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Tuesday, November 6, 2007

Richard Russell's daily comment

November 5, 2007 -- From Saturday's New York Times: "A separate survey of households, also conducted by the Labor Dept. presented a very different picture of the job market. It showed that fewer Americans over all were employed in October. The labor force shrank by 211,000 jobs, and 465,000 Americans said they were no longer working or seeking work."

Russell Comment -- Which Labor Dept. report do you believe, the bullish one that was highly publicized or this one -- they were both issued at the same time by the same Labor Dept. Incredible duplicity -- or is it just government stupidity?
My secret suspicion, and it's just a suspicion. It's that the US is on the verge of recession. But c'mon, what do I really know about the future? Not that much, I just listen to the language of the markets, and if I'm intelligent enough or lucky enough I can get a handle on what the markets are saying.

Most of the time, the markets are just jabbering away (like Richard Russell), they're not saying anything important. But then there are those rare occasions when the markets are saying something new and different, and at those times, dear subscribers, we had better damn well listen.

What, you don't believe me? OK, I'll give you an example. Right now we're hearing countless variations and varieties of opinions regarding what to expect during the rest of this year and into 2008. Real estate, interest rates, exports, US current account, the dollar, the stock market, gold, silver, inflation -- you name it, and a gaggle of "experts" are going to spout forth their opinions.

And that's all they're giving us -- their opinions. Sometimes those opinions are invaluable, but most of the time their opinions are either worthless or actually deceptive.

However, there is one opinion I respect, and that's the consensus opinion of everybody when it's expressed through their hard-earned money. That opinion, and you've probably already guessed it, is what comprises the markets.

Let's take an example. And this is one of my favorite examples. It's called the Wilshire 5000, which is an index made up of the dollar value of roughly all the stocks on the NYSE, the NASDAQ and the AMEX. Interestingly, the Wilshire is expressed in dollar terms, so, for example, 15000 on the Wilshire translates into fifteen trillion dollars. A decline from 15000 to 14000 in the Wilshire means a loss of one trillion dollars in terms of stock values.

I'm including a point&figure chart of the Wilshire 5000 below, so let's have a look. Here's what I see. I see two recent upward-pointing spikes -- the first spike rising to 15900, the second rising to 15700. Note that the second upward spike turned down well below the previous spike, and I don't care for that kind of action, it's simply declining tops. Furthermore, I don't like the fact that following each spike the Wilshire came down to the 15100 to 15150 zone. What that means is that all those who bought within those two spikes have now been left high and dry. They're locked in at higher prices. And that can turn out to be an ugly situation.

But here's the really important point. We now have a double bottom at the 15100 box level. From the bullish standpoint, it is now extremely important that the Wilshire HOLD at the 15100 level. If the Wilshire breaks down to the 15050 box, that would be very bearish action. It would be particularly bearish since it would come following those two upward spikes.

A drop to the 15050 box would mean that a heck of a lot of investors were trapped at higher prices, and suddenly the floor has been pulled out from under them. So let me put it this way -- I would take a drop to the 15050 box as a very bearish turn of events -- one that could easily lead to a Dow Theory bear market signal.

There, you see, that's the stock market providing us with some very valuable information. It's information that not one out of a thousand people are aware of. The market is not telling us whether the Wilshire is fated to break down. Nobody has that information. But the market is telling us what to expect IF the Wilshire holds or if the Wilshire breaks down. Hey, I'm not greedy. I'm thankful for that information. That's better information that anything I'll hear from Bernanke or Paulsen or Greenspan or the best analyst at Goldman Sachs.

So 15050 on the Wilshire, I'll watch that number like a red-tailed hawk watches a field mouse. And thanks, Mr. Market, many thanks for the info. I appreciate it. Your long-time student -- Richard Russell

Notes -- Lowry's Buying Power Index is near a seven month low, while Selling Pressure dominates Buying Power by a big 152 points. This is a huge negative. What's happening is that the great majority of stocks are failing to advance or even stay even with the major averages. Historically, this had led to trouble. Which, by the way, is where I suspect we are heading. My PTI as of today's close is only 14 points above a "sell signal."

