Great post from Richard Russell tonight. I hope he doesn't sue me, but I view it as plugging his site. Read all the way through. There is also good stuff after the market stats
dowtheoryletters.com
October 4, 2002 -- Great excitement at the opening, The unemployment rate dropped from 5.7% in August to 5.6% in September. But payrolls dropped 43,000, so the drop in the unemployment rate was simply an adjustment. Bullish news? Forget it -- people are still being laid off. Government adjustments can make statistics do anything they want them too. Moreover, the so-called "news" on unemployment is just history based on stale statistics.
Today in the New York Times the Times' veteran economics writer, Floyd Norris heads his column, "1974 Redux: Why Bear Market May Be Over." I was interested in hearing Norris' reasoning, and it goes like this --
The stock market has lost half its value and has just endured it most volatile, and worst, quarter in more than a decade . . . It feels like late-1974. And that was a fine time to buy stocks.
So that's his argument for believing that the bear market is over? It "feels" like late-1974. I was around in late-1974, and believe me there's a big difference. The big difference is VALUES and sentiment. In late-1974 people were scared to death, and stocks were being dumped as though they were infected with small pox.
I'll give you an example. I wanted to buy General Cinema in 1974. In December GCM was being quoted at 10. I put in a "good-till-cancelled" order for 1,000 GCM at 5, I forget what day it was, but it was a panic day. An hour after the opening somebody threw in an order to sell GCM "at the market." My market order was the ONLY order on the books, and I got the stock at 5. That's how bad it was in late-1974.
In 1974 the S&P was selling at 7.5 times earnings and yielding 5.1%. Today the S&P sells at 31 times earnings with a dividend yield of 1.7%. A bit of a difference, wouldn't you say? Not the kind of values that large, seasoned interests load up on.
On the same page in the Times I see an article, "Bond Rally Makes a Case for Investing in Stocks." In other words, Treasury bond yields are below 4% and the yield on the 10 year T-note is not far from the earnings yield on the S&P, so aren't stocks in a buying range?
Ah yes, but coincidentally, an article in the current (Oct. 14) Forbes magazine shows that there's no real correlation between bond yields and the earnings yield on stocks (page 22, Forbes). The article is from a book written by two brilliant British economists, Andrew Smithers and Stephan Wright ("Valuing Wall Street"). State the two Brits, the supposed ability of falling bond yields to push stocks higher is "supreme nonsense."
In the end, stock prices are a function of SUPPLY and DEMAND. Everything, all that we know and that anyone knows about stocks and the economy, boils down to supply and demand in the market.
And along these lines we have the Lowry's statistics, studies which deal strictly with supply and demand. Right now, Lowry's Selling Pressure Index is holding close to its highest level in history (at least going back to 1933). At the same time Lowry's Buying Power Index is just off its lowest level in a year.
So a desire to buy stocks? It isn't there. And an easing of the urge to sell stocks? It hasn't happened. The fact is that there's a huge supply of stocks to sell in this market, and there's little or no demand for those stocks.
So what will generate a demand for stocks?
Only one phenomenon -- LOWER PRICES.
The problem is that there are millions of people still holding stocks both in individual accounts and in mutual funds. If we get substantially lower prices, at some time or place people are going to drop their current complacency and their "hold for the long term" sentiment, and they're going to panic. That's going to give us the missing 90% downside days.
The sad part of it is that the lower this market drops before it starts generating panic (90% down-day) declines, the lower it's going to before it finally hits bottom for this initial "A" leg of the bear market.
In other words, 90% downside days lie ahead, and the lower this market goes before we get those panic 90% downside days, the worse.
One of the big economic questions is housing, and what will happen to the "housing bubble." I'm getting a lot of e-mails from subscribers across the nation, and almost all of them talk about hard times hitting their areas. My friend Gary Shilling has been "right on" regarding deflation and this market. Want to know how the housing bubble ends? Gary talks about it in this week's Forbes magazine. Listen to what he's saying --
What will burst the bubble? Don't look for the usual suspects -- interest rate hikes or overbuilding. Look instead for a second recessionary dip brought on by wealth losses and pink slips, pressuring consumers to retrench. When the Ralphs (common people) of the nation are laid off, they won't be able to make their mortgage payments on the homes they've bought, or to buy a house to being with. Then the bad news ripples through the move-up market.
