The Reaper Market Comments

September 2, 2002

Metals

Gold and silver may be bottoming now. The latest they should bottom is between fall equinox and September 27 according to my turning point work. If the U.S. attacks Iraq in this time frame (increasingly unlikely), gold could explode higher. Seasonally, gold is due a low in this time frame. ...It could be time to take delivery of some gold and silver coins. The physical metals themselves so far are outperforming the shares. But, if even $1 billion moves into the mining shares, the share prices could jump 50% almost overnight, possibly 100% in the junior mining stocks. One percent of money in equity mutual funds moving into mining shares could lead to skyrocketing mining share prices and trigger the short covering of the gold hedge positions held by the big banks. In such a case we could see a geyser-type explosion in gold. ...Gold even made the cover story of the Money section of USA Today on August 15. So far investors have put $650 million in gold funds this year. The U.S. Mint sold 48,000 Gold Eagles in July, 60,500 ounces in all, up 20% from a year earlier. July sales of gold were up 50% at some coin dealers. Some coin dealers sold as much gold in the first six months of this year as they sold in all of 2001. To offset this investor buying somewhat, the Swiss National Bank sold 7.8 metric tons of gold reserves in a 10-day period ended August 20. So far, the Swiss National Bank has sold 577.7 metric tons since it began its program of selling 1300 tons of "surplus" gold reserves in May, Y2K. ...The rule of thumb regarding gold still holds. As the U.S. Dollar rallies, gold declines. Gold made a secondary high on July 19, precisely when the U.S. Dollar made its intermediate low. ...It could be argued that the long-term fundamentals for silver are more bullish than they are for gold. There are reportedly only about a 100 million ounces of silver available (as of July 1). Short positions are reported to be approximately 1.8 billion ounces, a huge spread in favor of the bulls in silver. The U.S. Mint reportedly ran out of silver in mid-July. The U.S. government stockpile of silver is gone. Free available stocks of silver are said to be quite tight. But fears of recession have hurt silver, as it has hurt copper and palladium. ...There is reduced jewelry demand from Asian citizens, and reduced demand from automakers for both platinum and palladium. There has been Far East speculative buying of platinum, as the lease rates shot up. ...December gold has declined into the $290-$300 support zone, where it should hold. December silver has declined into $4.20-$4.40 support zone where it, too, should hold. ...October platinum is set to retest its double top at $560. ...Palladium continues to bounce along bottom at $320. Copper, a weak economic commodity, is languishing below 70 cents.

Recommendation

Futures investors profitably long December gold on scale-down weakness, use $294.40 open protective stops. Target: $450. Futures investors may scale-down purchase December silver with $4.19 open protective stops. Target: $5.50.

Stock Indices

This Reaper is about taking "stock" of reality. Approximately $35 trillion has been lost globally in stocks to the high-tech gods of dot coms and New Economy flakes, as well as other stocks in low places, such as Enron. In keeping with the theme of this rip-off, the August 2002 Playboy feature pictorial (I am told) is entitled "Women of Enron." It would seem that everyone everywhere associated with Enron has been skinned. ...When will the blue chip of blue chips (General Electric), the former manufacturing company which is now a debt juggling finance company (parent/owner of CNBC, where Bubblevision is consistently telecast), finally falls from grace? What will be GE's real earnings once pension plan liabilities and option costs are computed? ...Optimism among U.S. investors remains a Bruce Willis-type "die hard." AAII found 43.75% are still bullish on stocks. In mid-August, Merrill Lynch said that two-thirds of analysts are still bullish. This is still excessive. U.S. households maintain 57.1% of their assets in stocks, which is only 0.6% below the all-time high of 57.8% in November Y2K. But Charles Schwab has already eliminated nearly 7900 jobs as individual investors are not trading all that much any more. American investors pulled $55 billion out of mutual funds in July. But we have further down to go since there is still over $4 trillion in equity mutual funds. Meanwhile, the Investor's Business Daily Mutual Fund Index is down 23% this year alone.

The cost of options and pension plans is really going to cut into corporate profits, as is the normal contraction in business in this fierce global competitive environment. Pension plan lack of funding is approximately $200 billion. S&P 500 companies are going to have to cough up $150 billion for projected pension plan obligations. Based upon options in the S&P 500 companies, S&P 500 earnings could be overstated by as much as a third. Value is still not there, either. The P/E for the S&P is 35.5. The dividend for the S&P is 1.73%. Long-term historical realities suggest a yield of 6%-7% and P/E ratios of 12-15. ...The long-term bar charts showing the massive bearish head-and-shoulders tops on the S&P, Dow Jones Composite, Dow Jones Utilities, Wilshire 5000, and New York Composite are still intact with rallies back up toward the necklines. DJIA resistance: 9,100-9500. S&P resistance: 965-1,000. NASDAQ resistance 1050-1100.

Once this August vacation pause is out of the way, things could again turn interesting in September, particularly around fall equinox in the last third of September. Volume has not been impressive on this stock rally. This is consistent with a bear market. Insiders are still bailing out of their positions. In the first quarter of this year, for the first time in a decade, U.S. corporations sold more stock than they bought. Foreign investors are no longer pouring money into the U.S. stock market. Internationally, representing the world's second largest economy, the Nikkei Dow, is on its lows. The Dow Jones Transports and the Dow Jones Utilities and the NASDAQ have rallied unimpressively. (The Dow Jones Utilities have lost more than during their 1973-74 bear market.) Insurance companies, college endowments, pension plans--nearly every institution--has been severely hurt financially by this bear market. The big economic picture is that U.S. GDP is $10 trillion a year, and U.S, stock market losses are between $7 trillion-$8 trillion. The hard truth, too, is that the few people that had savings, the Baby Boomers and older, have been decimated by stock market losses and now by low interest rates, where they earn zip on their savings. Some Baby Boomers and younger are heavily in debt and are now being pinched hard with job and salary cuts. How long until the refinancing, which has funded more consumer borrowing and spending, also contracts? Toppy home building stocks and a bear market in lumber suggest the housing bubble will be next to go. The stock charts of Fannie Mae and Freddie Mac are starting to resemble the bearish/neutral chart patterns of the retail stocks, such as Wal-Mart and Target. Competition is fierce internationally due to cheap Asian labor in China and India. So, profits are shrinking. Corporate profits are going to continue to shrink due to the contracting economy, too, plus the huge option and pension unfounded obligations.

The U.S. Dollar, with low interest rates, is falling from favor internationally, as the Bush Administration is standing alone against the world with the decreasing possibility of an Iraq attack in late September. Then there are the huge gains the Democrats are likely to make in this November's elections. None of this is bullish for the stock market. At best we should expect a wide swinging trading range.

Recommendation

Futures investors short December S&P on scale-up strength toward 1000 use 1031 open protective stops. Target: 650-750. Or, futures investors may sell December NASDAQ short on scale-up strength toward 1100 with 1161 open protective stops. Target: 800-900.

China is poised to become world's biggest gold consumer.