the dow ~ richard russell comments

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    August 29, 2003. Let's see -- is there anything going on in this "quiet pre-holiday Friday?" You bet there is. First, slowly but surely, Iraq is turning into an unmitigated disaster. The British media is a lot tougher than the passive US media, and in Britain the newspapers and the BBC are accusing Mr. Blair of exaggerating the original dossiers on Iraq, dossiers that suggested that Iraq could be a menace. So let me put it this way -- Prime Minister Blair is hanging on to his job by the proverbial skin of his teeth.

    Our own President Bush has it better. He spends most of his time telling soldiers at military bases that he did the right thing and that there's no way we're going to retreat from Iraq. The rest of his time is spent running around the nation and raising money, which he's very good at.

    France, always anxious to "stick it" to the US, says that the whole Iraq thing should be put under the leadership of the UN (meaning, take it out of the hands of the US). Er, I don't think that's going to happen. Listen you stupid Frenchmen, we're the superpower, and don't you forget it.

    And what's the attitude in Iraq? Boil it down to this -- "Thanks for kicking Saddam out of our country, now do us a favor and kick yourselves the hell out of our country. We've had it with you Americans."

    Meanwhile, under pressure, Rumsfeld announces that we don't need a bigger military, we're doing fine now. Listen, Rummy was the head of the wrestling team at Princeton, and he knows what he's talking about.

    As far as I'm concerned, there's only one journalist in the US who's telling the real story, and it's none other than Paul Krugman of the New York Times. Today Krugman writes, "So unless we can somehow extricate ourselves from Iraq quickly, or persuade other countries to bear a lot more of the burden, we need a considerably bigger military. And that means spending a lot more money."

    Kruggie goes on, "For now, the administration is in denial. "'There will be no retreat,'" President Bush says -- Churchillian words, but where are the resources to back them up?

    "Even the government of a superpower can't simultaneously offer tax cuts equal to 15 percent of revenue, provide all its retirees with prescription drugs, and single-handedly take on the world's evildoers -- single-handedly because we've alienated our allies. In fact, given the size of our budget deficits, it's not clear that we can afford to do even one of these things. Someday, when the grown-ups are back in charge, they'll have quite a mess to clean up."

    By the way, Krugman will be speaking here in San Diego. The price to hear him is $35. I'm going to pay the money -- I think it will be worth it. Kruggie, if you happen to be reading this, "Give it to us straight, I'm ready".

    Writing in Newsweek, economist Robert Samuelson states, "If you ask who saved the US economy -- indeed the world economy -- these past three years, the answer is plain. The tireless American consumer did the trick, buying ever-larger homes, stuffing them with furniture and mobbing shopping malls. Producers from Albuquerque to Amsterdam benefited."

    Samuelson ends his column with the following -- "The great credit binge exemplifies the American spirit -- an optimistic belief in the future and a craving for more. It has spurred the US and global economies, but what happens when it fades? Although people worry about rising federal debt, the true debt bomb may be closer to home."

    And yes, America's consumers are even becoming bullish about the stock market. Writes a semi-hysterical Investor's Business Daily today, "Investors Hurl $21.4 Billion At Stock Funds." Translated that means that the little people spent $21.4 billion on mutual funds in July, the highest number in a year.

    And as far as the US economy is concerned, the LA Times tells us, "April-June GDP climbs at 3.1% rate, up from the initial figure of 2.4%, But jobless claims also increase." Initial claims for unemployment rose 3,000 to a seasonally adjusted 394,000 last week. So evidently, corporations continue to become even "more productive" -- by handing out pink slips.

    It seems that I'm the only guy in the nation to report on the weekly money supply. So here it is. M-3, the broad money supply for the week ended Aug. 18 fell $0.1 billion. But not to worry, M-2 increased by $43.5 billion.

    All right, I've got all the above off my chest. Now let's turn to the market and see if we can make any sense out of what's happening. As you know, we're in a trading range. We've been in one ever since mid-June. You don't have to take my word for it -- you can see it on the point & figure chart that I placed on yesterday's site.

    Since June we've had 18 reversals, but nothing conclusive from all this action. However, these reversals give the traders something to battle with. There's nothing like consecutive rallies and decline to keep the traders busy, and to keep the floor guys making commissions.

    Lowry's Buying Power has dropped to a five-month low, while Lowry's Selling Pressure has sunk to a multi-year low. The big picture seems to be that nobody wants to dump their stocks, and at the same time there's little urge to buy stocks. The result, again, is a trading range.

