the dow ~ richard russell comments

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    Grant, if this upsets you, I shouldn't read it...
    cheers,

    October 9, 2003 -- Here's what I think happened. Wolfowitz and Rumsfeld got together with Bush and they told Bush, "Hey, here's the plan -- we take over Iraq, which is crawling with weapons of mass destruction anyway. The Iraqis greet us as saviors, they love us -- we topple Saddam, we turn Iraq into a model democratic republic. Then the clincher -- we've got our red-hot military in Iraq, and presto -- the US controls the whole Middle-East. That, Mr. President, is the way the world's superpower should operate."

    And Bush swallowed the whole concept. The only problem is that the whole concept was wrong. The reasons Bush gave for taking over Iraq were wrong, the plan was wrong, and the intelligence was wrong. And surprise, the Iraqis viewed the US as invaders and occupiers. Now the Bush administration is having internal problems, as expected, and as the plan fails.

    Ironically, the picture that was given to Bush fit perfectly into his fantasies. "Ah, I'll avenge my father. Hey, didn't Saddam try to kill my daddy. I'll knock off Saddam, maybe put him up for trail along with Bin Laden, and I'll be a world hero in the bargain."

    But now it's beginning, just beginning, to dawn on Bush that he was taken. They gave him the wrong story. The truth of the situation is bursting over his head. What to do, how to get out of it somehow? How about this -- hook up with Arnold. Everybody sees Arnold as the new American hero. Bush and Arnold. Maybe that's it -- Bush and Arnold. And oh, to get rid of that prickly, arrogant Rumsfeld. Rummy and that Wolfie, do me a favor, guys -- disappear.

    This from today's Financial Times, "William Kristol, an influential neo-conservative with close ties to the Bush administration, wrote in the latest Weekly Standard magazine that the administration had been virtually 'invisible' in making its case for an extra $87 billion in spending on Iraq and Afghanistan. One reason for this is that the civil war in the Bush administration has become crippling. The CIA is in open revolt against the White House. The State Department and the Defense Department aren't working together at all."

    Today we hear that Rumsfeld had not been informed of the new Iraq set-up with the creation of an Iraq Stabilization Group put together by National Security Advisor Condoleeza Rice. And Rummie is really, really angry. And so it goes when wrong information and goofy policies run headlong into stark reality.

    So much for Russell's morning banter. Checking the news, we see that jobless claims dropped by 23,000 to 382,000, down to an eight-month low. We know these figures are "adjusted," meaning fudged, but the market, now pulling ever-further away from the Dow 9504 50% level, "wants to go higher." And higher she goes.

    The dollar appears oversold after its long descent from its August high. By the same token, the euro appears overbought, and the euro is probably overdue to a corrective decline.

    The yen continues to climb, this despite that fact that the Bank of Japan has spent billions trying to keep the yen down. All to no avail, the yen is now at its highest level since the end of the year 2000.

    Gold remains in its correction from the September 25 intra-day high of 394.60 on the December contract.

    The low close was struck on October 3 at 370.00 on the December contract. It would be "nice" to see Dec. gold hold above 370.00, which is almost on its 50-day moving average, but there's a good chance that gold will correct lower.

    The stochastics for gold are near bottoming as is momentum, but the correction in gold is only 12 days old so obviously we have to give it more time.

    The brightest part of the current gold picture is the action of HUI, the "unhedged" gold average. HUI struck a low close of 189.37 on October 3. As I write, HUI is still above its 50-day MA, which stands at 189.82, The stochastics for HUI have turned up, and it's just possible that the action of HUI is telling the real story for the universe of gold.

    The whole investment picture at this point presents a problem for conservative investors of which I am one. Stocks on a value basis are expensive, maybe as expensive as they've ever been. On top of the overvaluation, we have in the background the twin deficits of half a billion dollars in the trade deficit and even more than half a trillion dollars in the budget deficit.

    This is weighing on the bond market, the appears to have topped out. The 30 year T-bond this morning is down a full point.

    Stocks as I write are sharply higher with the Dow up 133 points to 9764. This comes as no surprise to my PTI, which is currently in new high territory. Subscribers who trade on the basis of my PTI are sitting with positions in the Diamonds, which move percentage-wise in step with the Dow.

    Strategy -- I wrote yesterday, that in my opinion, this is a market where the best strategy is to do as little as possible. The only clear trend that I see now is the rising trend of common stocks, but here we have the ultimate case of buying overpriced stocks in order to sell them to a "greater fool" who will take them off our hands at higher prices.