Gold chatter -- Meanwhile, there's a lot of yada yada being shoveled out about gold. I read in today's Financial Times that gold has been advancing because the dollar has been going down, but if the dollar rallies gold will take a dive. Then I read in our local newspaper that gold has been going up because the mines in South Africa are producing gold at their lowest rate in years. An article in a current magazine informed me that gold has been going up because "speculators" are driving up the price based on a general rise in all commodities. Guesses, rumors, theories, baloney.

My own take is that gold has been rising in reaction to the trillions of dollars, rupees, pesos, rubles, reals, yuan etc. that are flooding the economies of the world. An ocean of paper is being created and as the purchasing power of all this paper is diluted, it requires an increasing amount of any given currency to buy given unit of the ultimate tangible money -- gold

Actually, a lot of other tangibles have been rising in terms of paper money. Classic paintings have been rising in terms of fiat money, the price of outstanding collectibles has been rising, the price of beach front property around the world has been rising, gem-quality diamonds have been rising in price, classic car prices have been rising. And on and on. You probably have your own list. Put it this way, if its a genuine tangible, it probably taking more fiat money to buy it.

However, there is only one tangible that is immediately accepted around the world, only one tangible that can be bought or sold in any quantity at any time in any city or financial center -- and that tangible is the ultimate timeless money -- gold.

OK, more charts. The first chart below is one of my favorites -- the end-of-the -month chart of gold. Each last day of the month is charted, and this eliminates all the daily and weekly fluctuations and allows us to view the basic trend and price minus these deceptive fluctuations. Such charts tend to display the true underlying trend.

The charts are clear enough. They need no explanations. I might comment that for GDX (a proxy for the gold shares) you can see how difficult it has been to stay with the trend. Since 2001 there have been a number of white-knuckle corrections, but each time GDX has broken out to new highs. Since GDX is also affected by the general stock market, the moves have been more erratic than have been the moves in gold itself.

TODAY'S MARKET ACTION -- My PTI was down 6 to 5956. Moving average was 5942, so my PTI remains bullish but only by a shrinking 14 points.

The Dow was down 51.70 to 13543.40. No movers in the Dow Today.

December crude was down 1.95 to 3.98.

Transports were down 24.66 to 4778.09.

Utilities were up 3.74 to 529.58.

There were 772 advances on the NYSE and 2538 declines. DOWN volume was 78.0% of up + down volume -- not a good day.

There were 57 new highs on the NYSE and 270 new lows. Bearish reversal here -- my 5-day high-low differentials declined from PLUS 202 last Friday to MINUS 256 today.

Total NYSE volume was 3.42 billion shares.

S&P was down 7.48 to 1502.17.

NASDAQ was down 15.20 to 2795.18.

My Big Money Breadth Index was down 2 to 847.

Dollar Index was up .11 to 76.45. Euro was down .30 to 144.68. Yen was up .28 to 87.46. Canadian dollar (Loonie) was up .27 to 197.29. Brit pound down .85 to 208.03. Suggestion -- cancel your out-of-the US vacation and switch to NYC or Miami or even La Jolla.

Bonds were a bit lower -- Yield on the bellwether 10 year T-note was 4.31%. Yield on the 30 year T-bond was 4.61%. Yield on the 91-day T-bill was 3.58%.

CRB Commodity Index was down 2.15 to 452.9.

Dec. gold was up 2.30 to 810.80, a new recovery high. Dec .silver up 18 to 14.78, also a new high. Jan. platinum up 3.80 to 14.65, a new record high. Platinum is now so expensive that they're substituting palladium in wedding rings for platinum. Ladies, don't let them do it to you, make 'em give you that ring in platinum.

ABX up .42, AEM down 1.21, ASA down 1.42, NEM up ,73 to a recent recovery high of 52.34. Ah, I never lost faith in dear old Newmont.

GDX down .27 to 50.44. HUI down 2.63 to 436.73.