    But with all the good news about the economy emerging, why aren't stocks screaming skyward? Two answers. The first is that behind all the good news is a lot of bad news. The bad news mostly concerns the massive US budget deficits and the equally depressing negative current account deficits. It's also rather disturbing to realize that it's taking a trillion dollars in bank credit to move the US economy off its butt.

    How long can the Fed continue to flood the economy with liquidity? "As long as it takes," says the Fed. This, of course, means a deteriorating dollar in the face of a growing credit bubble. It's a situation which is not lost on real money. The result -- a bull market in real money, better known as gold.

    Of course, there's another phenomenon that seems to be lost on today's investors and, I might add, on today's stock analysts. This phenomenon is overvaluation.

    I'm looking at the latest weekly installment of the well-known Value Line investment service. Open to any page and check two statistics on any stock. The two statistics are the price/earnings ratio, or how much investors are willing to pay for earnings. The second item is the stock's yield, or what kind of actual return you are getting on your investment.

    It's ridiculous. Turn to any page. Monster World at 63.3 times earnings yielding nothing. Starwood Hotels at 43.times earnings yielding 2.6%. Radio One at 52 times earnings yielding zip. News Corp at 32.6 times earnings yielding 0.2%. MGM Mirage at 25.5 times earnings yielding nothing. And on and on.

    Stocks are selling at prices that would have been laughed at 25 years ago. As for dividends, forget it, there are none. So what are you buying when you buy these stocks at an average P/E of 32 and an average yield of 1.77%. You're buying hope and hype and high risk. Stocks today are priced to discount the greatest coming boom in US history. Will that happen? Call me skeptical.

    Of course there's another possibility. It's that stocks are simply the most over-priced they've ever been. I suspect this is the answer. Yeah, I know nobody agrees with me, but what the hell -- I never started Dow Theory Letters with the idea in mind that everybody had to agree with me or I'd throw a tantrum and stop writing.

    We've got a real, bonafide, primary bull market in one area, and that area is gold. On March 11 gold hit its high relative to HUI (representative of gold shares), and since March 11 the gold shares have outperformed gold, the metal. This has continued right up to today.

    We know that relative strength between the metal and the stocks alternates. First the stocks are stronger, then the metal is stronger, and then the stocks are stronger. Since March 11 the gold stocks have been stronger than the metal. That's bound to change somewhere ahead, but when it will change I have no idea, no inkling. When it changes on a trend basis, you, my beloved subscribers, will be the first to know.

    So put it this way, gold is now behind the stocks, and somewhere ahead this will change. However, you should remember that gold is safer than gold stocks because a lot can go wrong with a stock, while only two things can go wrong with gold coins. What are the two things? Gold can go down in terms of paper currencies. The second bad turn of events is that someone can steal your coins.

    Here's a P&F chart of HUI, and you can see that it's in a powerful primary advance. Is the advance too steep? I don't know nor does anyone else (regardless of what they may tell you). A primary bull market is like the Bible's description of the wind. "The wind goeth where is listeth," (translation, the wind goes where it wants to go). And so does a bull market.

    Remember, gold has been hold back for years. While the Fed was creating multi-billions of junk dollars, gold languished. Worse, gold was denigrates, stomped on, spat upon, hated by the great central banks of the world. But since gold or real money is the "truth" and Federal Reserve Notes of dollars are a "fantasy lie," it was only a matter of time until the truth emerged, meaning that real money burst out of its chains.

    Gold shares are leveraged since as gold rises. At each individual mine, the cost of mining gold remains fairly stable. Thus, as the price of their product rises, a mine's profits rise exponentially. This in turn means that as the price of gold works higher the gold stocks will tend to outpace the metal.

    Subscribers who have accumulated gold shares as I suggested that do, now must have attractive paper profits. In fact, many of you may have almost obscene profits. For this reason, it just might be time for the gold stocks to take a "time out." That doesn't have to happen, but it's a thought.

    I'm asked where I think the gold bull market is going? And my answer is two-fold. My first answer is that I haven't any idea where the gold bull market is going. A basic thesis of Dow Theory is that neither the duration nor the extent of a primary movement can be predicted in advance.

    The second part of my answer is this -- My experience with most bull and bear markets is that they will go farther than anyone thinks possible.

    And that all I have to say about the primary bull market in gold, at least that all I have to say about it -- today.

    TODAY'S MARKET ACTION -- More creeping higher action on low volume. But my PTI was up 6 to 5322; the moving average is at 5291, and my PTI remains bullish.

