Richard Russell
dowtheoryletters.com
>>We've never had a bear market in which hundreds of billions of dollars worth of stocks are held by the mutual funds. And I have to wonder what happens if or when the public turns bearish and wants to swap their mutual fund holding for cash. It could be quite a sight.<<
July 10, 2002 -- This could be the most important site I've written so far this year. So please read it carefully.
With rates low and staying low, with the stock market low and staying low ( low in price, not in values), the US is looking increasingly like Japan.
The great fear, as far as the Greenspan Fed is concerned, is DE-flation. Once the economy goes on the deflation path, it can get out of control -- meaning getting out of the Fed's control. The Fed is doing its part in fighting deflation. The Fed is fighting US and world deflationary forces with a massive increase in the money supply (and what else is new?).
However, for the real authority on inflation/deflation, I always turn to the bond market. No sector of the economy is more sensitive to the trend of inflation or deflation than bonds.
Today the bellwether 10-year note is yielding 4.73%. At the same time the TIPS, the inflation adjusted 10 year T-note, is yielding 3.11%. The differential has now dropped to 1.62. A few weeks ago it was 1.78. A year ago it was 2.20. Those sophisticated characters who buy and sell bonds are saying that the trend is toward LESS inflation. Some might even be so bold as to state that the trend is deflationary.
I've been stressing the fact that this nation is up to its eyeballs in debt. The government, the states, the counties, the cities are chock full of debt. The corporations are loaded with debt. American consumers are rolling in debt and taking on more debt even as you read this report. Never has any nation in world history taken on this much debt .
It's no secret that inflation is the debtors' best friend. Inflation makes it easier for debtors to service their debt with depreciating dollars.
Conversely, deflation turns debt into a living nightmare. During deflation dollars become scarcer and more valuable. And in the US where debt is king, a trend towards deflation could conceivably set off a debt melt-down.
A debt melt-down would be characterized by mass bankruptcies and a trend on the part of banks to be ultra-conservative. To put it another way -- deflation and a debt melt-down would be an utter disaster.
We've been watching the stock market deflate into its third year.
The stock market doesn't exist in a vacuum. The stock market moves first and the economy follows. One huge danger is that the stock market could be saying "deflation ahead." And the great fear is that what's been happening in the stock market could be happening in the economy -- a month, six months, a year from how.
This has got to be Greenspan's worst nightmare. Here he is, gunning the money supply for all its worth and he can't get the economy on the inflation path again. The culprit -- too damn much debt.
How do you get rid of debt? You pay it off (almost impossible now since it's still rising), you declare bankruptcy -- or you inflate it away.
It's obvious which method the Fed has chosen -- it's the method that we call -- inflation.
A few years ago I gave the problem an easy three word description. I called it --
INFLATE OR DIE.
I'm sorry to have to put it right there for everyone to see, because I'm afraid that some subscriber may send it to Mr Greenspan (and who knows, Greenspan may even read my site), and if Greenie sees this simple description it's going to scare hell out of him. Not that he doesn't already know it, but to see it in print, why it's enough to cause him to lose what little hair he's got left.
So increasingly, I'm seeing this bear market as the Specter of the Death of Debt.
The bull market was all about growth and optimism and phony earnings and the phony "New Economy" and the phony productivity and getting the price of your options up and rising price/earnings ratios.
This bear market will be all about balance sheets and crushing debt and collapsing earnings (but at least honest collapsing earnings) and rising pessimism and declining price/earnings ratios.
I've been drawing subscribers' attentions to the shocking collapse in the utility sector, and I've been puzzling about why the utilities have been caving in. My conclusion now -- the utilities are loaded with debt. Utilities are huge issuers of bonds. I think the reason the utilities are crumbling is that the market is fearful of their balance sheets -- TOO MUCH DEBT.
So here's my advice to subscribers -- get into as liquid position as possible. If you have a lot of debt, try to cut it down, try to get into a no-debt position.
