From: Greg Simmons [mailto:GSimmons@rothcp.com]
Sent: October 16, 2003
To: Greg Simmons
October 16, 2003 -- What are the three items that the US public owns? The three are houses, stocks and debt. Since any study of the markets demonstrates that it's best to avoid what the public is heavily in, I see these three items -- homes, stocks and debt as being increasingly risky. From a strict economic standpoint, it would pay us in the long run to be OUT of all three.
I understand that it is difficult and emotionally almost impossible to dump your home. It's easy to jettison your stocks. And for most people, it's close to impossible to get rid of your debts.
The current bear market correction against the primary trend is now about one year old. As I see it, this correction is getting rather old, and it would not surprise me to see this bear market correction end at any time.
I also see the current market advance being referred to openly as "a new bull market." This type of hype will serve to bring the investing in, which, of course, is exactly what the bear wants.
I was particularly struck by today's lead editorial in the cheerleading Wall Street Journal. The editorial starts, "The good economic news keep coming. Yesterday's reports included bullish growth for September and early October from 10 or 12 Federal Reserve districts, and another spate of sharply higher corporate earnings. Sooner or later this is going to be noticed by the American electorate, perhaps even by the Democrats running for president."
And my comment was yes, signs of improvement -- but at what a cost! Tens of billions added to the national debt, massive inflationary increase in the money supply, consumers loading up with even more debt, the worth of the dollar increasingly in doubt, and inflation picking up again.
All this to insure that the Bush administration has another go at it -- a second term? All this manipulation so the Fed can claim that it has "avoided a recession"? None of this seems to bother the cheerleading
Wall Street Journal. All it means to me is that I have to read the Financial Times if I really want to know what's going on.
I really hesitate to write the following, because it's bad for Wall Street, bad for business, even bad for my own business. But what the hell -- I'll be 80 in July, and when you're over 75 there's a law (I think it's included in the Constitution) that says that you can say anything you want and you can't be sued.
Here's what I'm going to say. The average person should not be in the stock market. The reason is that over time the average person loses money in the stock market. Look, we've had the greatest bull market third phase in history, running from the mid-1990s to the year 2000.
The US has never seen anything like it. And how about the average investor? How did he do in that fabulous, crazy, stock market blow-off -- and where is he now? My bet is that the average investor has now, net, lost money in the stock market. I've made this bet based on many people that I've talked to. And yes, the average investor would be ahead now if he'd never, ever entered the stock market. My bet is that right now, over all, the average investor has LOST money in stocks and mutual funds.
It's a lot like the publicity out of Las Vegas. You constantly hear reports of this or that person who hit a jack pot or came back from Vegas "with more money than when he left." But who ever talks about the losses? Who talks about the tens of thousands of people who leave Las Vegas with a thinner wallet and without their Rolex (which they hocked)?
Why is it this? Why do people lose their money in the market over time? Here's what I think is happening. My formula is that 90% of all decisions that people make are based on their emotions. This includes decisions made regarding buying and selling stocks, bonds, homes, gold, jewelry, art, collectibles -- you name it.
This, by the way, is why I advise people to avoid auctions. When you are bidding against other people, emotions come to the fore, and you usually overpay for an item. So my advice -- unless you are a true expert on the items you are bidding for -- stay away from auctions. Most of the time you will overpay.
Wall Street is basically a selling organization. Wall Street exists for the purpose of selling securities to the public. Wall Street is a distribution machine. As a rule, the securities that Wall Street sells are not priced at bargain levels. If they were real bargains, Wall Street wouldn't sell them to the public, they'd buy those "bargains" themselves.
The retail public doesn't understand values; they buy poor values, and ultimately the retail public loses money on those poor values. Example, the public today is back buying high P/E stocks which provide low or more often no dividends. The public will ultimately lose money on these stocks because they're overpaying for those stocks.
On the other hand, gold is cheap -- gold today is less than half the price it was at its 1980 high. Adjusted for inflation, gold based on 1980 prices should be over 2000. Gold today is undervalued, but the public won't touch it. The public doesn't understand or appreciate values. The public will buy gold when their emotions tell them to buy gold. That will occur when gold is much higher than it is today. Surging gold prices will trigger the public's emotions regarding gold. Thus, the public's entrance into the gold market will come a year, three years, maybe five years from today. But it will come.
