From: www.dowtheoryletters.com...
<<Financier George Soros says the US dollar could drop by one third over the next few years. Is George shorting the dollar?>>
June 28, 2002 -- Economists take notice -- all facts are history. So to start, let's go over a bit of history.
The US dollar has sustained it biggest quarterly drop in 14 years. Why? A decline in foreign demand for US assets.
Financier George Soros says the US dollar could drop by one third over the next few years. Is George shorting the dollar?
The House votes (by one vote) to raise the US debt ceiling another $450 billion to a total of $6.4 trillion. The US is swimming in an ocean of debt.
US consumer spending "unexpectedly" declined in May for the first time in six months.
The broad M-3 money supply increased by $38 billion in the latest week.
Stocks fell worldwide in the first half of 2002 -- investors lost trillions of dollars as US stocks suffered their biggest first-half loss since the 1970s, based on growing distrust of US executives and a concern that a rebound in earnings may be slower than originally expected.
So much for history.
I thought the most significant headline in any of the 12 newspapers I read daily was this one from the front page of today's New York Times.
"China Races to Replace US As Economic Power in Asia. China is rapidly strengthening its economic presence across Asia, gobbling up foreign investment and chipping away at the United States' position as the region's economic engine.
"As it buys up goods, parts and raw materials from its neighbors as never before, China has accompanied its new heft with diplomatic efforts to assure them that it wants to offer cooperation, not competition. Many have rushed to China's embrace and are nimbly shifting their economic alliances, particularly as the United States makes its way through only a tentative economic recovery."
"So far, the Bush administration has been loathe to talk publicly about China as an economic challenger in Asia.. . . . As part of what China is calling its 'go global' economic strategy, the Bank of China has already opened branches in Thailand, Malaysia and Singapore and will soon reopen one in Jakarta."
By the way, the Bank of China was an early subscriber to Dow Theory Letters.
I've been warning about all the above for months if not years. China, I believe, has given up on war as the way to win in the battle for world power. The path that China has chosen is economic supremacy, and certainly economic supremacy in Asia.
Gold moves and accumulates in the direction of economic power. And gold is now flowing into Asia as it leaves the US and Europe. Meanwhile, the US via the Greenspan Fed continues to enlarge its liquidity base. Yankee paper dollars spew forth throughout the world in return for the world's services and merchandise.
As the ocean of dollars grows larger, it also grows larger in relation to a limited supply of real money -- gold. I continue to believe that at its current price in relation to dollars, gold, better known as real money, is the cheapest thing around. Or to put it the correct way, the ever-expanding supply of paper dollars and other assorted fiat currencies are extremely expensive in terms of gold.
In the last few months we've seen the fiat currency of Argentina go down the drain, Brazil is following and now the Mexican peso is turning weak. If you were an Argentinian, think of what you would have saved in assets and tears if you had your money in gold rather than in the junk currency of Argentina.
And how much longer will it be until all paper currency comes under suspicion? Just a thought, just a thought.
Is there inflation in the US? If the definition of inflation is an expansion of the money supply, then yes, the US is most definitely inflating. As far as inflation in the price of goods, prices in many areas have been stable mostly due to cheap imports. But in services, movie tickets, sports tickets, medical costs, insurance, taxes and dozens of other cost-of-living items, prices have been rising.
What does the bond market (which is super-sensitive to inflation) think? The differential between the 10 year T-note and the TIPS has risen from a recent 1.66 to today's 1.77. Still low but starting to rise. The bond market sniffs just a bit of an increase in inflation.
The commodity indices have been rising. From its low of 182 on October 22, 2001, the CRB Commodity Index has risen to 208 today, a rise of 14.2% in eight months. I'd call that price inflation.
Stock Market -- Today is a particularly interesting day because it's the last trading day of the month. Funds who want to be in the "right" stocks can buy them today. Furthermore, with the S&P down 12 out of the last 16 weeks and down for the last five weeks in a row, this week has technical importance.
If today the S&P closes above 989.14 it will be an "up-week," and thus is will remove some of the oversold condition brought by the overwhelming number of downside weeks. As I write, two hours after the opening, it certainly appears that today will be a positive day for the S&P and the string of five down-weeks in a row will be broken.
So from the bear's standpoint, the bears want this week to be an up-week, since a higher week would render the market less over-sold.
Turning to the Dow and its moving averages, the 50-day MA for the Dow stands at 9838 today. The 200-day MA of the Dow stands at 9816. Thus, the declining 50-day MA is now only 22 points above the 200-day MA. A crossing is guaranteed next week when the 50-day MA breaks below the 200-day MA.
This will result in the Dow finally being in the full bearish configuration with the 50-day MA below the 200-day MA and the Dow below both. This would put a technical ceiling over the Dow. Once this happens, the Dow could rally up to the declining 50-day MA, but the 50-day MA would present a powerful barrier to the Dow on any rally. In other words, even the most explosive Dow rally would probably be halted at the level of the 50-day MA.
By next week, the 50-day MA will drop below 9800.
Suggestion -- I would use any forthcoming market strength to move out of common stocks.
Gold -- There's a chance that gold and particularly the gold stocks could undergo a full correction in terms of dollars. However, and this is important -- I have stressed that gold and gold share should not be purchased as an investment. Gold and most gold shares pay no return. Gold and gold shares should be purchased and held as insurance. Gold is a store of value, which the dollar is not. Gold shares are simply the entities that produce the store of value -- gold.
