July 1, 2008 -- At yesterday's close, Lowry's Buying Power Index (demand) and their Selling Pressure Index (supply) were at their widest spread, 483 points, in the 75-year history of Lowry's. This means that stocks are extremely oversold, yet evidently NOT oversold enough to entice the big buyers, the institutional buyers, to rush back into the stock market. This tells us that the market must drop even lower before the big money is ready to enter in any major way.
How low is low? How far down does this market have to sink before institutional money is willing to establish a major bottom or before institutional money is ready to "jump in with both feet"? Ah, that's the question that no one can answer. The final bottom is something we can't predict. But hopefully, it will be a place that we can identify. And that's the key word -- identification. Forget prediction, think IDENTIFICATION!
On yesterday's site I described where we are in terms of the 50% Principle and why market action is now so critically important. The KEY number for the Dow is the halfway or 50% level between the Dow low of 2002 (7286) and the record Dow high of 2007 (14164). The 50% level is 10725. The Dow must hold and consolidate above 10725 -- or else.
We all know something about the fundamentals. We know the dollar has been weak. We know inflation is raging. We know the banking system is sick. We know that housing foreclosures dot the land. We even know that the US empire is a paper tiger living off borrowed money. How in God's name can an empire with 120 military outposts around the world, a nation fighting two expensive wars -- live by borrowing? How can a nation continue to survive in its current form by borrowing over $2 billion a day? How long will the world continue to accept Federal Reserve notes (we mistakenly call them dollars) when the world is already choking on weak dollars?
I have a lot of questions, but I don't have the answers. A Zen koan runs like this -- "One fool can ask more questions than ten wise men can answer." Call me Russell, the fool -- all I can come up with is questions.
The market represents the sum total of everything known by everybody. I trust the mysterious wisdom and insights of the market. More than that, I depend on the market to give me the answers. Right now I'm obsessed with knowing whether the Dow over coming weeks and months will hold above 10725, the midpoint of the 2002 to 2007 advance. If the Dow can do it, if the Dow can halt and consolidate above 10725, then the miracle will have occurred. If Dow 10725 holds, then the stock market will be telling us that somehow, some way, we will get through this mess.
But if the Dow cuts through 10725 and continues lower, then Mr. Market will be telling us that we're in big trouble, major trouble, tragic trouble.
With it all, the US is not going to disappear. There may be a lot of changes coming up. The US standard of living may be heading lower, a lot lower. The great American punch bowl may be about to spring a leak or even crack wide open. But somewhere ahead the stock market will have discounted the worst.
Frankly, I thought that when the D-J Transports recorded their low on January 17 at a value of 4140.29, that the market had carved out the beginning of a Dow Theory bottom. I thought that on January 17 the stock market was in the process of discounting the worst that lay ahead.
Now I'm not so sure. Now I want to watch the action. Now I want to see if the averages can hold their own in the face of a continuing parade of really bad news.
Already, the D-J Industrial Average has broken below its March 10 reaction low of 11740.15. But the Transports have refused to confirm by a wide margin. To confirm the Transports would have to violate their January 17 low of 4140.29. Yesterday the Transports closed at 4942.70. That was 802 points ABOVE their January 17 closing low. So the Transports have stubbornly refused to confirm Industrials weakness.
All hail to the gallant Trannies, the heroes of the game -- well, at least up to now.
But this too could be changing. Check the daily chart of the Transports below. The Transports have broken below their 50-day moving average and are now attacking their 200-day moving average. MACD is now heavily oversold, and the histograms have been negative (below zero) since mid-May.
So the Transports are finally turning weak. It's a question of whether they can hold above their January 17 low of 4140.29.
I have a secret suspicion that if or when the Transports finally violate their January 17 low, that will be the bottom for this entire decline.
As usual, I've been giving this tired old brain a workout. And here's a question I ask myself. Suppose the dollar goes into a real swoon. I mean supposing there's a real run on the dollar. You own a house. In the face of a collapsing dollar, would you sell your house? Sell it for dollars? Remember, the dollar is just a fiat currency. A dollar only possesses value because the US government by fiat mandates that the dollar is legal for payments of all debts. There's nothing intrinsic about the dollar bill that you have in your pocket. The government says you can use your dollars to pay off all debts (and when you buy something you're indebted to the seller). If the US government did not exist, the dollar would be worth nothing, zip, nada. Not so with gold.
So the question -- suppose the dollar is collapsing in value, losing purchasing power at a frightening rate. Are you better off keeping your house or selling it for collapsing dollars? Remember, your house is something tangible, you may not know exactly what your house is worth, but it's certainly worth something. It may even be increasing in value in terms of weakening dollars.
