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May 15, 2007

It's a Secular Bear Market Right?
by Greg Silberman

Article originally submitted to subscribers on 13th May 2007...

This week saw a major change in position from some serious market students.

Chief amongst them was Richard Russell the Dow theorist from dowtheoryletters.com. I admire Richard's work immensely so when he stands up with a big change like this, I listen!

Richard had been extremely bearish on the stock market for over 5 years now. Then WHAM, last week he decided to reverse his stance. I believe he now expects a serious correction and then a resumption of the Bull market.

Thus begs the question, are we in a Secular (20yr+) Bear Market or is it still a Bull market AND more importantly, are we still right to be Long-term Bullish on Commodities?

The devil ofcourse is in the detail and in this case, it's how we define a Bull or Bear market.

Here's what we know:

If we define markets using relative values such as P/E ratios or as we commonly do, the Dow in terms of Gold, it appears that 2002 was a watershed year.

Chart 1 - Dow in nominal terms (top) ; Dow vs. Gold (bottom)

In terms of Gold, the Dow broke below a 20-yr rising trend line in 2002. This caused many market students to declare the end of the Bull market in stocks and the beginning of the bull market in Gold and 'things' i.e. commodities.

Historical P/E ratios (not shown) followed a similar pattern topping out at an S&P500 P:E of 30 in 2000, correcting to 15 by 2003 and now hovering around 20.

In other words, in terms of Gold, P/E ratios and foreign currencies (most notably the Euro), the 'Real' Dow seems stuck in a secular bear market quagmire and has failed to take out the 2000 highs by a long shot.

However, in terms of Nominal Dollar values (top of chart), the Dow is making new successive highs daily. And it's the nominal Dollar highs which get the media excited and attracts all the attention. Serious market students, like Russell, believe that a nominally priced Dow will discount the effects of the Dollar losing its purchasing power and it may very well be doing that now!

A higher nominal Dow coupled with contracting P/E ratios and higher Gold prices SMACKS of growth engineering through MONEY CREATION.

Nowhere is this more apparent than in this chart:

Chart 2 - Euro: Yen and Chinese Shanghai Index (green line)

The strongest of the major Fiat currencies has been the Euro and the weakest the Yen. The Euro has been on tear vs. the Yen rising over 20% in a little over 1 ½ years. A rising Euro vs. Yen gives an extreme graphical of the Yen carry trade which adds a flood of liquidity into capital markets.

Now, it's not by chance that the Chinese Stock market (green line) has gone parabolic in the face of this mass of liquidity. Yes, fundamentally there is real growth in China, the likes of which we have never seen before. But historically all markets go to extremes when a good story meets easy credit.

Secular Bull in Gold and Commodities

The biggest surprise to me is how successful central bank monetary policy has been to buoy asset prices. Add in artificially low interest rates through Dollar recycling and you get a world which believes inflation is not a problem and economic growth is great.

If commentators (such as Russell) are correct and the trend will continue for years to come, then imaginary growth will support higher commodity prices and bouts of inflation scares will boost Gold prices.

If people somehow manage to look beyond the paper façade and decide to protect themselves in a HURRY, Gold and things will have an even brighter future ahead.

As to what will wake people form their slumber, I'll handle in subsequent letters.

More commentary and stock picks follow for subscribers...

Greg Silberman CA(SA), CFA
www.goldandoilstocks.com

Profession: Research Analyst and Newsletter Editor
Company: Ritterband Investment Management LLC

Career Brief: Greg qualified as the youngest Chartered Accountant and Chartered Financial Analyst (CFA) in South Africa in 1998 at 25 years old. After completing his traineeship with Grant Thornton he moved to London where he worked for JP Morgan Chase in their Fixed Income Swaps Division. Sick of the grey skies and cold weather Greg relocated to Atlanta, Georgia where he spent the next 4 years freelancing as a management consultant. His targeted clients were fast growing mid size US based companies and he worked across many industries including credit cards, health insurance and energy trading. Greg has recently returned from Sydney Australia where he spent the last 2½ years working in Equity Derivative Structuring for Perpetual investments a major Australian Asset Management Company.

Greg has a passion for the markets and has been writing Greg's market newsletter for 2-years. A newsletter focused on metal and energy stocks and recently non-resource small caps listed in the US and Internationally.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Copyright © 2006-2008 Greg Silberman

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