Russell Monday 14th letter.

Sorry, but for some reason the charts do not paste. You guys do great charts anyway! JDJ April 14, 2008 -- "Inflate or Die." I've used this expression for years. But I was rather surprised when I read in today's Wall Street Journal (Op-Ed page) an article with the title, -- The Inflation Solution To the Housing Mess." Sure, I knew this would be the way we would go, but what surprised me was that the conservative WSJ would publish such an article. The article was too honest, too blatant. And it made sense. ........................................ Where are we? What's our investment position? Answer -- same as before, one-third or more in cash, a large position in gold (up to one-third of liquid assets) and the final third in your home. But unfortunately, there's no truly "perfect" or absolutely "safe" position at this time. At almost any other time since World War II you could have moved into a "safe" position and that safe position would have been cash. But with the purchasing power of the dollar now accelerating to the downside, cash isn't the safe harbor that it once used to be. Of course you can move into the euro, but the euro seems ridiculously expensive on a purchasing power parity basis, meaning that the euro is wildly overpriced in terms of what the euro can buy compared with what the dollar can buy here in the US. Americans living or traveling in Europe (and in many places in Asia) are shocked to see a cup of coffee at seven or ten dollars, or breakfasts at thirty dollars and up. It appears that no one wants to load up on dollars; nevertheless, technically, the dollar is drastically oversold, and betting against the dollar, short-term, is hardly a brilliant or even a safe play. From what I head, European exports to the US are not getting killed. Prices of Euro goods are "through the roof" in the US, and I note (again) that here in La Jolla we're flooded with European and Asian tourists (some come to the States just to shop). With the economies of the world in chaotic shape, gold becomes an intelligent place to be. "Shadow" statistics show M-3, the broad US money supply, expanding at a near-20% rate -- this is monetary inflation pure and simple. Our wealth is being decimated by taxes and inflation and that being the case, a position in gold makes sense. Gold continues to be our defense against a government that aspires to be both policeman to the world and a modern-day empire. Nice work if you can get it, but not so nice if you get it by borrowing at the rate of over two billion dollars a day 354 days a year. As for a home, maybe I'm weird, but I like the feeling of living in a house that I actually own, rather than sharing my home with a bank. A home isn't portable like a diamond or a gold coin, but a home is a tangible item that can be a source of comfort in an uncomfortable world. I lived in New York apartments for the first 35 years of my life, and from experience, I prefer living in my own house. And if that house in within walking distance of the Pacific Ocean, so much the better. How about stocks in today's world? If you own your stocks at "reasonable" prices and if you are following a compounding program, I think dividend-paying stocks make sense. However, it's still not decisive (at least to me) whether we're in a bull or a bear market, so speaking for myself -- I'm just as happy to be pretty much out of stocks while spending my time trying to figure out this market. Over recent months we've experience a parade of 90% down-days on the NYSE, and I've been puzzling over this action all weekend. The puzzle is that with a total of ten panic 90% down days, the broad market is still holding together -- with both the D-J Industrials and the Transports are still well above their January-March lows. If a year ago you had told me that this would happen, I would not have believed you; I would have thought it darn near impossible. The business and economic news today is awful, maybe as bad as I've ever heard it. The banking system remains in trouble, consumers are cutting back, the government itself is in trouble (deficits and wars), housing is in trouble. And the dollar is in trouble. How bad can it get? Well, there is one bright spot -- US corporations are in good shape, and they are loaded with cash. So in view of this laundry-list of troubles, why or how are the D-J Industrials and Transports able to hold above their recent lows? Or to put it another way -- what could the Averages be seeing or discounting which keeps them from falling apart? Of course, there's always the chance that the Averages will fall apart in the days and weeks ahead. This, by the way, is why I still elect to remain heavily in cash. With it all, the D-J Transportation Average has been the hero of the day and the year. In previous recessions, I've seen the Transports (previously referred to as the Rails) lead the way down. I well remember the Rail Average at the 1974 low selling for the incredibly low price of 57.93. At that time subscribers were writing to tell me that railroads were a dying industry, and that the railroads were on the verge of becoming history. Last Friday the Transportation Average closed at a price of 4813.86, which suggests that the Transports will be around for at least a while longer. In fact, as of last Friday the Transportation Average was 673 points