Richard Russell 01 (May 08 - Dec 14)

[winston]

Richard Russell: What the average citizen thinks of health care
From Richard Russell in Dow Theory Letters:

The average citizen thinks Obama is wasting his time in trying to install a new national health-care plan.

The American attitude to Obama care is that it won't work, it will be expensive, and if the government runs it, it will be a royal pain in the ass. Moreover, what the average citizen is mainly concerned with is -- finding or holding a job.

Last month the economy shed 36,000 jobs, and, ironically, this was widely heralded as "great news." It's like your leg is amputated and the doctor says, "You're a very lucky man, it could have been cancer."

The dismal fact is that it will take eleven million new jobs just to bring the nation back to where it was just before the recession began.

[winston]

US Budget Deficit

Referring to the ballooning US budget deficit, the quote du jour this week comes from 85-year-old Richard Russell, La Jolla-based author of the Dow Theory Letters.

He said: “The estimates of budget deficits are so huge that they defy the ability of the average citizen to comprehend them. As the US continues to create more dollars, at some point our foreign creditors are going to want higher returns (rate) before they are willing to make loans to the US.

Rising rates would be an extreme danger to the US. Not only would they hurt business. Rising interest rates mean a rising cost of carrying the national debt. The process of compounding the cost of the national debt would send US finances into a ‘death spiral’.

“I think institutional investors are holding off on buying stocks because they don’t see stocks as safe long-term holdings. Big money investors are looking ahead to higher interest rates. That combined with current high valuations for stocks constitutes a red flag for seasoned investors. The key here is probably the action of the bond market, and particularly long-dated Treasury bonds. The 30-year T-bonds would be particularly sensitive to Treasury financing looking years ahead.

“It is still not clear how the US is going to finance its enormous national debt. Reneging on the debt is unthinkable. To raise taxes and at the same time cut down on spending is almost an impossibility. That leaves inflation as the most probable answer. As soon as our creditors realize our ‘way out’ is inflation, they will halt their process of lending to the US, or at least halt lending at current low, low rates.”


Source: Investment Postcards

[winston]

Richard Russell: The stock market is severely overvalued
By Richard Russell in Dow Theory Letters:

The S&P is currently selling at 22.31 times trailing earnings. Just as important, the dividend yield on the S&P is a mini 1.90%.

Based on these statistics, I'm saying that the stock market is severely overvalued. The stock market is not priced to produce profits in coming years.

Actually, the market is priced to produce losses over the years, particularly if you factor in inflation, commissions, dangerously low dividends and rising taxes

My choice is to sit with gold and cash.

[winston]

Richard Russell (Dow Theory Letters): What to make of “triple bull signal”?

“Turning to the nearer term, the stock market issued a ‘triple bull signal’ yesterday. And I’ll be really fascinated to see how the year 2010 turns out. I have the feeling that there are going to be a lot of major surprises this year.

I’m guessing that the year 2010 is going to be a very tricky and difficult year. The reason I say that is that so much of the bullishness of 2010 was manufactured by the Fed and the Treasury and with the help of the greatest addition of debt in the history of the US or any other nation.

Everything in life and in finance is a trade-off. And I wonder what the trade-off will be from the US taking on trillions in debt to defeat the Great Recession.

“For the time being, the market is saying that ‘everything’s OK’. For the time being, that is. The three bullish signals are:

“First, the Dow finally closed above 10,725, moving the market into the bullish zone - this based on my interpretation of the 50% Principle.

“Second, in closing at a new high for the advance since March, the Dow confirmed the previous string of new highs set by the Transportation Average. This was a Dow Theory bull signal.

“Third, new 52-week highs on the NYSE rose to 601, thus bullishly surpassing the count of 523 on January 11.

“The question for me and my subscribers is, ‘Should we do anything about it?’ My considered answer is to tell subscribers what I am personally going to do. The answer is, ‘Not very much’.

I could take a belated position in DIA, but I don’t think it’s worth the risk, after taking in tax considerations and commissions. I’m content to stay with my gold and cash position. All things considered, I’ll sit tight with them.”

Source: Richard Russell, Dow Theory Letters, March 18, 2010.

[winston]

Richard Russell: There is serious trouble in the bond market
From Richard Russell in Dow Theory Letters:

At various and unusual times everything in the market boils down to one phenomenon. I've been talking about the bonds for months on end. What I said was that "the Fed can continue to follow its quantitative easing (printing money) program until the bond market says it can't."

