the dow: richard russell comments

Dub, if you read this, I see Russell must know you (see comment re taxi driver)...


July 31, 2006 -- Why is this such a tough business? In Alan Abelson's current Barron's column he repeats comments by David Rosenberg, Merrill's North American economist. Rosenberg compiles an inflation index of discretionary items, and this discretionary inflation index is now at plus 5%. Rosenberg states that this index is the reason why all the bond managers he runs into are so bearish on Treasuries -- they "feel" the inflation in their every day lives. But Bill Gross, who manages the world's largest bond fund, disagrees. Gross states that "the bull market has begun" for US Treasury debt. Who's right, Rosenberg's bond-manager friends or Bill Gross? It's the trillion dollar question -- but the answer isn't in yet.

Oil --Jim Rogers, co-founder of George Soros' Quantum hedge fund, says, "Unless somebody discovers something very quickly and very accessibly, we're all going to be dumbfounded at how high the price of oil will go, including me." Rogers is predicting that oil could reach $100 a barrel by the end of this year.

But, Francisco Blanch, head of Merrill's commodity research, oil, disagrees. Blanch says that supplies would have to stop from a country such as Iran to drive the price of oil that high.

Russell Comment -- I've been saying that I think natural gas saw its low on July 18 (Sept. futures) at 5.63. NG has been advancing for seven of the last nine days, and this morning Sept. gas hit 7.76. Say "bye" to cheap natural gas.
...............................................................

Indecision. With the Dow Industrial Average indecisive, with the Utility Average at a high for the year and with the Transports plunging below their 200-day moving average, it's time to examine the D-J 65 Composite. This is a composite of all three D-J Averages -- the 30 Industrials, the 20 Transports and the 15 Utilities. Over the years I've often turned to the D-J Composite to provide hints as to which way the market is heading. The chart below shows the D-J Composite fluctuating within a large triangle.

Note that the (blue) 50-day moving average is declining, and the Composite continues to "flirt" either side of it. The question now is whether the Composite will hold above the lower trendline of the triangle -- or whether the Composite will rally above the upper trendline. No conclusion yet.



No conclusion? OK, let's check out the weekly chart of this same D-J Composite. Here we see RSI "trying" to turn up. MACD is in oversold territory, and the histograms appear to be on the verge of turning up. However, the weekly Composite is still below its declining 10-week moving average. I'd call the D-J Composite "neutral," but those histograms could easily be a plus.




I've been receiving a ton of questions about the gold shares. So let's check out the weekly chart of HUI, the gold stock average. Here we note that HUI closed above its 10-week moving average on Friday. MACD has been oversold (first red arrow), and now we see a second area where the blue histograms have backed off but just slightly (second red arrow). The histograms appear to be ready to climb above zero into the positive area. Gold shares, historically, tend to lead the metal. The chart of gold shares is currently stronger than the chart of the metal.



So where is gold in the big picture? Below I'm showing a monthly chart of gold with a 13-month and a 34-month moving average. Gold on the monthlies is clearly overbought, but on the monthly chart gold can go through a lot of rather meaningless action while correcting from its overbought condition. Nevertheless, the wide swings in gold together with its overbought situation suggests to me that gold could have a lot of work to do before embarking on a new major advance.

Based on the chart, I think gold should now head for oversold territory, and this could take time. So I expect a lot of frustrating and really meaningless action in gold -- until we see definite signs of the metal finally becoming oversold.




TODAY'S MARKET ACTION -- My PTI was down 7 to 5677. Moving average was 5685, so my PTI remains bearish.

The Dow was down 34 .02 to 1185.68. No Dow movers today.

Sept. crude was up 1.16 to 74.40. Natural gas surged today, closing at 8.21 on the Sept. futures.

Transports were down 32.91 to 4381.99.

Utilities were down 1.60 to 433.42.

There were 1638 advances and 1602 declines. Down volume was 51% of up + down volume.

There were 94 new highs and 59 new lows. My 5-day high-low differentials improved from Friday's plus 181 to today's plus 194.

Total NYSE volume was a contracting 2.26 billion shares.

S&P down 1.88 to 1276.67.

Nasdaq was down 2.67 to 2091.47.

My Big Money Breadth Index was down 6 to 695.

Sept. Dollar Index was down .10 to 85.09. Sept. euro was up .21 to 128.13. Sept. yen was up .06 to 87.84. The surprisingly strong Brit. pound was up .40 to 187.00 on September.

