the dow ~richard russell comments

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    Note that the dow last night moved up above the 50% level... Significant post.



    September 2, 2003 -- THE MOST RECENT DOW THEORY LETTER HAS JUST BEEN POSTED.

    How's it going in ol' Iraq? The Los Angeles Times has been doing an outstanding job of reporting on the Iraq situation, probably better than almost any other major US newspaper. On Sunday the Times featured an article headlined, "Iraq's Rage at Boiling Point." Here are a few quotes from the article,

    "As living conditions have been slow to improve due in part to persistent sabotage, Iraqis increasingly have begun to suspect that the US-led invasion was aimed at stealing their natural wealth, not liberating them from oppression."

    Said school teacher, Khawai Ahmen, "America considers itself the superpower of the world, but here it is powerless to keep any semblance of order. The Americans fired our police and our army. Now there is no security and foreign terrorists are coming across our border."

    Said Rose Umran, a member of the Iraqi national volleyball team, "We can't walk our streets even in daylight. I had to come here with my daughter so she could apply for a job. This never happened under the previous regime.' said Khalida Hadi, her anger growing, 'Nothing works, no water, no electricity. Our food ration is nothing. We want our share of the oil money.'"

    On top of all the above, it seems that an increasing number of young men are crossing the Iraq border to fight "the American invaders." It's an incendiary situation, one that our US leaders never thought about or planned for. In the meantime, the Iraq situation is costing the US $4 billion a month -- and add another $1 billion a month for Afghanistan, which is heating up again.

    The latest, which I just heard, is that a bomb exploded near the headquarters of US-trained police in Baghdad. Will anyone want to be a cop in Iraq?

    Over the past few weeks we've been watching the stock market creep higher on diminishing upside volume. This is quite a feat, but why argue -- that's what's been happening. What it shows is that buying interest remains very low, and as stocks rise, up to now they have not been able to attract an expanded following.

    Of course, this can change, and it can change in a hurry. It can change in a number of ways. For instance, investors can suddenly decide that the bull's way is the right way, and consequently they can increase their buying along with expanded volume.

    Then again, investors and traders can decide that enough is enough, and start taking profits. Since the rally has been achieved on very thin volume, it would be important to see whether, if stocks decline, they are declining on increasing volume.

    The latest report from Chartcraft notes that "buying climaxes jumped back to high levels of 217. Again, buying climaxes are bearish signs of distribution, from strong hands to weak hands."

    This all has to do with near-term trading, and since at this point I'm more interested in the gold action than I am in non-gold action, what the general market does on a near-term basis is not critically important to my thinking. What is important is the fact that stocks are now about as overvalued as I've ever seen them. With the S&P selling at 33 times earning, there's little margin for error. Or to put it another way, there's no premium for risk in the current market. To put it another way, today stocks are selling priced for "perfection."

    If you buy a 10 year Treasury note, the US government guarantees you a return of 4.45% free of state taxes. If you buy a cross-section of the S&P you get a return of 1.75%. On a simple return basis, you do a hell of a lot better buying the Treasury note than you do buying the S&P.

    So why would anyone buy the S&P? It's simple -- they buy the S&P because they think stocks are going higher. But stocks are already priced at a sky-high 33 times earnings -- so can they go higher? Of course they can, but listen, you're in the investment business, not the gambling business, so you have to ask yourself, "Am I investing when I buy stocks here -- or am I gambling? And is this what I want to do with my money?"

    As I see it, we're in a very unusual period now, and it's a very risky period. Why do I say that?

    Because we're in a period where a desperate Greenspan-led Fed is flooding the system with liquidity -- so what we have now is a liquidity-driven stock market. We're in a period where short-term interested rates have been artificially lowered to 45-year lows. Greenspan promises to keep short rates at 1 percent for the foreseeable future.

    We're in a period where probably 70 percent of the trading is done with "other people's money." We're in a period where 40 percent of daily volume on the NYSE is program trading by professionals for short-term gains.

    We're in an area where we're inundated with government and media propaganda regarding how good the economy is. We hear it from a different Fed governor almost every day or so.

    We're in an area where the US is running up massive and unsustainable budget deficits and current account deficits.

    We're in an area where the US is entangled in a gathering post-war mess in Iraq. Let me put it this way -- the US is throwing four billion dollars a month into a country whose GDP is only two-and-a-half billion a month. How crazy is that?

    We're in a world where the US manufacturing and service bases are being systematically transferred to other countries.

