Richard Russell's daily comment

Not a pretty site….

November 6, 2007 -- Bloomberg -- Even after the dollar lost 34 percent since 2001, the biggest investors and most accurate forecasters say it will weaken further as home sales fall and the Federal Reserve cuts interest rates. The dollar plummeted to its lowest ever last week against the euro, Canadian dollar, Chinese yuan and the cheapest in 26 years against the British pound.

"We've told all of our clients that if you only had one idea, one investment, it would be to buy an investment in a non- dollar currency,'' said Gross, the chief investment officer of Pacific Investment Management Co. in Newport Beach, California, and manager of the world's biggest bond fund. ``That should be on top of the list,'' said Gross, whose firm is a unit of Munich- based insurer Allianz SE.

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There's a problem, and it's a doozie. Maybe it's just as much a question as a problem. Here's the question -- "Can you run a great empire on borrowed money?" My answer -- you can for a while, but only for a while. Eventually, something's got to give. The "give" will come in the nation's currency, in its standard of living -- or in the demise of the empire itself. It happened in Rome, it happened in Britain, and I'm very much afraid it's going to happen to the United States. The big question, of course, is the timing.

I sit here in La Jolla and I do a lot of wondering. For instance, I wonder if we get a primary bear signal, whether that will be the signal for one of the above listed items -- a fall in the currency, a fall in the standard of living or a demise in the American empire itself. Maybe all three, and then again, maybe none of the above, maybe something else that I'm not thinking about.

If we do get a bear signal, and a bear signal is in no way guaranteed, but if we do get a bear signal, and stocks start to head south in earnest, all the talk will be of subprime mortgages and the trouble with the big banks on Wall Street. Yes, that will be very specific and easy for most people to understand. People like answers, very definite answers -- answers with clear solutions.

But it may not happen that way if we get a bear signal. And I keep coming back to that original question. It's a question that haunts me. "Can a great empire continue to function on borrowed money?" You see, that's what worries me. Because there's no question that the United States is an empire with its military bases and influence spread around the world. And there's no question but that the US is running current account deficits of upward of $800 billion a year. And it's the truth that the US needs roughly $2.3 billion dollars coming in every day to sustain us and keep the nation running.

Ah well, I'm reminded of the introduction to a book by James Farrel. It runs like this -- "Alone and afraid, in a world I never made." Of course, I'm not alone, and I don't think I'm afraid. And it's obvious that I never made this world, because if I had made it, I would have made it quite a bit differently.

The current issue of Time magazine surprised me. The issue had a two page report on libertarian, Dr. Ron Paul, the Texas Congressman, who is running for President. Ron believes in the US Constitution. Ron would like to shut down the Federal Reserve and go back to the gold standard. I gather Ron would end the war in Iraq -- further, he would close down all our 120 military bases that are spread across the face of the globe. Ron would legalize narcotics and thereby end our expensive and idiotic "war on drugs."

I guess, to make it short, Ron would pretty much get the government out of our hair, and return it to its original Constitutional form. I'm all for that. Furthermore, I'd mandate that every US Congressman and Senator be fully conversant with the US Constitution. I'd mandate that each and every one of them take an intensive course in Constitutional law. What they'd learn would probably shock them, but they'd get over it.

I'll vote for Ron Paul in the coming election. He's not going to win, but I just can't see myself voting for one of the other candidates. "Why are they running?" I ask. "Do they stand for anything different? Do they question where this nation is heading? Do they ask how this nation is going to continue living on borrowed money? Do they ask why the Federal Reserve was never subject to a Constitutional Amendment?"

You know something -- the hell with it, I'm turning to the stock market. The stock market is easier to understand than are the motives of the men and women who are lusting to lead this nation.

"Take me to your leader". The leader, for my money, is the D-J Industrial Average. So let's take a look at it. The weekly chart is shown below. And what do we see? Well, the Dow rallied to a new record high on October 9. That high was 14164.53. Nice move but it wasn't confirmed by the D-J Transportation Average -- the Trannies halted their climb far below their preceding peak. That raised the possibility of a primary bear signal, but I've gone over that possibility time and time again (don't worry, I'll review it again in a few days).