Bonds were virtually unchanged. Yield on the 10 year T-note was 4.99%. Yield on the 30 year T-bond was 5.07.

August gold was down 1.00 to 646.80. Sept. silver was up half a cent to 11.37.

GDX was down .20 to 38.76. HUI was down 1.00 to 329.21.

ABX up .27, ASA up .01, AU up .23, NEM down .29.

Gold using up time, not giving up much, but not advancing much either. We wait for the "get rich on gold" crowd gives it up and goes home or back to driving taxis.

STOCKS -- My Most Active Stocks Index was down 4 to 348.

The five most active stocks on the NYSE were -- PFE down .12, SCT (Stottish Re. Group) down 12.01, F down .17, CD-WT down .05, LU unch.

The VIX was up .62 to 14.95.

McClellan Oscillator down 25 to +148.

CONCLUSION -- Another confusing day, but my PTI was down 7 so I call it a negative day. We've had a number of impressive up-days, but they're followed up, so I have to call the "one-day wonders." The fact is that the big investment money remains on the sidelines while the hedgies "pick each other's pockets."

By the way, I note that most of the really successful hedge funds are in options, futures, real estate, emerging market stocks, all over the lot and often actually low on US common stocks. The same with the most successful endowment funds (Harvard, Yale, Stanford) which are often low on common stocks and big on alternative investments, stuff you and I can't buy.

See you Tuesday,

Russell

.........................................................................................................................................
Spain has appointed the first woman to the board of their central bank. Furthermore, the Spanish government in June drafted legislation requiring companies to fill 40% of company board seats with women within eight years. Norway will require women to fill 40% of their board seats by 2008. Norway has the highest number of women on boards (29%) of any nation in Europe.

I've always said that you can gauge the level of a nation's advancement by the way it treats its women. And I'm thinking of many Mideast nations where women have very limited rights. This means that in a nation like Saudi Arabia half its population is rendered intellectually useless and subservient. In many African nations, women are treated little better than cattle.
..............................................................................................................................................
Over the past two years (ending in July) corporate insiders sold a massive amount of stock. Here are the top five in that category and the dollar amount of stock that insiders sold --

Google $7.2 billion in stock sold.
Carnival $1.2 billion sold.
Nike $939 million sold
Oracle $881 million sold
Qualcomm $503 million sold.
...........................................................................................
Wise words from Gideon Rachman of the Financial Times --

"Communism finally imploded because it could not produce prosperity. Militant Islamism is bound ultimately to go the same way."

..............................................................................................
Faye and I drove up to Los Angeles yesterday to see friends and business acquaintances, all of them in the movie business. The talk is all of Mel Gibson, his drunken arrest, and his hysterical anti-Semitic tirade. And then there was the added scandal of the L.A's Sheriff's department writing the melee up as "arrested without incident."

But, of course, the ultimate irony has to do with Gibson's block-buster film, "The Passion of the Christ." Jews called the film anti-Semitic, but Gibson denied that his film had any anti-Semitic overtones. Now with the latest Gibson explosion, it is seen that Mel Gibson is right at home with virulent anti-Semitic language. It's amazing what a man will say when his blood alcohol tests way over the legal limit. Let me put it this way, I don't think Gibson will be making any films for major Hollywood studios. But that's OK, Melvie finances his own films, and I, for one, can't wait to see what his next selection will be.
...................................................................................................

From an e-mail just received -- Russell

Hey Russell,

For a data point… I listen to a lot of talk radio in the car like O'Reilly and Savage. Three years ago gold was not really mentioned, now there is a commercial suggesting to buy gold about once per half hour.

Second, I regurgitated your story about gold three years ago to all the guys in my sales team (enterprise software) and was roundly called a fool or not even heard. I was one out of twenty with a substantial gold position. Now, I would say one out of eight are asking me for your web site or how they can buy gold. These are relatively wealthy and intelligent people.

Public interest looks to be increasing, though gradually.

Eric La Rosa
...................................................................................................................................................................


Thursday, July 20, 2006
Ghost Housing Market
Following is an update from Mike Morgan at Morgan Florida.
This entire post is from Morgan so I will skip my normal procedure of indenting.
It is about the "Ghost Market" in Florida.

Mike Morgan:

We recently had two more of Wall Street's finest out on a tour of Florida real estate markets. After the first day, these guys needed diapers. They've been listening to the garbage from home building company management teams and what dribble they hear on the conference calls. I showed them reality, and it hit them like a ton of bricks. Here's a review of reality.

