Market Comments

By: Richard Russell | Sun, Mar 16, 2003
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Let's start with my goof of the day. It's the 200-day moving average of the Dow. I don't know where I got my last figures (do I need new glasses?), but the correct figures for the 200-day MA for the Dow is 8478 and the correct figure for the 50-day MA of the Dow is 8108 (simple, not exponential MAs). The differential between the two is 370, which means that the rate of downside acceleration is diminishing for the first time.

As long as I'm starting with numbers, let's continue with a few numbers. One number that immediately hits me is the latest news on the broadest measure of the US flow of funds situation which is the current account (this takes into account the trade figures and all other money transfer figures).

The deficit rose 8.3% from the third quarter to a record $136 billion. For the year the deficit rose 28% to a record $503 billion or 5.2% of the entire US Gross Domestic Product. Classically, 5% is the danger level, and we're over that now.

This should, and is, putting pressure on the dollar. So far, the pressure has been mild and polite, but with the Iraq situation and projected tax cuts and new spending, the dollar's decline could accelerate. If so, the Fed will find itself in a tough spot. Normally, a central bank will protect its falling currency by raising rates and thus making the currency more attractive to hold. But as this time, because everyone is so loaded with debt, the act of raising rates would play hell with the economy.

So Alan Greenspan has effectively locked himself into an extremely difficult situation. What can he do? Pray.

Along these lines, I recommend strongly that subscribers read the piece in Barron's this week about Bill Gross, the mastermind at PIMCO.

Gross notes that foreigners own 35% of US Treasuries, 23% of corporate bonds, a 14% direct interest in US companies and direct ownership of 13% of all US stocks. Thus, if foreigner becomes frightened about the US dollar, we could have quite a waterfall in the markets.

Now here's a headline from the Financial Times (March 14) that you won't read any time soon in the Wall Street Journal. "The fact that markets have fallen for three years is completely irrelevant. . . equities are still not dirt cheap."

I just received the great publication from my old friend, Jim Grant, the publication being "Grant's Interest Rate Observer." The headline for these issues is, "Three years later and still not cheap."

James outlines the classic criteria used by Benjamin Graham to identify bargain stocks. Grant notes that at the 1974 bear market bottom, 85 of the S&P 500 stocks fit Graham's criteria of bargain stocks. The number declined to 65 in late 1982 and six in January 1991. This year there were only two stocks that qualified -- Limited Brands and Scientific Atlanta.

What's happening? My opinion is that over the last 29 years stocks have never been as cheap as they were at the 1974 bottom. Will we ever see stocks on the bargain table again, and I mean stocks as cheap as they were in 1974? My instinct is -- "Yes, we will see stocks that cheap again." But you won't want to buy 'em when they are as cheap as they were in late-1974. The reason is that the US and the markets will be in the throes of either a broad panic or a period of abject pessimism.

What could possibly generate those conditions? My guess -- a debt collapse and a question of the viability of the dollar. A loss of reserve status for the dollar. Mass unemployment and collapsing business. A loss of super-power status for the US. Take your choice of this grim selection.

In the Barron's article, Bill Gross is quoted as saying, "How much longer will the world be willing to devote 80% of its savings to finance our over-consumption? We've only gotten away with it because we're the globe's primary reserve currency, but fairly soon we're going to be regarded as the emperor with no clothes."

Enough, let's turn to the stock market. The market is particularly difficult now because of the "will he or won't he" situation in Iraq. I'd rather just look at the market from a technical standpoint. On January 27 we had a decline that was so close to a 90% down-day that for all purposes I'm going to call it a panic 90% down-day. Then last week on March 10 we had a second 90% down-day.

This second 90% down-day was followed by a rally towards the end of the week, with March 13 seeing the Dow up big-time -- the Dow was up 269 points.

The obvious question is -- will the market climb continue, maybe even taking the Dow back to its 200-day moving average -- back to say 850?

Obviously I have no way of knowing, and I honestly have no instinct or opinion one way of the other. What I do have an opinion about is that we have more 90% down-days in our future. And I also believe that in due time the stock market will come down to test and then break the October lows.

