Monday, September 29, 2008


"Shifting debt from the financials to the government won't bail out this stagnant supertanker, and I fear that will be the subsequent sentiment when the bailout bill is passed." Ned Davis of Ned Davis Research.

I watched the Obama-McCain debate. The two spent much of the time talking about how they were going to get rid of earmarks and about how they were going to cut way down on government spending. Neither of them get it, they just don't see the picture. Consumers are not going to be spending, they'll be cutting back. Just as corporations and businesses are cutting back on their overhead and on their spending where ever they can (much of it will be in the way of lay-offs).

If the economy is going to improve, it will be up to the government to do the spending. Governments all over the world will have to run up big deficits and increase their spending. After all, what got the US out of the Great Depression of the 1930s? It was the massive spending of World War II that finally turned the US economy to the upside. The giant war effort and related government spending put everybody to work, including millions of America's women. Jobs were plentiful. And now Obama and McCain are competing in promises to CUT government spending! Forget it. To get out of this recession, the US government will have to spend as it never has spent before, along with running trillion dollar deficits. The government will have to embark on a giant "rebuild America program." Our streets and freeways are shot, our bridges are tattered, the US government will have to engineer a massive "make work" program to rebuild America. Unfortunately, as I see it, Washington will be tempting to start another war.

Is there anything more prescient and sophisticated than the stock market? Yes, there is, and it's the bond market. But how can we know what the bond market is thinking? There is a way -- it's called the Confidence Index (CI), which is a figure posted every week in Barron's. The CI is a ratio of the YIELDS on the highest-grade bonds and the YIELDS on medium-grade bonds. The bond market is obsessed with safety and the return of the money is considered more important than the return on their money. When the bond market feels confident, it moves toward the higher yields of the less-safe medium-grade bonds. When the bond market doesn't like what it sees ahead, it moves toward the safety and lower yields of the highest-grade bonds.

As bond buyers move to the safety of the highest-grade bonds, the CI declines. When bond buyers move to the higher and less-safe yields of medium-grade bonds, the CI rises.

Below are some CI numbers along with the dates. Many years ago the CI had a wide following. The old formula we used was that the CI projects the stock market trend two to four months into the future.

2007 --
May 25 - 87.1 -- A high CI number showing great confidence.
June 29 - 86.4 -- Confidence slipping.
July 27 - 82.8 -- Confidence still declining.
August 31 - 83.6
Sept. 28 - 85.0
Oct. 26 - 81.8 -- Getting worse.
Nov. 30 - 78.7 -- Dropping below 80, a bad sign.

2008 --
Jan. 25 - 76.1 -- The ominous declining trend of the CI continues.
Feb. 29 - 74.0
Mar. 28 - 72.3 -- New low in the CI.
April 23 - 73.8
May 20 - 75.0
June 22 - 72.6
July 25 - 71.6 -- Another low -- no comment needed; danger flashing.
Aug. 29 - 68.5 -- Under 70 often signals a recession.
Sept. 19 - 74.1 -- A slight improvement.
Sept. 26 - 69.3 -- This is the latest statistic, and it's an ominous new low. The bond market is still opting for the highest-grade bonds and thereby willing to sacrifice yields. On the latest numbers, the bond market is "saying" that the economy will be worse in the period of two to four months ahead. This is a caution signal for all buyers of stocks.

Gold -- European banks have reduced their sales of gold to the lowest levels in a decade. Much of the selling by European banks took place between October and December, last year (from today's Financial Times).

Below a chart of three years of weekly gold. Gold has climbed back above its (blue) 50-week moving average, and RSI is above 50 and is trending up. At the bottom of the chart MACD is about to turn up, and the histograms are approaching zero. The Full Stochastic at the very bottom of the chart is moving up and oversold bottom and appear to be heading up.

On top of everything else, down volume, as I write is 94% of up + down volume, meaning that today could be another 90% down-day. Goldman is down over 18 points, Morgan is selling at 20.94, GM is selling at 8.99, all in all, a ghastly day. There's a hard rain a'comin'. Start cutting expenses and try to save.

From: DOWtheory

Thursday, September 18, 2008

More on the market

September 18, 2008 -- When the ratio rises, gold is out-performing the gold miner shares. The disconnect between gold and gold mining stocks may be over. Yesterday, for a change, the shares actually did better percentage-wise than the metal, which is why you see the ratio dropping at the end of the chart line. My only objection to owning the leveraged gold mining shares over bullion is that the gold shares are stocks, and in a rotten general market those who own the gold shares are tempted to throw their gold shares in with the rest of the falling common stocks. Which is what has been happening since last July. Of course, the purest play is actually owning the metal via gold coins in your possession. The gold mining shares are valued on many factors other than the price of gold. Of course, you can ascribe all of above to my own bias in favor of bullion.

Lowry's ominously reports that since this decline began, there have been a total of nineteen 90% down-days, the most of any period in the 75 year history of the Lowry's studies. I see this as massive distribution of stocks, and the implications of this are not pretty. Why have large sophisticated interests been so anxious to unload stocks, many times on rallies? We'll know the answer to this question in the fullness of time. I can't come up with the exact reason, but the action is hardly comforting.