ABOVE its January 17 closing low. And being a Dow Theorist, I'm naturally most interested to see whether the Transports can continue to hold above their January 17 low of 4140.29. So saying, let's take a look at the Transportation Average. The chart below shows the Transports not only holding above their January and later March lows, the Transports are even holding above a rising trendline. This is certainly impressive. Remember, for a Dow Theory bear signal the Industrials would have to break below their March 10 low of 11971.19 confirmed with a Transport violation of its January 17 low of 4140.19. And so far, despite being bombarded with bearish news, that has not happened. So again, where are we? Lowry's believes we are in a major or primary bear market. Their Selling Pressure Index is just below a multi-year high, meaning that there is still a huge supply of stocks to be sold. At the same time Lowry's Buying Power Index is at a multi-year low, meaning that the desire to buy (demand) is minimal. Under these conditions, Lowry's believes that the market is heading lower, and will continue lower until unmistakable signs of a bottom appear. The bottom-indications that Lowry's is looking for are clearly absent. I've followed Lowry's for decades and have great respect for their work. I've also followed the Dow Theory closely for half a century. I've lived through a good many bull and bear market, including the great bottoms of 1942, 1949, 1974 and 1980. Those were all classic Dow Theory-type bottoms, by which I mean they were bottom where stocks were selling at great values. When I say great values I mean blue chip stocks were selling at single-digit price-earning ratios while dividends were in the 5% and higher levels. Obviously, we're not even close to that kind of a "great value" stock market bottom. According to the current Barron's the S&P is now selling at over 20 times earnings while providing a mini-dividend yield of 2.16%. Most analysts and investors today have never seen a time of classic great values in stocks. So the question I ask myself it this -- are we heading down to a classic bear market low, the kind of low that Lowry's is expecting, maybe even the kind of low that we saw at the 1974 or the 1980 bottoms? That's obviously a possibility. There are enough bearish elements in the US and world economy to suggest and even allow for such a crushing bear market bottom. But if we are in that kind of vicious bear market, if a once-in-a-generation bear market low lies ahead, then it's got to start somewhere. It's got to take the first step. That first step would be the D-J Averages breaking below their recent January-March lows. Which is why I'm both cautions and optimistic. I'm cautious because yes, it could happen. The Averages could break down below their recent lows. But I'm optimistic because the Averages have NOT yet violated their recent lows. Consider this (again) -- on January 22 there were 1,114 new lows on the NYSE. Friday, with the Dow plunging in a panic-type 256 point drop, there were only 50 new lows on the NYSE. On top of that, investor and consumer sentiment remains dramatically bearish. It's almost painful to read today's business newspapers and magazines -- the University of Michigan's latest poll shows consumer sentiment at its lowest level in 26 years.. Analysts are calling the current economic situation the worst since World War II -- and yet the Averages are still NOT violating their lows. And that's impressive. So is there a conclusion to the current situation? Not yet, but I do think this -- so far the D-J Averages have refused to break down in the face of outstandingly bearish news, and that's what I call a bullish response. There's no way around it. The fact is that the Industrials and Transportation Averages are holding up; in the face of horrendous economic news. Bullish. What could be further confirmation of the bullish stance? Further confirmation would be the Averages starting to make headway on the upside. Here, I'll give you an example. Below we see a daily chart of the widely-followed S&P 500 Composite. Friday the S&P did poorly -- as you see it sold off and closed below its 50-day moving average. What would good action look like? Good action would be the S&P turning around and closing first above its 50-day MA, and then above its February peak. And then to put icing on the cake, the S&P would close above its (red) 200-day MA. That would be excellent action -- the trouble is that it hasn't happened yet. Conclusion -- We wait. We know what we're looking for, but we wait. The market itself will tell us whether the bull or the bear case is the correct one. For now -- we wait. TODAY'S MARKET ACTION -- My PTI was down 2 to 5930. Moving average was 5939 to my PTI remains bearish by 9 points. The Dow was down 23.36 to 12302.06. No movers in the Dow today. May crude was up 1.62 to 111.76. Transports were up 19.44 to 4833.30. Utilities were up .30 to 500.44. There were 1340 advances on the NYSE and 1956 declines. DOWN volume was 60.3% of up + down volume. There were 44 new highs on the NYSE and 93 new lows. My 5-day high-low differentials declined from minus 27 to today's minus 160. Total NYSE volume was 3.50 billion shares. S&P was down 4.51 to 1328.32. NASDAQ was down 14.42 to 2275.83. My Big Money Breadth Index was up unchanged at 824. Dollar Index was up .40 to 72.10. Euro was down .16 to 157.7. Yen was down .18 to 99.33. Bonds were lower. Yield on the 10 year T-note was 3.49%. Yield on the 30 year T-bond was 4.33%. Yield on the 91 day T-bill was a micro 1.03% as investors play it super-safe and want to be sure they get their money back. CRB Commodity Index was up 1.62 to 539.43. June Gold was up 1.70 to 928.70. May silver up 10 to 17.79. July platinum down 46.60 to 981.50. GDX down. 22 to 48.00. HUI up 2.72 to 446.03. ABX up .28, AEM up 1.00. GG up .73, NEM down .84. PAAS up .65. Gold and silver just drifting around, but silver outperforming gold. I'll have more to say about this tomorrow. STOCKS -- My Most Active Stocks Index was down 7 to 302. The five most active stocks on the NYSE were -- WM down 2.26, GE down .30, C down .85, CC up 1.07, and BAC down 1.36. The VIX was up .36 to 23.82. CONCLUSION -- Nothing proved today. Transports again strong, closing 693 points above their January 17 lows. There were 93 new lows today; an increase but still far lower than the 1,114 new lows of January 22. Don't get impatient; the market has just given us its verdict yet. And that winds up Monday's session. Tomorrow, folks, we'll know more tomorrow. Russell ............................................................... Talk -- The latest (April) Economist magazine's lead off editorial is entitled, "The Great American Slowdown." The Economist thinks the recession could be "shallow and lengthy," and the magazine notes that "you could do a lot worse." One of the potential saviors of the current situation is that US corporations tend to be in good shape, loaded with cash, and in better shape than they were during the last two recessions. Then note that Fed chief Bernanke told Congress that growth will strengthen in the second half of this year "nourished by lower interest rates and the fiscal package." In 2009, predicts Bernanke, the economy will be growing "at a little above" the trend rate, which the Fed thinks is around 2.5%. In general, the Economist and many economists believe the downturn will be shallow and drawn out. The less optimistic side of the story comes from columnist Jim McTague in this week's Barron's. After talking to many bank analysts, this is what McTague hears and fears -- over the next two or three years as many as 500 banks are likely to be closed or merged. . . Most people who bought homes after 2000 will find that they have negative equity as home prices continue to fall. . . If unemployment rises to 6% from 5 .1%, most of these people will be tempted to abandon their homes. ....................................... I talked to son Ryan, yesterday. Ry opened his Tinderbox restaurant in San Francisco about eight months ago. I asked him how business was in view of the "recession." Ry told me that "business is booming and he could actually use more space." He added that so far, the recession doesn't seem to have hit San Francisco. He noted that many San Franciscans have cancelled their trips to Europe or Asia and have decided "just to stay in San Francisco, save the money, and have a good time." Ryan thinks the "stay at home trend" has been a big plus for his restaurant. Yesterday I also talked to daughter, Lauren, who recently moved to my old home town of New York (Lauren loves the City). I talked to Lauren with Skype through my computer (costs nothing). It's really amazing. I can see Lauren, she can see me, and the talk came though perfectly clear. A week ago Faye talked for an hour via Skype to her best friend, June, in Paris. They could both see each other perfectly. Talking face to face via the Internet -- the wave of the future. I love Skype -- I think it's fantastic. Of course, you have to allow for my enthusiasm, I was around when radio was first becoming popular back in the early twenties. ....................................................................... From the April 2 New York Observer: "For the Super Rich, The Boom Years Have Just Begun. At the top level of the Manhattan market, prices continue to set records; average luxury apartments now $7.66 million. . . The average sales price of a luxury apartment here increased from 33.5% from the fourth quarter of 2007 and 65.2% from the first quarter a year earlier. . . The median price went up 16% quarterly and 45.7% annually. The explanations fall by the wayside. Foreign money? Perhaps; but foreigners make up maybe one-third of all new-construction buyers, and that's not enough to truly tilt the market significantly one way of the other. Cheaper financing? Luxury buyers aren't nail-biting over mortgage rates like most people. Wall Street? The Street's had a bad stretch going back to at least the autumn months. Perhaps it's just money and demand -- Economics 101. Russell Comment -- New York's where the big money is, and New York's where the power-elite of the world want an apartment. And one more thought -- is this a preview of world inflation to come? I think it may be. New York tends to lead when in comes to money, just as the West Coast tends to lead when it comes to social trends. Interesting thought -- remember the old "hemline thesis?" The length of women’s skirts tells you the way the market going to go. Well, right now the trend is thigh-high short skirts and stiletto high heels. Aside from very sexy, could this be telling us something about the market ahead.

