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August 9, 2010 -- Headline from page one, New York Times, Aug. 7: "Nation Lost 131,000 Jobs As Governments Cut Back. Hiring By Private Sector Anemic in July."
Headline from the Weekend Investor section of the August 7 Wall Street Journal: "How To Beat Deflation. Strategies to Protect Your Portfolio From and Take Advantage of the -- Dreaded 'D' word."
The specter of deflation is cropping up in many media outlets today. In fact, I'd say that deflation talk has almost become popular. The key question is this -- Fed Chief Bernanke is obviously reading and hearing all about the "coming deflation." What will Bernanke do about it? I think he will fight deflation with all the weapons at his command. And Bennie has a lot of weapons, least of which is printing "money."
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The air is filled with rumors and contrary opinions, so many that it is literally impossible to follow them all. Some of the opinions and views have such earth-shaking implications that it's difficult to ignore them. But as my subscribers know, we're not a news site, and we don't invest or divest based on the news of the day.
A few examples -- I just finished my friend, John Mauldin's always excellent column (how does he travel continuously and write the column?). Rather than paraphrase what John is writing, I'm including an actual segment from John's latest column --"Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages are implicated."
Russell Comment. Would Obama actually do this? My answer is that Obama and his buddies are so frantic to get the economy moving again that they would be willing to try anything.
Beyond mortgages, Americans are so loaded with debt that maybe the next Obama step would be to forgive ALL personal debts in the US. Better still, why not return to the year of Jubilee and cancel out ALL world debts (I don't think holders of US Treasuries would go for that one).
The current issue of Barron's is fascinating. The inimitable Alan Abelson notes that stocks are not cheap. Alan asks, "Where is it written that a market that in a not too distant-past values stocks at 60 time earnings, can't value them, if the outlook sours, at six to eight times earnings?"
Russell Comment -- Yes, I have noted that the big booster in bull markets and the big killer in bear market is the change in price/earning ratios, rather than the actual change in earnings.
But here's what I really want to talk about. From the cover page of Barron's -- "Why the Fed Will Soon Print $2 Trillion." The related major article is entitled, "Time to Print, Print, Print," and is written by Jonathan R. Laing. The author believes that the Fed has only one way to go, "Quantitative easing," and maybe printing another $2 trillion of fed notes (dollars). Laing concludes, "so it's more than likely that the big artillery of quantitative easing will be unleashed to push the economy out of its despond. It's high time to get out the money-printing machines. Damn the risks of triggering a bit of inflation and some modest investment bubbles. The alternatives are far worse."
Then (believe it or not) in the same issue of Barron's we see an article by my old friend, Robert Prechter, the guru of the Elliott Wave thesis. Robert explains how a great contraction in credit and debt will bring about deflation. Robert notes that the amount of dollar-denominated debt worldwide is some $57 trillion. . . The already-issued debt and potential debt is poised to overwhelm the possibility of management monetization. The Fed's assets amount to $2.3 trillion, a drop in the global debt bucket."
Robert concludes his frightening article as follows -- "If you are positioned for more inflation -- as the vast majority of investors are -- you are likely to find yourself on the wrong side of the monetary bet. Positioning for deflation simply means avoiding traditional investments, especially risky debt, and maintaining maximum safety in cash equivalents, held in the safest institutions. If you shed market and institutional risk, you can sail through deflationary times unscathed."
Russell Comment -- Whew, how's that for a scary contrary opinion? Robert believes that way to safety in a deflation is to have cash, and lots of it. My concern with this approach is that I question the safety of the US dollar (and all fiat money, for that matter). So in an all-out deflation, Robert Prechter will be sitting in all cash or US Federal Reserve notes. But the dollar is collapsing, and with a US that is deflating, none of our foreign creditors will want dollars (in fact, they will be trying to get rid of dollars). With fiat money in retreat all over the world -- and currencies devaluing against each other, the world's peoples will turn to the only money they can trust -- gold. I'm aware that Prechter believes gold will be heading down in a deflation, I disagree.
I was there during the Great Depression, and I can tell you nobody at that time had dollars. But if you did have dollars they were trusted and they were considered as good as gold. Today, it's different. The very validity of the dollar is in question.
By the way, Prechter believes the Dow will end its bear market at a value of 400. If so, Prechter is looking for a calamity comparable to the Great Depression of the 1930s.
Russell response -- I distrust all scenarios and predictions, although I read 'em all and find many of them fascinating. In the end, I only trust the wisdom of the stock market. I haven't liked the recent action of the stock market, and I've advised my subscribers to get out of stocks. From our standpoint, when it comes to news events, our main interest is not in the news, but in the stock market's reaction to the news.
The stock market will tell its story as we go along and in its own good time. Our job is to ignore all opinions and forecasts and to follow the stock market and believe what it's telling us.