Referring to the chart, note that the new Dow high was accompanied by a lower peak in the RSI. Furthermore, the new Dow high was also greeted with a lower peak in MACD. Finally, note that the weekly Dow is now below its (blue) 10-week moving average. Nothing fatal in the picture, yet, but it's not exactly a healthy picture either. I mean it hardly makes me want to go out and load up with common stocks at this time.

Below I've posted an up-dated chart of our old friend the Bullish Percentage (BP) of stock on the NYSE. You can see that the BP is now just above 50% -- 51.87% to be exact. This is not a healthy trend, and if the BP drops below 50% it will mean that the majority of stocks on the NYSE are in bear trends. That can't be good. Well, can it?

So what I'm saying is that I'm watching the whole show with eagle eyes (or what's left of my weary old eyes). And I'm less than thrilled with what I see. It's time to be careful, time to be aware of what "could" lie ahead.

I'll tell you one thing that really has been puzzling me. I've written repeatedly that the stock market is in position to signal a primary bear market. But I haven't read or heard a blasted thing about that from anyone else -- nor have I read about it in any other publication. In the 50 years that I've been writing Dow Theory Letters, I've never seen a situation where a primary bear market "could be" signaled and nobody, I mean NOBODY, would even know what happened. It's eerie. It's weird. It's the damnedest thing I've seen in years.

Gold -- has been making upward tracks, and I note that some of the gold-bugs are growing skeptical. A few are issuing warnings. Some of the warnings are based on individual Elliott Wave interpretations. A few of these Elliotteers are showing that gold is entering corrective wave 4 preparatory to the "real" upward explosion which would be wave number 5.

They may be correct, and then again, they may be out in left field. Personally, and I've said this before, there are now too many Elliott experts, and they don't all agree. Personally, I'm staying with market action, and so far, the market action for gold has been good.

The other argument is that "the public is now hot for gold," and that gold has become "too popular and therefore Gold is overbought." My own appraisal is that the public hasn't even begun to buy gold. The average American hasn't the faintest idea of where to buy gold. Furthermore, the average American has absolutely no idea of the meaning of gold -- or why gold is considered real money.

As the rise in gold continues, the chorus of "it's gone too far" gets louder. In fact, I wonder if the camp of the gold sceptics is actually becoming lop-sided (a contrary take on contrary opinion!). Today in the Financial Times I read this about gold (although the Financial Times and its sister publication, the Economist have never liked gold), "As the price approached $800, the momentum of buying interest slowed -- one sign that a correction could be at hand."

So I have three conclusions about gold at this time --

(1) What we're seeing now is not public buying. The public couldn't be less interested in gold. At over $800 a coin, gold is pricing itself outside the grasp of the public.

(2) A surprisingly large number of gold-bugs are calling for a correction in gold. That means these sceptics are on the sidelines and waiting impatiently for a correction.

(3) It's a bull market in gold. In big bull markets, guessing at the start of corrections is seldom a successful or profitable business. Ride the bull.

Here's an interesting test. Go into any privately-owned local store and buy something that costs say $50. Then go to the owner of the store and say, "I'm really sorry, I forgot my wallet. But I happen to have a South African krugerrand with me, and I wonder if you'll accept this in payment?" See what the store owner says. My bet is that he'll turn you down. Why don't you try it?

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China -- Below we see a weekly chart of FXI, which is composed of China's 25 "big companies." I guess you could call FXI the "Chinese Dow." At any rate, China's market over the last four years has been hot, hot, hot.

But over the last few weeks we see RSI severely overbought. We see MACD rolling over. And on the latest action we see a gap in the weekly posting with FXI just above its 10 week moving average at 185. Note the spike in volume four weeks ago, and then the steady drop-off in volume.

Investors in China have opened 46 million trading accounts this year, nine times the number from last year as individuals poured $2.2 trillion in saving into equities. The demand has pushed up valuations of Chinese stocks to the highest in the world. The Index has risen 174% this year alone.

TODAY'S MARKET ACTION -- My PTI was up 4 to 5960. Moving average was 5942, so my PTI remains bullish by 18 points.