    In that respect, it's very much like the real estate business today. He in La Jolla we see little homes selling at $1.5 million that are being gobbled up by speculators in order to be sold at $1.7 million or hopefully for $2 million.

    Yesterday I explained to a friend that buying a home is a good deal when you can buy the home, pay the mortgage and all expenses, and then rent it for a profit. You can't do that today. You haven't been able to do it for many years. But believe me, there are times in the real estate cycle when you could do it. Those were the times to buy homes for profit. Those are the times when homes were great values.

    Today, when you buy a house, you buy it simply because you like the house or you believe you can save on taxes or you want something tangible.

    Of you buy a house because you believe inflation will lift the value of the house over time, and you want an inflation hedge.

    But again, don't kid yourself into thinking that in buying a home today you are buying a great value. Because you're not. You're buying at the high end of the cycle, and once the cycle turns down it can be difficult to sell a home. Houses most of the time are relatively illiquid, they're not like stocks where you can dump your winners or losers in a few seconds.

    I use the home example because it may be easier to understands than using stocks as an example. But you have to remember that over many years most of the increase in total income from stocks has come not from earnings growth but from dividends. Thus, when you buy low-dividend high P/E stocks today for the most part you are not buying values, you are simply speculating on the trend, and this can be risky and often costly.

    There's nothing like buying great values in stocks, real estate or a business or anything else. As far as buying values in stocks or real estate today, the values just aren't there.

    By the way and before I forget, some of the commodities are literally flying higher. Copper, cotton, beans, cattle, platinum, These commodities are responding to the massive infusions of liquidity that the Fed and world central banks have been injecting into their respective economies.

    ..........................................
    I thought the excerpts from a piece by Steve Sjuggerud was well worth considering --

    "We're extremely close to the scariest scenario imaginable, at least from my
    perspective.

    "There are three major ways to size up the markets to get some clues on where
    it might be headed: fundamental analysis, technical analysis, and analyzing
    the market sentiment. All three reveal a gruesome spectacle.

    "We've already made the case about market sentiment - the dumb money is at a
    record level of optimism, while the smart money is at a record of pessimism.
    Which crowd do you want to be with?

    "In the case of fundamentals, stocks are still more expensive than they've
    been at any time in history. We are still at 30 times earnings and three times
    book value in the case of the S&P 500 Index of the big, boring stocks. And
    of the tech stocks, oh my... by my calculation, the companies of the Nasdaq
    100 are trading at a price-to- earnings ratio of 49. To explain this in plain
    English, if you were buying a stock with a P/E ratio of 49 as a business, it
    would take you 49 years to break even on your investment. Why would anybody in
    their right mind borrow money to invest in that?

    "The Nasdaq 100 Index is trading at 8 times sales. If you were buying this
    business, that means if you paid yourself every penny of sales for the next
    eight years, you'd break even. Of course, you can't pay yourself every penny of
    sales. Rent needs to be paid, salaries need to be paid, and of course it
    will cost you money to make your product. In other words, getting your money
    back in eight years is a total pipe dream. The basic point is, fundamentals in
    tech stocks are horrific.

    "All that's left is the technical analysis - the major trend. The trend has
    not broken down yet... but in the face of horrific fundamentals in the
    tech-heavy Nasdaq 100, and the truly scary insider selling in the tech stocks, it is
    time for us to place our chips on the table that the Nasdaq 100 will be
    lower a year from now than it is today.

    "When the market breaks down, you can't say you weren't warned...
    Regards,"

    Steve Sjuggerud
    for the Daily Reckoning

    Flash -- M-3, the broad money supply, was down $6.8 billion for the week of Sept. 29. M-3 trend is slowing down.

    TODAY'S MARKET ACTION --It's hard to fault the market action. Today the Dow and the Transports made simultaneous new highs. That's considered powerful action, and normally that will call for higher prices. Market sold off today from the highs, but it was still up at the close, and that's the key.

    My PTI was up 5 to a new high of 5356 with the moving average at 5314. PTI remains bullish.

    The Dow, after being up over 130, closed up 49.11, but that all right -- it did close up and the action undoubtedly scared a lot of traders. There were no movers in the Dow today.

    Dec. crude was up a big 1.19 to 31.09.

    Transports were up 59.11 to a new high of 2850.73.

    Utilities were up 1.10 to 253.56. For yield ED, DQE, look good for yield.

    There were 1984 advances and 1277 declines. Up volume was 64.2% of up + down volume.

    There were 513 new highs and 10 new lows. My High-Low Index was up 503 to 15899,

    Total NYSE volume was a rising 1.51 billion shares.

    S&P was up 4.96 to 1038,73.