Gold has advanced seven days in a row, and should be ready to back off a bit. The many arguments and rumors regarding gold are almost deafening. I don't give a damn what the gold bulls or the gold bears say, I follow the price action as best I can. Often, the best test -- is what an item can or can't do. On the latest correction, gold held 1100 -- bullish. Can Dec. gold climb into the 1300s, which would be a record high? That's what I'm waiting to see. By the way, gold may be forming a head-and-shoulders bottom. More technicals -- the 200-day moving average for Dec.gold is at 1155.10. The 50-day MA for Dec. gold is at 1215.90, which is bullishly above the 200-day MA. If Dec. gold can close above 1215.90, that would be a bullish development.
The Federal Open Market Committee meets tomorrow. Will they hold interest rates at zero and will they accelerate their printing? If they do, it will put pressure on the dollar and it will be bullish for gold. If they boost interest rates, expect gold to correct.
TODAY'S MARKET ACTION:
My PTI was up 7 at 6117. The moving average at 6095, so my PTI is bullish by 22.
The Dow was up 45.19 to 10698.75.
Transports were up 59.09 at 4516.35.
Utilities were up 1.30 to 395.02.
NASDAQ was up 17.22 to 2305.69.
S&P was up 6.15 to 1127.79.
September crude was up 0.78 at 81.48.
Total Volume on the NYSE and associated exchanges was 3.43 bn.
There were 2199 advances and 830 declines on the NYSE.
There were 305 new highs and 15 new lows.
The Big Money Breadth Index was up 4 at 807.
Dollar Index was up 0.26 at 80.67. Euro was down 0.49 at 132.25. Yen was down 0.60 to 116.48. Currency prices as of 1 PM Pacific Time.
Bonds: Yield on the 10 year T-note was 2.82. Yield on the long T-bond was 4.01. Yield of the 91 day T-bill was 0.14%.
December gold was down 2.70 to 1202.60. September silver was down 0.23 to 18.24.
My Most Active Stocks Index was up 2 to 200.
GDX was up 0.02 to 50.19.
HUI was down 0.22 to 459.72.
CRB Commodity Index was down 0.12 at 274.59.
The VIX was up 0.40 to 22.14.
Late Notes -- Dow up 45, Trannies up 59, Utes up almost 2. It's increasingly more difficult to be bearish on this market when my PTI remains bullish. It was up 7 today to 6117, making my PTI bullish by 22 points. As for the "internals," well you heard the PTI report. NYSE breadth was good, 2199 issues higher, only 830 down, 305 new highs and 15 new lows. Up volume on the NYSE was an impressive 71% of up + down volume.
Dollar Index was up 0.26 to 80.67. Are there too many bears on the dollar. When the shorts overdo it, you know what happens -- the item goes UP. Bonds were slightly lower. Dec. gold was down 2.70 to 1202.60, but still holding above 1200. Tomorrow Bernanke and the gang meet for the Fed Open Market Committee, and everybody is waiting breathlessly to hear what the gang comes up with.
My pen-pal, the one and only Dennis Gartman notes that the M-2 is diving and that the adjusted monetary base has gone nowhere for the last nine months. John Williams reconstructs the broad M-3 money supply and shows that it is diving. So what's going on -- is the Fed playing games with us? Can the market and the economy go up without a rising money supply?
Never mind, we go by the action of the market, and so far, the action has been OK, although a bit ragged.
See you tomorrow, with diamonds hidden in my hair -- wait, Faye just cut most of my hair off. I'm walking around with a buzz cut, can this be me?
Adios,
Russell
Expensive stones, most of them over one billion years old.
With the advent of GIA (Gemological Institute of America) certificates, diamonds are becoming a leading safe-haven item. You can send a diamond to the GIA and get a recognized certificate showing the cut, carat, color and clarity of your diamond. Seasoned buyers will not buy a diamond without a GIA "cert." These certs have finally put diamonds in a different category. You can now buy a diamond a receive (with a cert) a close approximation of what the stone is worth.
India is fast becoming the center of diamond cutting and trading. The best diamonds have come from the Golconda area of India. The Golconda diamonds were "whiter than white." By the way, the Golconda mines are exhausted. The lower the nitrogen content of a diamond, the whiter the stone is. Golconda diamonds have a nitrogen content of 2% to down to 1%, making them the whitest of all diamonds. Actually, a few other diamonds sport this low nitrogen content, and despite the fact that they don't come from India, they are still called Golconda diamonds. Only about 1% of all diamonds are classified as Type IIA or Golconda diamonds. These special diamond bring huge prices. For instance, a well-cut internally flawless Type IIA diamond of 5 carats may sell for over one million dollars.
As a rule, white diamonds are judged on their whiteness -- the whiter, the better. Colored stones are judged by the depth of their color and the evenness of their color throughout the stone.
Diamonds as a safe haven have one big advantage over gold. Millions of dollars worth of stones can cross a border hidden in a tiny packet or sewed into the lining of your pants. And with the advent of GIA certs, you can be reasonably assured of what they are worth. High-grade stones are so hot today that dealers have been calling retailers and asking them if they have any overage in their diamond inventory. There is almost no bargain diamonds for sale today. The best deals are seen when a professional outfit buys a diamond from a private party, a party that knows nothing about the value of their diamond.
Thus you see ads in the newspapers as follows: "We want your gold and jewelry and particularly your diamonds. Nobody pays higher prices than we do."
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