Honest opinion?... Fluff....

I'm delighted to read Richard Russell's opinion, but I believe he copyrights and sells his material. I think what you want to do is provide a paragraph or two and then link to his Dow Theory Letters like that.

Edited by Jnavin, 14 April 2008 - 05:58 PM.

I'm delighted to read Richard Russell's opinion, but I believe he copyrights and sells his material. I think what you want to do is provide a paragraph or two and then link to his Dow Theory Letters like that.

I didn't think he'd mind since he was getting a pretty bad wrap from 1 published article that was posted here.

As I last posted:

A number of people have mentioned that Richard was bearish on the market since 2002. Granted that was the case but he still participated in the run up by compounding his long term dividend paying stocks and remember he was long gold. Which would you have liked to have purchased in 2002 and held to today SPX or GLD? If he held & compounded his stocks and purchased & held GLD since 2002 what percentage of investors do you believe have had better returns? I'm betting that number is very low!

I am not saying this guy is great at all, just giving him some credit. It's easy to point out that he was bearish on the market since 2002 and make him sound dumb. Say that he was bearish on the market but bullish on Gold since 2002 and he appears to be a genius!

JDJ

Tell me J.D. what did you find actionable in his report? To me, for trading purposes... I expect a subscription service to give me either some kind of technical edge on entering and exiting trades, or a list of recommendations... maybe even a model portfolio.

As an active market participant... I do not need a recap of the "closing" prices of the indices etc. What is important is how those issues traded, highs/lows/volume etc. So that's of no use to me.

And as far as the shameless plug for his son's restaurant, that's fine... except that his relayed observation about business in San Francisco doesn't match the truth. I live in the Bay Area... A year ago there was plenty of business, you needed reservations... Today's situation is that people are dining in more than dining out, there are less business travelers, and our economy is slowing down. I live on a mountain overlooking the SF Bay, I see Richardson Bay Bridge from here... Highway 101, all the traffic from Marin and Sonoma Counties North of here cross that bridge going to/from S.F. There is no rush hour here anymore. The freeways would back up coming and going a year ago, now I can count the cars going across. That's at 5 o'clock in the evening.

Gas in San Francisco is well over $4 a gal, parking is $10 or more per hour, parking tickets run over $50 each, food prices here are skyrocketing and restaurants are struggling for business.

So, I while I find his technical information useless, I find his this-information about the S.F.Economy disgusting...

Here, I decided to check this guy's story out about his restaurant. Read some of the comments from his patrons:
http://www.yelp.com/...t-san-francisco

The place was deserted and you could smell the desperation of the management which only added to the stench of that awful popourri popcorn and burning fat on the steak.