Gold and gold shares should be held by all those who believe that the purchasing power of the dollar is on the way down, as it has been since 1913. The change is that the Fed is now expanding bank credit at a frantic rate. The other change is that the US is awash in debt.
Periods of massive credit creation always end in deflation. Japan has been going through that process ever since 1989. The difference between Japan and the US is that the Japanese had, and still have, huge savings. US consumers, on the other hand, have no saving except their homes. This is a very tenuous situation. As the US bear market moves on, it is bound to hit the housing bubble. The coming deflation is also bound to impact on the US debt mountain.
Gold is pure money. Unlike Federal Reserve notes (we improperly call these notes dollars), gold is not a product of debt. Thus, when the great deflation arrives, gold will become an island of safety. At that time, there's no telling how many dollar it will take to buy and ounce of gold.
TODAY'S MARKET ACTION -- A very strange day. My PTI was up 2 to 5268 with the moving average at 5299. PTI remains in its bear mode.
The Dow was down 30.67 to 9239.25. There were four Dow movers -- JNJ down 2.16, MMM down 2.17, PG down 2.65 and WMT down 2.65.
August crude was unchanged at 26.88.
Transports were up 37.77 at 2730.32.
Utilities were up 4.55 to 273.80.
There were 2145 advances and 1090 declines.
There were 166 new highs and 68 new lows.
Big Board volume was 2.11 billion shares.
S&P was down 1.14 to 989.50.
Nasdaq was up 3.43 to 1462.65 on 1.95 billion shares.
My Big Money Breadth Index was down 8 to 784.
The Sept. Dollar Index was down .20 to a new low of 106.70. Sept. euro was up .24 to 98.72. Sept. yen was down .18 to 83.90.
Sept. 30 year T-bond was down 5 ticks to 102.25 to yield 5.51%. Sept. 10 year T-note was down 3 ticks to 107.07 to yield 4.82%. Sept. muni futures were up 2 ticks to 103.20.
Gold got hit hard, August gold down 5.70 late in the day to close at 313.90. July silver down 4 at 4.83. Sept. platinum down 2.20 at 531.30. Sept. palladium up 180 to 318.80.
Gold/Dollar Index ratio was down 4.37 to 294.60.
XAU down 1.86 to 71.58, breaking below a head-and-shoulders top pattern. HUI down 2.83 to 127.45. NEM down .48, PDG down .64, ABX down .61, AU down .05, AEM down .17, HL up .23.
STOCKS -- My Most Active Stock Index was up 3 to 300.
The 15 most active stocks on the NYSE today were -- TYC up 1.18, XRX down 1.03, AOL up 1.08, GE down .85, Q up .04, T up .80, EMC up .33, PFE down 1.75, MO up .81, PRU up .86, C down .16, ILA up .34, CCU up .82, EDS down .20, WMT (Wal-Mart) down 2.69.
A few more -- GM up 1.86, DCX up 1.28, MER up .92, MWD up .46, IBM up .10, AXP down .68, AAPL up .86, KO down .09, DTE up 1.09, SO up .50, JPM up 1.20, CSCO up .13, INTC down .38, DELL up .34, COST up .03, TGT down .85, MRK down .24, FD down .43, GPS down .10, AA up 1.12, DIS down 15.
McClellan Oscillator finally turned positive today at plus 29. The Oscillator has been negative for almost six weeks, so we should get some kind of a rally coming up, but how much of a rally and how strong remains to be seen. Use the really for moving out of stocks. Gold and gold stocks should be accumulated on any forthcoming weakness.
CONCLUSION -- Well, the S&P was up for the week, up by a fractional .36. But the Dow was down for the week. Utilities escaped from their head-and-shoulders top for another week, but that monthly head-and-shoulders pattern is huge. S&P still working on the right shoulder of its own giant head-and-shoulders pattern, a pattern that can be seen only on the monthly chart.
Gold is in a strange and erratic correction, one that smacks strongly of manipulation to me (they hit gold right near the close)
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Certain interests such as the central banks, the gold banks and the hedged gold mines do NOT want higher gold. In the end, the primary trend of gold will prevail.
More tomorrow. I want to thank the many new subscribers that have signed up, and I want also to thank the many other advisory services that have recommended Dow Theory Letters over recent weeks.
I'll be back tomorrow with a bit more.
In the meantime, as I write my cable service, Road Runner (Time Warner) is down. I wonder why they always pick the afternoon as I'm writing this report to shut down? Ah well, nothing's easy in this world, and dealing with the Internet never seems to be easy.
So I'm very sorry if this site comes to you late, but well, it isn't my fault.
Your "nothing goes smoothly" scribe,
Russell
Market wisdom -- "The market always does what it's supposed to -- but never when."
Russell version -- The market takes a long time to react to a forthcoming economic trend, but when it finally does react -- it does so with great speed.
Excellent New Book -- I just received a new book written by my old friend, Robert Prechter. This is a fascinating treatise on what Prechter sees coming up in the economy and the stock market. The book is entitled, "Conquering the Crash -- You Can Survive and Prosper in a Deflationary Depression." (Wiley). The book is absolutely "must reading" and I suggest that all subscribers buy and study this book. It's an education in itself, whether you believe what Bob is predicting or not. I will write more about this book in the next Dow Theory Letter.
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