one of his better logical days, and mostly all by his self
December 4, 2002 -- After all the losses sustained so far in this bear market, are stocks cheap yet? Well, not exactly. Standard & Poor's decided a few months ago to issue honest earnings on the S&P 500. Honest earnings? Yes, that means earnings adjusted for options and for pension expenses plus other expenses.
Standard & Poor's calls their new honest earnings "core earnings." So what is the trailing P/E based on core earnings? The latest figure is that the S&P is selling at 50.67 times core earnings.
So we've got the S&P 500 selling at 50.67 times earnings with a dividend yield of 1.69%, I'd call that expensive, wouldn't you? In fact, I'd call it downright ridiculous.
The latest Fortune magazine (Dec. 9) cover story tell us to "Get Back in the Market." This seems to be the cry today, since almost everything I read beckons us to "get back in the market." But in the same issue of Fortune magazine on page 99 there appears an article entitled, "Beware the Pension Monster. It lurks behind funny accounting ready to pounce on unsuspecting investors."
The Fortune article is quite an eye-opener. The article states, "Big corporate pension plans in America owe some $1.2 trillion to their current and future retirees, and for the first time in years companies don't have enough money stashed away to pay for those benefits. The size of the current shortfall? $240 billion. To put that in perspective, that's more than half of what they're expected to earn this year. . . . The debit is not just an accounting mirage: companies will have to start pumping cash -- some $29 billion in next year alone -- into pension funds. That's real money. Money that won't go into dividends or research or new plants. In other words, the monster is going to suck the blood out of those corporations."
On top of everything else, the bear market has wiped out over $300 billion in pension fund money. Finally, with interest rates at 41 year lows, where the hell are pension funds going to get the money coming in to keep their plans above water.
So are Standard & Poor's new "core earnings" legitimate? Are the justified? You bet they are. Just wait until next year's earnings from the big corporations come in.
By the way here are some expected pension fund returns, and here is what the actual returns were --
Bank of NY expected return 10.5%; actual returns were minus 31.6%;
Harley-Davidson expected 10.5%; actual were minus 25.4%;
Gannett expected 10%; actual were minus 22.1%;
Tyco expected 10.0%; actual were minus 20.8%
Pepsico expected 9.8%; actual were minus 20.3%
Raytheon expected 9.5%; actual were minus 20.5%
Charles Schwab expected 9.2%; actual were minus 7.50%.
Russell comment -- Those looking forward to a better economy next year and a surge in corporate earning will, I believe, be due for a shocker.
One thing is clear. The Fed is dead set against deflation. One definition of deflation is that "deflation is not enough money chasing too many goods." The Fed is clear that there's no way that they'll allow that to happen. The Fed is going to fight the forces of deflation with its printing presses. Just listen to this excerpt from a recent almost shocking speech by Fed Governor Ben Bernanke.
The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Feed is several times the stock of US government debt.
Do you realize what this guy is saying. He's saying that to ward off deflation, the Fed would buy up all Treasury debt and if that's not enough they could then go out and start buying foreign debt.
You read this and you realize the depth of the Fed's fear of deflation. You read this and you realize that China's exporting of deflation is a direct menace to the US. You read this and you realize that with the Fed inflating, and with the price of manufactured goods deflating, the US could, at best, be facing stagflation for years to come. At worst the US could face a situation where the Fed loses control and the economy collapses under untold mountains of debt.
After years of Fed inflation, the nation is now gasping under a mountain of debt. The easiest way of handling debt is via inflation. But suppose deflation enters the picture (the Fed's nightmare). In that case, debt become an almost impossible onus. Debt looms ever-larger in the face of deflation.
Count on it, the Fed knows it, you can almost hear the Fed Governors mouthing it -- INFLATE OR DIE.
Gold -- You know, it's fascinating. You can literally see it on the tape. Day after day the battle against gold goes on. Feb. gold opened up 2.50 today, then Fed gold climbed to a high of 324.50. From experience I waited for gold to be attacked. How do you attack gold? You do it with shorts. When you short an item you create supply. And sure enough, within an hour after the opening in came the short sellers and Feb. gold dropped back to up 1.10.
Who would want to short gold? With all the possible "plays" in the market, who in the world would want to short gold? You tell me, I just can't imagine. Unless it's the gold banks or the still-hedged gold mines or the Fed or somebody fronting for the Fed. You tell me. It's very mysterious, very predictable -- and it sure smells of manipulation.
Market Action -- The Dow "strings out" but holds well below its 200-day moving average. The 200-day MA of the Dow stands at 9166 today, a new bear market low.
But the faster-moving 50-day MA of the Dow stands at 8301 and is rising. Midway between the two we find the fluctuating Dow -- which is now well off its November 27 closing high of 8931.58.
At the same time the Transportation Average stands at 2334, never having confirmed the Dow. To confirm the Transports would have to rally above their November 6 closing high of 2413.71.
First indication of trouble would be a Dow closing below 8676.
Bonds -- The bond action is particularly interesting here. The wide consensus is that the "bull market in bonds is kaput -- over." After all, rates are at a 41 year low, and how much lower can they go? Certainly sounds logical. However, bonds have yet to collapse.
The long T-bond hit an intra-day low on Oct. 24 at 105.30. The bond then rallied to a Nov. 12 high of 112.11, before dropping to a double-bottom at 106.11. Today the bond is trading up 25 ticks to 108.26. So far, the collapse has not come as forecast.
TODAY'S MARKET ACTION -- And there wasn't a lot of action. But my PTI was down 4 to 5250 with the moving average at 5242. PTI remains bullish by only 8 points.
The Dow ended down 5.15 at 8737.78. No Dow movers today.
March crude was down .59 at 26.71.