Nice lighting... Awful food, insufferable arrogance. We cannot wait till this embarrassment closes. Shame on those pretentious owners for over-thinking a neighborhood place in a neighborhood that is starving for a small yet classy place to enjoy - take your overdone cheap theatrics back to the midwest where they obviously came from. San Francisco is not your town.

Food was mediocre, service was generally average, food was overpriced for the portion. We spent last Friday evening here having dinner, it was somewhat empty, but service was attentive.

I won't be heading over there to try it...

Edited by SemiBizz, 14 April 2008 - 07:19 PM.

Honest opinion?...

Fluff....

Exactly. Money is made in trading. Trading requires action. Newsletters are mostly
for entertainment. A great newsletter would cut the crap and just say buy or sell
XYZ...now.
D

Tell me J.D. what did you find actionable in his report? To me, for trading purposes... I expect a subscription service to give me either some kind of technical edge on entering and exiting trades, or a list of recommendations... maybe even a model portfolio.

As an active market participant... I do not need a recap of the "closing" prices of the indices etc. What is important is how those issues traded, highs/lows/volume etc. So that's of no use to me.

And as far as the shameless plug for his son's restaurant, that's fine... except that his relayed observation about business in San Francisco doesn't match the truth. I live in the Bay Area... A year ago there was plenty of business, you needed reservations... Today's situation is that people are dining in more than dining out, there are less business travelers, and our economy is slowing down. I live on a mountain overlooking the SF Bay, I see Richardson Bay Bridge from here... Highway 101, all the traffic from Marin and Sonoma Counties North of here cross that bridge going to/from S.F. There is no rush hour here anymore. The freeways would back up coming and going a year ago, now I can count the cars going across. That's at 5 o'clock in the evening.

Gas in San Francisco is well over $4 a gal, parking is $10 or more per hour, parking tickets run over $50 each, food prices here are skyrocketing and restaurants are struggling for business.

So, I while I find his technical information useless, I find his this-information about the S.F.Economy disgusting...

SB,

I am new to this game. I spent many years working hard for my money and raising the family, and would like my money to start working harder for me now. I like Richards’ long term approach using compounding but I’m not sure that’s for me. Although I enjoy reading the posters here and have learned plenty I’m sure day trading is also not for me, so as I stated once before I guess I’m a tweener.

I have considered putting my money with a manager but paying $20,000 plus a year doesn’t seem right. Right now I’m learning and trying to decide what might fit me best. My first 2 years looked quite ugly but this year has been better. Either I’m learning or getting lucky, who knows.

As far as Richards’ comments on San Francisco, maybe his sons business is one of the ones that is doing real well right now. I know in my business you can talk to many people that think things are in the toilet & I think everything is rosie!

JDJ

JD, consider this... if you aren't willing to trade... your money is going to be at risk garnering a sideways return... Just look at the last 3 months...

http://bigcharts.mar...&mocktick=1.gif


If you held, you net return was basically zero, but there was a 10% trading band available, and you could have made a real tidy sum. In a bear market, it is not about compounding by holding long term, it's about capital preservation... for me that is keeping my account liquid, with measured high reward, low risk plays.

Takes a little time to learn, patience and discipline, but it pays.

A chart of the S&P 500 for the last nine years JD.

http://data.moneycen...8&CE=0&CF=0.jpg

A chart of the S&P 500 for the last nine years JD.

http://data.moneycentral.msn.com/scripts/chrtsrv.dll?symbol=$INX&E1=0&LPR=2&C1=2&C5=4&C5D=14&C6=1999&C7=4&C7D=14&C8=2008&D5=0&D2=0&D4=1&DD=1&width=612&height=258&CE=0&CF=0.jpg

Semi & Milbank

Points well taken which is why I do not care for Russells buy & hold compounding method at this time. In a longterm bull market I'm sure he and others did well. It's pretty obvious that the times are changing.


JDJ

Edited by jdjimenez, 14 April 2008 - 08:12 PM.