BIG MONEY KEEPS BAILING OUT OF STOCKS

The "smart money" looks ahead and takes the cash while it is available. The smart money understands John Exter's inverted pyramid. Smart money understands cash. They know it is something that can be counted on in reality and not just in theory.

Items at the top of Exter's inverted pyramid retain theoretical value. Really smart money knows that the best "cash" in the world is gold because that is the most reliable money in the world. It can't be inflated away or lost in a deflationary depression when businesses fail en masse.

As I reviewed the Wall Street Journal's "Insider Trading Spotlight," it dawned on me that this is the way rich people think all the time, not just in the short term. And it dawned on me that rich people are rich because they don't take undue chances, so they avoid the big losses that wipe them out. Compounding is the surest way to become wealthy. Gambling on high-risk endeavors is the surest way to degrade your portfolio to commonality. So it shouldn't be surprising that only a select few folks are able to think individually and outside of the box that the ruling elite wish to keep you in.

Last week, a review of insider sales by sector revealed that for every $100 of insider transactions, $98.15 involved insiders selling their own stock and only $1.85 out of every $100 involving a purchase by insiders of their own stock.

Heaviest sector selling came in technologies where $181 of sales were recorded for every $1 of purchases, and in consumer services where $106 of selling occurred by inside executives for every $1 of purchases. Some of the big name executives to sell large blocks of stock in the companies over past couple of weeks were folks like Larry Ellison of Oracle, and a very large number of shares were sold by various members of the Walton family of Wal-Mart. Also, G. Hutchins of Seagate Technology unloaded $411.3 million of his company's stock as reported by the Wall Street Journal on September 24.

That these big time executives are selling their stocks does not of course mean they see the same gloomy picture that your editor sees. I doubt many of them are as pessimistic as I am about the economy. However, the fact that they are taking their money out of the companies they manage and the fact that corporations are hoarding more cash than at any time in 35 years, suggests they see limited investment opportunities in the industries they know best. Why, if that is true, should we not do the same? In fact, we are doing the same, which is why we are sticking with our Model Portfolio.

Long Inflation/Short Dollars

In his latest "Pivotal Events" publication, Bob Hoye suggests that we have seen the top in commodities with an emphasis on copper being the key. Last week we saw a huge decline in base and industrial metals prices which Hoye thinks was the most important event in the markets last week. In talking about the dollar, Hoye said the following:

"Earlier in the summer we observed that the street was long risk and short caution. Perhaps this can be rephrased as 'the world is long inflation and short dollars.'

"Of course, the dollar is used to trade in items other than other currencies. This week, those who were short dollars against base metals suffered a reversal of fortune. This suggests that at some time, those who are so aggressively short dollars against other currencies are similarly vulnerable.

"Of course, the success of this position rests mainly upon the determination of the Fed to trash the dollar. We have never doubted that this dedication would ever falter or tire. However, our case has been that once there are enough asset prices declining, it (as during previous post-bubble periods) prevents even the most reckless of central bankers from continuing to trash their currencies.

"We will stay with our ChartWorks analysis, but look forward to the moment when Prof. Market denies the Fed's ability to print."

With this your editor agrees, for reasons I tried to point out in our October monthly issue. There will come a time when it will be the 1930s all over again, when the Fed's efforts to pump up the money supply will fail and the "pushing on a string" analogy will once again become prevalent. And I wonder, given the fact that corporate executives see little reason to invest in their businesses, whether we may not be getting very close to that situation now. In fact, Corporate America is retaining cash and paying down debt more now than any time in the last 35 years!

Key to this whole discussion is the continuing breakdown of the equity markets with the Dow once again falling below 10,000. It seems we may be nearing some key technical points in the Dow which if violated, could lead to a serious breakdown and a continuation of the mother of all bear markets that began in 2000. For example, were the Dow to break through the downward sloping channel at around 9750 we might see an acceleration of the bear market move.

Longer term we remain convinced we are still in the early stages of what will prove to be a psychologically devastating bear market in equities and a major, major bull market in gold. Trends for gold can bee seen from the Secular Gold Bull Market Chart that follows. So far in October, the average daily gold price (London PM fix) has been $417.32. The 20-Month average is $383.53 and the 40-month average is $344.34. If the average for October holds up, we will experience the highest average yet for gold in this new bull market. The previous monthly average was $413.98 last January when the junior gold stocks were on fire.

