Taylor On US Markets & Gold
FINANCIAL MARKETS
The Dow Finally Confirms
Chart courtesy of BigChartRichard Russell, the mostly highly regarded living practitioner of Dow
Theory, has been telling us subscribers over the past number of weeks to
keep our eyes on Dow 8521.97. A move above that would pave the way for a
POSSIBLE bull run within the primary bear market for equities because if
the Dow were to rise to that level, it would have confirmed an earlier move
by the Transports above its March 2003 high. With both the Dow and
Transports moving above their recent high points, Dow Theory holds that a
significant rise in equities could be under way.
As can be seen from the charts displayed above, yesterday, the Dow closed
above 8521.97 on Friday. In fact it closed at 5266. As such it has now
confirmed the earlier move in the transports above its March 2003 highs. In
"Russell's Remarks" dated May 2, 2003 following the close of the market,
the dean of Dow Theory suggested the following:
"Let's not be cute, let's just take what's happening at face value. Dow
confirmed, PTI at new high, Big Money Breadth at new high, Most active
Index looking strong. A good looking but overbought market moving into the
"bad" six months.
"Conservatives should sit tight, while players might buy DIA or QQQ with
close stops-and hope for the best. Warren Buffett says stocks are
'expensive.' I agree. But remember, the market can do anything, it really
can."
In other words, the odds seem to favor a possible rise in stock prices at
this moment and it could even be a fairly sustained move. I would even go
so far as to say, I think we could see an up year for stocks in 2003,
although I still think it is more likely we will see a 4th year down, which
has not happened since the Great Depression. But Richard Russell is right.
Markets can and do almost anything from time to time. They have a way of
humbling even the most arrogant among us.
**********
Equities May Have Risen Last Week.
But the K-Winter Winds Blow Colder Still
As we have said before, during prolonged bear markets, powerful bull market
rallies are a given. In fact, some of the most power bull markets rallies on record take place during bear markets at least partly because of the
psychology related to early stage bear markets. First, people have a hard
time thinking stocks can go any lower because they are already so far below
their peaks. So convinced are investors that stocks are a bargain during
early stages of a bear market, that any temporary bottoming prompts them to get ready to buy aggressively, lest they fear they will miss a resumption
of a bull market. The current existence of this psychology is in itself
evidence that the bear market is far from over because at bear market
bottoms, hopelessness is the predominant emotion, which leads to a prolonged undervalued market. Secondly, as unwarranted bullishness prompts
bullish emotions to drive people back into the market, even the cold
calculating short sellers are forced to cover their positions. The
combination of the two psychological factors combined with an abundance of
fantasy money, which Greenspan is showering on us with great abundance,
provides the elements for a powerful bear market rally.
I have decided that I am personally not going to "play" this possible bear
market rally by buying one the equity indexes. I recently tried that and found I was occupying too much of my time watching the market and then in
the end actually lost a small amount of money on trading the QQQ's. I want
to keep focused on the primary trend as per Dow Theory as well as the really big picture provided by Ian Gordon's Kondratieff work. And if anything, economic news of this past week if anything continued to confirm Ian is right. The direction of our economy overall is downward. The deflationary depression prediction of the Kondratieff cycle unfortunately remains alive and well for anyone who cares to examine the evidence with an
open mind. For example:
- The Chicago NAPM announced that factor orders fell to 44.6 in April. A reading below 50 shows activity in the nations factories is shrinking.
- Jobless claims, while lower than last month, were still at 448,000, well above the 400,000 area considered to be indicative of a declining labor market.
- Mortgage applications fell for the sixth straight month.
- The U.S. Treasury is back to deficit spending. George Jr. has pretty much picked up where papa Bush left off so that unless Congress agrees to lift the debt ceiling, the government may soon run out of money. Of course it won't because Congress will lift the ceiling and the Treasury will, print, print, print, using their legalized counterfeiting operations to continue to defy the property rights of all Americans!
- Homeowners took $24 billion of equity out of their homes during the first quarter of this year.
- The U.S. trade and balance of payments deficit continues to soar despite a declining dollar.
- Capacity utilization, which my good friend James Tu watches very
- carefully, remains very anemic at 74.8%. That along with a still overvalued dollar and globalization makes it next to impossible for companies to gain any pricing power which in turn retards capital spending and the expansion of employment.
- Corporate profits remain abysmal and on that basis, stocks are still perched at ridiculously overvalued levels in spite of big earnings growth from oil companies which received unexpected boost from rising oil prices thanks to Iraq, Venezuela and Nigeria. According to John Mauldin, ("Why the Stock Market is Rising" dated May 2, 2003), "68% of economic news releases have been worse than expected, and revisions of prior data have generally been down, according to Merrill Lynch. In many ways, the current environment is similar to that of May 2001, when the economy was receding."
Denials and Dreams Continue
In the early days of the Great Depression, the Hoover administration
continued to repeat month after month that "Prosperity is right around the
Corner." And now, we constantly hear, wait until the second half of the
year. A return to profits and a growing economy are about as elusive in
this Kondratieff winter as in the early days of the 1930's K-Winter. I have
come to the conclusion that given their vested interests, it is simply not
possible for most Wall Street folks to even begin to comprehend how screwed up our economy and our markets are. I have suspected that were true all along, but the following two experiences last week have convinced me that most Americans are not capable of facing or investigating realities that may bode ill for our future.
IS THERE ANY WONDER WHY AMERICA's ECONOMY IS IN TROUBLE?