Or could a house decline in price even in terms of weakening dollars? That would be the worst kind of deflation. Even in the Great Depression of the 1930s, that didn't happen. It didn't happen because in the 1930s "a dollar was as good as gold." The only problem during the 1930s was that nobody had dollars.
This is an interesting question, and I'm not sure of the answer. But it does suggest one thing to me -- a home owned free and clear is not a bad holding. It's a solid, tangible item.
Investment position -- Our position has been to be in cash and gold. We don't have to show profits in this kind of market, we're happy just to avoid losses. And so far, that's what cash and gold have done for us.
The daily chart of gold shows a symmetrical triangle, which is a pattern of indecision. But over the last few days gold has broken out of its triangle to the upside. That's a positive, that's bullish. Will it work higher or will it just hold its own. I'd be happy if it does either. But in time gold should advance to new highs. I think the bottom is in for gold, following a three-month correction.
TODAY'S MARKET ACTION -- My PTI was up 2 to 5935. Moving average was 5942, so my PTI remains bearish by 7 points.
The Dow was up 32.25 to 11382.26. One mover today, AXP up 2.42.
Aug. crude was up 1.30 to 141.30.
Transports were down 85.00 to 4862.98.
Utilities were up 1.44 to 522.29.
There were 1397 advances on the NYSE and 2003 declines. DOWN volume was 51.1% of up + down volume.
There were 38 new highs and 617 new lows. My 5-day high-low differentials declined from minus 1923 to today's minus 2144.
Total NYSE volume was 5.85 billion shares.
S&P was up 4.92 to 1284.93.
NASDAQ was up 11.99 to 2304.93.
My Big Money Breadth Index was up 4 to 804.
Dollar Index was down .08 to 72.38. Euro was up .38 to 157.87. Yen was up .15 to 94.47.
Bonds were a bit lower. Yield on the 10 year T-note was 3.99%. Yield on the 30 year T-bond was 4.54%. Yield on the 91 day T-bill was 1.82%.
CRB Commodity Index was up a big 13.17 to a record high of 609.15. Inflation, anyone?
Aug. gold up 16.20 to 944.50. July silver up a huge .78 to 18.29. July platinum up 6.70 to 2088.70.
GDX up .94 to 49.52. HUI up 8.77 to 458.65,
ABX up 86, AEM up .90, ASA down .74, NEM up 1.21.
One share of the Dow buys 12.05 ounces of gold.
One ounce of gold buys 51.64 ounces of very cheap silver.
Gold breaking out of its triangle as shown on the chart above. That's good, if you like gold or if you're trying to keep up with inflation.
STOCKS -- My Most Active Stocks Index was up 9 to 214.
The five most active stocks on the NYSE were -- C up .37, F down .10, BAC down .06, GM up .25, GE up .43.
The VIX was down .30 to 23.65.
CONCLUSION -- I can't say that it was an impressive performance. Dow was up with Utilities but breadth was down, down-volume was ahead of up-volume and there were 617 new lows against only 38 new highs.
The market is working off an extreme oversold -- but today didn't win a cigar or even a gold ring. The breadth remains pitiful.
I love birds, I really do. When I was a kid we used to raise canaries -- loveable little songsters. But La Jolla seems to be inundated with three of the noisiest of the breed -- sea gulls, crows and parrots. The sea gulls are everywhere, and they are constantly screaming as they fly. They also dump on our cars or on our sidewalks.
I understand crows mate for life. For whatever reason, they are always calling for, or screeching at, each other. They also make a variety of weird and even scary sounds. As for the parrots, they cackle and crackle when they're flying. Parrots love palm trees, and we've got a lot of palms. So between the sea gulls, the crows and the parrots, La Jolla often sounds like a South American jungle.
And even worse, the crazy gulls will stand in the middle of the street as they peck away at a piece of bread or a candy bar. I've had to stop the car a few times recently for gulls who were standing in the middle of the street just staring at me. I mean nothing seems to scare the gulls or those increasingly bullying crows. Help! .............................................
I've been watching the Olympic trials, which the TV stations seems to have buried. Yesterday's re-runs were shown here at 11:PM, past my bedtime.
Mistakes will be made -- Tyson Gay is America's top sprinter. At the trials Tyson Gay broke the world's record in the 100 meters with the wind-aided but incredible time of 9.68. One news outlet got it wrong, it was OneNewsNow.com, which calls itself "news from a Christian perspective." The station headed the story, "Homosexual runs wind-aided 9.68 seconds to make Olympics." The station corrected the story by midday Monday. .......................................