Transports were up 8.44 to 2345.48.
Utilities were down 4.84 to 199.04. Not good action in this important group.
There were 1635 advances and 1571 declines. But the action was on the downside with up volume 534 million and down volume 884 million. Down volume was 62% of up + down volume.
There were 24 new highs and 17 new lows. My High/Low Index was down 7 to minus 8224.
Total NYSE volume was an expanding 1.44 billion shares.
S&P was down 3.21 to 917.53.
Nasdaq was down 18.89 to 1430.07 on an expanding 1.86 billion shares. Nasdaq hit its 200-day MA, and promptly turned down.
My Big Money Breadth Index was down 3 to 722. This is the lowest since November 8. Kinda strange -- this Index should be leading the market, not lagging. This is the movement of the BIG money.
Dec. Dollar Index was down .31 to 106.13. The Dollar Index came right up to its 50-day MA and then turned down. Dollar Index is on a "sell." Dec. euro was up . 51 and now again over par at 100.01. Dec. yen down .04 at 80.23.
Dec. Nikkei was down 150 at 8990.
Bonds were higher. March long T-bond was up 19 ticks to 108.17 to yield 5.02%. March 10 year T-note was up 15 ticks to 111.12 to yield 4.17%.
Feb. gold was up 1.90 to 323.10 on an up-gap. Feb. gold well above its 200-day MA (314.80) and now also above its 50-day MA (319.70) -- and on a "buy" signal. Next target for Feb. gold is the Nov. 12 high of 326.20.
March silver up 2 to 4.57. Jan. platinum up 4.70 to 592.50. March palladium down 8.00 to 255.00.
Gold/Dollar Index ratio was up 2.40 to 304.10. Target is to get over 310.
XAU up .91 to 68.03. HUI up 2.35 to 122.08.
Gold A-D line up 18 to 1077.
ABX up .18, AU up .40, GLG up .38, MDG up .17, NEM up .63, RGLD up .67, SIL up .07 (the A-D includes four silver stocks, and silver appears to be rising with gold).
STOCKS -- My Most Active Stock Index was down 9 to 229.
DIA down .35 to 87.58. Keep stops at 86.50.
The 15 most active stocks on the NYSE were -- NT down .14, AOL (a mess) down .27, AMD down .38, GE down .10, MOT down .55, NOK down .15, GLW down .28, F up .21, HPQ down .86, THC up 1.01, MU down .87, DIS down .88, HD down .02, EP down .29, EMC up .05.
More -- GM up .51, MSFT down .17, PFE down .24, COST down .69, KSS down 2.90, KBH up .73, MER down 1.02, AIG down .22, GD down 2.15, JPM up .09, CSCO down .10, INTC down .58, QCOM down .83, EBAY down .64,NOK down .32, WMT up .51, ED down .42, SO up .02, TE down .71, KSE down .70,, DTE down .35.
The VIX stays high -- up .38 today to 32.14. The option-writers are still primed for trouble.
McClellan Oscillator declined to 35 today. It looks as though it should plunge below zero, which would be bearish, but looks can be deceiving. For a daily look at the McClellan, I use the great decisionpoint site.
CONCLUSION -- Not exactly inspiring action, but as I've said, I'm going to give this rally every benefit of the doubt. Volume indication continue negative, with buying very blah. At the same time, there hasn't been much selling pressure either. I have the feeling that this market is mostly professional feeling around for a real trend. So far, I don't think they've found one. Don't forget, we now have 6,000 hedge funds pulling their hair out trying to make money.
That does is for today. And yeah, I'm sure we'll know more tomorrow.
Before I forget, be sure to buy and read the fascinating and very informative book, "Gold Wars" by Ferdinand Lips. You can get it in paperback. And it's quite something. It's front cover sub-title is "The Battle Against Sound Money From the Swiss Perspective."
Adios,
Russell
An e-mail (below) received yesterday.
$24,000...That's what my dad paid for our 3 bedroom raised ranch 35 miles northwest of Chicago in 1969. My dad sold that home three years ago for $150,000. For the holiday we were back in that area so I drove by the house. Its on the market again so I called the realtor to find out the asking price....$239,900. Nearly a $90,000 increase on a $150,000 house in three years. That's absurd and is more evidence that the bubble is not just on million dollar homes but on the lower end of housing as well. These homes are now 40 years old on quarter acre lots, three bedrooms 1000 square feet. Hardly the ammunition that should command that type of appreciation. I fear for the day the bubble burst. Most homes in that price range are sold with very little down. When it does burst these home owners will be upside-down on their mortgages. The eventual burst will feed on itself and leave Joe consumer who is already up to his eye balls in debt holding a mortgage that is worth a hell of a lot more than the home. You think America is swimming in debt now. Just wait.
Another e-mail received yesterday -- You may be right that someday no one will accept dollars in exchange for goods and services. But when you say that "Your home, your business, your savings your life insurance, almost everything you own is denominated in dollars." Isn't quite true, with the exception of savings and life insurance or bonds, which are contractual obligations to be paid in dollars. But your business, real estate and stocks for that matter are only "quoted" in dollars. These assets will be traded for what ever currency is valued. If the dollar becomes worthless no one will sell their business for dollars. The business, real estate or a company represented by shares of stock will still have value. Quote that value in your currency of choice, dollars, yen, francs or gold.
Gold is not the only hard asset.
Would love to hear your thoughts and where I may be missing something.
Craig From Pacific Palisades (Also a nice place to live like La Jolla)
Russell comment -- True, gold is not the only hard asset, but it's been around for 6,000 years. In the future, you may be selling your house for so many bushels of wheat or square feet of lumber or some other foreign currency that offers real value. But I'll bet on gold. |