The national debt of the US is now compounding negatively. No currency can hold up in the face of our over-spending and rapidly compounding national debt. Speaking of money, the Fed over a two day period injected over $120 billion into the US banking system. Just this morning it was announced that the Fed would quadruple the amount of dollars central banks around the world can auction to close to $250 billion "to address the continued elevated pressures in US dollar short-term funding markets." Central banks around the globe are flooding their banking systems with much-needed liquidity, and of course, gold is taking note of this trend as the net total of fiat currencies around the world surges.

This is global inflation.

In the end, gold conquers all. Back in July 1999, the Dow would buy 44 ounces of gold. Things change -- as of yesterday (see chart below) the Dow would only buy 12.62 ounces of gold. Since 1999, the Dow has lost 71% of its value in terms of gold. I expect this ratio to decline to 5 or below, before the next few years are over.

Many ignorant gold detractors claim that "gold is just another commodity". Really? The chart below shows the ratio of gold to the CRB Commodity Index. Just another commodity? Then why is gold surging while world commodity prices are falling?

The VIX was down 3.12 to 33.10.

From another standpoint, the "external market" looked deceptively good today with the Dow up 410.03 and Transports up 182. But the "internal market" didn't cut it --with up volume only 57.4% of up + down volume -- we're looking for a 90 percent upside day -- and today was far from that. So we wait for the hoped-for 90% upside day. Today there were 72 new highs and a fat 1041 new lows --33531 stocks were traded on the NYSE so a large 29.4% of all stocks traded today hit new lows, hardly a healthy showing. With crossed fingers, we wait for that elusive 90% up-day.

From: DowTheory

Wednesday, September 17, 2008

The Economy: stock market

The U.S. government took control of American International Group, Inc. in an $85 billion bailout to prevent the bankruptcy of the nation's biggest insurer and the worst financial collapse in history.

Time zones -- In the past, September and October have seen some costly market action on the NYSE, but at the same time many bear markets have ended in the September-October zone. I was around in 1949 after the fierce bear market that began in 1946 topped out. The Averages hit their lows in December of 1947, and by mid 1949 a great bull market was born.

Then there was the 1957 mess. The Dow hit its low in October, and by December the Rails hit their low. In 1958 it was all up and away for the market.

Next, I lived through the 1973-74 horror show. The Averages hit their God-awful lows in the October-December period, and from there it was higher and higher.

In 1980 the lows were recorded in March-April, and again in 1982 late-July and early-August saw the blessed lows. So each big downer is different and each one dies in its own way. Let's hope that the current down-leg dies in the next several months as so many have before. I've learned never to depend on an exact repeat where the market is concerned, but these last couple of months of the year have me on my guard.

Yesterday I wrote that I was afraid that the next phase of the economy would be a cut-back by US consumer in their spending. This usually starts with a cut in discretionary spending, eliminating the easy stuff, movies, restaurants, expensive clothes, jewelry. The chart below of the consumer discretionary spending ETF shows signs of topping out on a daily basis.

The next phase after a drop-off in discretionary spending is a general cut-back by consumers at all retail outlets. And here we see the retail ETF also looking toppy. It's been years since Americans have actually cut back on their spending. As I've said before, the current two generations are the only two in US history that have never seen hard times. Anyone under 50 in the US has never had to deal with hard times. This probably explains why Americans are so blase about the current awful stock market action. Do you know anyone who is now sitting in 100% cash? Do you know anyone who has a collection of bullion gold coins? Most Americans have never seen a one-ounce gold coin.

Good Lord, what have they done to the Wall Street I grew up with and loved? First there was Merrill, Lynch, Pierce, Fenner and Bean, and there was Lehman Brothers, and Goldman Sachs and Morgan Stanley. Lehman and Merrill didn't make it, and now we have only two masters of the universe -- Goldman and Morgan. Charts are below. Will they make it or will there be none? Hmmm, I don't like the looks of these two charts. Give my regards to Wall Street, the street is looking rather bare. Will Wall Street go the way of 52nd Street, the lost home of jazz in New York? Hey, I'm not going back to Manhattan, I'm saying out on the West Coast where it's safe.

Below, a daily chart of Goldman.

And Morgan Stanley.

Question -- I note that lately you've been emphasizing gold coins above all other forms of gold. Why?

Answer -- You may think my answer is silly. People don't tend to trade their coins. When gold goes through one of its vicious corrections, my experience from the 1970s is that many subscribers panic and sell their gold. I don't know of a case where a frightened subscriber wrapped up his gold coins and hauled them over to his coin dealer to sell them. It just doesn't seem to happen. People seem to become too attached to their beautiful gold coins. Then, when gold turns around and heads higher, the coin-holders remain IN THE GAME. That's the simple reason why I suggest that subscribers hold gold coins. They just don't sell them!
I'm beginning to hate that meaningless phrase, " Taxpayers money." It's ALL taxpayer's money. How is it that nobody ever mentioned the multi-billions the US spent on the war in Iraq, who's money was that if it wasn't taxpayer's money?

