The MasterBlog: Richard Russell's Daily Letter March 20 - A house, gold, and cash....
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Friday, March 21, 2008

Richard Russell's Daily Letter March 20 - A house, gold, and cash....

I like to keep it simple. A house, gold, cash

March 20, 2008 -- Yesterday's follow-up from Tuesday's huge rally was disappointing. Instead of continuing the rally, investors and traders moved in and took profits. But today was a totally different story, and a constructive story it was.

And there is that question -- was Tuesday a 90% an up-day? Seems like it was, but nobody except your editor seems to have noticed or given a damn. But yes, I was very impressed by the market's "secretly" bullish action on Tuesday. I thought I was seeing big-time buying as well as frantic short-covering.

Bull's on the market (and there are mighty few of them today) might be encouraged by the action so far. On the bright side of it, the Dow and the Transports still have not broken down below their January lows. Maybe we should just stop trying to outguess this market, let's make it simple -- as long as the D-J Industrials hold above their first quarter lows, the situation will remain constructive if not actually bullish. If both Averages break below their first quarter lows, the bear market will continue. The lows I am referring to are the January 17 Transport low of 4140.29 and the later March 10 Industrial low of 11740.15.

There, that should be simple enough. I know that the great majority of analysts and experts are now bearish. I remain neutral-bullish. As I see it, nothing has been definitely proved yet, one way or the other. This market has been as volatile as any I've ever dealt with. But the lows recorded during January 17 and March 10 have not yet been taken out. I'll let the stock market tell me whether the bears or the bulls are the dominant forces. But let me put it this way -- personally, I wouldn't want to be short of this market.

Next thought -- we hear our presidential candidates blab a lot about "change." I don't know what change they're talking about, but change seems to be the popular word of the day.

You want to talk about "change," we're seeing it now -- in the commodity markets. I'm thinking that we could either be on the edge of a world slowdown -- or simply an across-the-board correction in overbought commodities. You can see it in the action of materials from copper to oil to industrial metals to agricultural prices. What, even farm prices heading lower? That's right, take a look at the chart of agricultural prices below --

And even industrial metals are declining -- base metals as lead and zinc and iron.

Talk about change, subscribers, we're seeing it, and the changes are coming with express speed. How about gold? Check out the daily chart below. Wife Faye, my chart expert, says "Gold could easily drop to 850 -- look how far it is above its (red) 200-day moving average."

I've been advising subscribers to get out of debt, to get on solid ground -- no borrowing, no margin, no mortgage -- OUT of debt. If the charts are right, if we're kissing inflation good bye, then debt is going to be a growing problem and a dirty word.

What would be the reaction of the world's central banks be to deflation or even a slowdown? My guess is that they'll fight those trends tooth and nail. They'll fight it by creating more fiat money. You remember my old adage, my old warning -- "INFLATE or DIE." I think that's where we're heading or maybe where we are.

How will this affect gold? It should put bearish short-term pressure on gold and bullish long-term pressure on gold. Gold's first reaction to deflation? We're seeing it now, and the direction is down (besides, gold was technically overbought anyway). Gold's later reaction to central bank massive creation of paper -- upward pressure on gold.

Hey, you can't say we don't live in exciting times, that's if "excitement" is your thing. Me, I've learned to accept it either way -- dullness or excitement. And after all, what choice do we have?

Wait, please say hello to the hero of the game. Say hello to the Dow Jones Transportation Average -- daily chart below.

Happily, we now have a lovely three-day weekend ahead of us to mull over the new turn of events. The great majority of Americans don't have the vaguest idea of what's going on. I trust you do. Therefore, think of it -- you're ahead of the game. You've already been forewarned.

TODAY'S MARKET ACTION -- My PTI was up 8 to 5932. Moving average was 5942, so my PTI remains bearish by 10 points.

The Dow was up 262.06 to 12361.72. There were six movers in the Dow today with only three Dow Industrials lower.

Apr. crude was down .70 to 101.74.

Transports were up 136.48 to 4707.68.

Utilities were up 2.40 to 477.72.

There were 2440 advances on the NYSE and 894 declines. UP volume was 76.5% of up + down volume.

There were 16 new highs on the NYSE and 135 new lows. My 5-day high-low differentials declined from minus 878 to minus 1247.

Total NYSE was a huge 6.15 billion shares.

S&P was up 31.09 to 1329.51.

NASDAQ was up 48.15 to 2258.11.

My Big Money Breadth Index was up 10 to 838.

Dollar Index was up .61 to 73.28 (upside reversal?). Euro was down a big 1.99 to 153.45. Yen was up .29 to 101.15.

Bonds were higher -- yield on the 10 year T-note was 3.32%. Yield on the 30 year T-bond was 4.16%. Get this -- yield on the 91 day T-bill was .50%. Pretty soon we'll be paying the Treasury for the privilege of owning T-bills. Yikes.

CRB Commodity Index was down a large 13.11 to 510.69.

Apr. gold was down 25.30 to 920.00. Mar. silver down 1.59 to 16.85. Apr. platinum down 18.40 up 1877.30.

GDX was down 1.59 to 47.78. HUI down 8.73 to 430.05.

ABX down 3.25, AEM down.93, NEM down 2.75, PAAS up .72.

Gold correcting along with silver. Too much recent excitement, suddenly all the ads tell you how to make a killing in gold. Didn't work out exactly that way -- late buyers got killed.

STOCKS -- My Most Active Stocks Index was up 7 to 344.

The five most active stocks on the NYSE were -- C up 2.09, F up .17, GE up 1.90, CIT down 2.01, WM up 1.87.