As housing demand dries up, prices will fall and the whole mechanism will work in reverse. Those with big leverage will see their equity wiped out, forcing them to sell, pushing prices still lower. Up to now, house appreciation has been off-setting stock losses for many people. That helpful phenomenon will be history.
House-price drops typically lag the economy. In the early 1990s, Los Angeles residential real estate didn't peak until two years after overall business topped out, and then single-family house prices fell for six straight years.. . . Residential prices take a while to react largely because the market prices of people's houses are not available daily to force them to admit that their property had declined in value.
People today have no knowledge and no experience with deflation. I grew up with deflation during the 1930s and I remember it well. Subscribers ask me how actual deflation could hit the US. Listen to these words from Stephen Roach of Morgan Stanley, writing for the International Herald Tribune --
The American economy now has a record exposure to global competition. In the second quarter of 2000, America imported a third as many goods as it produced. More and more these goods are coming from highly competitive Asian producers who have much lower cost structures than their American counterparts.
Every major Asian economy except South Korea is in the throes of deflation. Courtesy of ever-expanding trade relations with Asia, America is now buying more and more from China, Japan and other countries that are already in deflation. The growing market share of these increasingly cheap foreign goods helps drive down rices of products made at home.
The impact of deflation would be most acute for wage earners and debtors. To stay profitable, companies would have to cut jobs or wages, eventually inhibiting consumer purchasing power. Meanwhile, the fixed obligations of indebtedness would have to be paid back in deflated dollars, squeezing over-extended borrowers all the more.
America is already at the brink of deflation. The GDP price index recorded only a 1 percent annualized increase in the second quarter of 2002. That is the lowest inflation rate in 48 years. Prices of goods and structures are already contracting at an annual rate of 0.6 percent.
So what I"m doing is trying to give you, my faithful subscribers, is a picture both of the technical condition of the stock market, and also the horrendous background of what I believe this bear market is discounting.
It's going to be mean, it's going to be frightening, it's going to trigger a set of circumstances that this generation has never dealt with before. Only old-timers like Richard Russell can envision what problems and pain deflation can bring. I know, because I grew up in an era of deflation, and I remember well what it was like.
I just received my weekly chart book from the St. Louis Fed. What immediately struck me was the chart of Commercial and Industrial Loans. Both the "Large Banks" line and the "All Banks" line have dropped to new lows. Bank loans are contracting, either because business is stalling or because banks are becoming more conservative -- probably both.
This is telling me that we're moving into the period where business in going to noticeably contract. Forget the talk of a "double dip" recession -- this recession never ended, it just didn't show in the phony government statistics, but I now expect business to start showing real signs of contraction. So far, I believe the massive sale of cars on zero financing and the appreciation in home prices have served to mask the recession. I believe both of those "stimulants" are now about over.
LET ME PUT IT THIS WAY. THIS IS THE WORST BEAR MARKET SINCE 1929-32. AND THESE IGNORANT ANALYSTS AND THESE MIS-GUIDED STRATEGISTS ARE TELLING US THAT WE'RE IN A RECOVERY, THAT WE'RE IN THE PROCESS OF AVOIDING A "DOUBLE-DIP" RECESSION.
BELIEVE ME, WE'RE GOING INTO THE DAMNEDEST RECESSSION-DEPRESSION THIS GENERATION HAS EVER SEEN. A YEAR FROM NOW YOU WILL NOT RECOGNIZE THIS ECONOMY.
TODAY'S MARKET ACTION -- After four years, this is still, incredibly, a market of slow but nasty attrition, a market of "death by a thousand cuts." I'll admit that I thought the real trouble, the panic conditions, would come faster than they have. But the panic conditions lie ahead. Within a matter of months (even weeks) we're going to see panic action that you won't believe.
The gods of the market have decided that this early phase of the bear market is to be a dragging, costly, maddeningly slow affair. Maybe that's just the bear's sadistic way of keeping people in the market way past the time when they should have sold.
My PTI was down 6 to 5212 with the moving average at 5249. PTI remains bearish.
The Dow was down 188.44 to 7528.75. There were five movers in the Dow today -- BA down 2.30, IBM down 3.40 to 56.50, MO down 2.91, MRK down 2.03, and UTX down 2.95. A Cal jury awarded a cancer victim $28 billion against MO. The award will be pared way down, but Cal is becoming a nightmare for the tobacco industry.
The Dow broke to new lows today. The Dow is leading this market down. And this is what I call blue chip, premium leadership on the downside.
Nov. crude was down .14 to 29.62.
