Richard Russell Comments

May 15, 2002 -- First, some assorted items: Historically, major market reversals off a bottom have been characterized by an atmosphere of fear, abandonment of hopes, capitulation, panic.

That was not the case this week, when on Monday the market surged on the "news" of better times for Cisco. The market surge on Tuesday was set off by the reported rise in retail sales and better earnings by Wal-Mart. The feeling was "this could be the bottom." This is not the kind of sentiment that accompanies major market turns to the upside.

Next -- the power of the ratings agencies of S&P, Moody's and Fitch are not fully appreciated. A "bad mark" from one or all of these outfits can kill a company's bonds and almost sink a company. Warren Buffett bought a big chunk of Moody's. Wonder why?

S&P announced yesterday that it would change its assessment of corporate performance by taking into account the cost of stock option awards. That alone could cause a big change in the earnings of many corporations.

S&P will also take into account the profits from optimistic estimates of corporate pension plans. In other words, companies will not be allowed to include as profits over-estimates in their pension plans.

Next, the strength of the dollar. I just ran a ratio of the Dollar Index against the euro. The most recent trendline on this ratio runs from March 2, 2002, down to the present. It shows that the peak of dollar strength was recorded on May 6. But the trendline reversed to the upside on May 13. In other words, on a trend basis the euro has been stronger than the dollar since May 13. It will be most important to see whether this new trend in favor of the euro continues.

In this business, what fascinates me the most is the broad trends of history and the occasional critical reversal of those long-term trends.

I believe we're at the crossroads of the battle between financial assets and tangible assets. Today you can almost sense the action in tangibles. In California the median price of a home this year is up 19% over 2001. Auction prices of art objects are booming. Gold and silver are creeping higher. Diamonds and top-quality jewelry is firm. Land prices are strong

In the meantime, stock are very mixed but on the whole they are wobbly and overpriced. The broadest stock indices are declining even while some special groups such as home building remain strong.

A biggie, a major trend change occurred in August 2000. August 2000 represented the peak of strength for the S&P against gold. Since then the ratio has declined in favor of gold. In fact, in December 2001 the 20-month moving average of the ratio crossed below the 40-month MA, meaning that the trend towards gold has long-term implications.

Another trend that I see materializing is one that I've talked about frequently. It's the trend of the need for INCOME.

Stocks today, broadly speaking, provide no dividend income. A study of history shows that roughly half of the total return to stockholders over the years has come from dividends. Today few stocks pay attractive dividends and a huge list of stocks pay no dividends at all.

The zero-dividend stocks got away with this during the bull market when most stocks were advancing. But that has changed. Now the majority of stocks are declining, and stock-buyers can no longer depend on capital gains when they buy a stock.

I can see the time coming when people will ask, "What's the dividend, how safe is it, and how long has the company paid the dividend?"

Question -- "Russell, you say this is a bear market? If that's true, how can you expect tangible items to continue to rise if the primary trend of the stock market is down?"

That's a good question, and so far most tangible items have been rising (I believe) in reflection of the all-out inflationary policies of the Fed. But if the Fed loses control of the situation, if the forces of debt overwhelm the forces of inflation, then it could be a new ball game, -- and the great need will be for liquidity.

If that happens, then the price of almost everything could decline as the rush for dollars ("legal tender") overwhelms every other trend. But since gold is intrinsic money, money that cannot go bankrupt, gold could be the one item that would rise in the face of a deflationary collapse.

Question -- You say gold is in a bull market. How long do you think the gold bull market could last?

In January 1997 the 20-month moving average of gold crossed below the 40-month MA, meaning that gold was is a pronounced downtrend or bear market. In February of 2002 the 40-month MA for gold turned up. As of now, the 20-month MA of gold is about a month away from crossing back ABOVE the 40-month MA.

This crossing would be of major technical significance. The recent bear market in gold lasted roughly five years, counting from the bearish crossing to the impending bullish crossing.

When these long-term crossings take place, they tend to last quite a long time. As a guess, I believe the bull market in gold following the bullish crossing (which should take place next month) will last around five years, or perhaps as long as the preceding gold bear market.

Thus, I see gold in a long-term bull market, but with many stumbling blocks and counter-moves. Remember, the last thing the central banks want to see is a bull market in gold.

Question -- "How can Greenspan, who, when he was younger, warned against deliberate government inflationary policies, -- how can he justify the tremendous increase in the money supply of the last few years?

My own take on Greenspan is that he is nearing retirement and he wants to keep his "guru/maestro" reputation intact. Like Clinton, Greenspan wans a legacy. To do that he can not leave office with the nation in a deep recession. Therefore, Greenspan is taking the calculated risk of booming the money supply, depending on this procedure to re-ignite the boom -- or at least to hold off a collapse.

Greenspan may be thinking that if the Fed can hold off trouble for another year or so, he, Greenspan, will be retired, in which case the next Fed Chairman can wrestle with the economy.

Debt, debt, debt -- How big is US debt at present? US debt is now 300% of the total GDP of the nation. This compares with 1929 at which times US debt was 260% of GDP.

As for foreign holdings of US securities, foreigners hold 10% of all US stocks, 37% of US Treasury debt, 13% of total federal agency bonds and 23% of all US corporate bonds. Will foreigners continue to hold these massive amounts if the dollar continues to weaken? That's the trillion dollar question.

