November 15, 2002 -- Let's start with today's "hot news." US production was down .08% in October for the third straight month. Well, we guessed this one so I don't know how "newsy" it is.
Producer Prices were up 1.1% for the month. With the Fed creating over a trillion dollars in bank credit and rates at a 41 year low, the question is "What took you so long?"
Factory usage was down to 75.2% for October. Sure, why not -- most of US production has been moving to China. Wonder what their factory usage is? I've seen pictures of some of the new factories in China. They are HUGE.
Joining the trend, Lehman is laying off 500 employees including name-strategist Jeffrey Applegate.
Aon Corp. is liquidating it $1.9 billion money market fund. Falling interest rates have made it difficult for money market funds to find enough decent securities to keep them from producing losses.
The Fed, fearful of a continued recession, is pinning its hopes on the still-rosy housing market. But with the Producer Price Index up and signs of inflation appearing, bonds have sold off sharply. Mortgage rates are based pretty much on the rate on the 10 year T-note. And the note has been weakening.
Yesterday Greenspan was asked what the Fed could do if rates dropped to zero and if still more stimulus was needed. Answered Sir Alan, "As a consequence, there's virtually no meaningful limit to what we could inject into the system were that necessary." Russell Comment -- this is Greenspan's way of saying that it will stop at nothing in its battle to ward off deflation. Gold anyone?
One of the main desires of the Fed now is to keep mortgage rates low, near record lows. If mortgage rates were to rise, that would eliminate the main stimulus of the US economy and refinancing would disappear. This, above all, is what the Fed wants to avoid.
Russell Comment -- The greatest mystery of all is what keeps the dollar from collapsing. One theory is that the dollar is a lousy currency, but all the other currencies are worse.
Another theory is that there's been so much borrowing against the dollar that the dollar is in a sort of giant universal short squeeze. With unbelievable amounts of debt in existence, everyone needs dollars to carry their debt.
Speaking of debt, check this out. New York City has a deficit of $1 billion this year and over $6 billion for next year. According to today's New York Times, this is what the City faces -- "Mr. Bloomberg wants to close next year's $6.4 billion gap with the $1 billion in income taxes from commuters; $2.3 billion from the higher property taxes; the $800 million surplus from this fiscal year; $1.1 billion in cuts in city agencies; and $1.2 billion in actions requiring the approval of the state and federal government and the city's labor unions."
Escape to California? You think California is any better? The state of California budget deficit for next year is estimated at $21 billion, up from an earlier estimate of $ 10 billion. How is this monster deficit going to be financed. I'm afraid to find out. To live in California you have to love it. To live in New York City you have to be out of your mind.
What does it all add up to? It adds up to rising unemployment. As for the great productivity that Greenspan keeps talking about, what it really means is that you fire workers and let the remaining workers make up the difference. The Chinese squeeze on US pricing power means that the way to hanging on to profits = fewer workers doing more. Greenspan calls it rising productivity. I call it rising unemployment.
All right, enough buzz and baloney -- let's see what the market is telling us.
Looking at the Dow we see what looks like a "head-and-shoulders top" pattern, with the Dow now working on a right shoulder.
But the games not over unless the right shoulder gives way and the Dow breaks below its "neckline" or its support.
I will continue to give the secondary bullish trend the benefit of the doubt -- until proved otherwise. In other words, unless the Dow breaks down below its support, I'm going to say that the trend remains bullish. Interestingly, the support line for the Dow is just about where the 50-day moving average of the Dow is. Therefore, I'd say that the situation remains bullish unless the Dow declines and breaks below 8174, which is the current level of the 50-day MA. Since the S&P has traced out the same pattern, the "sell" signal for the S&P would be a closing below its own 50-day MA, which today stands at 867.
What I find so fascinating about the current situation is watching the struggle between the world forces of vicious competition and deflation -- pitted against the current seasonal and cyclical positives for the stock market. In other words, the widely-advertised expectation is for the market to rise, based on the Presidential Cycle and the fact that we are now in he "good six months" period of the year, meaning the period of November through to late-April.
I have no doubt that a lot of money is now positioned on the bull side of the market based on the above factors. Will the bear market oblige by moving the market higher as expected -- at least for the next six months? And what would it mean if the market refuses to oblige?
Gold -- With all this debt piling up, with all the new credit being created -- and with the threat of increasing bankruptcies looming, there will be an increased desire for something intrinsic, something that isn't created out of debt.
Yeah, I'm talking about gold.
And what do you know -- I've been having new thoughts about the gold situation. The new thoughts are that I don't think serious gold buyers are at all anxious to see gold surge to new highs -- at least not at this time. No, I think gold is under serious, quiet ACCUMULATION, and the accumulators are actually hoping that gold "takes it slow."
One of these groups is the gold mines who are still hedged and who are anxious to get rid of their hedges. The last thing these mines want is a booming gold market at this time. Another group is the "silent accumulators," those who see the writing on the wall, and who are quietly buying gold at what they consider "dirt cheap" prices. A third group is the gold banks who have a huge short position in gold. Still another group are the Commercial shorts, part of these, of course, are the gold banks.
If you examine the weekly gold chart that I included on page 6 of the recent Dow Theory Letters, you will note that within the rising channel there are six distinct declines in gold. But this is important -- note that each decline ended at a HIGHER LEVEL than the preceding decline. This is a tell-tale sign of accumulation.
The most recent decline in gold took December gold down to a closing low of 311.20. This close at 311.20 was just above the rising 200-day moving average of Dec. gold.
From there gold rallied again. As I write the 50-day MA of Dec. gold stands at 319.20. Dec. gold this morning sold at 319.70, slightly above its 50-day MA. The two immediate upside targets for Dec. gold are 325 and then 330. I don't think gold buyers are anxious to see those two targets bettered today or tomorrow. No, they'd rather accumulate gold at dirt cheap prices.
Newmont, I believe, will be the blue chip of the gold share universe. This is the stock that the funds will eventually buy. Newmont is the worlds largest producer of gold, and the stock has outstanding management. NEM is removing the hedge position that it inherited when it bought its Australian company. NEM took a sharp break on Nov. 12, but the stock held well above its last decline low. I believe NEM is a buy, and I bought another 500 more shares this morning for my own account. Every subscriber should own some shares in NEM.
The points I am making is that those who buy gold here must be patient. This is the accumulation phase of the gold bull market. The funds have no gold shares. The public doesn't even know how or where to buy gold coins. Gold metal and gold shares are being bought by knowledgeable investors who have a vision of the future. That vision, I believe, entails very hard times for paper money, money that is created out of thin air by central banks, money that is deemed "legal tender" by fiat.
