Richard Russell comments

July 19, 2002 -- I'm writing this just after the opening today, and today promises to be a very significant one. If there's such a thing as the PPT or "Plunge Protection Team" (and I'm not sure there is one), today is where the "Team" will have to do its work to save this market, and more specifically to save the Dow from breaking below 8235.81. Because 8235.81 marks the level of the September 21 lows.

If the Dow closes (and I emphasizes CLOSES) below 8235.81 all the major averages will be in harmony on the downside, and at that point I'll turn to zero-ing on the D-J Transportation Average.

Nobody seems to be watching those sneaky Transports, but as I write the Trannies are at 2337 whereas the September low for the Transports was 2033.93. So even if the Dow closes below 8235.81, the Transportation Average will still be more than 300 points away from confirming.

Well, you seldom get a perfectly clean, decisive market picture, and this may be one of those times. In this business, the bulls take what they can get, and by the same token the bears take what they can get.

As subscribers know, I've been concentrating on the Utilities. Why? Call it instinct. After half a century of studying markets, I guess you develop a sort of sixth sense as to what to include in your appraisals and what to toss out. Personally, I've always been a utility follower. This giant industry entails hundreds of billions of dollars of market capitalization.

The Utility Average came into being in January 1929, so it was never incorporate in the original Dow Theory. My mentor, the great Dow Theorists, George Schaefer was the first to use the Utilities in his Dow Theory studies, and I learned from him.

So far, the Utilities have been leading on the downside, and as I write the Utility Average is down an horrendous 10 points to a new low of 216.80. The bear market decline in the utilities has been relentless. From the Utility Average high of 416.11 set on December 26, 2000, the Utility Average has lost 48% of its value. This is more than the entire loss in the Dow during 1973-74.

While I'm talking percentages, I want to turn to the Nasdaq 100. From its high of 4816 recorded in March 2000, the Nasdaq 100 is now at 983. This is a shocking loss of about 80% -- not that far from the 89% loss in the Dow during the 1929-32 bear market, which was the worst bear market in US history.

Turning to the currencies, the Sept. Dollar Index as I write is down .49 to 104.36. This within a hair of it's low of two days ago. At the same time the Sept. yen is up .69 to 86.68. This is the highest yen level since the end of March.

What does a higher yen mean for the Japanese, who must export? Example, at giant SONY a rise of just one yen against the dollar can wipe out eight billion yen or $69 million of annual operating profit. Overseas sales at SONY constitute about 70% of its revenue.

Skipping around, let's turn to gold. The big item that everyone is talking about is that statement by Morgan Stanley's Barton Biggs. And I quote --

It certainly is possible that gold can return to its long-term equilibrium inflation price of $500 an ounce, or even take a run at its all-time high of close to $1,000. What would cause such an explosion? A seep decline in the equities market, higher inflation, or competitive devaluations of the major currencies. In a bleak world, gold could beat almost everything else.

One of these days I expect the funds to move into the gold stocks. When they do, they'll need liquidity, and probably the only gold stock with enough liquidity is Newmont (NEM), with its capitalization of $11 billion. Newmont is an advocate of being unhedged, and probably the biggest story in gold is that NEM in taking over Australia's Normandy mines also took over Normandy's huge hedge book. For this reason, many gold experts have warned against buying NEM.

Of course, we don't know what's happening at any given time, but the story is that Normandy has sold forward more than six million ounces of gold. How to get rid of all those forwards sales? Kate Welling of welling.weedenco.com recently interviewed old-timer Richard Pomboy. Pomboy has done it all, research boutique, hedge funds, etc. Here's what Pomboy says about the NEM forward sales. And thanks Kate, for the quote below.

The only negative in Newmont is that they acquired Normandy, and Normandy had a hedge position. But it is primarily in Australian dollars, and every time the Australian dollar moves up 1 cent, that reduces the negative position in the hedge book by $50 million. I would guess their hedge book right now is probably around $300 million, so if you had a 6-cent move here in the Australian dollars, which is very possible, that hedge book would be neutralized and make it easy for Newmont to close it out. So it is also a currency bet. . . Plus Newmont has closed out 2 or 3 million ounce of their hedge already this year. They are taking every opportunity they can to either deliver into the hedge or close it down, and the hedge is equal to less than one year of Newmont's production. So I think it will not be an issue.

Russell comment -- Newmont inherited top management from Franco Nevada. Most of the talk is just that -- talk, and frankly I don't know what the NEM's latest hedge position is, and neither does anyone else. I will say this -- NEM been warned repeatedly and obviously knows the whole story. My bet is that Normandy will probably take the right action in getting rid of the Normandy hedge.

Back to the Fed, and the big question -- is the Fed losing its battle to reflate the economy? The latest M-3 money supply figure show M-3 down $8.2 billion for the week. The previous week shows M-3 down $38 billion. This is NOT what the Fed wants. And if it continues, it's deflationary.

