Richard Russell June 4, 2007 Daily Remark

June 4, 2007-- (Bloomberg) -- China's benchmark stock index plunged 7.7 percent after the government's main business newspaper signaled officials won't try to halt a slump that's erased more than $350 billion of market value in four days. The CSI 300 Index dropped 292.52 to 3511.43, the biggest points slide on record. The measure, which doubled in the past six months, has tumbled 16 percent from its May 29 peak after the government tripled the tax on share trades to 0.3 percent. Russell Comment -- So far, China's plunge hasn't rubbed off on other exchanges, not even on other Asian exchanges.
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(Bloomberg) -- In the options market where the savviest investors take apart conventional wisdom, the Federal Reserve is facing growing pressure to consider raising interest rates as soon as December. Russell Comment -- Just a few months ago leading fund managers were predicting two interest rate cuts by the end of this year. Oh well --
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Last week the D-J Industrials and the Transports recorded new record highs. So did the D-J Composite, the S&P 400, 500, and 600, the NYSE Composite, an the broad Wilshire 5000, the Amex and the Valueline along with new highs in the Russell 1000, 2000, and 3000. That's quite a list, and in view of this extensive list of new highs, it's hard to believe that this market is heading anywhere but higher.

Question -- Russell, I understand that the market is bullish and that your PTI continues to advance to new highs. Yet, according to this week's Barron's the dividend yield on the S&P 500 is 1.81%. -- and the dividend yield on the D-J Industrial Average is 2.2%. So don't you hesitate to buys stocks when prices, at least from an historical standpoint, are so overvalued?

Answer -- I grew up in an era when a "good" stock would do well at ten times earnings while providing a dividend yield of 6%. That's a far cry from the values of today. On Dr. John Hussman's site he makes the following statement, "On normalized earnings, the S&P 500 continues to be priced at the highest multiple in history except for the late 1990's bubble and the beginning of the subsequent plunge."

That statement alone is cause for caution. Yet, in the face of classic overvaluation the stock market plows ahead. Beyond all other considerations, the stock market is subject to the laws of supply and demand. On a trend basis, the current Lowry's studies show that demand has been increasing while supply or the desire to sell has been decreasing. Why this is? It's difficult to say. The stock market is a discounting mechanism, and obviously investors see something ahead that is causing them to be bullish -- bullish enough so that they want to buy stocks despite all current value considerations.

Like my PTI, the supply-demand equation which Lowry's measures does not explain WHY demand is so insistent, it merely tells us that it IS persistent. It's our personal choice to go with the trend of the market, to go lightly and conservatively with the trend -- or to step aside because of our concern with valuations.

I feel it's my duty to provide my subscribers with both sides of the picture. Yes, stocks look as though they want to go higher. Yes, the forces of supply/demand favor higher prices. And yes, stocks, based on historical measurements, are expensive.

Question -- OK, Russell, so in view of all of the above, what are you personally doing in this market?

Answer -- I have a very smart wife, she's a corporate lawyer, and she's got a very level head. I don't do anything unless we both agree on our strategy. Faye has developed into an expert chart-reader. She also knows the meaning of overbought and oversold. Many months ago we took what I would call a conservative positions in oil stocks and oil ETF's, raw material ETF's, some utilities, and PPA and PHO. We always keep positions in muni bonds and gold.

I've been dealing with the stock and bond markets for fifty years. There have only been about four times in the past when I've gone all-out in the stock market, when I've been what you'd call 110 percent invested. Those instances were always (with the exception of gold) when the market was down and stocks were clearly undervalued. This is not one of those times. Stocks are not "down" and they're not undervalued.

Now understand me, it appears that a great era of optimism and speculation is here and probably a great deal more of it lies ahead. There's no question in my mind that the US public has remained on the sidelines during the last few years. The retail stock-buying business is moribund. There's just no excitement on the part of the public. If you remember the late-1990's, that was excitement. The public was in the market up to its eye-balls. The talk everywhere was about the stock market. Initial public offerings were fought over. Customers were berating their brokers if they couldn't get a piece of some new issue. Tech stocks were going wild. Everybody wanted to get into the act. The stock market was viewed as a waiting gold mine.

We have none of that today. New highs in the major averages are greeted with a blank stare. However, I can't remember a situation in which the major stock averages were recording new highs day after day, week after week, when the public didn't ultimately joined in the fun. Maybe it will be different this time, but I doubt it.

All of this leaves you and me with the choice -- should we invest very conservatively, should we be fully invested in this market, or should we pretty much stand aside and watch the show?