Of course there can be no doubt that the rising stock prices were a direct
result of money created out of thin air. But given this severe detachment
from reality concerning such an elementary economic matter on the part of
our leaders, is it any wonder that analysts continue to project better days
ahead. They do not understand that money is manufactured in our fractional
reserve banking system by debt and that we are in the early stages of debt
strangulation. And with so called economists like Mr. Wesbury not even
understanding we were ever in a bubble, never mind how we got there,
analysts are ignorantly free to continue advising investors that "prosperity is right around the corner." The following quote from Carl Swenlin at www.decisionpoint.com sums up how people are continuing to engage in wishful thinking to their own peril.
"EARNINGS UPDATE: Earnings reporting for Q1 2003 is just beginning, and we can monitor the progress using the spreadsheet we download from the
Standard & Poors web site. The latest is dated April 23 and about one-third
of S&P 500 companies have reported Q1 results. It is interesting to watch
original estimates being adjusted as actual results are reported. Most
interesting is that pro forma estimates/results are moving higher (from $11.96 to $12.39), while GAAP results have moved slightly lower (from
$11.43 to $11.40). This indicates that "earnings improvements" we are
hearing about are being engineered in the pro forma dreamscape, not
reality. Using Q1 GAAP estimates the P/E would be about 30.57, slightly
improved over the 12-month period ending December 2002, but still
grotesquely overvalued."
US DOLLAR ON THE DECLINE
The biggest news last week may have been the Dollar's decline. Not only did
it break below lows earlier this year, but as the chart below shows, it has
now broken decisively below longer term support lines to close the week at
96.74. The next stop will be around 90.
Chart courtesy of StockChartsThere is no price in the world that are more important than the dollar because of the dollar's reserve currency status. There are some pretty good
reasons why countries that were considered our allies may now be interested
in putting a stop to the U.S. aggressive military and foreign policy initiatives and one sure way to emasculated the U.S. would be to trash our currency. If the U.S. dollar were not so overvalued to start with, the task of bringing down the U.S dollar, and thus reducing the ability of the U.S. to finance its military exploitation would not be so easy. But the fact is the U.S. is borrowing money from foreign countries which it uses to not only fund our good life, but also to fund our military. In fact, foreigners are now funding more than 40% of the U.S. Treasury. At present the U.S. needs to borrow something in the range of $1.5 billion to $2 billion per day from foreigners to support our habit of over consumption. The dollar will decline if less than that flows into the U.S.
Economic factors combined with political angst over U.S. militarism may be
combining to send the dollar lower. While this may not be good news for the
spoiled, cheating brats on Wall Street, Dr. Stephen Roach of Morgan Stanley quite properly points out that a weaker dollar is a must if we are ever to return to a more balanced global economy. At the present time, the
developing world requires the U.S. to live beyond its means, spending more
than we earn. What is needed to restore a more balanced global economy is
for developing countries to begin to stimulate more domestic demand for
their production and for the U.S. to start consuming less and saving more.
Roach concludes that perhaps the only way that can be accomplished is by
way of a weaker dollar.
We might add that another step in that process would be for China to allow
its currency to float. Yet in view of all the pressures that country faces
as outlined by James Tu in our recent interview, the Chinese are unlikely
to follow that free market policy any time soon. The result I believe,
especially if the dollar continues to weaken, will be a acceleration of a
beggar thy neighbor foreign currency devaluation such as helped pull the
world over the economic abyss during the 1930's. But then again, lest we
forget, we have now entered the Kondratieff winter.
GOLD
Chart courtesy of StockChartsThe negative correlation of gold with the dollar is clearly appreciated by comparing this gold chart with the dollar chart shown above. Given our views on the economy as stated above, and given the bullish chart pattern for gold above as well as basic shortages to meet demand, we remain very, very bullish on gold.
Gold can only enter a bull market if it is viewed as money, not as a
commodity. As Dr. Larry Parks has pointed the more gold that is used as
jewelry, the lower the price of gold goes. So he has so aptly pointed out
that the hundreds of millions of dollars the World Gold Council has exacted
from the shareholders of major mining companies represented a huge loss for shareholders of these companies. Gold is money. It is little else. That's
why there is something like a 40-year above ground supply of gold. No other
metal comes even close. Not even silver.
But now, as we are getting more and more demand for gold as money, both
from individual investors and from central banks of countries that are
gaining at the expense of a degenerating western society, there is reason
to be very bullish on gold.
One development that could really boost gold as an investment is the
securitization of gold. The World Gold Council and at least one other
concern here in the U.S. that I know of is in the process of making gold
tradable as an equity. One proposal for example would use one gram of gold
as a share. With a unit now a $10.95, you could buy 100 grams (about 3.2
ounces) of gold through your friendly stockbroker for $1,095 before paying
commissions. Indeed, it is my understanding that gold bullion is already
trading in Australia in units of 1/10 of one ounce worth about US$34 or
A$54.30. And I also understand that in China, individuals will soon be
allowed to trade gold on the spot market. As the dollar's problems from an
inherent weakness of the U.S. economy finally become more widely known and accepted, gold should rise dramatically in the weeks and months to come,
easily eclipsing I suspect the old 1980 high of $850 registered in January
1980.
As the dollar's problems from an inherent weakness of the U.S. economy finally become more widely known and accepted, gold should rise dramatically in the weeks and months to come, easily eclipsing I suspect the old 1980 high of $850 registered in January 1980.
May 6, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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