www.dowtheoryletters.com
>>We're now in the mess that I've been warning about all along -- I call it INFLATE OR DIE.
What happens if the US starts to deflate? If the US sinks into deflation, the difficulty in servicing debt of all types becomes increasingly difficult. It becomes more difficult because dollars gain power and dollars and LOANS become harder to obtain. There's nothing more ominous than mountains of debt facing a deflationary environment.<<
August 7, 2002 -- I ramble quite a bit in this report, so please excuse me, my mind rambles a lot as I watch and think about this market. Thus these sites often resemble a stream of consciousness. Can't help it -- that's me.
OK confession time is over, let's begin --
Talk is now rampant to the effect that the Fed needs to, and will, drop interest rates again. The Fed always avoids surprising the market, and with a 12th drop in rates now factored into the money market and into stocks, it would be surprising, even shocking, if the Fed didn't follow the "dictates" of the markets.
That's right, the Fed doesn't lead the market (that would take know-how and expertise), it follows the market. Following the market means another rate cut sometime this year, and probably sooner, since it's clear (at least to me) that the US is still in recession.
The Fed's wide-open battle to revive inflation is not lost on gold. Before the opening today, December gold was up between six and seven dollars. With M-3 increasing at around $20 to $40 billion a week, and with MZ rising at around a 10% annualized rate, a seven dollar rise in gold is a drop in the bucket for "real money" (real money is what those of us who believe in the US Constitution call gold).
Bonds, which trade off, among other things, the inflation/deflation equation, were up 6 ticks at the opening, higher later.
The question is asked, "Why is the Fed so frantic to revive inflation and avoid deflation? Here's the answer. Government (federal) debt is now about $6 trillion. Private debt is estimated to be $32 billion. How can this monster total of debt be serviced? You service it with INFLATION.
We're now in the mess that I've been warning about all along -- I call it INFLATE OR DIE.
What happens if the US starts to deflate? If the US sinks into deflation, the difficulty in servicing debt of all types becomes increasingly difficult. It becomes more difficult because dollars gain power and dollars and LOANS become harder to obtain. There's nothing more ominous than mountains of debt facing a deflationary environment.
Of course, another BIG question is -- whither the stock market? A lot of excitement was generated early this morning on the news that Cisco has "bettered its numbers." This was taken as a sign that the worst may be over for tech. Hopes spring eternal.
Turning to yesterday's action, I thought it was significant that volume was still lacking on the rally off the July 23 lows. As for yesterday's action, I thought hat was also interesting was the by the close, the S&P gave back almost 40% of its gains in obvious profit-taking. And the Dow, which was up as high at 375, ended up 230, which was also quite a slice off the top.
Today the market opened with the Dow up over 150 points, and I'll be watching two items in particular -- how the market closes and how much volume is generated today. As a rule, if you don't see a day or so of greatly expanding upside volume within 10 days from the low, the rally will be sub-par and often the rally will often fizzle out.
I want to digress a bit to another subject. The subject is the US through its "war on terrorism" becoming the undisputed policeman to the world. It's obvious to me that "super-cop" is the way this Administration is going, no question about it.
The latest sensational new is that according the Washington Post, A briefing given last month to a top Pentagon advisory board described Saudi Arabia as an enemy of the United States, and recommended that US officials give it an ultimatum to stop backing terrorism or face seizure of its oil fields and its financial assets invested in the United States.
'The Saudis are active at every level of the terror chain, from planners to financiers, from cadre to foot soldiers, from ideologists to cheerleaders,' stated the explosive briefing. It was presented on July 10 to the Defense Policy Board, a group of prominent intellectuals and former senior officials that advises the Pentagon on defense policy.
Like it or not, this is the way a very influential element in and out of the US government is thinking.
Now put yourself in the shoes of a multi-billionaire Saudi. If the US is even toying with the idea of seizing Saudi assets, the Saudi billionaire is going to start playing it safe. Playing it safe means moving a part of your assets OUT of the US and into other nations, most likely a European nation.
The US as policeman to the world and as the world's bulwark against terrorism involves spending untold billions of dollars. The US already has its military stationed in thirty countries around the world. The US now spending 50% of all the defense spending in all the nations of the world. How can the dollar hold up against this kind of spending, this kind of strain?
My answer is that "The dollar can't hold up against this kind of spending."
This, I believe, is one of the forces behind the slowly gathering bull market in gold. With most of the economies of the world weak, the pressure to devalue one's currency, the pressure to re-inflate, will become increasingly strong. This is the ideal atmosphere for higher gold.
