June 24, 2005 -- "Gold really starts to glitter when you can't get an 'honest' return on your money invested in any major currency. That is, when the inflation rate is above money market rates on all major currencies, investors turn to gold as a store of value." Economist Paul Kasriel in his daily comment (June 23) for Northern Trust.
Headline in today's New York Times: "Capital Nearly Speechless on Big China Bid. . . For the Bush administration and even for many members of Congress, China has become almost too big to bash. . . Alan Greenspan said virtually nothing about the deal. But he used some of his bluntest language ever to warn lawmakers against imposing tariffs on China as a way to pressure it over its exchange rate policies." Russell translation -- leave China alone, they bought over $200 billion in US Treasures over the last year. And they could always cut back on their buying.
Follow the money -- From today's Financial Times: "CNOOC's advisors, led by investment banks Goldman Sachs and JP Morgan, stand to earn fees of $200-$300 million if the Chinese company succeeds with its $19.5 billion bid for Unocal, the world's third largest cash offer to date. . . . A CNOOC victory . . . could also increase Asia's importance to the earnings of global investment banks." Russell Translation -- The buy-out will probably go through. There's too much money in it for US bankers. Furthermore, US regulators will not receive a go-ahead from the White House to try to halt the deal. ....................................................................... Newer subscribers may wonder what I was talking about when I wrote yesterday that the worst thing that could happen now would be for Bush to succeed in reducing the government deficit (Bush promised to half the Federal deficit by the end of his term in office). In Richard Koo's prophetic book, "The Balance Sheet Recession," Koo warns against cutting the deficit at this time.
The reasons are as follows -- US corporations are continuing their efforts to get their balance sheets in order, which means becoming increasingly efficient and cutting expenses whereever they can. At the same time US consumers are over their head in debt, and will probably turn to paying off debt and saving at the first sign that the stock market has topped out -- or that home prices are turning down. This leaves the US government as the lone savior, the lone big spender, that can keep the economy afloat. If the US now cuts back on its enormous deficits, such action could throw the country into recession or worse. That could be what yesterday's market swan-dive was beginning to discount.
Bill Gross of Pimco may have been sensing the same thing when he stated in a recent interview that the Fed could boost short rates one or two more times, but by the end of this year the Fed might actually be lowering rates again.
And I wonder if this headline from yesterday's Financial Times isn't a preview of that's coming up in the US -- "Interest rates set to fall Across Europe as economic growth dips." Suddenly, only a month after raising rates, Europe is thinking of dropping rates -- this in the face of sliding business across Europe.
The housing picture has become an increasing concern for the Fed. According to the FDIC the 22 major local markets that feature the fastest rising prices account for 35 percent of the nation's entire housing values. This is a situation that has become almost "too hot to handle." The Fed faces a major dilemma here. If they try to put the brakes on the housing boom, they run the danger of sending the whole economy into recession. On the other hand, if they allow the housing bubble to continue inflating, the potential danger simply worsens.
Greenspan completely "goofed" on the stock market bubble of the late-'90s. Now he has a second chance to mess up here in 2005 with the housing bubble that he created. Russell Question -- So will asset-inflation (housing) save us from the bear market? Well, it has so far. And I emphasize the phrase "so far." ............................................................ On to the markets -- Below we see the daily McClellan Oscillator. Yesterday the Oscillator finally did what I warned it would do -- it broke below the zero level into negative territory. The question now is whether we'll get a mild correction of a more serious decline.
The last deep correction occurred during March-April of this year, and obviously there's no way of telling what the market is in for now. The market has entered the period known as the "bad" six-months of the year (May through October), so it's certainly possible that we could get an ugly decline in the months ahead. Furthermore, both the D-J Industrials and the Transports have now fallen below their 200-day moving averages.
Now lets check the Dow, which I call the "backbone of the economy Average." Here we see the Dow plunging below its (red) 200-day moving average. The Dow's 50-day MA stands at 10378. If the Dow closes below 10378, we will have the full negative juxtaposition with the 50-day MA below the 200-day MA and the Dow below both. I'm writing this in the morning an hour after the opening, so I obviously don't know how the Dow will close.
RSI for the Dow has turned down and is in oversold territory at 30. But the MACD has just turned negative, so it's a question of how oversold the market will become on the downside. I look for the Transport to continue leading the way to lower prices.
Question -- Russell, you state that you believe that the Transportation Average will lead the market down during this bear market. Why do you say that?
Answer -- One reason is that the Transportation has no earnings, in fact the Transport Average is running at a deficit (trailing) of $150.00. Furthermore, the dividend on the Transport Average is a mini 1.02%. I suspect as this bear market deepens, we could see the Transportation Average drop as much as 80 to 90% from its high.
Most analysts don't seem to be aware of it, but the formation in the Transportation Average is now deadly. What I see here on the weekly chart is a huge "head-and-shoulders" formation, a clear pattern of distribution. These patterns are particularly bearish when they slope downward as this formation is doing.
Once this pattern breaks support (down-sloping blue line is support), I expect it to take the whole market with it to lower levels. Advice -- keep your eye on the Transportation Average, the stock average which most analysts ignore.