The Dow was up 117.54 to 13660.94. Two movers today, AIG up 2.52 and XOM up 2.72.

Dec. crude was up 2.72 to 96.70, new closing high.

Transports were up 40.75 to 4818.84.

Utilities were down .39 to 529.19.

There were 2129 advances on the NYSE and 1196 declines. UP volume was 65.9% of up + down volume.

There were 150 new highs and 211 new lows. My 5-day high-low differentials declined from yesterday's minus 256 to today's minus 367.

Total NYSE volume was a 3.52 billion shares.

S&P was up 18.10 to 1529.27.

NASDAQ was up 30.00 to 2825.12.

My Big Money Breadth Index was up 3 to 850.

Dollar Index down .39 to a new all-time low. Euro was up .85 to a new record high of 145.53. Yen was down.17 to 8.29.

Bonds were a bit lower. Yield on the 10 year T-note was 4.35%. Yield on the long T-bond was 4.65%. Yield on the 91-day T-bill was 3.64%.

CRB Commodity Index was up 5.84 to 458.79 -- a new record high.

Dec. gold was up 12.60 to a new recovery high of 823.40. Dec. silver up 59 to a new 24 year high of 14.83. Jan. platinum up 17.20 to a new record high of 1483.70.

GDX up 1.81 to a new high of 52.26. HUI up 19.12 to a new high of 455.93.

ABX up .94, AEM up 1.82, ASA up 3.96, NEM up 2.16, PAAS up 2.96.

What's to say? Precious metals look good, they look bullish, stay in 'em.

STOCKS -- My Most Active Stocks Index was up 3 to 542.

The five most active stocks on the NYSE were -- C down .82, EMC down .09, GE down .02, CDE up .52, BAC up 1.11.

The VIX was down 2.92 to 21.39 as investors breathed easier today.

CONCLUSION -- Not a bad bounce today, but so far the declines look stronger than the advances. For instance, up volume was only 69.2% while my PTI was up only 4. But hey, give the bulls a chance, we haven't had a bear market signal yet, and that certainly is a huge plus. Nevertheless, caution is the word.

Hmm, gold up 16.40 in the aftermarket to 827.20 on December. Those gold coins must be getting expensive. Even the Krugies are over $800.

Let's see what tomorrow brings.

The R man

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Russell comment -- Mukasey for Attorney General? The confirmation fight is over water-boarding, which Mukasey refuses to admit is torture. The stubborn old fool, of course water-boarding is torture. Try it yourself. Lie on the floor. Put a wet rag over your face so you can't breathe. You'll immediately think you're suffocating. That isn't torture? What the devil is Mukasey thinking, assuming he's thinking at all? Water-boarding was used in South Africa against blacks as a leading means of extracting information. That's when I first learned about it. Mike Mukasey's confirmation will be another Bush disaster.
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I've been meaning to say this for a while, so here goes. I have over ten thousand subscribe residing in the US and all over the world -- from South Africa to China to Brazil to Sweden. How did this happen? One factor, I guess is that if you just hang around long enough and you're not overly stupid, and you don't make too many ghastly mistakes, you tend to gather a following . Of course, the other thing is that I try to present something of value on each site. If my subscribers can pick up one item of value from each reading, I consider that site worthwhile. Of course, there's another factor that has helped me in this business -- I say what I mean, whether it's politically or socially acceptable or not.

Maybe Woody Allen expressed it best when he said -- "Ninety percent of success in life is just a matter of showing up." Wise words.

The great "gift" I receive from my subscribers is information. I perceive my subscribers as 10,000 pairs of eyes and ears from all over the planet. Subscribers may think I don't read what they send me via e-mail, but believe me I do. I read each and every e-mail that comes in, and if a given e-mail is of general interest, I try to include it on the site. Aside from what I receive from my subscribers, I read a lot, and I mean a LOT. I go through 12 newspapers a day and I've lost track of the number of magazines that I subscribe to (you name it, and I probably get it).