Transports were down 46.10 to 2137.68, Keep your eye on that low of 2034.
Utilities were down a huge 9.77 to 200.81. TXU down a shocking 5.86, AEP down a numbing 2.70.
There were 820 advances and 2415 declines. Up-volume 258 million, down-volume 1.523 billion, down volume was 85.5% of up + down volume, no 90% down day today. BUT THEY'RE COMING.
New highs 30 and new lows 375. My High/Low Index was down 345 to a new bear market low of minus 5556.
Total NYSE volume expanded to 1.81 billion, indicating institutional selling.
S&P was down 18.33 to 800.62.
Nasdaq was down 25.18 to 1140.38 on 1.57 billion shares.
My Big Money Breadth Index was down 8 to a new bear market low of 703. Big-cap stocks leading this market down.
Dec. Dollar Index was up .64 to 108.00. With stock markets around the world sinking, the currency guys and gals still believe that the safest place to be is in dollars. Are they right? Time will tell. Of course, you know what money I think is safest, don't you? It's called gold, but gold's time has not yet come.
Dec. euro was down .68 to 97.70. Dec. yen down .39 to 81.43.
Dec. Nikkei was down 45 to a new bear market low of 8835. Japanese are weathering their deflationary recession all right, at least so far, because they are huge savers (which, by the way, is not the case here in the US).
Bonds were firm with the Dec. long T-bond up 8 ticks to 113.20 to yield 4.73%. Dec. 10 year T-note was up 1 tick to 115.12 to yield 3.68%. Dec. muni futures were unchanged at 109.31.
Dec. gold was up .90 to 323.30 (gold holding stubbornly above 320, which is fine with me). Dec. silver was up .05 to 4.49 (gold outperforming silver, stay with gold). Jan. platinum was up .80 to 558.90. Dec. palladium down 2.00 to 316.00.
XAU up .43 to 67.10. HUI down .50 to 119.50. Gold shares (not the metal) feel some pressure when all common stocks are declining, but gold shares will do much better than other stocks. Patience.
Gold/Dollar Index ratio down 1.00 to 299.30.
NEM down .04, PDG up .05, ABX up .11, AU up .80, AEM up .09, HL up .05.
STOCKS -- My Most Active Stocks Index was down 11 to a new bear market low of 166.
Of the 15 most active stocks on the NYSE, only 2 were up today. Here are the 15 -- EMC down 1.18 to 3.83, SGP down .34, GE down. 62 to 24, MO down 2.91 to 36.59, C down .53, LH down 11.5 to 21.68, TXU down 5.86, JPM down 1.08 to get this -- 16.54, HD up .84, EP down .72, AOL down .68 to 11.81, F (that's Ford and LOADED with debt, could F be heading for bankruptcy?) down .50 to an incredible 8.66, PFE down 1.09, XOM down .12, FDC up .04.
More -- GM down 1.35 to 36.42, DCX down .85, MSFT down .94 to 43.77, GS down .85, FNM down 1.55, AIG down 1.92, MER down 1.07 to 30.17, MWD down .65, KSS down 1.05, KBH (home building) down 2.19, LEN (home building) down 2.48, CAT down 1.48, JNJ down 1.03, AXP down 1.43, CSCO down .32 to 9.50, BAC down 1.80, DTE down 1.37.
McClellan Oscillator coming in about half an hour.
CONCLUSION -- I don't know what else to say, I think I said it all on this site already. It's clear that the smart money doesn't want to go through this weekend loaded with stocks.
Remember what I've been saying all along, "In a bear market everyone loses, but the one who loses the least is the winner."
I'm wondering where the top-grade bonds are going. I keep thinking that the long Treasuries are going down to, would you believe, a 3% yield. Before this bear market is over, the Fed will lower short rates as low as they can go. You're going to see a big split between top-grade AAA bonds and lower grade BBB bonds. The Confidence Index has been telling us that. Believe it. Please believe it. Top grade bonds will do OK in this bear market, lesser grade bonds and junk bonds will not do well.
If you followed my advice and bought top-grade bonds you should be way ahead in this great bear market. If you bought gold and gold shares for insurance, you're fine, sit tight, patience, before this bear market is over gold will out-pace every piece of junk paper money on the planet. Just ask the Brazilians, just ask the Argentinians, they've been the first to know. The Asians know about gold, they've been big accumulators as the world's damn-fool central bankers have sold their nation's gold.