One big problem is going to be housing, where millions of homes are financed by mortgages. And, in case you weren't aware of it, as far as the cold eye of the market is concerned, mortgages are simply a form of DEBT.
This, by the way, is why I'm not happy about REITS, this is the reason why I'm not happy about the way Fannie Mae and Freddie Mac are acting, this is the reason why I take the new low in the Confidence Index as a bearish omen. The Confidence Index is a barometer of credit conditions.
This is what I believe this bear market is all about. It's about the coming melt-down in debt.
And what's the most liquid form of pure intrinsic value? What the ONLY money that isn't somebody else's debt.
The answer again is a four-letter word -- GOLD.
People ask me how gold could possibly rise in a deflation. In a deflation where the viability of anything and everything could be in question -- the desired asset is cash, money. And the only money that is free of debt is GOLD. In a debt-melt down, the dollar price of gold could "go to the moon."
By the way, I haven't heard a blessed word about a debt melt-down from CNBC, from CNN-FN, from Bloomberg, from the WSJ or from Barron's or anyplace else.
THEY DON'T HAVE A CLUE. THEY THINK THAT THIS "LOUSY MARKET" HAS TO DO WITH CORPORATE SCANDALS. GUESS AGAIN, MEDIA GUYS, IT HAS TO DO WITH THE COMING MELT-DOWN IN DEBT. HEY, YOU HEARD IT HERE FIRST.
Next, let's turn to stocks. The giant "head-and-shoulders" pattern in the Utility Average (the pattern only shows in the monthly chart -- that's how big it is) has now smashed through support, and the utility shares are collapsing.
Then we have the S&P Composite. Here again we have a huge "head-and-shoulders" pattern with critical support at 944. As I write the S&P has broken critical support and is selling at 920. Below this head-and-shoulders pattern is a massive vacuum, and frankly, I don't know how bad it can get, but this S&P picture (see charts on page 6 of the last Dow Theory Letters) is as nasty a chart as any I've ever seen.
The very broad Wilshire 5000 (actually it's composed of 6,500 stocks) is also in a well defined head-and-shoulders top. I put critical support at 9000. As I write the Wilshire is at 8897. In other words, the Wilshire has joined the other averages in violating support.
I believe the die is cast. The first psychological phase of this great bear market is nearing its end. And with the breaking down of the S&P Composite and the Wilshire -- the second phase of the bear market has arrived.
The second phase of a bear market is usually the longest phase. The second phase sees the gradual exit of the public from the market as investors slowly turn from hopeful to frustrated to bearish. In the second phase stocks decline as they discount the worsening economic, social and political picture. In the second phase stocks go down as earnings collapse, and as bad news fills the pages of the daily newspapers.
We've never had a bear market in which hundreds of billions of dollars worth of stocks are held by the mutual funds. And I have to wonder what happens if or when the public turns bearish and wants to swap their mutual fund holding for cash. It could be quite a sight.
Anyway, for what it's worth, all the above is the way Richard Russell sees the developing picture.
TODAY'S MARKET ACTION -- My PTI was down 6 to 5241 with the moving average at 5293. The PTI remains bearish.
The Dow was down 282.59 to 8813.50. There were 7 movers in the Dow. BA down 2.42, GM 3.53 (the car boom is over), HD down 2.10, JNJ down 2.32, MMM down 4.00, MRK down 2.18, UTX down 2.70.
The Dow, I believe, is heading for its September low of 8235.
August crude was up .68 to 26.77.
Transports were down 28.73 to 2547.99.
Utilities were down a whopping 15.00 to 237.99.
There were 798 advances and 2477 declines, but no 90% down-day yet.
There were 47 new highs and 213 new lows (no panic here).
NYSE volume was 1.79 billion shares.
S&P was down 32.36 to 920.47.
Nasdaq was down 35.11 to 1346.01 on 1.81 billion shares.
My Big Money Breadth Index hit a new bear market low, down 10 to 748.
The Sept. Dollar Index was up .28 to 106.33. Sept. euro was down .40 to 98.74. Sept. yen was up .31 to 85.43.
