Taylor On US Markets & Gold
Financial Markets
The equity markets and the dollar rallied last week despite the fact that
the news on the economic front could not have been much worse. In fact the
market seemed so preoccupied with news from the hot deserts of Iraq that it barley seemed to notice the temperature of this Kondtratieff winter blew
considerably colder last week.
The markets ignored the fact that the number of people on America's
payrolls fell 108,000 during the latest week, even though this number was
far above the consensus.
The market ignored more signs that the consumer is starting to pull back
markedly, which led to significant growth of unemployment in the retail
sector.
The markets ignored that fact that the Fed is once again talking about
panic moves to thwart deflation.
The markets ignored signs of growing insolvency in state and local
governments. State bankruptcies have jumped by 26%.
The markets ignored the fact that manufacturing and construction in America has continued to decline.
The markets ignored that fact that home foreclosures and credit card
defaults are soaring.
The markets ignored signs that capital expenditures are continuing to be
cut back.
There is no way in my view that the secular bear market in stocks is
anywhere nearly over. On the basis of equity valuations alone, that would
appear to be true given the fact that U.S. equities remain extremely
overvalued. Bear markets don't end until a period prolonged period of time
following the capitulation phase of the bear market. And we have not even
come close to capitulation, judging by the still overvalued state of U.S.
stocks.
We are indebted to Carl Swenlin for sharing his insights and statistics
free of charge at http://www.decisionpoint.com/TAC/Swenlin.html. We highly recommend you subscribe to Carl's paid for charting service (see details below) but he also updates investors weekly with P/E ratios for the S&P 500. At the present time, the S&P 500 is selling at 31.39 times earnings. That is an astoundingly high P/E ratio which proves my point that despite the trillions of dollars of paper losses in the stock market, Americans are not yet convinced the stock market is a bad place to put your money. Yet that must be and always is the consensus opinion at bear market bottoms. As Carl points out, historically a P/E ratio of 20 has been considered the boundary for overvalued. What does a P/E ratio of 20 really represent? It is equal to an Earnings Yield of 5% which means that to the extent you can believe a company's accounts, it is "paying" you, either in retained earnings and/or in the form of dividends, an annual return of 5% on your money.
A more normal or median P/E ratio has historically been around 15 times,
which means that your stock investment is "paying" you 6.67% when retained
earnings and dividends are combined. However, the PE ratio at bear market
bottoms are usually below 10. A P/E ratio of 10 translates into an Earnings
yield of 10%. Major blue chip stocks usually see their P/E ratios bottoming
somewhere between 5 and 10 at bear market bottoms, following the
capitulation phase.
The S&P 500 closed at 878.85 on Friday. Its earnings per share are $28,
leaving that index with a P/E ratio of 31.39, equal to an earnings yield of
3.2%. If the S&P were selling at 15 times earnings, it would be at 420 or
52% below the its current level. But to get to a level that would represent
a bear market bottom, the S&P would have to decline to below 280 or more
than 68% below current share price levels for the S&P 500 stocks! No
matter what happens in Iraq, unless military victory can some how result in
a massive increase in earnings for American companies (not even the most
blatant market optimists are suggesting that), it is hard to see how our
equities markets are not in for a major decline even though trillions of
dollars have already been lost. And we think the existing economic
environment provides fertile grounds for a resumption of the bear market,
once the war is over, no matter what the longer term outcome of that
conquest may be.
Don't Underestimate America's Capacity for Delusional Thinking
It is hard for Americans not to fall prey to our mainstream media
propaganda machine. From the "bad hair day" Wall Street cheerleaders in the morning on CNBC to Hanity and Combs on Fox late at night, we hear a
constant "Yeh America!" refrain all day long, especially now that we are at
war. However, to get a better idea of what is really going on, not just what we as Americans hope is going on, it sometimes pays to read more independent and objectivist views outside of the mainstream.
GOLD
The price of gold has been very weak and the dollar has temporarily halted its decline as our stock market has responded positively over the past few days to the perception that things are going well in Iraq. However, taking
a look at the trend of gold and the dollar from a longer term perspective
from the charts above illustrates that the bullish gold and bearish dollar
primary trends remain in place. We will of course continue to watch these
major trends realizing that markets can give us the unexpected, even over
the longer term.
The trend is your friend unless you choose to defy it. And as long as we
remain convinced that we are inexorably moving toward the deflationary
depression of the Kondratieff winter, we see no reason to allow recent
setbacks in the price of gold and gold shares whipsaw us in and out of
various markets.
A Negative War Premium for Gold?
The markets seem to once again be assuming the U.S. has total control of
the War in Iraq. That kind of thinking may be as far off base as believing
we have seen the bottom in the bear market even though stocks remain
extremely overpriced. The ability of the American people to engage in
wishful thinking and to ignore truth is amazingly strong. For reasons noted
above, even the assumption of a military victory may be premature. But
assuming we are victorious, what will the repercussions be to the global
economy and trade in the future, not to mention capital flows into the U.S.
from a world that is quite fed up with the U.S. printing trillions of
dollars and then using them to buy everything in sight and to conquer the
world.
We are not in the gold trading business. We simply want to identify a major
trend and then ride with that trend even when the trend is at times widely
questioned. But James Sinclair is a very accomplished gold trader. Jim pointed out a chart that shows blatant gold market rigging. Believing that the gold Cartel had one more shot at gold bulls, Sinclair said he put in bids to buy gold at $323 when it was selling a few dollars higher. He thus was a buyer last week at $323.
Larry Kudlow calls for $350 to $375 Gold
Not that we take Larry Kudlow seriously when it comes to gold. Like most
other supply siders left over from the Reagan Administration, he has not a
clue that the price of gold has been severely rigged at prices far below
its true equilibrium price. He seems to think the gold market is an honest
market. And so when ever gold begins to fall he thinks natural market
forces are telling us that the Fed should pump more money into the system.
But when the price rises, he thinks the Fed should cut back on its liquidity. The trouble is with this philosophy is that while the Fed has been creating trillions upon trillions of dollars over the years, Kudlow somehow does not understand that if gold were in tune with the money supply it would be selling at thousands of dollars, not the mere pittance of $325/oz. where it now is.
But for what ever it is worth, Kudlow said on CNBC this past week that he
thinks the price of gold is going to return back to the $350 to $375 range
as Greenspan begins to open the money spigots even more. I wonder. How much this guy get paid for all the disinformation he spreads on CNBC? Gold may well go or beyond $350 or $375 over the next few weeks, but it won't be because the Fed is inflating the money supply. It will have more to do with an inability of the gold cartel or Plunge Protection Team hold it down than from printing money which we are certain is at this stage deflationary, not inflationary.
April 8, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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