So the public loses money in investments because they buy emotionally when investments are "exciting" but overvalued. Ultimately overvalued investments become undervalued investments, and unfortunately, that's when the public sells. The public buys at the wrong time and sells at the wrong time. Thus, they are always fated to lose money in the stock market. It's only a matter of time.
Wait, how about their homes? Anybody who has bought a home over the last ten years is probably ahead. But a home is a special case, because people live in their homes, and they don't tend to sell them they way they sell a stock that's declining.
However, what bothers me is that half of all US homeowners have large mortgages on their homes. So when the inevitable severe recession hits, not only will the price of all homes come down big-time, but many homeowners won't be able to pay off their mortgages. At that point, the overpriced home of today becomes a disaster. The value that homeowners have built up in their home in good times -- will disappear in bad times.
Of course, those who own their homes for cash, no mortgage, will be able to keep their homes regardless of market conditions. Nevertheless, the market value of their home will decline along with all the other homes that are mortgaged.
So my "take" on a home today is that today a home is an expensive luxury (you can rent cheaper than buying), but unlike a stock, a home performs a physical and emotional function -- you live in it.
On to the markets -- I get the feeling of "wooziness" in the markets at this point. Trends seem to have disappeared. Today, for instance (written two hours after the opening of today's session) the
December Dollar Index is down .42, Euro up .45, Dec. S&P up 50 but the Dow is down 61, and yet breadth is up 296. A "messy mix" with crude down .33, long T-bonds up 21 ticks, December gold up 1.30 and Newmont, the bellwether gold back at 40 again.
Is the Dow leading the market, but if so how is it that breadth is up? Are the gold stocks leading the metal, or is the metal holding the stocks back? Just a lot of questions in a market that seems to be somewhat confused or let's just say it's "unclear."
One fairly consistent measure is my gold advance-decline line. It's been hitting new highs, and as I write this morning 19 of the 20 stocks I use to compute on my gold advance-decline line are higher. If this holds until the close, my gold advance-decline line will be at a new high.
I believe (I'm just using my intuition here) that the gold shares, taken as a whole, are leading the price of the metal. The successive highs in the gold advance-decline line, I believe, are forecasting higher gold prices.
As for the stock market, you can make a case for the stock market simply becoming overbought, and now it is backing-and-filling preparatory to another run to the upside. My main case against the stock market at this time is based on valuations. I don't care what anyone says, stocks today are expensive, and aside from utilities, they don't pay attractive dividends.
That's a "turn-off" for me, preventing me from taking a major position in stocks. I've been doing a lot of thinking about T-bills vs. the 10-year TIPS. True, the TIPS have inflation protection, but if inflation heats up, rates will rise, and the rates on the T-bills will also rise. The TIPS give you a yield of 2.5% against a 1% yield in the T-bills. This may mean a lot to PIMCO which deals in hundreds of million of dollars, but for me that's not enough to make me want to buy TIPS over T-bills.
TODAY'S MARKET ACTION -- A lot of milling around but no real weakness.
My PTI was up 4 to 5366 with the moving average at 5318, so the PTI remains bullish.
The Dow was down 11.33 due to two movers -- CAT down 4.39 and IBM down 3.48.
Dec, crude was down .20 to 31.66.
Transports were up 8.94 to 2872.58.
Utilities were up .78 to 253.21.
There were 1893 advances and 1329 declines. Up volume was 62.1% of up + down volume, a mild up-day.
There were 297 new highs and 9 new lows. My High-Low Index was up 288 to 17723.
Total NYSE volume was 1.36 billion shares.
S&P was up 3.31 to 1050.07.
Nasdaq was up 11.04 to 1950.14 on 1.72 billion shares.
My Big Money Breadth Index was up 6 to 738, a new high.
Dec. Dollar Index was up .11 to 92.83. Dec. euro was down .41 to 115.89.
Dec. ye was down .20 to 91.33.
German DAX was up 7 to 3577. Dec. Nikkei was up 230 to 11080.
Bonds were turned lower when the Phila. Fed's Manufacturing Index was announced as being up o a seven year high. The news also strengthened the dollar.
Dec. long T-bond was down 12 ticks to 106.00 to yield 5.30%. Dec. 10 year T-note was down 20 ticks to 110.18 to yield 4.45%.