At any rate, there's a LOT of info that comes my way, and I want to thank all you subscribers who take the time and trouble to send your items and info to me. It's a huge help, and although there's no way I can write and thank each person individually, believe me I'm thankful.

Ironically, I may add, although I'm a news hound, I base most of what I write on the action of the markets. I guess you could call me a news hound and a market nut.
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Mr. Russell -
It seems the markets swing between 90% up days and 90% down days in a way that I've not seen before.
Is the frequency of 90% days not highly remarkable? Should we expect it to continue like this?
Is it perhaps due to the new era of internet-mediated news and trading causing the herd to swing in ever more correlated (and crowded) waves?
(Oh and maybe a zillion hedge funds all chasing "alpha" like never before?)
Best
MPD

Russell Comment -- This high volatility is a result of (1) huge differences of opinions between various factors in the market , (2) rising fear on the part of investors, who are paying rising premiums for insurance (protection) against a market melt-down.
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Richard

You have written extensively about the nature of the end of a bull market. In a nutshell, you've described it
as the last buyer spending his last dollar. The implication is that the market has just gotten too high,
and the buyers are simply out of money.

I'm curious about if, or how, this idea would apply to the eventual end of the current bull market in gold.
I know that there are many different kinds of buyers for gold, and many different reasons for buying and
holding gold. But, given the Feds marching orders to maintain full employment, and its belief that continuous
inflation is the method-of-choice in accomplishing that mission, (which is tantamount to continuously growing
the economy ), then the above-characterization of the end of a bull market , seems inconsistent.

The relentless inflate-or-die approach will have to end up with "die" winning eventually, because clearly
they cannot inflate forever. That is the implication of the asymetric nature of returns : they can only go
to -100%, at which point the game is over. It would seem that a real gold bull market will accelerate
faster and faster, as more and more people realize what is happening.

Perhaps, in retrospect, the end of the gold bull market will mean that, indeed, the last buyer has disposed of
his or her last dollar, and the economy is now on a gold standard. I suppose this is one meaning to its end.

Regards, Mike Priwer

Russell Comment -- You're asking how the bull market in gold will end. I've thought long and hard about this. It could end in a number of ways. I could end with the current fiat money system breaking down, and a new system with gold-backed currencies installed. Or it could end with interest rates climbing so high that investors would sell their gold and buy bonds yielding 15% or more. It could end with gold simply remaining at some high level, while central banks cut back on their creation of junk currencies.

Frankly, this remains a huge question in my mind -- how will the bull market in gold end? Frankly, I don't think anyone anywhere knows how the gold bull market will end? Does anybody know when the dollar will hit bottom, and at what value vs. gold?