I can't tell you which path to take. Each investors has his own tolerance for risk. Me, I take the conservative approach and so does my wife. For my offspring (I manage their accounts), it's a different story. I opened their accounts and took initial positions back in 1982, I've been compounding their accounts ever since. Whatever money arrives each month in the way of interest or dividends, I invest. Where I can, I opt for safety and dividends. Lately, I've been buying EGLE, TMA, PFE, XOM and COP. I'll almost surely stay on this path, the compounding path. This is the path I've advised for my subscribers over the years.

I view this compounding process basically as buying income. If stocks go down, I'm able to buy more income. If stocks go up, I'm simply more careful. That's my position in investing. I find it to be easiest on my nerves, and it leaves me to making the fewest decisions. Just buy the best stocks, the steadiest stocks, and the ones that throw off the most attractive income.

Question -- Do you think we're in a bubble type atmosphere?

Answer -- From the standpoint of values -- yes. Famous value investor Jeremy Grantham, founder and chairman of GMO, a Boston global investment management firm ($145 billion in assets) believes that we're experiencing history's first worldwide bubble. He states, "From Indian antiquities to modern Chinese Art; from land in Panama to Mayfair, from forestry, infrastructure, and the junkiest bonds to mundane blue chips, it's bubble time'. Then he warns, "Every bubble has always burst."

So the question again is -- do I think that we're experiencing a bubble, an international bubble? Yes, I do, but that doesn't mean that it's not going to be a much larger bubble, because I think it will be.

Question -- What's going on with the US money supply? I'm hearing all kinds of talk about an expanding money supply.

Answer --The yield curve has unwound, it's no longer inverted. The residential mortgage market is tightening, and the Fed is no longer accommodative -- in fact, Bernanke states repeatedly that he's worried about inflation. But strangely, the money supply continues to expand. There's an interesting site entitled, "now and futures.com," which traces M-3 via it's own formula, and according to this site M-3 is now advancing at an annualized rate of over 14%. In other words, the money supply has moved up and out of the control of the Fed. The surging M-3 has probably gone a long way towards keeping the US economy growing, this despite the still-dismal real estate market.

Question -- Russell, according to Stock Market Cycles advisory, we have now seen a record 241 consecutive weeks in which there were more bullish advisors than bearish (figures compiled by Chartcraft). What do you make of this, isn't it bearish when the majority of advisors remain bullish?

Answer -- In my half century in this business, I've seen many popular technical indicators gain favor and then fail or fail to elicit investor interest (remember the odd-lots?). I'm beginning to think that the percentage of advisors bull or bearish has joined the "useless indicator" bin. The study just doesn't seem to have meaning any longer. After all, we've seen almost a half a decade with advisors bullish over bearish, and what's the result? Nothing. Or let me put it another way, if a bull market climbs a wall of worry, this bull market has double-crossed us by climbed a wall of advisory bullishness.

Question -- I note that the Commercials in gold have pulled back on their position in futures for three weeks in a row. Isn't this a plus for gold?

Answer -- I would say "Yes." If this was just short covering, the open interest in gold contracts would be contracting. But actually, open interest in gold has just risen to a new high. Thus it's clear that while the Commercials are cutting back on their short position, someone else has been buying. All in all, this should be bullish for gold.

I also thought the following from this week's Business Week was significant --

"Gold, long considered by Asians to be lucky and the only store of value, is getting a boost from the Chinese calendar. Mainland China snapped up 31% more gold in the opening quarter of this year than last, buying almost 90 metric tons. Officials at the World Gold Council trade group credit the Year of the Golden Pig that began in February: It comes along every 60 years. The Council says current demand is the strongest since the early 1990s when inflation fears and currency devaluation caused a gold boom in China.

"Most popular among those who find it auspicious to buy gold now: jewelry and 'lucky balls', a small ornament worn around the neck or wrist. In India, the world's largest gold market, first-quarter demand is up 50%. Indians bought 211 metric tons of gold, now at $653 an ounces. The surging economy gets the credit there."

Russell Comment -- Also a plus for gold is the fact that Europe's legacy central banks have been cutting back on their gold sales. While Europe's central banks have been selling gold, Asian central banks have been buying gold. And what does this tell us about the future?

Question -- Russell, a few sites back you showed the Shanghai stock index in a clear parabolic rise. I know this sounds rather "far out," but do you think it's possible that China's stock market has topped out, at least temporarily?

Answer -- Well, yeah, that thought has occurred to me. But the odds are against it. However, it wouldn't surprise me to see the Shanghai market enter a steep correction. So far, the stock markets of the world have effectively ignored the latest Shanghai "shakeout." But I'm watching Shanghai with more than casual interest.

