Believing in fairy tales, Americans have kept stock prices from adjusting to reality. To be sure, if the deflationary path outlined above pans out, they will be forced to understand that the tooth fairy did not put the money under the pillow. At the end of this week the S&P 500 P/E ratio stood at 26.87. Historically ratios above 20 were considered high. A P/E ratio of 15 was considered fair value and when the P/E ratio gets to 10 or under, the equity markets have been undervalued.
(Editor's Note: The following chart shows the S&P 500 would necessarily have to drop 59% to 490 to reflect a fair value P/E of 15)
If we could make the case for vigorous economic growth in 2003, we would be less apprehensive about current stock valuations. However, with pricing power still on the decline, with personal and corporate balances sheets still a disaster and with no end in sight for excess supplies of goods and services we find it hard to be optimistic, no matter how much money Greenspan pumps into the system. If there profits continue to decline, why would capital spending rise? And why would companies not fire workers rather than hire them? And with job losses mounting, why would the housing bubble not implode? And with housing and car markets bubbling in excess thanks to all manner of intervention via printing press money, gold manipulations and perhaps direct equity intervention, why would we expect those major industries to come back any time soon, even if the economy and equity markets in fact did finally hit bottom?
Bullish Markets: Gold, Silver, Gold Stocks & Commodities. The spot price of all four markets is powerfully above rising longer and shorter term moving averages and major resistance levels have been broken through.
For gold, the next major area of resistance is likely to be in the $375 to $400 range. Silver needs to take out $5.00 and then $5.50. The XAU closed the week at 79.51. If it can get through the highs in the 90's of this past spring, gold stocks should be "off to the races."
The U.S. Treasury markets are still technically bullish, but with gold on the rise, and with rates off their lows, most economists are predicting that the bond market may have seen its highs (lows for interest rates). I'm not so sure about that because as long as bad days for equities are good days for bonds. We say that because we think stock have much further to fall. So as long as stock fall without a major plunge in the dollar index, we could continue to see bonds rise still further. Indeed, that is how the Fed no doubts hopes to keep the outrageously overvalued housing market alive. They will go out into the market and buy long Term government debt if need be to drive down long-term rates.
At some point, that policy will fail. We suspect it will be when foreigners finally do lose confidence in the dollar and America. At that time, we expect to see a plunging stock market and a plunging bond market even though the economy will also be heading lower. Normally a weak economy bolsters the bond market but two factors could shake the very foundations of confidence in the dollar and the American economy. Those two factors are: 1) Flight of foreign capital from the U.S. and 2) Massive insolvencies in Corporate, personal and local government debt markets. So what we really want to keep an eye on is that point in time when bad news in the stock market is no longer good news for the bond markets. What that day arrives, we expect to see a massive dive in the bond markets, the dollar market and the equity markets. Conversely, bullish markets should be gold and some of the stronger foreign currency markets.
If the bond market starts crapping at the same time stock pries decline, then we might look for a very rapid decline in the dollar and an approach to James Sinclair's targeted decline of the buck toward the mid 70's on the Dollar Index. At the same time, we would expect gold to take out the resistance levels noted above, the first of which is the $375 to $400 range. So the Treasury markets, which are astoundingly large, should hold a key to the direction of many key markets in the days ahead. A flight out of the dollar and out of the Treasury markets at the same time is the bad omen we must keep watch for.
Bearish Markets: Stocks remain substantially below their declining 200 day moving averages, but above their shorter declining averages. A break below key support levels could trigger a test of the October lows. If those lows are broken, I think we may start to see the beginning of a capitulation phase that is always necessary in order for bear markets to end. A rise above the downtrends could buy more time for stocks, but with the primary direction of the market down, the bear market would not be over.
The other major bearish market of concern is the US dollar. At 102.47, The dollar has fallen decidedly below its uptrend support lines. The next support level is around 90. After that it falls to around 80 and after that to the mid 70's which is where James Sinclair says the dollar may be headed before some sort of gold linking will be required to keep the dollar from heading for zero.
**********
GOLD
With its close at $350.90 on Friday in New York, gold is looking very, very bullish. I thought its performance on January 2nd when the market posted a gain of over 200 points was especially encouraging.
What is my target for gold in 2003? Lets start by looking at the market fundamentals. As noted by Frank Veneroso in his excellent work back in 1998, based strictly the yellow metals supply and demand fundamentals, it should have traded at $600. To get to this price level, no exceptional fear or panic from paper would be required. The only requirement would be for governments to stop dishording, by way of outright sales and gold leasing programs. Based on supply and demand fundamentals as well as short term and long-term elasticity of supply and demand that was the equilibrium price Mr. Veneroso came up with. He proved with little doubt that the amount of gold being dishorded was severely understated by Goldfields, the World Gold Council and others like the CPM group. For an update of Mr. Veneroso's work, the reader is invited to click on to the following link: www.gata.org/Veneroso1202.html.
BLANCHARD SUES J.P. MORGAN CHASE & BARRICK
The following notice was sent out to the clients of Blanchard and Company, the largest gold bullion coin dealer in America:
On December 18, 2002, Blanchard and Company, Inc. filed an antitrust lawsuit against Barrick Gold Corporation, J.P. Morgan Chase & Co., and other, as yet unnamed, bullion banks, accusing them of unlawfully combining to manipulate the price of gold at the expense of Blanchard's clients. Blanchard is paying the costs of the suit.
Barrick has made over $2 billion from its short sales of gold, inherently high-risk speculations that have been profitable in every one of the last 59 quarters. The same type of accounting maze that hid Enron's debts has made it possible for Barrick to manipulate the price of gold without the checks and balances that come from public scrutiny.
January 7, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks www.miningstocks.com