The presidential candidates continue to waste time arguing about who's the most religious, who goes to church more often, who's the most patriotic, who wears the biggest American flag button. Meanwhile the important issues are avoided. Both candidates recently visited Billy Graham and his son. That really gave me a sense of security and well-being. And I ask myself, what's next, extended telephone calls to the Pope? ........................................
Recently I wrote about hormones in meats and our giant California kids. The girls here in La Jolla are both huge and beautiful. And in summer they don't wear a lot. This e-mail just came in.
Hi Richard, I wish we had more hormones in meat when I (sort of) grew up. Ever try finding a girlfriend in California when you’re 5’7” ? The women here are Amazons. And that’s without heels, for those who still wear them, and they do in La Jolla and Del Mar. Best wishes, John F. San Diego
Russell Answer -- Aw c'mon, some big California girls actually prefer smaller guys. The can physically dominate them. Furthermore, they think little fellas are cute and cuddly (and hopefully rich). .........................................................
The latest from Bill Gross, always highly worthwhile information -- Russell
June 30 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said a Barack Obama administration may have no other choice than to produce the first $1 trillion U.S. budget deficit. "You have inherited a mess,'' Gross, co-chief investment officer of Pimco, said in an open letter to Obama, the likely Democratic presidential nominee, published on the Newport Beach, California-based company's Web site today. "What do I think you should do as the new president to rectify this mess? All I know is that any solution will come with a high price tag.''
Higher taxes for hedge-fund managers and oil companies will not cover the $500 billion stimulus the economy needs, including the anticipated Obama tax cuts for the poor and middle-class, universal health care and aid to the depressed residential real estate market, said Gross, a long-time Republican. The likely expenditures and increased borrowing suggest that "intermediate and long-term yields on government bonds have already bottomed and will gradually rise'' through the next four years and possibly beyond, Gross said.
Gross domestic investment in machines, houses and inventories has fallen by $200 billion since its 2006 peak, Gross said. Domestic consumption will soon be $300 billion short of what's needed for an economic rejuvenation, he said. With the deficit already pushing $500 billion even before the next president is sworn in, Gross anticipates it will reach $1 trillion deficit by 2011.
Republicans "will blame you for years and label you "Trillion-Dollar Obama,''' said Gross, in his analysis that assumes Obama will defeat his presumptive Republican adversary, John McCain. "There is, in fact, not much that you or any other President can do.''
Obama Proposals
Mark Porterfield, a Pimco spokesman, said Gross wasn't available for additional comment.
"Bill Gross is correct that higher taxes for hedge-fund managers and oil companies will not cover Barack Obama's agenda,'' Jason Furman, Obama's economic policy director said in an e-mail response. "Which is why Obama has proposed an ambitious program of spending restraint.''
Obama's proposals include ending the war in Iraq, cutting subsidies for private Medicare plans and student lenders, eliminating no-bid contracts, and reforming the process known as earmarks where direct funding is allocated to specific projects in legislation, Furman wrote.
Japanese Comparison
Gross draws a comparison with Japan's efforts to recharge its economy after a 1980s real estate bubble fizzled. Over seven years, expansionary fiscal spending grew the deficit from 2 percent of GDP to 10 percent at its peak, he says. "Our trillion-dollar level in 2011 would equate to something like 6 percent of GDP, a mere pittance by Japanese standards,'' Gross said.
Gross expects housing prices to fall a further 10 percent by January, by then a "Japanese-style deflation will be in full stride.'' Home prices in 20 metropolitan areas fell the most on record in April, from a year earlier, according to an S&P/Case-Shiller home-price index released on June 24.
A decision on a $300-billion Senate bill to reduce home foreclosures was delayed until next month after lawmakers failed to settle a dispute on adding energy tax cuts to the measure. The Senate plan would allow an estimated 400,000 homeowners to avoid foreclosure by refinancing their mortgages into fixed- rate, 30-year loans backed by the government.
'Firm Background'
Global growth led by developing countries and rising commodity prices will provide a "firm background for stimulative U.S. monetary and fiscal policies'' and save the U.S. from Japan's experience of deflation and near 0 percent interest rates, Gross said.
Russell Comment -- The idea will be to avoid the decade-long Japanese experience of deflation. This will require massive government spending, massive deficits, and government-sponsored inflation. Bernanke and our new masters in Washington cannot allow deflation to become imbedded in the US economy. Bernanke is well aware of this. He is an expert on the Great Depression and deflation of the 1930s.