Inventory -- Our current levels are all time highs. We've never seen anything like this. If you want to believe the NAR numbers, so be it. In the previously hot markets, inventory levels are well beyond a year, and in some markets 2-4 years. You have hundreds of thousands of homes in the hands of flippers, not to mention all of the unsold inventory the builders are sitting on, and you still have the normal market of people selling for reasons like death, new job, etc..

Ghost Market -- Why so much inventory? The Ghost Market of so called "investors." These people were not investors. Maybe speculators, but even that is too kind. They were uninformed gamblers. For the last two years, you had better odds at the Big Six Wheel in Vegas. And the builders knew it. The builders saw buyers flipping contracts before closing a few years back. There response was to include a contract provision that you could not assign the contract, and you must close with the builder. They told the Street they were doing this to control investors. Well, that's pure nonsense. If they wanted to keep investors out, they could have demanded sworn affidavits. They could have put deed restrictions in regarding sale and rental of the home. But there logic was not to eliminate investors from the market, but rather to capitalize on them. So with assignments prohibited, the new wave of lemmings had to buy from the builders. And away we go! So now we have a market flooded with people that had no intention of living in the home. When, in the history of the world, have you seen millions of people buying multiple homes like a box of donuts? Like donuts, the value of these homes is dropping as they sit on the market.

Quality - Builders have been selling the vast majority of their homes to flippers. Flippers don't care about quality. Rarely does a flipper order a competent home inspection. Rarely does a flipper even do a walk through. They are only concerned with flipping the contract as soon as they close. The builders did not let this opportunity go unnoticed. They built lower and lower quality homes, often ignoring building codes. How? In many markets the pace of construction has outpaced the ability of the local authorities to inspect homes, so these markets allow the builder to hire their very own private inspectors. Now if you hired an inspector that flagged your homes, how long do you think you would keep that inspector? So the builders find inspectors that are willing to look the other way. Many of the homes on the market today do not meet building codes. We are seeing an escalation of defective roofs, defective trusses, defective stucco and the list goes on. We actually set up a website to help home buyers with information. I'd like to report on all of the home builders, but for now our site is focused on just one builder www.Lennar-Homes.info. We'll be adding new sites over the next few months.

Location - Once again, builders realized they could sell anything as long as they pegged it as "pre-construction." Building next to dumps, rail lines and depressed areas became the norm. Flippers never bothered to visit the sites. Let's look at Miami. Out of area flippers just hear two things. "Miami" and "pre-construction." Our trips through Miami reveal that many of the construction zones are in depressed areas full of crack houses, empty warehouses and worse. The flippers didn't care, and neither did the builders. But the "real" buyers that might live in these condos and homes care. And they are not going to buy these projects.

Cancellations - If you think the cancellation rate is less than 50%, I've got a bridge for sale. Flippers are dumb, but they are not going to wipe themselves out. If they bought a property for $500,000 and it is now selling for $400,000, why would they close? They will simply walk away from their contract, leaving the builder with more unsold inventory. Here's one example to drive this point home. An investor client of ours was recently released from his contract price of $490,000. The builder just resold it for $315,000. That's a "real life" example. That's a 36% haircut for the builder. Margins? There are none at these prices. P/E ratio low? How about no P/E ratios? One final note: The flippers have about 3% in closing costs with the builder. Then they have about 10% with the new buyer. So they need a 13% increase in price to break even. What would you do if prices have already fallen by 20%? Lose another 7% or walk away from the contract?

Affordability - Prices skyrocketed artificially because flippers did not care about price. They only cared about one thing . . . We're they getting pre-construction pricing? Now we have a flood of inventory on the market that buyers cannot afford. First time buyers generally need homes under $300,000. Even in previously hot markets like Port St. Lucie, we saw average home prices rise above $300,000 for pre-construction homes. And the high end market is not immune to this problem either. Buyers that purchase million dollar plus homes are far more astute then the first time buyer. The high end buyers read the Wall Street Journal and follow the numbers. They see the massive build up of inventory, and they all tell me the same thing. "We're looking, but we're going to wait till prices come down." And with that kind of logic, prices will continue to drop.

Interest Rates - Compounding the affordability problem are interest rates. A little over a year ago a buyer could secure a $300,000 mortgage for $1,250 a month (less if they used an ARM). Now the same buyer is looking at a $1,750 mortgage or $6,000 a year more in mortgage payments.