To the extent they can be trusted, there is no doubt that economic numbers in U.S. economy have been getting stronger. And the fact that corporate profits surged upward 29% in the 4th quarter lends support to at least some of the government numbers. However, keep in mind why the U.S. economy has been so strong. We have had huge amounts of fiscal stimulus in the form of military spending and tax refunds. And, we have had monetary stimulus on an almost unprecedented scale. By pumping money into the economy in such huge quantities, interest rates are artificially low which has been stimulating the housing and auto industries. One wonders what is left for Americans to buy in the years to come once these major purchases have been made and as interest rates finally begin to rise reflecting the realty of a savings short America.
Also, we need to remember that intervention in the economy always ultimately leads to other problems. Problems related to artificially low interest rates are addressed below by the famed Austrian economist, Ludwig von Mises. I have taken the liberty of excerpting some of his comments in a 1936 essay he wrote titled "Austrian Theory of the Trade Cycle" because I think it goes far in explaining the sick economic dynamics that underlie the U.S. economy and indeed the global economy. The imbalances that constant intervention decade after decade are leading up to are what Ian Gordon describes as the Kondratieff winter.
In recent weeks, I had not been checking and comparing the S&P 500 Earnings Yield with the 10-year U.S. Treasury bonds, so I was surprised when I noticed for the first time in quite a while, the S&P 500 earnings yield of 4.42%, is actually above the 10-Year Treasury Yield of 3.83%. Applying the very successful model established by Michael B. O' Higgins, if on the first day of the year, stocks are providing a bigger yield then the 10-Year Treasury, you buy stocks and forget bonds. At the start of 2004, the 10-year U.S. Treasury remained above the S&P 500 earnings yield. Partly for that reason we structured our Model Portfolio again on the basis that common stocks in general (with the exception of inflation hedges like gold and energy) should not be held but instead we chose to hold short term, high quality government treasury obligations (predominantly foreign currency bonds through the Prudent Global Income Fund).
We will of course revisit the S&P 500 Earnings yield/US. Treasury yield on January 1, 2005 once again. But on the basis of at least two factors, I believe it is premature to begin buying the general stock market at this time. First, stocks remain very expensive by historical standards. The P/E ratio for the S&P 500 was 22.61 at the end of this week even though earnings have grown so dramatically. Historically, P/E ratios over 20 have marked stock market tops, not bottoms. Bottoms usually are marked by P/E ratios under 10 and dividends in the 5% to 10% range for America's strongest companies. Secondly, interest rates have been pushed to artificially low levels by U.S. and Japanese monetary policy, which as von Mises points out below is guaranteed to lead to big economic problems down the road. So, not only are interest rates artificially low relative to stock earnings, but the future of earnings may indeed be in jeopardy thanks to monetary manipulation by the Fed, not to mention dislocations caused by huge fiscal deficits.
The stock market is a great future discounting mechanism so the topping pattern and continued deterioration of the equity markets as discussed below may be telling us that von Mises views expressed below are right on target. The chart below suggests the Dow is continuing its topping pattern. What I find really interesting as I watch the major indexes throughout the daily trading sessions is how constant attempts to take the market higher are consistently met with selling in what is known as a distribution pattern so typical at market tops. If I had my guess, what I think is happening is that mutual fund money is going in and the really big, sophisticated money is coming out as the little guy continues to feed the rich and powerful as they literally take food off the table of the average Joe. This is always the way it happens at market tops. Why would this time be any different? In fact more average people are in the market now than at any other market top so my expectations are for this bear market to inflict more pain on Americans than any other prior bear market including that of the 1930's.
To get a better sense of the overall market, I have begun to review various sector charts provided by www.decisionpoint.com. Last week I began keeping score of these varied indexes as follows:
Bullish Sectors:
Slightly bullish = price is above the 20-day moving average only. Mildly bullish = price is above the 20-day and 50-day moving averages. Substantially bullish = price is above the 20-day, the 50-day, and 200-day moving averages.
Bearish Sectors:
Slightly bearish = prices are below the 20-day moving average only. Mildly bearish = prices are below the 20-day and 50-day moving averages. Substantially bearish = price is below the 20-day, 50-day, and 200-day moving averages.
GOLD
The charts for the continuous gold and silver bullion contracts:
The charts above show that technically, gold is looking very good, and silver is looking very, very good. All the fundamentals appear to be in place for a long, long bull market for these precious metals though, as we have said repeatedly in the past, silver may be a problem when the Kondratieff winter hits. However, with regard to silver as well as other commodities that we view as having less monetary values, we want to keep an open mind. Although we know deflation will follow inflation, it is impossible to know when that might happen. Gold works wonderfully well in both extreme environments while commodities (of which we consider silver to be more than gold) will most likely not perform as well. But so far, our inflation hedges have boosted our Model Portfolio very significantly over the past two years.