Dollar -- Below we see a daily chart of the US Dollar Index going back one year. First note that the recent rally in the dollar has failed by a wide margin to better the bearish descending (blue) trendline. Next, note that the Dollar Index has stalled at its (thin blue) 50-day moving average. Finally, we see MACD about to drop below its (red) 9-day moving average. If this occurs, the histograms will sink below zero, and the Dollar Index will turn negative. In all, not a healthy picture for the dollar. The dollar rally could be over, which would be a plus for gold.



TODAY'S MARKET ACTION -- My PTI was up 4 to a new high of 5927. Moving average was 5862, so my PTI remains bullish by a big 65 points.

The Dow was up 8.21 to a record high of 13676.32.

Sept. crude was up 1.17 to 68.16.

Transports were down 35.49 to 5290.52.

Utilities were down 1.09 to 518.20.

There were 1841 advances on the NYSE and 1411 declines. UP volume was 57.8% of up + down volume.

There were 332 new highs and 27 new lows. My 5-day high-low differentials rose from Friday's plus 996 to today's plus 1248.

Total NYSE volume was a low 2.21 billion shares.

S&P was up 2.84 to 1539.18.

NASDAQ was up 4.37 to 2618.29.

My Big Money Breadth Index was up 4 to a new high of 817.

Dollar Index was down .28 to 82.04. Euro was up .45 to 134.87. Yen was up .15 to 82.10. Canadian dollar was up .28 to a 30 year high of 94.48 -- this as commodity-rich Canada prospers.

Bonds were higher. Yield on the 10 year T-note was 4.92%. Yield on the long T-bond was 5.02%. Yield on the 91 day T-bill was 4.62%.

CRB Commodity Index was down .21 to 4 11.53.

August gold was down .50 to 676.30. July silver was up a fraction to 13.74. July platinum was up 7.40 to 1303.00.

GDX was down .01 to 40.05. HUI was down .31 to 342.53.

ABX down .22, AEM up .05, ASA down .17, NEM down .10, PAAS up .50.

Gold and gold shares (and silver) stood still today. Total dead heat.

STOCKS -- My Most Active Stocks Index was up 2 to 608.

The five most active stocks on the NYSE were -- SLR up .51, WMT up 1.74, GE up .36, EMC up .23, and PFE down .16.

The VIX was up .51 to 13.29.

CONCLUSION -- It would be nice to see the Transports move up in harmony with the Dow but you just can't get perfection in this market (actually, I believe rising oil prices are spooking the Trannies). Volume unaccountably declined today, but in general I'd call it a bullish day. My PTI rose to a new record high today, which is always a plus.

That about wraps it up for Monday.

Oh, the big news today (at least on the West Coast) was that Paris is going into the slammer. She going amid cat-call and nasty hoots from a mean-spirited crowd. Actually, I was sort of sorry for her. With four daughters of my own, I tend to relate to daughters.

Actually, Paris Hilton is a genius at publicity. What has she done in this world? Literally nothing except to advertise that she's an heiress. But having done literally nothing, she's become a national and even an international "star." That takes some doing. When Paris gets out of jail, she should go into the public relations and publicity business. She's a public relations sensation waiting to happen.
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The following is from today's Bloomberg.

"The G-8 was formed to address problems; ironically, Russia's contribution to the G-8 summit this year will likely be that it is the problem,'' says Gary Smith, head of the American Academy, a research organization in Berlin.

The tensions were already evident last year in St. Petersburg, as Putin teased U.S. President George W. Bush over the lack of progress on democracy in Iraq and U.K. Prime Minister Tony Blair over corruption allegations involving a senior aide. But the outbreak of hostilities between Israel and Hezbollah in Lebanon diverted attention, as the other leaders squabbled over what to say and do about the conflict.

Since then, things have only gotten worse. Russia has argued with the U.S. over its backing for independence for Kosovo, the Serbian province mainly populated by ethnic Albanians, and over American plans to place missile-defense installations in eastern Europe.

"If the U.S. nuclear potential extends across the European territory and threatens Russia, we will be obliged to take countermeasures,'' Putin told journalists from Group of Eight countries June 1, according to a transcript posted on the Kremlin's Web site today. "Of course, we'll have to select new targets in Europe.''

Russell Comment -- "New targets," what does Putin mean? Oh, I get it, I think he means nuclear targets.

One other comment -- Russia's leader, Putin, is an ex-KGB agent. What did the world expect, a flaming democrat? Yet Putin is popular in Russia, where prosperity has reigned for the last five years.

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