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The article below has the feel and the smell of what's happening and what's going to happen -- Russell
By Steve Schifferes BBC economics reporter, Cleveland, Ohio A wave of foreclosures and evictions is about to sweep the United States in the wake of the sub-prime mortgage lending crisis. This could destabilize the US housing market and may also lead to further turmoil in financial institutions, which collectively own $1 trillion worth of sub-prime debt. Cleveland, Ohio, is an industrial city on the banks of Lake Erie in the US "rust belt". It is the sub-prime capital of the United States. One in ten homes in the city is now vacant, and whole neighborhoods have been blighted by foreclosed, vandalized and boarded-up homes. Many of these homes are now owned by the banks and investment pools owning the mortgages, and the company making the most foreclosures in Cleveland is Deutsche Bank Trust, which acts on behalf of such investment pools. Cleveland is facing a rising crime wave, and the cost of demolishing the vacant houses alone will cost the city $100m of its tax base. According to Jim Rokakis, the County Treasurer for Cleveland's Cuyahoga County, "Wall Street strategies that made the cycle of no-money-down, no-questions-asked lending possible have sucked the life out of my city". Sub-prime lending is spreading across the United States, fuelling the hot housing markets of Southern California, Florida, Washington, DC, and New York City. One in five US mortgages now falls in this category. As the credit crunch continues to bite "families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighborhoods," says Michael Calhoun of the Center for Responsible Lending, which tracks these issues. Sub-prime mortgages carry a much higher risk of default by the borrower than other kinds of mortgage lending. That is because most of them are "balloon" mortgages (technically known as hybrid-adjustable rate mortgages, or ARMs), which offer the borrower a fixed-rate loan for two or three years, and then switch to a much higher adjustable rate after that. Many of them are set to switch in the next two years, leaving borrowers unable to afford the higher payments. There have already been 1.7 million foreclosure proceedings in the US in the first eight months of 2007, and up to 2 million families are expected to lose their homes over the next two years, according to estimates by the US Congress's Joint Economic Committee. But why have so many people in the US taken out sub-prime mortgages? The sub-prime lending market started as a way of lending to people with poor credit history - as long as they had collateral like a house that could be used to guarantee the loan. It was particularly prevalent in inner-city areas, especially among black and Hispanic borrowers. Many of these mortgages were sold by unscrupulous and little regulated mortgage brokers, who received handsome commissions for selling expensive and unsuitable products. Some customers were not told that their interest rates would go up sharply after two years; others were promised they could refinance their home before higher rates took effect. Others found that when they had difficulties paying, huge unexplained fees were added to their bills, putting them further in debt. Some, such as Ron Todd, who lives in a suburb just south of the city, are in danger of losing their home after being made redundant by Northwest Airlines, a big local employer. Others are worried that their neighborhoods - and the property values of their own houses - will be ruined by the foreclosures all around them. According to Claudia Coulton, co-director of the Centre for Urban Poverty at Case Western Reserve University in Cleveland, over 10,000 families - one in eight of all owner occupiers in Cleveland - will face eviction this year - and the number is expected to rise. She says the crisis is threatening to "overwhelm the government agencies and community organizations that address the problem". Some people argue that the sub-prime lending crisis has been caused by irresponsible borrowers who lied about their income to cash in on the housing boom. Ms Gerecke disagrees. She says few of her clients would knowingly put their home at risk. Many sub-prime borrowers report that mortgage brokers misrepresented the kind of mortgage they were being offered, their annual income, and even the value of their home. Working together? President George W Bush's administration wants to solve the foreclosure crisis by getting lenders and borrowers to renegotiate the terms of loans. Foreclosures are spreading areas in like Los Angeles and New York It is pledging more money for advice services, and has been urging key lenders to take a more sympathetic approach. Robert Steel, the US Treasury Under Secretary for Domestic Finance, told the BBC that the government's role was "to ensure that lenders and servicers are being flexible with regard to working with borrowers". He added that no policy could eliminate foreclosures altogether because there was "a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works." But according to Mark Zandi, chief economist for Moody's, only 1% of sub-prime mortgages have been renegotiated rather than foreclosed so far. Ms. Gerecke says a piecemeal approach involving millions of individual renegotiations will not work. Each case takes hours of negotiations, and the mortgage companies' loan loss departments are overwhelmed by the crisis. A way out? The only way out, says Ms. Gerecke, would be national loan terms agreed for the whole industry. One such plan has been proposed by Sheila Bair, head of the Federal Deposit Insurance Corporation (FDIC), one of the key banking regulators. She told the BBC that sub-prime interest rates should not be reset if the borrower has kept up all payments and is not in arrears. But such a deal is proving extremely difficult to reach, given that thousands of investors around the world own a share of these sub-prime mortgages. ........................................................................................... Nov. 5 (Bloomberg) -- U.S. credit markets are enduring their worst bubble ever and it may take six years for them to return to normal, investor Jim Rogers said. " "Never in American history have people been able to buy a house with no money down,'' Rogers said in an interview in New York. ``We have the worst credit bubble, and it's going to take a long time to work its way out. You don't cure a bubble in five or six months. It takes five or six years.'' Rogers, the 65-year-old chairman of Beeland Interests Inc., also said he's pessimistic on the U.S. dollar. The dollar fell to $1.4528 per euro on Nov. 2, the weakest since the European currency's debut in January 1999. The U.S. currency traded at $2.0893 per pound last week, the lowest since May 1981. `"The dollar is in serious, serious trouble,'' he said. Rogers said he hoped the Federal Reserve raises interest rates to stem inflation, but if it does ``the dollar is going to collapse.''