    We're in a period where the US consumer, instead of saving, is spending most of his income, while running up huge debts.

    We're in a period where other nations are inflating their own currencies (via their central banks), and then buying dollars in their struggle to keep their own currencies low. This is artificially keeping the dollar high, which will impact even more negatively on the US trade balance.

    We're in a period where the US possesses the world's reserve currency and where the US has assumed leadership of the world. But the US is also the world's biggest debtor -- and US debts are increasing. How long can a nation that is running up massive debts continue to be the world leader?

    It is a rather cynical truism that if you want to know where the power is going, then FOLLOW THE MONEY.

    I'm now going to make a slight alteration to the above adage. I'm saying --

    "If you want to know where the power is going, then FOLLOW THE REAL MONEY -- AND THE REAL MONEY IS GOLD.

    On that basis, I'd say that the power is now going to China.

    I don't know who's running China's economy, but I can tell you that they are very shrewd -- they don't seem to miss a thing. I don't know what China's policy-makers are reading, and I don't know who they are listening to, but I do know that they are smart, and I know that the Chinese have always been good businessmen (did you ever hear of a Chinese restaurant filing for bankruptcy?).

    Years ago the Bank of China subscribed to Dow Theory Letters under the Bank's actual name. I don't know if China still subscribes to my writing -- I don't know because most bankers and many institutions and funds now subscribe under a private or assumed name. For this reason, I never know who my subscribers really are.

    But I do try to put the pieces of the world situation together, and what I see is the rise of China and India and perhaps much of Asia.

    I've stated before and I'll repeat that I believe somewhere ahead the Chinese will make the renminbi fully convertible. I think that in time they'll float the renminbi, and it would not surprise me at all if they back the renminbi with gold, making the renmimbi an almost irresistible competitor to the dollar. By the way, according to the Chinese teller at my bank, the renminbi in Chinese means "the people's money."

    Ah those founding fathers -- what would they think of where we are now? Ben Franklin said, "We give you a republic, if you can keep it." I've often wondered -- was that a hope? Or was it a distant warning? Or was it both?

    With professional managers and hedge fund traders taking up so much of the action on the exchanges, it's becoming increasingly difficult for me to write anything intelligent on market action during the early part of the session. Often the market will rally and decline two or three times during the day before pointing to an actual up or down price near the close. And even five or ten minutes before the close we'll see what I call that little "zutz" where somebody (is it a broker, the Stabilization Board or some individual?) drives the Dow up 25 or 30 points -- often to the plus side of the market.

    The Bad and the Good -- I'm not sure exactly why, but suddenly I'm receiving 10 to 20 "hot" mailings from various sources, all promising wild profits and all warning that I'll miss massive windfalls if I don't subscribe immediately. These mailers are very slick, all printed on glossy paper, and they're written very expertly and very seductively. Ah, if it was only this easy to "make a fortune." I've spend fifty years searching for the "pot of gold at the end of the rainbow" in this business. Sadly, I must confess that I've yet to find it.

    Now for the good. One of the best-informed and most level-headed writers in the business is David Fuller of Fullermoney out of London (www.fullermoney.com). Maybe there is something in the London air that clarifies or concentrates the mind, I don't know. All I do know is the David has an excellent sense of the big picture, and I'm always eager to read what he writes. I want to include some of what David writes about gold in his latest report.

    "Clearly, a gradually increasing number of investors recognize that gold is a value play, especially relative to paper assets, and they know that the seeds of a future inflationary problem have already been sown by excessive credit creation. Paradoxically, by ensuring that gold is not officially money, central banks have probably ensured that its appeal as a store of wealth will be greater than ever before, during the next era of spiralling inflation, perhaps 10 to 20 from now. Meanwhile, credit creation and the bubbles it creates are gradually re-monetizing gold in the eyes of experienced investors.

    "Gold is in the early stages of a secular bull market against all currencies. The comparison I've often made during the last two years is that the gold price today is where the S&P 500 was in the early 1980s. . . Gold's long-term trend is now irrefutably upwards. I suspect this will be a stealth bull market for a number of years and the euphoric stage could be at least a decade away. Nevertheless, there are good reasons to believe that the 2001 to 2018 (?) advance will be the best yet for gold. With markets, one extreme move is often followed by another in the opposite direction, and gold experienced a 20 year bear market. Gold's recovery commenced from record low levels against the D-J Industrial Average, which reached 41.8 times the price of gold in June 1999, and is still over 26 times higher and currently rising. The historic mean for the gold/Dow ratio is around 5. To put this in perspective, credit creation (effectively, the printing of money) led by the US and Japan is massive and is almost certain to continue, because every central bank wants a soft currency while slow GDP growth and deflationary pressures persist. As gold enters a more fashionable stage of its investment cycle, there are many more people to purchase it, not least the citizens to China, who are now allowed to own gold. The probable launch of gold exchange traded funds (ETFs) in the US and UK later this year (one already trades in Australia) can only lift gold's investment profile by making it much more accessible to the public."