Gold -- The daily chart of HUI, the gold average, is increasingly interesting. Here we see a clear "head-and-shoulders" bottom pattern with the upside breakout above the (blue) resistance line. After the breakout, we see a pull-back to the breakout line, and then a further push higher. Once a stock or an average breaks out above the resistance line, the resistance becomes support.
I expect backing-and-filling and consolidation now, but the chart points to higher prices for the gold shares. HUI is moving towards overbought status as seen in both RSI and the MACD.
It's early in the gold bull market, and I expect a lot of buy-outs and mergers in the various gold shares.
The bull market in gold could go on for years as the various paper currencies, one by one, lose value against each other. In the end, all fiat currencies will lose value against the only true money -- gold.
It will be a long hard fight, but in the end truth will win over lies and deception. And paper money is built on lies and deception. Why do I say that? Because it's a damnable lie to insist that you can print wealth -- that wealth can be created by book-keeping entries -- without thought, without work, without sweat.
TODAY'S MARKET ACTION -- My PTI was down 6 to 5638. The moving average was 5601, so my PTI remains bullish.
The Dow was down 122.99 to 10298.45. No movers in the Dow today.
August crude was up .42 to 59.84.
Transports were down 46.87 to 3419.50.
Utilities were down 2.82 to 380.60.
There were 1181 advances and 2048 declines. Down volume was 69.1% of up + down volume -- a decent down day.
There were 236 new highs and 55 new lows. My 5-day high-low differentials declined from yesterday's plus 1121 to today's plus 990.
Total NYSE volume was an expanding 2.31 billion shares.
S&P was down 9.24 to 1191.49.
Nasdaq was down 17.30 to 2053.27 on 2.14 billion shares.
My Big Money Breadth Index was down 2 to 735.
Sept. Dollar Index was down .34 to 88.68. Sept. euro was up .68 to 121.29. Yen was down .20 to 92.36.
German DAX was down 61 to 4568. Sept. Nikkei was down 15 to 11,465.
Bonds were higher. Sept. long T-bond was up 19/32nds, almost to a new high, at 118.30 to yield 4.21%. Sept. bellwether 10 year T-note was up 5/32nds to 113.26 to yield 3.91%. Yield curve keeps flattening.
August gold down 1.20 to 442.00. July silver up a fraction to 7.28. July platinum up 4.00 to 896.00.
Gold advance-decline line up 4 to 1128.
XAU up .81 to 92.60. HUI up 1.51 to 199.21.
ABX up .17, AEM up .10 GLG up .23, NEM up .20, PAAS down .24.
I thought the gold action was pretty good today. The stocks acted slightly better than the metal, but the metal acts OK. Remember, those dirty Commercials are trying to knock gold down and make a quick trading profit. Commercials increased their shorts for the second week in a row. Be careful.
STOCKS -- My Most Active Stocks Index was down 3 to 420.
The five most active stocks on the NYSE were today were -- GDT down 4.70, GE up .12, PFE down .38, LUL dow .08, NWS-A up .26. XOM down .87, most oil stocks were down day despite higher oil.
The VIX was up only .05 to 11.95. I don't see any fear here, and that's a negative.
McClellan Oscillator was down 67 to minus 47 and now has broken below preceding lows. Not a good sign.
CONCLUSION -- Market getting oversold, but that doesn't necessarily put the brakes on the downside. Volume picked up on the decline today, and that's not a good sign. Today was another "distribution day," since volume increased as the market declined.
An indication of something? HGX, the Phila. Housing Index, has declined in four of the last five days.
This was a tough week, and I'm going to take it easy over the weekend. Two of my kids will be in town, and that will keep me busy. Did I say I'm going to take it easy?
See you Monday --
Russell ..................................................................................................................................... The celebrity craze seems to have the whole world in its grip. Us Weekly now sells 1.5 million copies a week. Now there's Star, the Globe, National Enquirer, on and on. And everywhere I look its Lindsay Lohan, the Olsen twins, Paris and Paris, Jolie, Tom Cruise and Katie Holmes (they call them Tom-Kat). Where does it all end? Aw, it's all right, it takes people's minds off Iraq, Washington, and the fact that we're all headed for hell in a handbasket, that is, unless we're really, really good.
And how about this? My old friend Marty Zweig (I took over his advisory service in 1998) bought the penthouse (three floors and the ballroom) in New York's fashionable Pierre Hotel on Fifth Avenue at 59th Street. Marty paid for $21.5 million for the whole thing in 1999. Recently, Marty put up his place for sale for a cool $70 million. He wanted to make it the biggest apartment sale in New York history. Up-keep for the place is $40 thousand a month. A year went by and no buyers. So now Marty has divided his place in two, $11 million for one section and $59 million for the other. I'd take the cheap one myself, but I just can't hack the New York weather -- or the crowds. Marty, don't be greedy, sell before the stock market really falls apart -- or the housing bubble pops.
Every once in a while, the New Yorker magazine comes up with a funny cartoon. In the current issue we see two men in a cavernous factory room, I mean the room is huge. And there's nothing in the place, it's totally empty. One fellow says, "Well, that does it Charlie -- we've outsourced everything."