    The Dow was up 41.61 to 9415.82. There were no movers in the Dow today.

    Oct. crude was up .07 to 31.57.

    Transports were up 14.79 to 2683.24.

    Utilities were up .88 to 239.57.

    There were 2121 advances and 1050 declines. Up volume was 73.6% of up + down volume.

    There were 257 new highs and only 4 new lows. My High-Low Index was up 253 to 10102.

    Total NYSE volume was 950,509.

    S&P was up 5.19 to 1008.03.

    Nasdaq was up 10.40 to 1810.58 on 1.19 billion shares.

    My Big Money Breadth Index was up 6 to 703.

    Sept. Dollar Index was down .84 to 98.10. Sept. euro was up 1.03 to 109.66. Sept. yen was up .56 to 85.80.

    German DAX was down 8 to 3484. Sept. Nikkei was up 70 to 103.85.

    Bonds were lower with the Sept. 30 year T-bond down 7 ticks to 106.00 to yield 5.22%. Sept. 10 year T-note was down 5 ticks to 109.23 to yield 4.45%.

    Dec. gold was up 5.20 to 376.80. Dec. silver was down 1.8 to 5.13. Oct. platinum was down 3.80 to 708.60. Dec. palladium was down 1.10 to 203.90.

    Gold/Dollar Index was up 8.50 to 384.10.

    One share of the Dow buys 24.98 ounces of gold.

    Gold advance-decline line was down 5 to 1259.

    XAU was unch. at 91.00. HUI was down .83 to 193.79.

    ABX up .07, AEM down .16, GFI down .13, GG down .13, GLG unch., HL up .02, GSS up .01, HMY up .08, NEM up .62 to a new high of 39.26, RGLD down .02.

    Gold shares backing and filling, action remains good.

    STOCKS -- My Most Active Stock Index was up 5 to 253.

    The 15 most active stocks on the NYSE were -- AMD up .40, PFE up .15, AOL up .31, NT down .02, GE down .10, RAD up .33, MOT down .04, BSX down 2.54, AWE up .10, SBC down .32, EMC up .18, JPQ up .27, DIS up .25, JNJ up .39, TXN up .13.

    VIX was down .44 to 19.49.

    McClellan Oscillator was up 32 to plus 136 and moving toward overbought.

    CONCLUSION -- Government spending it totally out of control. The huge incoming deficits must be paid either by borrowing, raising taxes or inflation. Cutting spending seems out of the question. The easiest way to handle the deficits is the way that seems least likely to anger voters -- and that's inflation. So inflation it is -- and inflation it will be.

    Seasoned, forward looking investors are moving to protect themselves. The easiest and best way to protect yourself against inflation and the degradation of paper currency is via gold, silver and platinum, the classic precious metals.

    I see astronomical budget deficits ahead. This administration has opened a thousand cans of worms and has succeeded in turning our allies against us as well as literally the whole Arab and Islamic world. My guess is that we're just beginning to see the results of this administration's incredible, bumbling miscalculations -- both on the war front and in its financial shenanigans.

    I don't know how much in the way of precious metals my subscribers are willing to take on. Many have probably not moved at all yet. Ask around -- do any of your friend own gold or gold stocks. The very thought of owning gold has most people answering with glazed eyes and a subdued "duh."

    Yet somebody is moving the universe of gold higher. Who could it or they be? The universe of gold is being moved higher by seasoned, forward thinking investors who see the writing on the wall. The writing spells out the words -- "Inflation and currency degradation."

    To ward off the natural forces of correction that would normally follow the great bull market bubble, the Greenspan Fed is on the way to building the greatest debt edifice in the history of man. When this edifice finally tumbles over, it may signal the destruction of the fiat dollar.

    The current liquidity-generated rally in the stock market is a SIDE SHOW. The real show is in the future of the dollar, the future of interest rates, and the bull market in tangibles, led by real money or gold.

    So far, I've referred to the rise in gold as a "stealth bull market." It won't remain stealthy forever. When it finally becomes a recognizable bull market, the gold bull market will move into its second phase. This is the phase that sees the gradual entrance of the public. When the second phase starts I don't know. But I do know that we're not there yet.

    I'll be writing a bit more tomorrow. Have a great holiday weekend, drive carefully, and do some thinking. The latest theory is that the brain is like a muscle -- the more you use it, the better it gets.

    The American dream seems to be early retirement. I've always questioned that ambition. Too often retirement means the end of thinking. If I could say one thing to all the retirees, I'd say this -- "Get off your asses and do some real thinking. Believe me, the future of this nation depends on a thinking, informed citizenry. Is that what we have? I dunno, just check the movies that have come out this summer. Maybe that's your answer.