Gold was up today, even though the dollar was also up. We don't see that too often. If the stock market continues to sag, the Fed is going to pour more gasoline on the fire and maybe drop Fed Funds another quarter. If we get a bear signal, I'd almost bet the Fed will drop rates another quarter -- I know I would if I were Bennie S. All of that is good for gold.

STOCKS -- My Most Active Stocks Index was down 8 to 539.

The five most active stocks on the NYSE were -- C down 1.83, EMC down 1.06, F down .28, MER down 1.40, and BAC down .66.

Wash. Mutual, Morgan Stanley, Wells Fargo, AIG, Goldman Sachs, Wachovia, Countrywide Financial , JP Morgan were all on today's most active list and ALL were down. The Street is receiving its Baptism of Fire, but it'll survive. Usually, it's the customers that get killed, this time it's the boys on Wall Street that are getting killed right long with their customers. A lot of jobs are up for grabs on the Street, but you don't want them -- too much pressure.

Board to the CEO -- "You idiot, you screwed up royally. Now take your hundred million and get the hell out of here."

The VIX was up 1.30 to 24.31, whew, it's getting hot in here.

CONCLUSION -- It's never easy in this business, but the way things are going, it's really, really not easy. I hope all my subscribers are in good shape, no margins, no overloads in common stocks, plenty of gold and well, we'll see whether we get that bear signal or not. So far, the market has been descending rather slowly and politely. That's OK. Makes people think that everything's all right.

I'm ready to Tuesday --


Don't miss this one! Get on the YouTube site. Then click on to "The Long Johns, the Last Laugh -- subprime." This skit is a howler, please don't miss it.
"I'm thinking about buying a house in America," said a Frenchman at a dinner party last night. "Prices are so low. This looks like it could be a good opportunity. You probably won't believe this, but you go into almost any real estate office in Paris and you'll find houses listed for sale in Florida. And it's amazing what you can get for your money…a place on the water, with a swimming pool…in the Tampa area. It's listed for just $300,000. We couldn't get anything similar in France for that kind of money.

"One thing that is most astonishing to us in Europe is that Americans don't really have much money. They earn a lot…or they have earned a lot…but they just don't have much to show for it. I know people in California who earn very high salaries. Here in Europe, even with our high prices, you would live very well if you earned that kind of money. But they have children in private school…they pay a fortune for health insurance…and they have these gigantic mortgages. After they've paid those expenses, they just don't have much left." Above two paragraphs courtesy of Bill Bonner from the Daily Reckoning site.

I've been writing about the markets for about half a century, and I've never had a dull moment doing it. Furthermore, I've always made a good living doing what fascinated me. But one of the great pleasures in this business is receiving e-mails like the two below.

I've been a subscriber for over 30 years. I've respectfully disagreed with you a number of times on social issues, but following your investment advice has been rewarding far beyond my wildest expectations.

Early on, I took what was for me a major position in the gold shares and coins you recommended and I've seen my $150,000 grow to more than $450,000. And I'm not trading any of it until you give the word. It's not a lot of money by todays standards, but I'm happy and very grateful to you.
Thank you,
Al Olson

Richard --
Having intended to thank you many times in the past, your statement that you don't know how many subscribers took your advice to buy and hold gold and gold shares has prodded me to let you know that I, for one, did--and have profited greatly from it. Four years ago, I put all my IRA funds into stocks of major gold producers, and my somewhat smaller separate savings into gold coins. I began giving gold coins as gifts to my children and their spouses, and silver coins to my grandchildren, instead of trying to pick the right size and color and suitability of ephemeral items. The initial gold coins that I bought are, of course, now worth about 250% of the original purchase price, (in depreciated dollars.)

I gave some of my copies of Dow Theory Letters to my two fifty-something sons and discussed my belief that they contain vitally important information about money and finance. They profited from the education, invested their retirement accounts in the USAA Precious Metals fund, and are grateful (!) to their old man for his advice.

So many, many thanks for your sharing your knowledge, insight, and guidance! Incidentally, we share the same birthday on July 22.
Al Heiser


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