Market Comments

By: Richard Russell | Tue, Jun 10, 2003
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Slowly but surely the truth is emerging about the US economy and our future. This weekend the truth appeared in both the New York Times magazine and in Barron's. In Barron's it appeared through an interview with Wall Street icon Seth Glickenhaus, an interview which I have urged all my subscribers to read (I've followed Glickenhaus' remarkable career ever since he made millions in the early '60 on the AT&T split. Seth has always tended to be an optimist, so this interview is really a shocker).

Glickenhaus answers the Barron's question, "So we're not out of the woods?"

Glickenhaus -- "you know the expression, 'You should live so long.' After a 16-year cycle of boom, it is unreasonable to expect the readjustment to take less than 16 years. We are in for a very long period where the economy will not grow very much. This is intensified on a world basis by the deteriorating caliber of our political leaders. Bush has no fiscal sense whatsoever and is radical in his approach. The Republicans live solely to make the rich richer. The Democrats have no leadership; and are barely conscious of the major issues of the day, which include growing unemployment, lack of affordable housing for the poor and the low end of the middle class, lack of health insurance, deterioration of our infrastructure -- our bridges, roads, sewer systems, -- growing water shortages, drugs and crime. Just to name a few of our major issues. One of the major things they overlook is that we are currently spending $350 billion for military purposes. Meanwhile, Russia spends something on the order of $40 billion and China spends $20 billion. We spend more than all other countries together . . ."

Then in the New York Times magazine (read by millions the world over) Peter G. Peterson, storied co-founder of the Blackstone Group and Chairman of the Federal Reserve Bank of New York writes an article, "Deficits and Dysfunction," subtitled, "How the Republicans (and Democrats) have sold out our future." And this is quite an article, believe me.

In my opinion, Fortune magazine is the best investment magazine being published today. The current issues ("Fortune's Midyear Investors' Guide 2003") contains some excellent articles. The article I wish all subscribers could read is entitled, "Can Stocks Defy Gravity? That's what Wall Street wants you to believe. Don't buy it. The best minds say that market will rise, but it won't soar."

And then a subtitle, "In the early '70s the risk premium was at 3%; the next decade saw lackluster returns. Today? It's right back at 3%. . . . During the past 50 years the risk premium has averaged 5%, and over that time stocks have posed 10.5% average annual gains. In 1929, just before the Crash, the risk premium stood at zero. In 1972, it hovered at 3%, predicting the lackluster returns of the next decade. And where does it stand today? Right back at 3%.

Russell Comment -- the "equity risk premium is the extra compensation that investors demand for putting their money into stocks rather than putting their money into "riskless" 10 year Treasury notes."

All the above points to the following conclusions -- We're in a primary bear market. Stocks are currently (understatement) still overpriced. Considering that we're three years into a bear market, very little has been corrected, and stocks have risen to the "very expensive" zone again.

Excellent long-term total returns come when you buy and hold stocks that are bargains on an historical measurement. Poor long-term total returns come when you buy and hold stocks that are expensive on historical measurements.

Today the S&P is selling at 32.5 times earnings while providing a yield of just 1.67%. As I see it, this extreme of overprice means that long-term holders of stocks will probably lose money over the coming decade. That's in the absence of a bear market collapse like 1973-74. If we do experience a real bear market smash, then, of course, the market may offer bargain prices. In which case, those who have the stomach to buy stocks at the bottom of a crash will be able to show good profits, assuming that this is the beginning of a new bull market.

Obviously, nobody knows how the picture will play out. The Fed has set its full power against a deflationary collapse, deciding to fight the bear with the greatest onslaught of cheap money and declining rates in history. This has resulted in a housing bubble, a bond bubble, and a partial reviving of the stock market bubble. As I see it, the greater and more numerous the "newly revived bubbles," the better the chances of an ultimate crash.

Near-term stock market -- With Lowry's Selling Pressure collapsing, logic suggests that any correction of this severely overbought market "should" be minor. But I prefer to put aside all preconceived notions and allowing this market tell its own story. Remember, also that the McClellan Oscillator has been above zero for around ten weeks with only a three-day "correction" below the zero line.

The stochastics have just turned down on all the major averages, and we'll just have to see how much selling pressure comes into the market. If this is to be any more than a minor correction, we'll have to see a clear rise in Selling Pressure. So far, I don't see it, but this is a day-to-day situation, and today is only the first real down-day.

The bonds were up 19 ticks this morning, and very close to their late-May highs. The Fed has told the world that they can control all maturities of bonds from the closest to the furthest away. How could the Fed control the long bonds? They'd buy 'em, that's all.

As for gold, the Commercials have now assumed a very large 160,000 contracts short. Shorting an item creates increased supply, and undoubtedly the rise in gold shorts has put pressure on the metal. Why have the commercials put out so many gold shorts? The simplest explanation is that they see deflation in the picture. But remember, the Commercials are also traders, and if they sense that an item, gold in this case, is overbought, they'll move to make money on the short side.

As for the big picture in gold, these secondary movements should be ignored by holders of gold and gold shares. We're looking at the big picture, and in the big picture it's a question of the survival status of the dollar.

If you're genuinely worried about the future of the dollar, how about buying euros? The argument against the euro is that Europe is in lousy shape, and Germany, the engine of Europe, is in recession. Furthermore, the euro is a new and untested currency and it's also another a fiat currency manufactured by a central bank.

For all these reasons, the safest way out of dollars is gold. The central banks may want you to believe that gold is a commodity and not money -- but 5,000 years of history tells us that the central banks are "whistling in the dark."

What has all this got to do with investing, or to put it another way -- How do we invest at this precarious point? My suggestion -- stocks are expensive. The long-term view for stocks is not good. What I've done is opt for yield and compounding on one hand -- and the insurance or the hedging capabilities of gold on the other hand.

For yield I bought AAA-rated muni bonds a few years ago, and I have held them ever since (I recommended these for subscribes week after week, month after month). And I have bought higher-yielding utilities. I've simply compounded the interest and dividends as it comes in.

On the other end of the scale, I've bought gold items on the thesis that the current monetary system is doomed and that the $44 trillion of unfunded liabilities facing the US government are unsustainable.

Investors are currently in a very difficult situation. There's little yield from notes or bonds and almost nothing in the way of yields from CDs or money market funds. As for stocks, the yield on the S&P is down to a trifling 1.67%.

As an example, I just received Value Line, and they review 51 stocks in the "hot" Medical Supplies industry. Of the 51 stocks, four provide yields just over 2%, most have yield a bit over or under 1% and 32 pay no dividends at all. This is investing?

CONCLUSION -- The first day down doesn't mean much and either does today's low volume. Almost every major decline in the stock market begins on low volume, and volume increases as stocks fall. But, of course, that doesn't mean that this is going to be a big drop -- it's far too early to tell. Lowry's Selling Pressure indicates that up to now there's been a steady decline in the desire to sell, and these trend don't usually turn on a dime.

But the story isn't ours to tell, the story is for the market's to tell, and as I said, one day down doesn't mean anything. What I want to see is whether, if this decline continues, we see a pick-up in volume and an increase in downside momentum.

Those with DIAs and SPYs keep close stops under these babies.

Gold -- with Commercials up to their ying-yang in shorts, these guys are obviously expecting and playing for lower gold. They tend to be right, and they were right today.

Stocks -- the pros aren't particularly worried about this market -- in fact, I'd say that the pros are confident and looking for just a minor correction. You can see it in today's very minor rise in VIX.

Will the pros be right? Usually, but not always, which is why this is such a fascinating and difficult business.


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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