    Nasdaq was up 18.12 to 1911.90 on a big 2.05 billion shares.

    My Big Money Breadth Index was unchanged at 728,

    Dec. Dollar Index was up .29 to 92.33. Dec. euro was down .60 to 117.12. Dec. yen was up (again) .39 to 91.80.

    German DAX was up a large 86 to 3481. Dec. Nikkei was up 105 to 10610.

    Bonds were lower. Dec. long T-bond was down 24 ticks to 107.15 to yield 5.21%. Dec. 10 year T-note was down 14 ticks to 111.30 to yield 4.30%.

    Dec. gold was down 6.20 to 369.80. Dec. silver was down 2.8 to 4.84. Jan. platinum was down 7.70 to 718.40. Dec. palladium was down 3.25 to 211.75.

    Gold/Dollar Index ratio was down 8.0 to 400.50.

    One share of the Dow will buy 26.17 ounces of gold.

    Gold advance-decline line was down only 2 to 1298.

    XAU was down only .33 to 91.05. HUI was down only 1.09 to 196.78.

    ABX up .07, AEM up .16, AU up .12, DROOY down .08, GFI up .13, HL down .04, NEM down .20, RANDY up .08, RGLD up .06.

    Today had to be one of the strangest days for gold that I've seen in quite a while. The gold stocks gave ground very grudgingly, despite the 6.20 drop in Dec. gold. Which makes me think that the price of gold is being manipulated, and the gold stocks just don't believe the lower gold price.

    Of course you can also say that it's easy to manipulate gold, the metal, but how do you manipulate dozens of gold shares? Hanky-panky going on in gold, but in the end gold and gold shares will do what they are supposed to do. Which is what? Answer -- go up, because it's a gold bull market, and it's fated to last a long time -- perhaps many years. But yes, today was a doozy, a very strange day for gold and gold shares.

    STOCKS -- My Most Active Stock Index was up 7 to 292.

    The 15 most active stocks on the NYSE were -- LU up .02, CA down 3.13, NT down .12, GE down .05, AOL up .33, HPQ up .79, AMR up 1.43, MU up .15, AWE down .16, PFE up .12, GPS up .96, AGRa up .20, F up .19, C up .26, NOK up .26.

    VIX was down .26 to a low 1.92, showing mucho confidence.

    McClellan Oscillator was up 15 to plus 85. But Summation Index zig-zagged higher, which is a positive.

    CONCLUSION -- Stock values are ridiculous, but market action is good. Would you buy overvalued stocks in a market that acts well? You would, then here's your chance. But the very basis of Dow Theory has to do with buying stocks when they represent great values -- and selling those stocks when they are overvalued.

    Me, I don't need the money that badly, so I tend to stick to Dow Theory rules. A high valuation market is a high risk market, and I'm very risk averse. I just keep compounding with a few munis and a few utilities, and I wait. I also try to avoid doing something stupid.

    The essence of investing, as every commodity trader knows, is risk management. Risk management means never taking the big loss. That's hard to do in a bear market, but it can be done.

    Why is risk management difficult in a bear market? It's difficult because the bear is always trying to lure you into doing something stupid, which means luring you into taking the big risk.


    Enough -- let's just see what tomorrow brings.

    Russell

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    Trends -- I've said it all along. One of the biggest global trends is the increasing empowerment of women. You see it everywhere. Most of the exciting new pop singers are women. And women are rising in politics. Here's Condoleeza Rice taking on more power (bye, Rummie).

    Today in USA Today we read the "Cholo is bursting out of the barrio." Cholo is slang for Mexican gangster and it's starting in east Los Angeles." The celebrities are infatuated with Cholo, and the word is that Cholo is the new rap. Says Irma Zandi of Manhattan's Zandi Group, "We're at the very start of something as big or bigger than hip-hop."
    ...............................................................
    Many of today's trends start with blacks in the penitentiary. The trends then move to kids outside, then on to MTV and from there to the fashion designers.

    Do you ever watch MTV. Kids all around the world are glued to it. It's a huge maker of teen customs, it's America's biggest export.

    It all starts from the streets, and a lot of is carried along by women, Pink, Mya, Christena Aguilera. This is what's happening -- it's women, it's latino, it's barrio, and it's a huge and growing influence in the US and around the world.
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    Dear Russell,

    I was in Zurich last week for the first time since the late 70's. At that time it seemed that every bank you passed had gold bullion and/or gold coins (cardboard fakes) displayed in their windows. And the current prices for gold items were prominently displayed.

    Last week I did not see a single display of that sort anywhere. The window displays only addressed the current interest rates. I never even saw a sign quoting the current price of gold.