Sept. Nikkei was down 220 to 10,590.
The rush to safety continues with the Sept. 30 year T-bond up a point to 104.25 to yield 5.36%. The Sept. 10 year T-note was up 23 ticks to 108.21 to yield .64%. The Sept. muni futures were up 21 ticks to 105.17.
I think gold acts well, and seems to be consolidating above 310. I bought a batch of Kruggies today, paid just over 320 for them. August gold was down 1.40 at 315.10. Sept. silver was down a fraction at 5.05 (silver acting really well, stronger than gold, so far). Oct. platinum up 2.20 at 515.70. Sept. palladium up 1.85 at 327.00.
Gold/Dollar Index ratio was down 2 .77 at 295.67.
Don't forget, gold closes 3 hours before the stocks. XAU was up .31 to 78.27. HUI was up 2.99 at 139.72.
NEM up .26, PDG down .11, ABX down .34, AEM up .10, HL up .05. I continue to believe that when the funds finally start buying gold shares, their number one pick will be the world's largest producer, NEM. Everyone should have some of this blue-chip gold stock.
If we get the debt melt-down I've been talking about, T-bills and gold will be the favored items. And there's nothing wrong with holding some physical gold. My more sophisticated subscribers can buy euro futures.
McClellan Oscillator is negative at minus 116. And it looks close to breaking down again -- to new lows for the move.
STOCKS -- My Most Active Stock Index was down 11 to a new bear market low of 269.
The 15 most active stocks on the NYSE were -- LU up .11, GE down 1.25, PFE down 2.00, WYE down 1.55, TYC down .85, AOL down .88 to 13.11 (don't like the action here, and AOL has $28 billion in debt!), C down 1.26, MRK down 2.18 to (would you believe) 43.57, T down .23, F down 1.12 to 13,99 (Ford holds HUGE debt), RD down 5.16 (being kicked out of the S&P 500), NOK down .70, XOM down 1.58, VIA'B down 4.91, EMC up .13.
Just a few more -- UPS now in the S&P up 2.51, AIG down 3.15,WMT down .89, JPM down 1.12, DUK down 3.06, MSFT down .97, CSCO up .37, INTC down 1.15, CAT down 1.63, AA down 1 56, DD down .78, KO down 1.74, MO down 1.52, AXP down 1.33, KSS down 1.07, COST down 1.05, MER down .78, MWD down 1.62, GS up .64, TXU down an incredible 4.99, D down 3.43, AEP down 1.68.
CONCLUSION -- I think I've already said it all, but one thing sticks in my mind. Now that the S&P has broken down from that monstrous multi-month head-and-shoulders top, could we have a market crash ahead? It wouldn't surprise me. It may not happen, but listen my faithful subscribers -- it would not surprise me. Remember, the mutual fund public has probably stopped buying -- they've been "holding for the long haul" -- but they haven't really started to sell yet either.
I'm afraid the "long haul" could arrive in the next week or maybe the next month. Maybe the moment of truth known as the "long haul" will come when CNBC starts talking about a primary bear market. Or maybe it will come when Alan Greenspan admits in public that he hasn't got the vaguest idea whether housing is in a bubble or not.
And that's it for today from the R man. But wait, there's a bit more below.
In their biggest change in years, S&P yanked out seven foreign stocks from its flag-ship 500 and replaced them with seven US babies. Out are Royal Dutch, Unilever, Nortel, Alcan, Barrick Gold and Inco, and in are E-Bay, Electronic Arts, Goldman Sachs, Prudential Financial Group, SunGard and UPS.
Why did S&P make the changes? I honestly don't know -- maybe they wanted to make this a 100 percent All-American bear market.
I just received the St. Louis Fed weekly chart book. Here we see MZM rising at a 13.2% rate and the Adjusted Monetary Base rising at a 9.7% rate. But the rising money supply isn't helping, because their chart shows Commercial and Industrial Loans in a downtrend and scraping the bottom. The money's there, but nobody wants to borrow. |