Question -- "Russell, I note that you are referring increasingly to the very long-term 20-month and 40-month moving averages? Why is this?"

I'm using the very long-term moving averages because there's so much flagrant manipulation in the markets today. Inflated earnings, manipulative CEO's talking on CNBC of CNN, deliberate fraud in earnings reports. It's as if nothing is honest today.

You can manipulate the near-term trend, but you can't manipulate the long-term trend of the markets. Thus, I have turned to the long-term moving averages to define what the real trend of the markets and various averages and groups are.

I'm always interested in how "the general market" is doing -- that is from a major or primary trend standpoint. So what markers do we have? I look at the following --

The Dow Jones Total Market (listed daily in the WSJ) is down 3.99% for the year. The broad Wilshire 5000 is down 2.78% for the year. Investor's Business Daily's Mutual Fund Index is down 7.3% for the year. The S&P 1500 Index is down 3.09% for the year.

Take your choice -- those four give you some idea of the total stock market picture -- stocks are DOWN for the third year in a row, at least so far.

TODAY'S MARKET ACTION -- The market failed to make it the much-desired three days in a row on the upside.

My PTI was down 2 to 5292 with the moving average at 5319. PTI remains in its bear mode.

The Dow was down 54.32 to 10243.82. There were no movers in the Dow today.

June crude dropped a big 1.21 to 28.15.

Transports were up 29.74 to 2797.98.

Utilities acting poorly, down 4.20 to 393.91, and I wouldn't blame anyone for taking profits in utilities now (or losses as the case may be).

There were 1693 advances and 1498 declines but up-volume was 620 million shares and down-volume was 776 million shares.

There were 146 new highs and 32 new lows.

Total NYSE volume was 1.40 billion shares.

The S&P was down 5.26 to 1091.00.

Nasdaq was up 6.52 to 1725.57 on 2.22 billion shares.

My Big Money Breadth Index was down a surprisingly large 8 to 810 (the low for the year was 804).

June Dollar Index down a big .88 to 114.37. June euro up.75 to 90.95. June yen up .53 to 78.45.

June Nikkei up 30 to 11,605.

Bonds a bit higher, the June long T-bond up 8 ticks to 100.12 to yield 5.74%. June 10 year T-note up 8 ticks to 104.23 to yield 5.25%. June muni futures up 6 ticks to 102.21.

Gold is backing-and-filling but still well above its rising 50-day MA; June gold up 1.40 to 309.00. July silver up 3 to 4.63. July platinum down .40 to 532.90. June palladium down 15.00 to 368.00.

XAU down .60 to 75.74. The Gold/Dollar Index was 270.34, up 3.44. NEM was down .38, AEM down .20, AU down .48, PDG down .09, HL up .06. Stocks got ahead of the metal and the situation may now be correcting.

McClellan Oscillator at plus 3 today on a weak rise.

STOCKS -- My Most Active Stock Index was down 3 today to 408.

The 15 most active stocks on the NYSE were -- AOL up .30, SGP down 3.49, GE down .65, ABT down 4.84, TYC up .32, EMC down .12, DYN down .85, AWE up .03, L up .62, HPQ down 1.15, LU down .15, C up .3, T down .05, AIG down 2.17 to a surprising 65.90, MOT up .09.

Others -- CA down 1.35, IBM down .98, ELN down 1.29, MER down .90, CSCO up .11, KBH down 1.01, GM down .72, TXU down .86, PG down .90, UTX down .45, MSFT down .13, JPM down .63, YHOO up .23, AMZN up 1.13.

CONCLUSION -- The dollar could be the KEY here -- it's acting poorly. Also, I do not like the action of the utilities, and utilities tend to be a lead indicator. The market was somewhat oversold at the beginning of the week, and the action so far could just be a working off of the oversold condition.

But I'm not in the mood to outguess this treacherous market over the short-term, so I'll defer to my PTI, which remains bearish.

I note also that in days like today when the breadth is positive -- downside volume is ahead of upside volume. And volume tends to lead price.

Looking forward to Thursday,

Russell

When I first moved to San Diego in 1961 this was sleepy little Navy town with the world's best weather and a population of about 120,000. My Eastern friend didn't even know where San Diego was ("Hey, is it north or south of LA?"). Gradually, the place began to fill up and more recently the population has been booming (as has been the price of real estate)/

The current issue of Forbes lists San Diego as the number 1 place to do business in the West.

The Forbes write-up is below --

San Diego, Cal.
Job growth 21%.
High-tech GDP growth 86%.
Population 2,820,844.

Has the most diversified high-tech economy in the US, with hundreds of biotechs, communications, software, internet and information technology outfits. Oh yeah: Great climate, too.


I've said for years that California would not always stand for all that potential tax money going to near-by Las Vegas. And now it's happening. California's bettors provide 35% of the revenue garnered by Nevada. The battle is on.

Forty-six Indian tribes in California now have gambling properties that together earn about $5 billion a year. And the Indian Casinos are getting fancier and more sophisticated. For instance, Pechenga reservation between San Diego and LA will soon have a 522 room hotel, a collection of restaurants, and a hall for touring Broadway shows. And for Californians, its hundreds of miles closer than Vegas.

The Cal casinos are packed with gamblers, and its starting to scare Las Vegas and Reno. My bet is that over the next five or ten years Las Vegas will be losing a load of money to the upstart California casinos. I call it the revenge of the Indians.