Guess what? The bond market is now very close to saying, "We've had enough."

... You may remember that I emphasized that the bond market, in size, dwarfs the equities market. If the bond market (the debt market) heads down and interest rates head north, it would signal that the "fun's over."

... Many older subscribers probably remember my lifelong emphasis on the POWER of COMPOUNDING. But what of the power of negative compounding on debt? I think we are about to find out.

The power of negative compounding will be brutal. The cost of carrying the world's debt (including the US national debt) will be devastating. It will be highly deflationary and it will crush everything in its path. There will be a frenzy for dollars -- dollars will be needed to carry or pay off debt. There will be initial pressure on gold. There will be pressure on stocks. "Safe" high quality high-yielding bonds will compete with all other investment sectors.

[winston]

Richard Russell on the government's insane Social Security projection
By Richard Russell in Dow Theory Letters:

Projections made last year did not show a deficit in the Social Security program until 2017. Guess what? Projections made this month show a S.S. deficit for this year!

The incorrect government projections were based on unemployment being at 8.2% in 2009 and 8.8% this year. The projections were based on a quicker and stronger recovery from the recession. The S.S. shortfall this year will be about $29 billion.

Oh well, a billion here and a billion there and pretty soon you're talking about real money, as Congressman Everett McKinley Dirksen famously said.

[winston]

Richard Russell: A big reason for caution
By Richard Russell in Dow Theory Letter:

...On January 17 we saw 601 new highs on the NYSE. We haven't seen a day with as many as 500 new highs since. This is an area to watch carefully. A rising Dow with declining new highs is a worry. Markets don't top out amid bad news. Rather counter-intuitively, markets top out amid good news. Right now the business news is turning bullish and optimistic. This is the kind of atmosphere that bull markets tend to die in.

The point I'm trying to make is that in timing this market, you'll get no help from reading Newsweek or Business Week or Fortune magazine or the Wall Street Journal. These media darlings will all be "going with the flow" and carrying the prevailing wisdom and bullish stories. This is particularly true in rallies following major stock market declines, when the readership is hungry to hear anything that smacks of good news.

[winston]

Richard Russell: U.S. caught in the jaws of a compounding "meat grinder"
From Richard Russell in Dow Theory Letters:

For decades, my subscribers have listened to me jawing about the wonders of compound interest. With the total national debt rising by a probable trillion dollars a year as far into the future as we can see, and interest rates also rising, the US is caught in the jaws of a compounding "meat grinder."

There's no way the US can continue over-spending by a trillion dollars a year in the face of rising rates. A collapse in the system or outright inflation (none of this stealth inflation of the last decade) will be the result.

Gold will be subject to two opposing forces. Rising rates will be negative for gold. But pressure on the dollar and on all fiat currency will be a plus for gold. In the end, I believe pressure on fiat junk money will be the stronger force. In its misplaced frenzy to "repeal" the Great Recession, many western governments will destroy themselves.

[winston]

Richard Russell: Why the bull market in gold has much farther to go
By Richard Russell in Dow Theory Letters:

I firmly believe we're witnessing a great primary bull market in gold. This bull market is opposing a long-term bear market in fiat or non-intrinsic currencies.

Since there is no discipline putting a limit on fiat-currency production, I believe in our lifetimes we will see the end of fiat currencies as acceptable substitutes for real money.

When that happens, there will be no ceiling for gold. In their guts and in their hearts, every seasoned investor knows this, which is why the bull market in gold will continue.

[winston]

Richard Russell: This is the most portable form of concentrated wealth
From Richard Russell in Dow Theory Letters:

As subscribers that have been with me for a while know, I've advised buying gem-quality diamonds. Why? Diamonds are the most portable form of concentrated wealth. You can cross any border with a 15-carat stone, worth over a million dollars, something you surely can't do with gold (Have you ever tried to lift half a million dollars worth of gold? Good luck ...).

... Large diamonds are expected to increase in price about 25% to 50% over the next five years. Diamond values have changed over the years because of the Rapaport grading tables.

You can now present a diamond to a knowledgeable dealer, and he can give you a legitimate price for your stone in a matter of minutes. Diamonds and gold, the new intrinsic monies. Part of the new measures of eternal wealth.