    I'm through for Friday --


    I received an e-mail yesterday from a subscriber who writes (angrily) that there used to be two things in the market to consider -- fundamentals and technicals. Now, he says, there are three things to deal with -- fundamentals, technicals and manipulations. This subscriber complains that "the market wants to go down," but Fed manipulation won't allow it.

    Is this possible?


    Based on your comments about silver on 7/11, and because of the general increased interest in commodities & precious metals, I bought 30,000 shares of CDE on 7/17 as a small speculation in my retirement account....I almost bought 50,000 shares and now wish that I had. I thought that the price ($1.47) was "low", based on the past 52 week range. Unbelievably, it started to rise immediately and persistently, and I watched, fascinated and puzzled. Going away for a long weekend, I put a stop-loss @ $2.47 (about 7% below market) on 8/21 & was stopped out @ $2.45 next day. Net of commissions I made 64.8% in 35 days. It is STILL rising!! Tempted again, I bought 10,000 @ $2.715 and am keeping a stop-loss 6% below close each day, because I find it hard to believe that it isn't about to top-out. Do you know what is going on here? I haven't been able to find any specific news that would explain it. Thanks for your excellent advice and ongoing macro-economic and social commentary.

    Doug Sewall, MD

    Hello Mr. Russell,

    Your constant teachings on gold being real money have made me understand
    what gold means. I started thinking about gold in January of 2002 and I
    started buying gold in May of 2002.

    The reason I am writing to you is a very personal one. I was talking to my
    parents about gold and they explained to me that without gold neither they
    nor I may be here in US today.

    My mother was born in Karachi, India in 1938. Today it is a part of
    Pakistan. My mother's family is Hindu and when the British partitioned
    India into Pakistan and East Pakistan (now Bangladesh), my mother's family,
    along with millions of others, suddenly found themselves in a country in
    which they were no longer welcome.

    In those chaotic day of 1947-1948, anywhere from 1-10 million where
    ethnically cleansed. The exact number is unknown, but there is no doubt
    that it was one of the largest migrations and killing sprees the world has
    ever known.

    My mother's family lost their home, their country, and barely escaped with
    their lives on a ship in the middle of the night. What bought them passage
    on that ship was some of my grandmother's gold jewelry. At that time no
    amount of India rupees or British pounds mattered when it came to buying
    tickets to freedom. The only thing that mattered was gold. It literally
    saved their lives. Once my mother's family arrived in India, they lived in
    refugee camps until they could be resettled. What allowed them to eat? Once
    again it was my grandmother's gold jewelry. My mother had 6 sisters and 2
    brothers. There was very little to go around.

    One of my aunt's who moved to Hong Kong in 1968 has an almost pathological
    desire to own gold. She wanted to replace my grandmother's sold jewelry for
    her, but sadly, my grandmother died long before this could occur. To this
    day, my aunt continues to buy gold.

    My father's story is not as poignant, but it is very interesting as well.
    My father's family owned estates in eastern India and they owned stocks of
    companies that produced jute. Jute was a very valuable commodity before
    nylon was invented. My father was born in 1932 at the height of the British
    Raj into a very well to do family. He had his own servant whose job was to
    dress him and take care of him only.

    In 1947 when India was partitioned, all of his family's land ownings were
    lost as they were in what was now East Pakistan (Bangladesh). Guess where
    the jute companies were? In East Pakistan (Bangladesh). My father's family
    became almost destitute over night.

    In 1950, my father was to start university. His family could not afford it.
    My grandmother sold all of her gold and silver jewelry to put her only
    child though college. Because of gold, not land titles or stock
    certificates, my father, my grandmother, my mother and I have been able to
    eat and have nice roof over our heads.

    The irony of this. My parents, who have lived in America since 1970 do not
    believe in gold like I do. They have been brainwashed to think the
    government knows what they are doing. They also think the government will
    stop the rise on gold prices. They also think the dollar is backed by gold.

    I have explained your writings and all of the other information I have
    found on gold and the money supply to them, but they are still a bit
    sceptical. If this does not explain the power of the government, I do not
    know what does. My mother though humors me and has put 20 percent of her
    holdings in gold, gold stocks, and silver stocks.

    If it were not for gold, I may not have been able to write to you. If it
    wasn't for you, I would have never found my roots or even known my parent's
    history. Thank you as always.

    Best regards,

    Soumen Sanyal

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