Gold was higher but dropped off on the Phila. news. Dec. gold up a dime at 373.20. Dec. silver down 2.5 to 4.92. Jan platinum was up 1.90 to 72.31. Dec. palladium was up 5.25 to 196.90.
Gold/Dollar Index ratio was down .70 to 401.70.
One share of the Dow buys 26.23 ounces of gold.
My gold advance-decline line was up 18 to a new high of 1327.
XAU was up 2.01 to 93.97. HUI was up 4.54 to 206.11.
ASA up .64, AU up .88, BGO up .14, DROOY up .11, GSS up .13, HMY up .68, KGC up .22, NEM up .5, RGLD up .78.
Gold stocks seems to be discounting a rise in the price of gold. My gold advance-decline line now climbing almost relentlessly. Paper profits in gold shares keep building. As they say on Delancey Street, "How can you hate it?"
STOCKS -- My Most Active Stock Index was up 2 to 302.
The 15 most active stocks on the NYSE were -- LU unch., EMC up .57, NOK down .61, F up .18, NT up .03, PFE up .27, IBM down 3.59, GE up .16, HPQ down .55, GLW up .05, AMD up .35, TWX unch., CAT down 4.06, MU down .01, TYC up .50. And the winner was CDE up 5.62%, then HMY up 4.82%, next BGO up 4.59%.
VIX was down .51 to another new low of 17.18. A lot of confidence that stocks are safe.
McClellan Oscillator was up just 6 today to plus 47. Oscillator has a weak look, telling us that this is not a strong advance. The weak Oscillator plus the very low VIX may be cause for concern.
FLASH -- Foreign central bank holdings of US debt has risen to above $1.0 trillion for the first time. Flash -- M-3, the broad money supply, was down a whopping $39 billion for the week ended October 6. Alan G, are you watching?
CONCLUSION -- If you have Diamonds, this could be an advantageous time to "jump the gun" and take profits. I'd rather be in golds anyway.
As for golds, the shares continue to lead the metal. Can 20 different gold shares all rising be wrong? I wouldn't think so. My gold advance-decline line is saying that the majority of gold shares are continuing to RISE.
For holders of assorted gold shares, it's been a scary month or so, but holding has paid off. Huge percentage gains for subscribers who have bought and held, adding on the corrections. We're still in the first psychological phase of the gold bull market, and this is the hardest phase to buy and hold, because gold is still hated and avoided by the retail public and by most of the institutions. What happens when the public and the institutions begin to like gold? Ah, those emotions -- they'll come into Additional comments on gold. A bullish signal from HUI, the Amex's "gold-bug's Index. Here we see HUI move up above its previous peak or X to the 204 box. This should put HUI in line to attack the high or the 212 box. The whole structure as seen on this P&F chart looks bullish. If HUI does attack and break out above 212 to the 216 box, I would think that we could see gold start to catch up with the gold stocks. Ever since March the gold shares have been leading the metal.
Somewhere ahead, this will reverse.
Signing off but will reappear tomorrow -- You obedient servant, the R man.
Below is the portfolio of "cheapies" that I suggested that subscribers buy back in July -- to be bought along with gold coins and the larger gold mining stocks. This run-down being sent to me by a gracious subscriber who, I take it, bought the portfolio. This run-down below does not include today's action --
Oct 14th 2003
From The Economist Global Agenda
Money used to be backed by gold. Now it is backed by the promises of central bankers. Are these worth less than they were?
IN BETWEEN saving the world from terrorism, President George Bush is finding time to dash off to Asia at the end of this week, first to Tokyo and then to Bangkok, where he will attend a meeting of the clumsily named Asia-Pacific Economic Co-operation, which sounds a little better as its acronym. There he will meet, among others, Hu Jintao, the president of the country American manufacturers most love to hate when they are not investing there.
It is a racing certainty that the subject of China's currency, the yuan, and whether it should be revalued from its present 8.3 per dollar, will be high on the agenda, if not atop It is, of course, always lovely to talk, but although America wants a lower dollar, and wants one now (which is understandable for a country with a current-account deficit of 5% of GDP and a congenital inability to save), China couldn't seem to care less.