In all history only one commodity has held its value and held its reputation as a store of value. That commodity is gold.
No paper "money" in world history has served as a store if value. Only gold has held that title. Central banks of the world can whine that gold pays no interest, that gold is an outmoded "relic," that their paper money will rule. But in the end they're lying, and in the end truth will overpower lies. Ultimately, real money will always triumph over paper created by central bank machinations. It's simply a matter of time.
I'm going to digress by talking a bit more about gold. As I see it, the funds in time will be forced to buy some gold shares. I think their first choice will be Newmont.
But here's my thought. Somewhere ahead I believe we're going to see not only an expanding gold bull market but a surging, explosive gold bull market.
If that happens, and I believe it will, then the big percentage increases will probably be seen in the secondary little gold stocks such as CBJ. GSS, KGC, BGO, ECO, TVX, DROOY, and even AEM, GLG, GG, GFI.
My thinking is this -- for your gold position buy both end of the spectrum --buy actual gold coins such as Krugerrands and also buy the speculative "cheapie" golds. A gold stock like BGO can go from 1.10 to 9 dollars. whereas Newmont may go from 26 to say 50 or even 75.
Here's how this market appears to be working.The market rallies sharply for a day or so as the heavy short position panics and as retail buyers come in -- and then the massive supply hits the market, meaning that sellers unload on every rally. To back up that picture, I can tell you that Lowry's Selling Pressure Index (supply) is just below it's highest level in 70 years, while Buying Power (demand) is not far off its July 23 low.
To put it another way, as I see it, the urge to buy stocks is now a lot less than the urge to sell stocks. Every rally is cut short by a wave of selling. I've yet to see a single day of higher prices on surging volume. Maybe it will come tomorrow or Thursday or Friday but so far -- not one real institutional-accumulation day.
When institutions accumulate following a real bottom, they do it with a dramatic surge in upside volume. tha jus h hasn't happened.
Short Interest and violent action -- Most analysts and experts don't understand how the short interest works. Consider this -- in the 29 months since the S&P hit its record high of 1527.46, the short interest on the NYSE has increased in 23 of those months. Last month the short interest on the NYSE jumped 7.5 million to a record high.
In the last two years the stock market has erased $7.1 trillion in stock values. This occurred while the short interest was building. In other words, these shorts were operating in a bear market, and on a longer-term basis, the rising total of shorts has been right.
If this had been a primary bull market, those shorts would have been squeezed out of the market and the market would be going through the roof. There's nothing more explosive or bullish than a rising total of shorts that are aligned INCORRECTLY against the primary trend in a bull market.
However, the situation is very different in a bear market. In a primary bear market the shorts are aligned CORRECTLY with the primary trend. Thus, shorts in a bear market who have the guts to "stay" with the overall declining trend can make money.
But shorting is basically a precarious business. As the bear market goes along, we will see occasional huge upward surges as the bear market becomes oversold and as "something" (often a piece of news) frightens the shorts. Then we'll see a wild short-covering rally helped along by some retail buying.
I think that's exactly what we've been seeing in the many 200, 300 and 400 upward pops as this bear market continues. Note how each short-covering surge has soon been followed by new lows in the market.
TODAY'S MARKET ACTION -- Up-down-up describes today's market -- but it did end UP. My PTI was up 8 to 5227 with the moving average at 5268. PTI remains bearish.
The Dow ended up 182.06 at 8456.15. Today's two movers were MMM up 2.49 and MRK up 2.12.
Sept. crude was down .67 to 26.50.
Transports were up 35.84 to 2271.34.
Utilities were up 1.57 to 233.83.
There were 2075 advances and 149 declines.
There were 23 new highs and 96 new lows. My High/Low Index dropped to a new low of minus 3714.
Total Big Board volume was a declining 1.48 billion shares.
S&P was up 17.21 to 876.77.
Nasdaq was up 21.37 to 1280.92 on a rising 1.56 billion shares.
My Big Money Breadth Index was up 10 to 738.
Sept. Dollar Index was down .99 to 107.99. Sept. euro was up 104 to 97.38. Sept. yen was up .58 to 83.40.
Sept. Nikkei was up 175 to 9,915.
Bonds were strong with the Sept. long T-bond up 22 ticks to 107.17 to yield 5.20%. Sept. 10 year T-note was up 22 ticks to 112.02 to yield 4.29%. Sept. muni futures were up 6 ticks to 105.30.
Dec. gold surged 8.80 to 316.10. The upside target for gold is to rally above its 50-day MA at 319.30. Above 319.30 would be a buy signal for gold.
