Richard Russell On Stocks & US Dollar
Last night I read through Warren Buffett's annual Berkshire Hathaway report, which is always a fascinating and pleasurable task. Buffett can be very casual and even philosophical in one section of the report and then all business in the next section. One particular paragraph in his report struck me, and I'll repeat it below.
"There are many giant company managers, whom I greatly admire. Ken Chenault of American Express, Jeff Immelt of GE, and Dick Kovacevich of Wells Fargo come quickly to mind. But I don't think I could do the management job they do. And I know I wouldn't enjoy many of the duties that come with their positions -- meetings, speeches, foreign travel, the charity circuit and government relations. For me, Ronald Reagan had it right: "It's probably true that hard work never killed anyone -- but why take a chance?'"
"So I've taken the easy route, just sitting back and working through great managers who run their own shows. My only tasks are to cheer them on, sculpt and harden our corporate culture, and make major capital-allocation decisions. Our managers have returned this trust by working and effectively."
Everybody is fascinated with Warren Buffett. Sure the billions of dollars and his incredible intelligence and success have been part of the fascination. But what interests me about the man is that he knows himself, knows what he likes and what he needs. Unlike many "showboat" millionaires and billionaires who literally live to impress the world with their successes, Buffett lives within himself. He doesn't have to prove anything. He leads by example. One of Buffett's habits and pleasures is simply walking around the streets of Omaha and saying "Hello" to people as they pass. Everybody in Omaha knows Warren Buffett, if not personally or by sight.
Buffett is probably the only billionaire on earth who has no enemies or even angry critics. Aside from his monetary successes, he's one very unusual guy.
On to the stock market. We might as well look at the Dow first, because that's where everyone looks, if not first, at least second or third. In February the Dow took a 592 plunge in a very short time. The daily chart below shows that plunge very clearly. RSI dropped to oversold as did the histograms at the bottom of the chart. As a rule, the market will stage an almost automatic 50% recovery following a crash -- and that was a crash.
Thus, what we're seeing now is really automatic, it's a post-crash recovery, and it's going to take some time. Is the recovery weak or strong? Note that volume has dropped off dramatically as stocks work higher, but it's early so I wouldn't give the market bad marks for that. If the Dow can't make it at least halfway back to the highs, that would be a negative indication. Normally, after the halfway recovery the market will come down and test the crash levels again. The lows had better hold.
So you see, we have what should be some interesting post-crash ahead of us. I'll try to make sense out of the action as we move along.
A lot of the gold-holders are getting "antsy" about the action of gold. They want gold above 735 and quickly. And so far, gold hasn't obliged. This has discouraged some gold people, even angered others. "What's wrong? I own gold. Why isn't it surging?"
There are many reasons why gold will move -- up or down. And the reasons vary from month to month and even year to year. Right now, I believe gold is being guided by strength or weakness in the dollar -- this rather than inflation or deflation. OK, so let's look at the dollar -- and maybe in a different way. Because I don't think most people are looking at the dollar the right way.
I show a weekly chart below of the US Dollar Index going back three years. And here's what I note. Despite all kinds of rallies and declines, the dollar today is higher than it was in March of 2005. In fact, if we look at just the lows, the dollar has been building a series of higher bottoms. Most recently, I've heard much talk to the effect that "the Dollar Index is sure to break below its recent December low of 82.30." But that hasn't happened, which is discouraging to gold people. In fact, looking at RSI and MACD, the dollar looks as though it could rally.
This "hidden strength" in the dollar is misleading a lot of investors. Furthermore, with Japanese rates at a still ridiculously low .5%, the carry trade remains alive and healthy. Borrow yen at 0.5% and buy dollars at 5% or buy New Zealand dollars at 7%. The dollar is still wanted by investors.
My whole point is this -- the long-term fundamentals all seems to point to a major dollar decline. And I don't doubt that major dollar trouble lies ahead. But not yet. Investors still like the fact that the dollar pays a better rate of interest than most other currencies. But isn't there a risk in holding dollars? Sure there is, but so far the dollar has acted OK. The December lows have held. If the dollar starts to weaken from here, "We'll bail out." But the dollar is holding, and may even want to rally.
That, I believe, is what's holding gold back. Gold may not move decisively higher until the dollar moves decisively lower. Patience, gold holders, patience.
Richard Russell
Editor-in-chief - DOW THEORY LETTERS
http://ww2.dowtheoryletters.com
March 9, 2007
The inimitable and venerable Mr. Russell gained wide recognition via a series of over 30 Dow Theory and technical articles that he wrote for Barron's during the late-'50s through the '90s. Through Barron's and via word of mouth, he gained a wide following. Russell was the first (in 1960) to recommend gold stocks. He called the top of the 1949-'66 bull market. And almost to the day he called the bottom of the great 1972-'74 bear market, and the beginning of the great bull market which started in December 1974.
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