Bill Murphy's GATA Continues the Good Fight!
Friday evening, GATA's Bill Murphy, one of my heroes because he stands up and fights for what is right, reported the following to subscribers of www.lemetropolecafe.com. I believe Bill's work gives you an accurate picture of what is really going on in the gold and silver markets to a degree that you will never get in the main stream media. Accordingly, with Bill's permission, I am passing on some of his remarks made on Friday evening, March 26, 2004.
"What a morning! Gold exploded with the April COMEX option expiry out of the way. Due $1.70 higher, it rocketed right out of the gate, climbing $6.90 higher before the gold police showed up to corral it from going any further. There is that $6 rule again. Talk about a broken record. It is like dealing with the "Do Not Pass Go" sign in Monopoly. In this case it is The Gold Cartel's monopoly on the gold trading pattern. Somebody send those bums to jail.
"Word is famous commodity trader John Henry bought 10,000 gold contracts on the OTC market yesterday morning. In years past the cabal has been able to shake them out. Times are a changin'. They tried again yesterday and failed. Early attempts also failed today.
"As we all know, the gold move has been DRAMATIC the past two weeks. What makes it even more so is the euro is near its lows on this recent setback, while gold is not far from 15-year highs. While few like to hear, "I told you so!" I am going to do so since this ole fart is celebrating his 58th birthday with my family. Gold is moving up sharply, independent of the dollar, which is just as it should happen and what we wanted to happen. Gold is soaring around the world in terms of other currencies. All those out there who only pointed to a collapsing dollar as the sole reason gold would go up have been dead wrong. That is just about all we heard from all the pundits these past many months. The kid here and Mahendra got it right. Those are the facts. Enough of the chest thumping. However, I sure do love having a big smile on my face these days - better than all those frowns on my physiognomy for so many years!!
"Many market participants seem perplexed by the gold market's strength. Café members are not. While gold was below $400, it was brought to your attention that the Chinese and Saudis were going after bullion, and gone after it they have! In addition, gold and silver are going through a structural change in that new big money speculators want in to make the precious metals their investments of choice. This is what the ebullient market action is telling us.
"Some other key points to note for the day:
"*Gold rose sharply even as commodity prices tanked for the second day in a row. The CRB has sunk more than 8 points in only two trading sessions.
"*Gold closed around 349.5 in euros, which is a NEW 15-year high. Fantastic!
"*The gold open interest rose another 3127 contracts to 283,020. Only the aggressive selling by The Gold Cartel has held gold back from taking out 15-year highs in dollar terms.
"*Gold's weekly close was the second highest in 15 years, only topped by the one on the second week of January, 2004.
"As far as silver goes, word has it the Russians sold 2.5 million ounces on the London Fix putting pressure on the price. While gold was due higher pre-COMEX, silver was due five lower. However, gold's dramatic early move sent silver into a tizzy as it rallied 17 cents on the day before selling off.
"There was only one silver delivery and it wasn't directed my way. Unreal - I have been standing for a March silver contract for one month and I still don't have it! We are now down to the last day possible for the shorts to give it to me, which is Monday. I expected to receive notice of delivery weeks ago. And people wonder why the silver price is going up.
"The silver open interest rose 535 contracts to 119,970, a new high for the bull market move. March dropped 12 contracts to 236.
"Strangely, word keeps coming back to me that the silver traders in New York keep telling everyone there is plenty of silver around. Why doesn't someone ask them, "If that is so, then why is the silver price soaring?"
"Perhaps the Russians will supply the silver market and meet the soaring short-term demand. However, that is all it will do, temporarily delaying the price increase. This new demand is going to intensify as the year goes on. The shorts are in deep, deep trouble.
"Silver made yet another weekly high close. Somewhere in the days and weeks ahead it is going to go bonkers.
"How many times over the past couple of years have we seen gold soar in the early COMEX trading only to be stopped cold the rest of the session by cabal forces? Unlike normal free markets, it never surges, sets back and then surges again. The gold trading action this week suggests "the day" is coming in the near future when this tactic is going to fail, and the bums are going to be blown out of the water as they are overpowered by world-wide gold demand. Gold is going up on its own without the help of outside markets. What do you think the gold price is going to do when the dollar resumes its inevitable downtrend, when the US stock market heads for the toilet, or when the heinous terrorists strike in dramatic fashion again? This is not a market to be short!"
March 28, 2004
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com