Hey, do you really want to know about taxpayer's money and taxpayer's debts? The national debt of the US is now $9.671 trillion. The annual interest on this debt in fiscal year 2008 will be $500 billion. US taxpayers are paying the ever-increasing annual cost of carrying this debt including money borrowed from Social Security. Cost of carrying the national debt since September 28, 2007 is $1.93 billion a day, and the nation is now in recession. Yet, in the last 36 years the US Dollar has lost 80% of its value. In the year 2007 if you had bought goods costing one dollar, back in 1971 those same goods would have cost you twenty cents. (I well remember the ten cent loaf of bread, and the nickel subway or ferry ride in the NYC of my youth -- figures above courtesy of Ed Reinke.)

All the above is why I continue to hold those shiny one-ounce gold coins. What will they be worth in ten years? What will the dollar buy in ten years?

Gold opened this morning up over fifty dollars to above 830 (Dec. gold). This tells me that the next crisis will be in the dollar. Gold is the safe haven for a deteriorating dollar.

Question -- Do have a bias as to which way the stock market works out? Are you completely subjective and neutral?

Answer -- Of course I have a bias as to the US and its outcome -- I put my life on the line for my country. I have five kids. The last thing I want to see is this country falling apart at the seams. Is that answer enough?

This market has the soul of a murderer. I said this before. Just when all the smart money has moved out of stocks and is in the "safe haven of US dollars," there'll be a run on the dollar. Surging gold represents a run on the dollar. Buyers are getting rid of dollars as they buy gold, which is what we saw today. How do I know if there's a true run on the dollar? Watch the bonds, they'll be falling out of bed.

The VIX was up 5.85 to 36.15.

LATE NOTES: Today there were only 12 new highs and 1018 new lows. 3312 stocks were traded today, which means that almost one-third of all the stocks traded today hit new lows -- a ghastly performance. Lowy's reports that today may have qualified as a 90% down day. I ask myself, will the Dow decline to the point where it yields a classic 6%.? I certainly hope not, but I'm ready for anything.

There are those who have made fun of the so-called crazy "gold-bugs." These are the people, many are my subscribers, who have held on to their gold like the bite of an angry pitbull. The last man standing will be he who owns gold. When all is lost, gold will still be the island of indestructible wealth.

What you read here I don't think you will read anywhere else. Feel free to send a copy of today's site to family members and friends, and even to your broker with the blessing of this old veteran.

50% Principle finally turns bearish.

Sadly, I must report that the Dow closed today down 449 points at 10609.66 -- a tragic close. This takes the Dow below 10725, which is the halfway level of the entire rise from the Dow 2002 low to the 2007 Dow high. The great stock market balance has finally tipped over to the downside, and the extent of the potential market losses ahead are now unknown. I was hoping that the downside of the Dow could be confined to the area above 10725, but this was not to be. I now urge subscribers to move as far as possible into cash and T-bills with a balance against catastrophe via gold coins.

I just spoke to my coin dealer, who told me that he is able to get sporadic groups of American Eagles, but Krugerrands are "off the market" and where available are selling at huge premiums. He can obtain Canadian Maple Leafs and in rare cases odd lots of various gold coins. The US mint is out of Eagles.

December gold closed today up 70 dollars to 850.50. Shades of 1979, and subscribers who were with me in the '70s know what I mean.

Scoreboard --- Markets - Percentage of Change for this year
Index 2008
Dow Industrials -16.6%
Mumbai -33.4%
Toronto -11.6%
Singapore -29.0%
Stockholm -25.2%
Sydney -25.3%
Frankfurt -26.1%
Paris -27.2%
Milan -30.4%
Johan. (Comp.) -13.7%
Zurich -18.0%
Brussels -30.3%
London -22.2%
Amsterdam -28.0%
Mexico City -16.7%
Japan (Nikkei) -24.2%
Hong Kong -34.2%
Seoul -26.9%
Shanghai B -65.9%

Tuesday, September 09, 2008

Lehman crashing a shocking 6.36 points: almost a 50% drop.

There's nothing scarier than a market that goes steadily lower with no obvious reason and no news. Today was a weakish down-day with down volume only 46% of up + down volume, far from a 90% downday. This time Transports joined the Dow in breaking preceding lows, so the downside is in harmony with both D-J Averages, no non-confirmations here. The volume leaders today included many large banks and financials with Lehman crashing a shocking 6.36 points to 7.79, almost a 50% drop. That's enough to scare even the staunchest bull. And where it ends, nobody knows.

Where's the damn outrage? -- The two CEOs who were relieved of their duties at Fannie and Freddie, as I understand it, received parting gifts of $9 million and $14 million. Disgusting! And what about the CEO's of all the big banks and the 219 local banks on the "watch list." They allowed their banks to buy so many toxic bonds that when the bonds were priced to market, the banks were seen to be under water. What happens to all these moron CEOs? Do they get kicked out with gifts of millions too? Where's the responsibility? Where's the justice? Where's the outrage? Why aren't charges brought against these fakers who got away with super-stupidity and derelictions of duty? Why are they receiving millions as they are kicked out of office? Disgusting, shameful, ugly! And there's no outrage.