    Fuller obviously sees the gold bull market to be very extended, lasting up to a decade of more. He refers to the "euphoric stage" which is the same as my "third phase" of the bull market, but he sees it maybe ten years out. I'm guessing that it may come sooner, but we both agree that this is the "early" or the accumulation phase of the gold bull market. Thus it would pay subscribers to be very patient with their gold and gold stocks -- it's going to be a long, extended bull market in gold. And so far, the public and the media don't even seem to be aware of its existence.

    TODAY'S MARKET ACTION, and it could be very important. Why? Because today for the first time the Dow closed above the 9504 halfway or 50% level of the entire bear market decline. Most of you have read my discussions of the 50% Principle, but I'll write more about this tomorrow. Suffice it to say that today's action could have bullish implications for the market, particularly if today's upside action is followed up during the rest of the week.

    My PTI was up 6 to 5328 with the moving average at 5292. The PTI remains bullish by a large 36 points.

    The Dow was up 107.45 to 9523.37. There were 2 movers, IBM up 3.75 and MMM down 2.32.

    Oct. crude was down a big 2.16 to 29.41.

    Transports were up 62.60 to 2745.86.

    Utilities were up 3.90 to 243.47.

    There were 2390 advances and 898 declines. Up volume was an impressive 84% of up + down volume.

    There were 424 new highs and 5 new lows. My High-Low Index was up 399 to 10501.

    Total NYSE volume was 1.42 billion shares.

    S&P was up 13.98 to 1021.99.

    Nasdaq was up 31.03 to 1841.48 on 1.75 billion shares.

    My Big Money Breadth Index was up 8 to 711, its highest level since June 18.

    Sept. Dollar Index was up 1.00 to 99.68. Sept. euro was down a big 1.48 to 108.20. Sept. yen was up .21 to 86.01.

    German DAX was down 4 to 3567. Sept. Nikkei was up a large 460 to 10856.

    Bonds were hit hard -- Sept. 30 year T-bond were down 124 ticks to 104.08 to yield 5.33%. Sept. 10 year T-note was down 110 ticks to 108.12 to yield 4.60%.

    Dec. gold was down 2.50 to 374.30. Dec. silver was down 12 to 5.01. Oct. platinum was up 7.10 to 715.70. Sept. palladium was down 2.05 to 201.85.

    Gold/Dollar Index was down 6.20 to 377.90.

    One share of the Dow buys 25.44 ounces of gold.

    Gold advance-decline line was down 10 to 1249.

    XAU was down 1.05 to 89.95. HUI was down 2.37 to 191.42.

    ABX was down .25, HUI was down 2.37 to 191.42.

    AU up .20, GG down .17, GLG down .25, GSS down .04, HMY up .08, KGC down .13, MDG up .19, NEM down 1.36, RANGY down .06, RGLD up .06.

    Golds are overbought, and particularly NEM, so it may take some backing and filling to work off an overbought situation. But considering the big rise in the dollar, gold is acting quite well.

    STOCKS -- My Most Active Stock Index was up 9 to 262.

    The 15 most active stocks on the NYSE were -- GE up .80, PFE up .50, F up .72, NT down .02, MOT down.11, AOL up .22, AGRa up .14, AMD down .12, EMC up .32, DYN up .31, NOK up .18, C up .79, IBM up 3.79, AGRb up .2, MU up .14.

    VIX was up .46 to 19.95.

    McClellan Oscillator was up 40 to 182 -- the McClellan is now in overbought territory and the Oscillator should now start trailing down. But as long as the McClellan is in plus territory, the trend of the majority of stocks on the NYSE will remain bullish.

    CONCLUSION -- The stock market is obviously betting that the huge infusions of liquidity will lift the US economy out of its jobless torpor and on to better times. Interest rates are now heading up, and pressure is being putting on China (it's not going to work) to allow the renminbi to rise, thereby helping US trade and employment.

    The stock market is getting a head of steam on it, and the old bubble is starting to inflate again. The fact that the Dow closed above the 50% level should not be minimized -- this could be an important event -- particularly if the Dow can hold above 9504 and build from here.

