells them, they see and feel inflation and it feels expensive. We've got a group in the White House who tell us that you're either with us or you're with the terrorists, and therefore preemptive wars against nations who may threaten us are justified. We're told it's a dangerous world, it's a yellow-light world.

    For whatever reasons, and I list just a few above, people are worried. When people are worried they tend to escape and they also seek to be safe. As for escapism, it's everywhere -- from the explosion of tabloids scandal sheets sold at your supermarket to sex on TV to nudity in public to the sports-craze to the latest comic-strip movie to gossip about who's gay and who isn't.

    When people are worried they seek safety in their financial lives. The bear market in stocks has frightened most people and rendered most people poorer. More recently, the bond market has shocked many people who didn't understand that bonds can go down. So where does one go to be safe?

    The usual place is one's own currency, in America's case -- the dollar or T-bills. The other place is your home. After all, a home is something tangible, something you can touch and feel and live in -- it's there. And haven't homes prices been going up ever since the early 1970s. So there is a craze on the part of Americans and people throughout the world to "buy their own home, whatever the price."

    Older Americans who have "kept safe" by holding their money in T-bills or CDs find themselves confronted by a frightening situation -- to be safe means to have little or no income. These people are both confused, frightened and bewildered ("go see a movie, brother, or better still, have a drink").

    Of course, there's always the item which has meant ultimate safety since before the time of Christ. That item is the essence of intrinsic value -- gold. But gold is been banished from the system ever since 1971, when Nixon slammed the gold window down and ended anything even hinting of a gold-backed dollar.

    So its been over a generation that Americans have associated gold with real money. After all, hasn't the paper-dollar system "worked" for over 30 years without the yellow metal?

    This has resulted in gold selling at almost absurd, bargain-basement prices in relation to paper (fiat) money. And here in the year 2003 we see "dirt cheap" gold in the face of a US that is building debts and deficits at a rate that has never been seen before. So Richard Russell says that gold is the great bargain item in the current market picture. Gold in 2003 is like the Dow in 1949 (and by the way, the Dow in mid-1949 was priced at 161. How do I know? I was there. And I was buying).

    A great financial specter lies ahead. It's a sleeping monster. That specter is DEBT and DEFICITS. The specter is coming as sure as night follows day. It's the cloud that hangs over the entire financial system. But just as we poor humans escape by going to the latest comic-book movie, the mass of investors are escaping by reading the latest newspaper headline which promises maybe better times next quarter.

    So let's get "down and dirty" and deal with today's market. After all, this is the present, and as the bible tells us, "It's not given to man to know his fate."

    TODAY'S MARKET ACTION -- As background, for the latest figures on buying climaxes (NYSE, Nasdaq and Amex combined) for the week ended August 4 there were 298 buying climaxes. This is less than the record 531 of two weeks ago, but it is still the third largest total on record. Buying climaxes = distribution, the movement of stocks from strong hands to weak hands.

    Lowry's statistic are most interesting. Buying Power has been sinking to its lowest level in three months. A lot of switching around, but no real urge to buy. The saving grace for this market is that Selling Pressure has remained low -- meaning that there's been, so far, very little urge to sell stocks.

    But Lowry's Selling Pressure Index has been forming a head-and-shoulders type bottom, and I've been watching to see whether this bottoming pattern would break out to the upside. If Selling Pressure does break out, then with Buying Power extremely weak -- we could get a hell of a decline in the stock market.

    Very important day today. My PTI was down 8 to 5280 with the moving average at 5283. So my PTI is on a "sell signal." Subscribers, please be guided accordingly.

    The Dow ended down 149.72 to 9036.32. There were no movers in the Dow.

    Sept. crude was up .38 to 32.22.

    Transports were down 30.45 to 2544.59.

    Utilities were down 3.91 to 231.12.

    There were 989 advances and 2265 declines. Down volume was 84% of up + down volume.

    There were 44 new highs and 73 new lows. My High-Low Index was negative for the third day in a row -- down 29 to 7543.

    Total NYSE volume was 1.30 billion.

    S&P was down 17.36 to 969.47.

    Nasdaq was down 40.50 to 1673.56 on 1.70 billion shares.

    My Big Money Breadth Index, which has been weak all along, was down 10 to 682, its lowest level since June 2nd.

