richard russell

BEST OF RICHARD RUSSELL

April 2, 2003

If you're me, you read and you listen and you think and you ponder and you talk it over with a few smart people, and inevitably you come to the big question -- What's happening in the world? What's it all about?

Here's my take. I believe we're slowly moving into a world recession or worse, possibly a world depression. Here are some items that I gathered just from today's newspapers. I don't usually pay too much attention to news because all news is history -- it's already happened. But when news goes along with my studies of the markets, I'm inclined to factor the news into my scenario of the "big picture."

Here we go -- An index based on a survey of purchasing managers in 2,500 euro-region companies (poll by Reuters) dropped from 50.1 in February to 48.4 in March. "We see no recovery this year," said Ralph Wiechers, chief economist of Germany's VDMA engineering industries federation which represents 3,000 companies. "This bad news reinforces global manufacturing's helplessness."

Japan's Nikkei tumbled yesterday, dropping a huge 3.7% to 7972, near a twenty-year low, as war fears, weak industrial output and fear of the mysterious SARS virus all hurt stocks. Production in Japan fell 1.7% in February, worse than expected.

The president of the United Auto Workers said that China's low wages and lax labor policies threaten union efforts around the world. The search for ever-cheaper labor costs creates a "race to the bottom," he said. He also suggested that the UAW would be unwilling to make concessions in its contracts with talks with automakers later this year.

"Everyone is looking at an economic situation that is substantially worse that it was one, two or three years ago," said Martin Leach, President of Ford Europe last week.

With sluggish sales and rising inventories, GM announces what it calls the most sweeping offer in its history -- 0% financing for up to five years on nearly every vehicle it's selling.

In the US consumer debt, things like credit cards loans but NOT including mortgages, has risen to more the $1.7 trillion. The American Bankers Association states that the number of accounts passed due on credit card bills rose to a record of 4.07% in the fourth quarter of 2002. Said James Chessen, chief economist for the bankers, "The rise in delinquencies is not surprising given the cumulative weight of layoffs and the poor prospects for re-employment in the face of anemic job growth.

Despite the late payments problem, companies are issuing credit cards at a record pace.

Yesterday marked the end of the first quarter of 2003. How'd we do? The Nasdaq started the second quarter of 2003 up 0.4%. The Dow was down 4.2% and the S&P was down 3.6%. According to Wilshire Associates, stocks are down another $400 billion, so far, in 2003.

According to USA Today, in the last quarter 26% of corporations polled said that business was "better than expected," and 43% said business is "worst than expected." For this quarter 20% of corporations said that business was "better than expected," and 58% said that business was "worse than expected."

But analysts blamed the current quarter's pessimism on the war. As soon as the war is over, they opined, business should get better.

OK, enough already. The above is just a skimpy, quick look at the world and this bear market as the recession-depression is slowly, very slowly developing.

At the very least, you can see how any deflation would brutalize this economy. With corporations loaded with debt and unfunded liabilities, with consumer loaded with debt and many defaulting on their debt, the US is not in a position to withstand any degree of deflation.

This is the reason why Fed Governor Ben Bernanke came out with his now-famous speech which drew attention to the Fed's ability to fight deflation with its ever-busy "printing presses."

On top of everything else, the US is now engaged in an expensive war with open-ended expenses. And at the same time, this administration is engaged in the unprecedented act of lowering taxes during a time of war. All this is part of the government's struggle to ward off deflation and recession at a time when both are threatening. Of course, it also has to do with re-electing Mr. Bush.

The "miracle," so far, is that the dollar is holding up at all. Of course, the Dollar Index is still in its corrective mode following its January-to-March swoon. As I see it, the Dollar Index is now in the act of "hanging on," although the June Dollar Index has fallen back below its 50-day moving average.

As for the Dow, which as subscribers know, I use for my major indicator of market action, as for the Dow its 200-day moving average stands at a new bear market low of 8390 today. The faster-moving 50-day MA stands today at 7988, The spread between the two has widened to 402, its widest since the decline began. Thus, on a smoothed trend basis, the Dow's decline continues to accelerate.

The Dow is now struggling to remains above its 50-day MA. A decisive break below the 50-day MA (below 7988) would turn the secondary trend of the market down. As matters stand, I classify the secondary trend of the market as "neutral-bullish"

I haven't mentioned the 50% Principle in quite some time. What it's saying now is clear enough.

From the bull market high of 11722 to the bear market low of 7286 the Dow lost 4436 points. The midway level of the entire bear market decline so far, is 9504. If the Dow can climb above the halfway or 50% level then according the 50% Principle, the Dow can advance to test its high of 11722.

But as long as the Dow remains below the 50% level (where it is now), then according to the 50% Principle the Dow, in due time, will decline to test its bear market low at 7286.

Thus, if we look at the market in the context of the very big picture, all the rallies and declines, all the spurts and swoons, all the daily and weekly back-and-forth action, is meaningless and relatively unimportant. The big picture is that following the October 9 low, the Dow has been unable to recover even half of its bear market losses.

As long as this is the case, the stock market will remain in the grip of the bear.

Richard Russell’s Dow Theory Letters

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