Gold/Dollar Index ratio was up a big 10.35 to 292.33 -- which was above it 50-day MA of 290.20. This is a bullish omen for gold.
HUI was up 3.77 to 116.64. XAU up 1.18 to 63.31.
NEM up .65, PDG up .21, ABX up 02, AEM up .18.
I bought 3,000 shares each of KGC, ECO and CBJ today -- I'll put these "cheapies" away and forget about 'em. I will treat them as perpetual warrants on gold. If they take off in three months, six months, a year, two years -- fine.
Until then I'll treat them as warrants that will fly if gold ever gets over 500; they'll soar if gold approaches 1,000. Will that ever happen? A better question -- how low could the dollar go?
STOCKS -- My Most Active Stock Index was up 3 to 241.
Today's 15 most active stocks on the NYSE were -- GE up 1.10, AOL up .90, TYC down .55, AOC down 6.43, C up 1.12, NOK down .03, HD up .23, PFE up 1.22, TXN up.61, XOM up .90, DIS down .48, ACF down 4.05, L up .26, SBC down .37, IPG up 2.75.
A few more -- GM up 1.02, DCX up 1.56, CSCO up .92, AMZN down .14, IBM up 1.22, FNM up .16, AIG up 1.43, MER up .49, GS up 1.05, JPM up .39, DELL up; .31, DD up 1.38, IP up 75, GPS down .09 to 11.15 (this is the GAP), TGT down .39, COST up 1.31, WMT up 1.10.
McClellan Oscillator up to plus 83. It appear that this upside correction is going to last longer, maybe a few weeks longer.
CONCLUSION -- A pretty good day with a plus 8 on my PTI, but where was the volume? Did you notice how the market turned positive an hour before the close. I continue to think that frightened shorts trigger these rallies. There are a mountain of shorts in this market via the hedge funds and the traders, and when the market doesn't gain downside momentum they become frightened and rush in to cover. This gives rise to these wild swing day after day.
As a matter of fact, two thirds of the last 25 trading days have seen the Dow change by 100 points or more. Old time traders can't remember anything that surpassed this kind of volatility.
What can I say -- it's just a fascinating market, particularly is you're not in it. If you're in it, I'd say it's a scary market -- one thing is sure, it's not an "investment" market.
And that'll do it for today.
Russell
"New Orleans 2002" arrives November 6-10, and if you've never been to a New Orleans seminar I can tell you that they're huge and they take place in a serious-eating town and a fun-loving town and believe me, these seminars are an experience. I spoke at the first New Orleans seminar (I think then it was called "The Committee to Legalize Gold" or something like that, and I spoke at around a dozen New Orleans seminars after that.
These days the most I travel is from here to Tucson to see my youngest daughter at the Univ. of Arizona. I haven't spoken at any seminars in years. Anyway, this year I'm going to speak via satellite to the New Orleans crowd. Other speakers will include Sir John Templeton, Gen. Hugh Shelton (he's Chairman of the Joint Chiefs of Staff), my good friends, the Aden sisters, Doug Casey, John Dessauer, James Stack, Martin Weiss and a whole list of notables too long to mention.
I've always had a good time at the New Orleans seminars, and if you want to see what I mean, call 1 800 648 8411 and get full particulars for this year's seminar.
They say you live longer if you laugh. Along those lines, a subscriber sent me the anagrams seen below. Somebody had a hell of a lot of time on his or her hands and is also probably a killer at Scrabble
CLEVER, CLEVER ANAGRAMS
George Bush:
When you rearrange the letters: He Bugs Gore
Dormitory:
When you rearrange the letters: Dirty Room
Evangelist:
When you rearrange the letters: Evil's Agent
Desperation:
When you rearrange the letters: A Rope Ends It
The Morse Code:
When you rearrange the letters: Here Come Dots
Slot Machines:
When you rearrange the letters: Cash Lost In 'em
Animosity:
When you rearrange the letters: Is No Amity
Mother-in-law:
When you rearrange the letters: Woman Hitler
Snooze Alarms:
When you rearrange the letters: Alas! No More Z's
A Decimal Point:
When you rearrange the letters: I'm A Dot In Place
The Earthquakes:
When you rearrange the letters: That Queer Shake
Eleven plus two:
When you rearrange the letters: Twelve Plus One
And for the grand finale:
PRESIDENT CLINTON OF THE USA:
It can be rearranged (With no letters left over, and using each letter only once) into:
TO COPULATE HE FINDS INTERNS
. |