I continue to hear intelligent analysts complaining about the "disconnect" between the supposedly improving economic figures and the sinking stock market. First of all, I don't trust the economic figures that we're being fed. And secondly, the "improving economic" conditions that we read about are the HOOK that is keeping investors in the stock market. These are the investors who are waiting for the market to "connect" with the recovery, even as these same investors continues to sustain horrendous losses.

The stock market contains all the knowledge that everybody knows about anything pertaining to business. Believe me, there's no "disconnect." The stock market is telling us in every way that it can that business will turn down in the period ahead. The only disconnect is in the brains of the analysts who are complaining that the stock market isn't following the supposed "improving economy."

Remember, we were told months ago that "the recession is over." Then why didn't the stock market boom on that great news? The stock market didn't boom because it knew that the recession was NOT over. The bear market was looking ahead and telling us that what we were seeing was only the START of the coming massive recession.

TODAY'S MARKET ACTION -- Today could have been a 90% down-day. I won't know until later in the day, so check this site later. But remember, 90% down-days usually come in series. So if history repeats, this decline will continue.

But let it -- if you, my subscribers, were taking what I've been writing seriously, you're OUT of the market for common stocks, and you're sleeping soundly tonight.

My PTI was down 6 to 5221 with the moving average at 5221. The PTI remains in its bear mode.

The Dow was down 390.23 to 8019.26. There were four movers, GM down 2.93, KO down 2.84, UTX down 2.81 and XOM down 2.35.

Today's action takes the Dow below its September low, and opens the way for -- well for anything, anything at all. Remember, the Transports have not confirmed on the downside, while at the same time the Utilities are falling apart. It's never easy in this business, but one things is abundantly clear -- this is a bear market and a bear market generates losses. Today was classic second-phase bear market action.

Sept. crude was up .18 to 27.84.

Transports were down 50.42 to 2332.18.

Utilities were down 11.18 to 214.94.

There were 751 advances and 2495 declines.

There were 28 new highs and 423 new lows.

NYSE volume was a large 2.47 billion shares.

S&P was down 33.81 to 847.75.

Nasdaq was down 37.90 to 1319.05 on 2.35 billion shares.

My Big Money Breadth Index was down 10 to a new bear market low of 720.

Sept. Dollar Index was down .43 to 104.42. Sept. euro was up .39 101.12. Sept. yen was up .64 to 86.84.

Sept. Nikkei was town 300 to 10,010.

Investors were escaping to bonds today, so bonds were higher. The Sept. long T-bond was up 19 ticks to 105.05 to yield 5.35%. Sept. 10 year T-note was up 9 ticks to 109.15 to yield 4.56%. Sept. muni futures were up 8 ticks to 105.23. Fed boosting rates this year as everybody was predicting just a few months back? I don't think so.

August gold was up 6.80 to 323.90. Sept. silver up 7 to 5.07. Oct. platinum down .40 to 520.80. Sept. palladium was up .50 to 324.00.

XAU was up .61 to 71.30. HUI up 2.73 to 129.62.

Gold/Dollar Index ratio was up 7.80 to a new high of 310.20.

NEM down .13, PDG up .20, ABX down .24, AU up .90, AEM up .37. HL up .29.

With gold up 6.80 wassa matta wid da stocks? My only explanation, they're still in consolidation phases. Take AEM, the stock is up from 2.50 in '98 to 15 recently, and that's a big move. The stock is tired of rising, and now it's consolidating. The gold stocks will move when they're ready.

The market is a law unto its own, and it doesn't operate for the benefit of Richard Russell or his gold-owning subscribers. Look at it this way -- unlike most investors today, you're not being wiped out by the bear market. Now that's a consolation, or it should be. And if you bought your gold shares when I first suggested it, you'd be well ahead.

A thought -- expected moves almost always take longer than you think they will. But when they finally come, they're almost always bigger than you thought they'd be. Latest example of this -- the bear market we're in.)

McClellan Osc.at a whopping minus 2.03. The Summation Index at minus 1260 is now lower than it was at the September low!! Market is super-oversold, but that happens in a bear market. For next week EXPECT ANYTHING, BUT MY ADVICE IS to STAY OUT OF THIS MARKET'S WAY.

This market can be likened to the Wabash Cannonball coming down the tracks at 120 miles per hour. Problem is that these tracks were only made for a top speed of 85 MPH.

I won't know if today was a 90% downside day until tomorrow when it will be posted.

STOCKS -- My Most Active Stock Index was down 7 to a new bear market low of 250.