    It reminded me of your comments regarding the fact that at this stage "Gold Fever" has not yet kicked in.

    Regards,

    Bob Eaton
    ................................................................................................................................................................

    An interesting e-mail received last night --

    What happens in a Bear Market? The term Bear Market is usually defined as a
    decline in financial assets denominated in paper. Paper assets are stocks,
    bonds, derivatives.

    Bear and bull markets move in almost perfect 18 year cycles. !8 years up
    followed by 18 down to flat. History bares this out. For purposes of this
    discussion, please refer to the Dow Jones Industrial Average (DJIA).

    1910-1929 - Bull market, DJIA peaks at 381
    1929-1948 - Bear market, DJIA went as low as 41 in 1933 and ended in 1948
    at 161
    1948-1966 - Bull market; DJIA goes from 161-975
    1966-1982 - Bear market - DJIA starts at 975, goes to 1000, bottoms in 1973
    at 577 and finishes in 1982 at 974.
    1982-2000 - Greatest bull market in history, DJIA goes from 974 - 11,722
    2000-???? - Potentially the greatest bear market in history

    In a Bear Market, the economic, social and politic fabric of a country and
    possibly the world deteriorates per Richard Russell. This period is marked
    with rising unemployment, wars, corporate and personal bankruptcies,
    declining tax revenues, and possibly rising inflation. Oh yes, as people
    lose faith in governments and paper assets, commodities such as oil, gold,
    sugar, coffee may go up. Gold is the one item that almost always goes up in
    these times. This is true in both deflation and inflation.

    The election of Arnold as governor of California is a perfect example of
    this. The economics of the state of California are deteriorating as are
    most US state
    finances. It is unlikely that California will be alone in attempting to
    recall it governor. Nevada and Alabama are already trying to do this. It
    should be noted that the governors of those two states are Republicans.

    Bear Markets punish both Democrats and Republicans alike. In fact, it
    punishes everyone.

    The best example of this is period from 1966-1982. No US president was able
    to complete 2 terms. In 1966, when the Bear Market started, Lyndon Johnson
    was the president. By 1968, he was so weakened by the war in Vietnam and
    the Bear, that he decided not to run for re-election.

    Richard Nixon won the election in 1968 and was easily re-elected in 1972.
    However, his failings in a Bear Market, forced him to resign in 1974
    shortly after the DJIA bottomed in 1974.

    Gerald Ford replaced him and promptly lost the election in 1976.

    Jimmy Carter came in and the Bear Market and the Iranian hostage crisis
    finished him off in 1980.

    Ronald Reagan came in 1980 and the Bear Market ended in 1982. By 1984 it


    The silent battle of the euro vs. the dollar continues, as you can see below --

    German Sources Say Russia Might Price Its Oil in Euros
    Combined Reports

    YEKATERINBURG, Ural Mountains -- Russia is increasingly looking at
    pricing oil sales in euros instead of dollars, reflecting the euro's
    growing role as a reserve currency, German government sources said
    Wednesday.

    "The question is taking on increasing significance," a person
    travelling with German Chancellor Gerhard Schroeder on an official visit
    to Russia said.

    A switch into euros by Russia, the second-biggest oil exporter behind
    Saudi Arabia and holder of the world's largest natural gas reserves,
    would represent a major shift in the balance of currencies behind the
    world's most traded commodity.

    European leaders have long expressed interest in seeing energy
    contracts priced in euros rather than dollars to promote the currency
    and boost price stability in the European Union.

    Most energy contracts are settled in dollars, meaning that for European
    buyers, trade in gas and oil is subject not only to fluctuations in
    their market prices but also to variations in the value of the U.S.
    currency. In 1999, just after Vladimir Putin became prime minister, he
    laid out a proposal to move Russia's trade out of dollars and into
    euros.

    A Russian Energy Ministry official said he could not confirm the
    report. "We cannot confirm this information. No talks are taking place
    on the issue. The ministry draws up export timetables, but does not
    deal with financial issues on oil supplies," the source said.
    (Reut
    truly was the dawning of new morning in America as Reagan's ads said it
    was.
    Reagan easily got re-elected as the new Bull market was starting.

    George Bush Sr., was done in by Ross Perot and the recession which followed
    the Reagan boom. Normally in Bull market he should have been re-elected.

    Bill Clinton was elected twice and he even survived his impeachment in 1998
    because of the Bull Market. In a Bear Market, he may have been forced to
    resign.

    What does this say about the future? It tells me that I would not want to
    be president or the governor of California until 2016 or so.
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