I've written repeatedly that "In a bear market whatever can go wrong will go wrong." That adage haunts me, and I have a feeling that it applies to US an attack on Iraq. If you were George Bush I'm sure you would feel that enough "has gone wrong" already. But this is pre-war, I'm thinking of what could go wrong if we actually attack Iraq.

Returning again to the stock market, Randal Forsythe in Barron's repeats the "awful truth" which Martin Barnes of the Bank Credit Analyst reveals -- (Barnes calls it "Wall Street's Dirty Secret"), the truth is that over the past 22 years, a span taking in the greatest bull market in history -- you'd have done just as well in Treasuries as you would have had you been in the S&P 500. At any rate, that's what a big bear market can do for relative investments.

The week ended March 14 finds the S&P selling at 29.7 times trailing earning with a dividend yield of 1.96%. The S&P is down 5.29% for the year.

The Confidence Index dropped from last week's low 65.5 to this week's even lower 64.5. This is the lowest CI figure since the 1940s, and it indicates that the bond market is anything but enthusiastic about the quality of credit today.

For the week the common stock advance-decline ratio was as follows -- March 10 minus 4.99; March 11 minus 5.19; March 12 minus 5.33; March 13 minus 5.02 and March 14 minus 4.93.

That about wraps it up for today, Saturday.

See you all Monday,

By the way, I'm reading an excellent new books by a great Wall Street investor and brain, Leon Levy. It's called "The Mind of Wall Street." I highly recommend this book, with an intro by Alan Abelson.

Dear Richard,

Thank you for your insights most of which are crafted with profound wisdom. But you labour about the Federal Reserve being done away with, " it is a scam " and unconstitutional. The power to coin money was vested in Congress only, not a private institution. But Congress is just another body that has abrogated its powers.

Has it ever occurred to you that the debt limit is a non limit. That Congress does have the power to limit this government on going deficits but simply automatically endorses every new request for new fiat money without ever turning it down. So why do you think Congress would be more judicious than the Federal Reserve ? Now there is a way. Just look at the following:
Some Geenspan Gems. It's impossible to say that he wasn't part of the Wall St. cheerleading squad.

From Bill Fleckenstein
"It is very rare that you can be as unqualifiedly bullish as you can be
right now." Alan Greenspan on January 7, 1973, two days after the market
peaked on its way to declining 50% over two years as we endured the worst
recession since the depression."

Alan Greenspan said in testimony before the U.S. Congress Joint Economic Committee June 1999, "But bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong."

March 8th 2000 - Alan Greenspan speech. Just days before the Nasdaq peak.
It appears to be only a matter of time before the Internet becomes the prime venue for the trillions of dollars of business-to-business commerce conducted every year. The fact that the capital spending boom is still going strong indicates that businesses continue to find a wide array of potential high-rate-of-return, productivity-enhancing investments. And I see nothing to suggest that these opportunities will peter out any time soon.

03/13 05:48
Argentine President Candidate Urges Peso-Gold Link, Herald Says
By Claire Shoesmith Buenos Aires, March 13 (Bloomberg) -- Nestor Kirchner, seeking to become president of Argentina, will try to return the country to a monetary system where the peso is backed by gold reserves, the Buenos Aires Herald said, citing Kirchner's economics adviser. The return to a gold standard would be part of a policy involving ``neither dollarization nor multiple currencies,'' the paper cited Kirchner's adviser, Jose Maria Las Heras, as saying.

Its an interesting idea. This comes after many attempts to stabilize the Peso, even linking to the dollar which was disastrous. Chaos reigns in Argentina and once again Gold is being thought of as a means of stabilizing the currency. It's a little early yet, and certainly Gold would have to be valued much higher than it is for it to be effective. But as has been said, " Man has always attempted to master Gold and in the end it masters them ". We will return to Gold but before we do, unfortunately chaos must reign. That is the only way it will be accepted !
Don Wilk


Richard Russell

Author: Richard Russell

Richard Russell
Dow Theory Letters Inc.

Richrd Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.

The Letters, published every three weeks, cover the US stock market, foreign markets, bonds, precious metals, commodities, economics --plus Russell's widely-followed comments and observations and stock market philosophy.

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