The 15 most active stocks on the NYSE today were -- AOL down .87 to 11.58 (AOL's debt has always bothered me, and now AOL bothers the hell out of poor old Time Warner. This may have been the worst merger of the century). JNJ down 7.88 to 41.85 (trouble at their Puerto Rican plant), ABX down .24, RD down 1.99, LU down .26, TYC up.57, GE down 1.18, PFE down 1.25, PDG up .20, AL down 1.91, UPS (going into the S&P) up 1.38, XOM down 2.35, Q down .25, C down .90, PRU up .12.

No use listing more -- almost everything else was down. The home-building stocks were whacked, FNM down 2.12 to 68.68, FRE down 1.70 to 56.12.

CONCLUSION -- A lousy day and an historic one. Dow closed just above 8000.

What I hear is that a good deal of the selling is coming from fund redemptions. Thousand of mutual funds are probably getting redemption requests as their owners watch their life-savings go down the drain. I've said before that this is the first time in history we've had a primary bear market moving into high gear -- and loaded with thousands of mutual funds. It could be self-feeding.

Up to now fund owners have been listening to their dead-head brokers and advisors telling them to "sit tight, you're in for the long term." That sort of BS was OK when their funds were only down 5%, 10% or 15%. But a lot of funds are now getting killed, and suddenly "holding for the long term" sounds like another brand of financial suicide. So what do you do? You call your brokers or wire your fund and tell them that "I've had enough, send me the cash."

What comes next? We should see a string of 90% down-days, but whether there'll be any rallies in between or not I don't know. We've had a fantastic string of 15 out of 18 down-weeks on the part of the S&P, but records are made to be broken -- they certainly were broken during the bull market.

Furthermore, the analysts have been yammering for weeks (or is it months?) that "this looks like the bottom." Maybe the bear is out to teach them that they've got quite a bit to learn about primary bear markets.

So far, arrogance has been the hallmark of this generation of Wall Street analysts and strategists. I guess the next stage is humility. Remember that word, "humility." It's the polite way of saying, "I was wrong." Have you heard any analysts or strategists saying that lately? Come to think of it, I haven't either.

Tomorrow, I'll say a few words about where I think this bear market could go and when.

See you on

Russell

Comment: I've often stated that today very few people appear to have learned how to read the language of the stock market. Maybe those two decades of bull market has allowed so-called market analysts to become either arrogant or just plain lazy.

I learned to read the Averages from Robert Rhea, the great Dow Theorist of the 1930's. To my mind Rhea was the greatest reader of the averages of all time. From George Schaefer I learned the true meaning of the primary trend of the market. In my opinion, Schaefer had better instinct and a deeper understanding of the primary trend than any analyst that I have ever come across. He was a genius in term of identifying and understanding the true importance of the primary trend.

I've studied every analysts from Schabacker to Drew to Edwards & Magee to Jimmy Hughes to Hamilton to Dow to God knows how many other, but my basic mentors were Rhea and Schaefer.

Poor New Yorkers, they're being forced to look close and personal at this nation's climbing debt. If you go to the southwest corner of Sixth Avenue at 42nd Street, face northeast and look up, you'll see the Debt Clock. The rapidly rising debt tab is displayed on a bill-board size, odometer-style computer-driven clock atop a four story building. Debt data from the weekly calculations of the US Treasury is fed into the clock's computer at the same time each week, and the computer calculates the change.

The clock was shut down in 2000 when the government began paying down the debt. Now with the debt piling up again, the clock is back in action, forcing poor New Yorkers to see what their government is doing The US national debt is now over $6 trillion, and that's a figure that is over the head of the average New Yorker to comprehend. They don't even know how to write $6 trillion. So the clock breaks the debt down to the size of a family of four. On that basis, the family's share last Monday was $85,194.32.

At first glance, the lower numbers on the clock flip by so fast that a person can hardly read them. Maybe every city in the nation should have a debt clock. Better still, let's put one in the White House, one in the Congress and one in the Senate.

Speaking of trillions of dollars, the loss in the stock market is now generally taken to be about $6 trillion or about the size the US national Debt. The Financial Times estimates that the international losses in this bear market currently runs about $35 trillion.

Here are a few more statistics. Taking this primary bear market as having started in September, 1999, this is now the longest bear market in 60 years and nearing the length of the 1929-32 bear market.

The 1973-74 bear market took the Dow down by 48.2%. The Utilities have already surpassed that percentage and so has the Nasdaq. In fact the Nasdaq Composite and the Nasdaq 100 have already suffered their worst bear markets since 1929-32.

That should impact on the world economy, wouldn't you think. Let me put is this way, this is the biggest wipe-out in securities values in world history.

Deflation in Prices? -- From an e-mail received today --

FYI --I stay in NYC about one night a month for business travel. Frequently I stay at a Best Western at 55th at Broadway. I've paid as high at $200/225 a night for a basic room back over 10 years with an average price I would say of $150.

Tuesday night I paid $89 (since Sept. 11th I had been paying $99, the hotel has been completely up-graded over the past two years as well.)

Karl T.

























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