Well, so ends another week. Maybe next week will be better. That's what I hope. Oops, I forgot. Hope is a killer in a bear market. Better to be right and safe than to be hoping.
I'll come up with something tomorrow,
Stay healthy and do the right thing --
Russell.
Wait, what's the right thing in a bear market?
Answer -- the right thing is to be OUT of common stocks (except for the golds).
I strongly suggest that you click onto www.mises.org and then click on to the great piece, "Is the Gold Standard History?"
From an e-mail received yesterday --
General Motors is slated to earn $6.10 in 2003. That figure is over 10% of
the total estimate of the SP500! General Motors is less then .5% of the index!!!
Include General Electric and Microsoft and these 3 companies are responsible
for 15% of earnings.
Subject: Anecdotal evidence from the outback....
Richard,
( The outback being, in this case, upper California.) Three small items heard / seen of late... the first two concern the consumer, of which I believe you have spoken of before, and the third item concerns overproduction and market competition, of which I also believe you have spoken.
1. I recently found myself siting at a picnic table in a nearby California State Park with several park rangers. They were discussing attendance figures at their parks, and the overall opinion was that park attendance was down 20% to 25% year over year. This does not agree with the accepted wisdom that post 9-11 people will be doing more short trips by car, more camping, more low-key family type activities. It sounds like people are doing less and spending less.
2. Nevada City is quite a tourist attraction. The local paper recently quoted the year to date sales tax and bed-motel tax as down about 10% year over year. Again, this sounds like the consumer doing less and spending less.
3. My cousin near Healdsburg has some acreage in wine grapes, the term "gentleman farmer" comes to mind. I believe he started this in the early-mid 1990's, with the idea that it would be a retirement activity. The following is a partial quote from his recent e-mail to me:
"Our grapes were picked last Wednesday. A good crop. Our grape contract was cancelled last month. Gallo must buy this crop and next years. After that it is going to be brutal in the grape business. We are putting our place up for sale early next spring. We need to downsize, it is wearing me out."
Decreased consumption, overproduction and brutal competition.... not really news to me because I read Richard Russell's D.T.L., and also Chuck Allmon's G.S.O.
Keep up the good work...JDT.
An interesting e-mail (below) from my friend, Aaron Russo --
Subject: The year 1902
The year is 1902, one hundred years ago ... what a difference a century
makes. Here are the U.S. statistics for 1902.
1. The average life expectancy in the US was forty-seven (47).
2. Only 14 Percent of the homes in the US had a bathtub.
3. Only 8 percent of the homes had a telephone. A three-minute call from
Denver to New York City cost eleven dollars.
4. There were only 8,000 cars in the US and only 144 miles of paved roads.
The maximum speed limit in most cities was 10 mph.
5. The tallest structure in the world was the Eiffel Tower.
6. The average wage in the US was 22 cents an hour. The average US worker
made between $200 and $400 per year. A competent accountant could expect to
earn $2000 per year, a dentist $2,500 per year, a veterinarian between
$1,500 and $4,000 per year, and a mechanical engineer about $5,000 per year.
7. More than 95 percent of all births in the US took place at home.
8. Ninety percent of all US physicians had no college education. Instead,
they attended medical schools, many of which were condemned in the press and
by the government as "substandard."
9. Sugar cost four cents a pound. Eggs were fourteen cents a dozen. Coffee
cost fifteen cents a pound.
10. Most women only washed their hair once a month and used borax or egg
yolks for shampoo .Canada passed a law prohibiting poor people from entering the country for
any reason.
11. The five leading causes of death in the US were:
a. Pneumonia and influenza
b. Tuberculosis
c. Diarrhea
d. Heart disease
e. Stroke
12. The American flag had 45 stars. Arizona, Oklahoma, New Mexico, Hawaii
and Alaska hadn't been admitted to the Union yet.
13. The population of Las Vegas, Nevada was 30.
14. Crossword puzzles, canned beer, and iced tea hadn't been invented.
15. There was no Mother's Day nor Father's Day.
16. One in ten US adults couldn't read or write. Only 6 percent of all
Americans had graduated from high school.
17. Marijuana, heroin, and morphine were all available over the counter at
corner drugstores. According to one pharmacist, "Heroin clears the
complexion, gives buoyancy to the mind, regulates the stomach and the
bowels, and is, in fact, a perfect guardian of health."
18. Eighteen percent of households in the US had at least one full-time
servant or domestic. |