Quite probably, then, tension will increase and the dollar will fall against other currencies that do not have such a firm peg. The rapidity of this fall will depend on two things. The first is the force with which Washington rattles its saber. On this subject, Buttonwood merely notes that next year is election year. The second is whether other countries, especially those in Asia which together hold $1.7 trillion of IOUs issued by the American government, are prepared to see the Treasuries in their portfolios rapidly devalued, their export competitiveness choked and deflationary pressures intensified.
Japan has such worries in spades. Though the world's second-biggest economy nowadays receives less attention than it did, Japan's recovery started in the fourth quarter of 2001 and growth is picking up. But officials there are increasingly worried that a rising yen will choke it off. The yen is close to a three-year high against the greenback. Its rise accelerated after the recent G7 summit in Dubai, when America's weak-dollar policy became most obvious.
Yet Japan needs the yen to fall because it needs inflation to help wipe out the massive debts the country incurred both during the bubble and in trying to get the economy going again after it had popped. Last week, the Bank of Japan further eased monetary policy, not in the usual way, by lowering the rate of interest, but by printing more money. The money supply, narrowly measured, is already rising at an annual rate of 21%. At some point, perhaps even the European Central Bank will wake up to the fact that the rising euro will keep the European economy close to recession. All of which is to suggest that none of the world's major currencies is especially alluring; for one reason or another governments in all three might want them to fall. Of course, they cannot all fall against each other. They can, however, fall against something largely unloved by those under the age of 50, and famously dismissed by Keynes as a "barbarous relic": gold.
All currencies are backed by something. When the world was on the gold standard, that something was the yellow metal: the value of each pound sterling, dollar or French franc was determined by the (fixed) amount of gold that the central bank agreed to deliver against it. Now those currencies are backed by something altogether less tangible: central bankers' promises that the currencies will maintain their value. Quite probably, these promises are not worth as much as they were.
It is only in very recent years that gold has lost its allure as a store of value. For centuries, the metal was virtually synonymous with money: the Egyptians were casting gold bars as money as long ago as 4000 BC. The gold standard's heyday was from the 1870s to the 1930s (with a brief interruption in the first world war). Britain left the standard in 1931, a move pronounced as "the end of an epoch" by no less an authority than The Economist. America did the same in 1933. One by one, other rich countries followed suit.
The gold standard was revived in a famous agreement in Bretton Woods, New Hampshire after the second world war, but only in America, which by then had three-quarters of the world's gold stock.
Although other currencies were fixed to the dollar, they were not fixed directly to gold. As other countries prospered, so America's current-account deficit began to rise and its stock of gold began to dwindle. By 1971, inflationary pressures were driving up the real value of the dollar. In August of that year, President Richard Nixon took America off the gold standard once again.
Since then there has been a central-banking standard instead. The standard was set by Paul Volcker, the Federal Reserve chief who quashed inflation (which erodes the value of money) with draconian interest rates in 1980, and killed off the bull market in gold, which had climbed from $35 an ounce in 1968 to $850 an ounce in 1980. In its place came a bull market in government IOUs. Bonds, after all, pay interest, unlike gold.
But hard money can be an unpleasant medicine, and the problems facing central bankers have not gone away since Mr Volker's day. Inflation has shown up in more than the price of carrots: it has also pushed up the prices of shares and property. For understandable reasons, central bankers have been slow to spot and prick asset bubbles. Thus have they swelled and popped in America and Japan in recent years, leaving mountains of debt in their wake, and weakening the credibility of central bankers as they try to control economies by tweaking the short-term rate of interest.
It used to be that gold perked up only when inflation did. But perhaps central bankers' lack of credibility explains why the price of gold has been rising even as deflationary pressures have mounted. It now fetches some $370 an ounce, down from its peak of nearly $390 last month, but way up from its price in the late 1990s, when it dipped to $253. Chris Wood, a strategist at CLSA, a stockbroker (and, in the interests of full disclosure, a former colleague at The Economist), reckons that the price could easily reach $3,400 or so-the level at the previous peak, adjusted for the rise in American personal income since then. "Gold will rise as confidence in the ludicrous powers still attributed to central bankers wanes," he says.
Possibly, the debt mountains that economies have built up will have to be inflated away. But no one knows how savage deflation will have to get before central bankers take that step, nor how dramatic tensions between America and the rest of the world have to become before faith in central bankers slips still further. The Bank of Japan might be providing an answer to the first of those questions; Mr Bush and his team an answer to the second.