Unlike last January, the gold shares have not yet reached their old highs. I think that is partly due to the complacency in the equity markets where until recently puts options have remained extremely low, indicating little concern about downward risk in equities. I think that may be changing now with the recent declines in equities and if the above noted key support levels are violated, we could see a huge rush out of equities and to a certain extent back into gold and gold shares. So far, I believe this move in gold has come mostly from foreign private sector interests who have been bailing out of U.S. securities and U.S. investments in general. Remember, the U.S. dollar is being supported mostly for political rather than economic reasons. Most obvious are the Japanese and Chinese central bank policies of buying U.S. Treasuries to keep their currencies artificially weak vis-à-vis the dollar.

A key to keeping the current game of musical chairs going in the U.S. economy is of course the willingness of the consumers to spend their fool heads off as Richard Russell puts it. We did get some stronger consumer numbers for the latest reporting period, but look at the chart for consumer Non-cyclical stocks. Note the breakdown in these stocks to below their long and short term moving averages. Could this be suggesting the American consumer is about to do what he should do for his own long term personal welfare, namely save more and spend less? But if he does, it could signal the start of a global recession because of the unbalanced global dependence on this source of demand for manufactured goods. And if this weakness is tipping us off to a recession in 2005, keep in mind as John Mauldin pointed out in his most recent missive, policy makers have basically no tools left in their arsenal to fight a recession. The cant drop rates. They can't spend more. Debt is at levels getting harder and harder to service. Unfortunately, these may well be the ingredients I believe of an impending Kondratieff winter freeze up.

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TRADER ROG'S CORNER

Trader Rog's Corner was written on Friday October 15th. Keep that in mind as he frequently talks about "today" or "this morning."

OUR U.S. DOLLAR WEAKENS

We got very close to the edge in dollar trading today, as the low was 86.98. Any closes under .87, and it should drop quickly to .85 then .80, which is major support. The G-7 Ministers and Treasury Secretary Snow, along with some Fed speakers, have all stated we need to see a weaker dollar for trade reasons. Unfortunately for them, a weak dollar makes a gold rally which they do not want either. So, they will accept the weak dollar, try to smother gold with PPT shorting, and buy S&P's, as required. It makes for a perfectly grand tug of war in three or four markets, keeping them all range bound.

I think the dollar will collapse within days, and they will not be able to stop gold. Watch for a powerful gold and silver rally of brief duration. It will be brief as it shall fly too high, too fast. Keep the stops fairly tight going up the rally ladder, and when we see a faltering top, we will blow the whistle with a Hotline announcement to exit fast. Alert your brokers in advance to your goals and stops positions. This event might be very hard to control with extreme volatility.

I want to see three daily closes over $429 and some rally pressure headed toward 450. After 450, we want 480 and a very brief touch and retreat at $502 gold. If we can accomplish this by December 1, I will feel that my fall mission is accomplished, and then we plan for the January excitement. Usually, fall is seasonably the best rally, but if traders and investors see $502 gold by December, they will have a lot more enthusiasm for the metals rally coming during the first quarter of 2005.

GOLD AND SILVER

As old Greenie would say, we have had a "soft patch" in the metals. We can't have a rally every day, but do not despair, as our uptrends shall now continue for October and at least a portion, if not all, of November. Remember your December Gold Futures Options expire in mid-November and you need to get out, at the latest, a week or two ahead of time. We still have the two weeks in October to finish our gold rally and lock up some profits. Watch the Newsletter for guidelines and Hotline reports.

I pulled a new weekly silver chart today with some speed lines, hunting for more support and resistance levels. Silver stayed in a spreading up channel for an extended period, but has popped over the top line that is touching $7.00 today. This indicator shows the rally pressure toward our goal of $9.795 by December 1, 2004. From the new support at $7.00, the next resistance line goes off my chart and lands somewhere near or over $10.00 silver.

October 16, 2003

Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
http://www.miningstocks.com