    Sept. Dollar Index was up .08 to 96.44. Sept. euro was down .06 to 113.33. Sept. yen was up .26 to 83.46.

    German DAX was up 33 to 3438. Sept. Nikkei was down 105 to 9320.

    Bond were hit again -- hard. Sept. 30 year T-bond was down 113 ticks to 105.09 to yield 5.38%. Sept. 10 year T-note was down 26 ticks to 110.27 to yield 4.44%.

    Bonds remain severely oversold, but so far that hasn't halted the selling. Not good.

    Dec. gold was up .30 to 351.20. Sept. silver was down 8 to 4.94. Oct. platinum down 3.70 to 680.00. Sept. palladium was down 5.35 to 170.50.

    Gold/Dollar Index ratio was up .30 to 364.40.

    One share of the Dow buys 25.72 ounces of gold.

    Gold advance-decline line was up 8 to 1218.

    XAU was down .44 to 80.80. HUI was down .70 to 165.14.

    AEM up .12, AU up .15 and buying Ashanti making it the world's biggest gold producer. BGO up .02, GSS up .06, HMY up .22. NEM down .54, PDG down .12, RANGY up .06.

    Gold's acting OK, it's going to be a long journey, folks, so sit tight and well, maybe it's time to meditate.

    STOCKS -- My Most Active Stock Index breaking down, off 11 today to 199.

    The 15 most active stocks on the NYSE were -- GE down .68, PFE down .48, HPQ down .83, NT up .01, AMR up .22, JPM down .94, AOL down 31, CPN down.35, C down .84, NOK down .37, TXN down .48, EMC down .31, MOT down .17, GLW down .38, MU down .60.

    VIX was up 1.46 to 24.11. VIX now climbing steadily as option-writers start to worry a bit, but this staircase rise in the VIX is not bullish.

    McClellan Oscillator was down 36 to minus 243. This is the third spike down in the Oscillator, each one past minus 230. Amazing!. Market is hugely oversold, but in bear market markets can stay oversold. If the market doesn't rally here, we're seeing something most unusual -- and dangerous!

    This is a particularly difficult market because it is so oversold. Me, I feel better on the sidelines, regardless of what happens.

    CONCLUSION -- Today the Dow, the S&P and the Nasdaq all closed below their 50-day moving averages. There was nothing to like about the action today, although volume was fairly light. I did get a PTI "sell signal," and I suggest that subscribers act on it.

    Unfortunately, I don't have today's Lowry's figures, but if Selling Pressure has broken out of its "head-and-shoulders" bottom this market could be in for real trouble. And I don't think the market is positioned for trouble. I say that because sentiment is bullish if not almost bubbly, price earnings are ridiculously high, and the news has been "encouraging." I never like a market that goes down in the face of "encouraging" news. A market that declines in the face of good news is reacting to forthcoming bad news -- but bad news from a quarter that's not yet in the newspapers.

    The bond market action is very important here. If bonds continue down, it's going to impact on housing, refinancing (it already is) and consumer credit in general.

    So let's keep it simple. The preferred position, as I've recently stated, is T-bills, gold and gold shares. I don't know the exact ratio you should have of the two, maybe 85 to 90% T-bills and the rest in gold items. If gold backs off you'll still be in good shape. If gold moves higher, you can always buy more. A lot depends on your disposition, your guts, your luck and of course, the market itself.

    Remember, in this business the operative phrase now and always is RISK MANAGEMENT. Better known as "Where will I be if everything goes wrong?" And believe me, in a bear market everything can go wrong. Which is why when the bear market hits bottom most people are a damn site poorer than when they started.

    Looking forward to Wednesday, I am --

    The R man.
    Hillary was in La Jolla yesterday to sign her new book. I was frankly surprised. The line for signing went completely around the block; people were waiting up to four hours to see her. The women love her. Wife Faye heard her speak earlier at some private meeting, and Faye was very impressed.

    My prediction -- if Bush's popularity plunges for some reason, I believe Hillary would run for the Presidency. After all, who have the Dems got? Dean, who nobody knows? Lieberman? Can you imagine the Mideast's reaction to the US electing an orthodox Jew?

    The signal -- If at or near election time, the US unemployment rate if 8% or higher, Bush will lose.

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