    A writer from Barron's called me today and asked me "How high I thought gold could go?" I told her that was the wrong question -- the right question was "How low can the dollar go?" I added, "Gold has been around for 5,000 years while the modern dollar has only been around since 1971. Gold is the standard and the dollar is the new paper-kid on the block. It all boils down to the question -- how much paper will it take to buy an ounce of real money."

    Of course, we've got a very novel situation here, with nations inflating their own currencies. Why? So they can buy up dollars in order to keep their own currencies weak. This is creating a global blizzard of paper that is beyond comprehension. And it's a blizzard that is floating stocks around the world -- higher. The more paper that is created, the cheaper gold looks.

    Mankind has succeeded in creating one of the strangest world situations I've ever seen. But don't knock it, learn to live with it -- because girls and boys, this is the only world that we've got.

    Signing off until tomorrow --

    Russell
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    Real Estate -- One of the big questions today is "whither real estate?" I just read a piece by one of Bloomberg's best columnists, the very bright Caroline Baum. Caroline tends to be fair and constructively optimistic. But she calls a spade a spade. Here's what Caroline notes in her latest column on real estate --

    The July stats -- Housing starts at a 17 year high, single-family homes start at a 25-year high, existing home sales set a record, new home sales set their second-best month ever. So is there a housing boom? A bubble?

    Mortgage debt rose $700 billion to $6.3 trillion in the first quarter. That was the biggest increase since 1980, when inflation was rising at a 12.6% annual rate. Mortgage debt burden or the ratio of mortgage debt to personal income matched the all-time high of 6.37% seen in the first quarter of 2003.

    The 9.4% increase in median prices for existing homes is the biggest two-month increase on record. But nobody's talking about it. One reason is that the rise in home prices has been taken out of the consumer price index.

    The Russell opinion is that the housing boom is near topping out. I say that because interest rates have risen, permits for building new homes are down sharply, and the ratio of rents to homes has risen sharply in favor of renting over buying.

    I believe that the overvaluation in housing coupled with the continuing lay-offs in the US is pushing the whole housing picture ever closer to topping out.

    Furthermore, I believe that a weakening dollar will drive interest rates high; if that happens then the housing boom is doomed.
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    Many of you have asked how to buy gold coins: We have a trustworthy local coin dealer (Leon) and his phone number is (858)459-2228. Leon ships gold and silver everywhere. I get no commission or any sort of compensation on this recommendation.

    ALSO, PLEASE do not post whole sections or portions of my Remarks or portions of the Letters on message boards or chat rooms. If you want to paraphrase something briefly that's fine, but please take it easy on posting my whole column. After all, this is my livelihood.
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    A few e-mails below --

    Mr. Russell,

    Thank you for your superb advice. In regards to your suggestion that investors buy physical gold, you might want to look into Goldgrams (Goldmoney.com). This is basically a bank that holds gold as its currency. It might be a smart and safe way to hold gold. It is founded and operated by James Turk. It may be the future of monetary transactions.

    Sincerely,

    Harsha Gowda
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    Snow's visit to Japan and China this week is curious, I believe. One day in Japan and today in China and back home. No press conferences that I've heard of. This visit taking place one month after Japan has just soaked up about 75 billion U. S. dollars. Come on. What's going on? I doubt he is going there to make a request. Not the way Bush operates. More likely, it seems to me, he is going there to deliver a message. We'll see what happens.

    I suspect at some time Bush is going to deliver a similar message to Schroeder and Chirac particularly if they don't start playing ball in Iraq. Agree or disagree with him, Bush is no dummy. He knows the dollar has to come down and the current account deficit has to be brought back into balance at some point.

    If France and Germany think they have problems with their economy now, I suspect Bush will really start putting the blocks to them with a cheaper dollar if they don't start giving us some support in Iraq. I doubt Bush will want Schroeder and Chirac to survive in office longer than he will.

    Then again if Bush does win re-election next year, (which I believe he will since people will be reluctant to make a change to possibly weaker hands with all the terrorism and international uncertainties in the world) look for things to really hit the fan in 2005. Bush, I believe, will deal with the current account deficit in a forceful way at that time come hell or high water. He is action oriented and not one to sit and watch the pot boil. You can make book if he stays in office, the current account deficit is going to be forcefully dealt with one way or another, I strongly believe.

    Stay well.

    Miller

    Russell Comment -- Good thinking, but also rather ominous.
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