Also on the most active list -- JPM up 3.50, FNM up 3.59, MER up 5.40, WFC up 1.97, MS up 6.22, LEH up 6.42, FRE up 2.68. Big money coming into the banks and the financials.

The VIX was down a large 3.22 to 26.62.

CONCLUSION -- I was impressed by today's stock market action. The homebuilding stocks may have bottomed along with the financials. I'll have to see more, but if you want a contrary opinion, it's this -- this market may have discounted the worst at the January lows. From a Dow Theory standpoint, at no time since mid-January have both the D-J Industrials and Transports been lower.

Hey, I'm feeling kind of lonely in this business. But that's OK, I've felt lonely before, and I guess after fifty years, I'm getting used to it.

See you Monday, rested and ready to go.

Your contrary California editor --


The US residential mortgage market is currently around $12 trillion, and the overall value of all US housing is about $20 trillion (that's twenty trillion dollars, subscribers). Many analysts are predicting that the housing market will fall 20% before the housing decline is over.

So you can see why the Fed, above all, does not want a general collapse in the price of housing. The Fed, along with the government, is doing all it can to "soften" the housing slide. Federal regulators are allowing Fannie Mae and Freddie Mac to purchase an additional $200 billion in mortgage securities -- this is equivalent to 10% of expected US home mortgage lending this year. Freddie and Fannie will also be raising new capital this year.

On top of that, the Fed last week sought to stabilize the mortgage market by saying it would lend as much as $200 billion in treasury securities to bond dealers in return for mortgage-backed securities. This will give these securities only a temporary home at the Fed. But mortgages bought by Fannie and Freddie will have a much longer stay at these two government-sponsored agencies.

So home owners, it's not the end of the world, not yet. And more Fed and government ideas are probably in the hopper. In the end, an awful lot depends on confidence.

On another and less happy subject, I assume all my subscribers read yesterday's Paul Craig Roberts piece. I happen to think Roberts is correct. The US has put itself in the incredible position of fighting an expensive war with borrowed money. Even without the war, the US is living on borrowed money. Our national debt is in the process of surging well past the $9 trillion mark. The wonder is that the dollar is viable at all.

I note that none of the presidential candidates are even talking about the debt -- or the $53 trillion in unfunded liabilities that we are facing. In fact, I believe we have gone so far in our debt and deficit situation that I just don't see how we're going to navigate out of it. The dollar, it seems to me, is ultimately doomed. The only question is timing, and here we're talking the impossible. It brings to mind Keynes' thesis -- "The market can stay irrational longer than you can stay solvent." In other words, even though the US dollar appears doomed, if you short the dollar, you can very easily go broke before the dollar finally succumbs (in fact, the oversold dollar may be in the process of advancing now).

So what do we do? I've been thinking about this for a long time, and I realize that there is no perfect answer, no ideal defense. You see, for the first time in modern history there are grave doubts about the very viability of our money. Even during the Great Depression, nobody doubted the value of a dollar. The dollar was "as good as gold." The only problem was -- nobody had dollars. Everybody was broke. Deflation swept the land, and money was scarce. I could give you a list a yard long of things I could buy in those days for a nickel. Talk about nickels, I would use nickels to take the subway to school, and I would use seven nickels to buy lunch. A movie cost three nickels. Nickels were useful, dimes were scarce and dollars were treasures.

Today it's a different story. Today there are too many dollars around -- but the world is questioning the viability of the US dollar. I understand there are places (China, for instance) where people do not want dollars. If they do receive dollars, they exchange them for another currency as quickly as possible.

The US has two sources of power besides our exports. One is our huge military. And the second is the reserve status of our dollar. If the dollar begins to lose its reserve status, we're in trouble. It would mean that we couldn't borrow, or if we could continue to borrow, we'd have to pay much higher interest rates. At some point, even higher interest rates wouldn't do it. Once our creditors were afraid of taking in dollars, no level of interest rates would convince them to lend to the US.

OK, that's the longer term story. The question I ask is -- what do you and I do about it? Here's what I suggest. Divide your assets into three sectors. One third of the total can be in a home preferably owned for cash, no mortgage. That means that you really OWN your home. Another third of your assets can be in gold. The final third should be in cash, and it can be in dollars or even partly in a foreign currency. But frankly, over the longer-term I'm tempted to lump all fiat currencies together, treat them all as a kind of junk. Because there's nothing behind any fiat currency but the full faith and credit of the respective nation. The viability of all fiat currencies is suspect.

Nations will lie about the worth of their money as long as they can get away with it. The US repeats its "strong dollar" policy even while allowing the dollar to go down the drain. My guess is that the trouble will start when the oil-producing nations start quietly unloading their dollars. China will likely do the same. Gradually, the word will emerge -- "the dollar is a doomed currency." Diversify as far as you can, and get out of dollars as quietly as you can.

In the meantime, I'm watching the stock market carefully. So far, following the initial rally from the January lows, the Transports have acted well, and the rest of the markets and averages have either been sinking or just "hanging on." Few investors have made any money since the January lows. The best you could have done was to minimize losses. It will be fascinating to see how the markets act over the coming weeks. Personally, I'm out of the stock market, so my main interest is academic. Well, that and I watch the markets for hints of things to come.

I'll breathe easier as long as one or both D-J Averages (Industrials or Transports) hold above those blessed January lows. But if both the Industrials and the Transports violate their January lows, I'll prepare for the worst -- and by the "worst" I mean hard times.

A house is a place for you and your family to live in. Gold is eternal wealth. Dollars are units of exchange. With a few of those lowly dollars, you can buy a loaf of bread. I like to keep it simple. A house, gold, cash -- what could be simpler?


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