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Richard Russell

Richard Russell

Richrd Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow…

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Market Comments

Guess I'll start the site with today's list of -- "What else is new?"

They stopped calling this the "Jobless recovery." Now they're calling it the "Job-loss recovery." Today's report shows payrolls down 17 thousand with the unemployment rate at 6.1%.

Keep on pumping -- Money supply statistics for the week ending May 26 -- the broad M-3 money supply was up $13.4 billion.

Europe's central bank reduced it's interest rate by 1/2 percent. Meanwhile, Canada's dollar hit a six-year high against the US dollar, rising to 74.56 cents. The Bank of Canada's rate is 2% above the Fed's 1.25%.

Germany's jobless rate held at a four-year high of 10.7% in May.

Mortgage rates in the US hit record lows this week. Average rate on the 30-year fixed-rate mortgages dropped to 5.26%. This was the ninth time this year that this rate has fallen to record lows. The popular 15-year fixed-rate mortgage dropped to a record low of 4.73%. Rates for one-year adjustable mortgages dropped to a new low of 3.59%. The new record low rates led to a "flood of new mortgage applications. The percentage of equity US home-owners held in their homes dropped to a record low.

Insider selling of stocks rose to a 10-month high. Insiders sold 3.1 shares for every 1 they bought.

April factory orders fell 2.9%, biggest drop since November '01.

And the NYSE came up with new rules while promising to disclose the pay of its executives. Chairman Richard "I kiss everybody" Grosso is receiving $10 million a year for his services.

What's all the above worth? It's unclear, but it is also well to remember that as far as the stock market is concerned, it's not the news that's important, it's the market's REACTION to the news that's important.

There's a question in my mind regarding whether the market is even paying attention to the news. What this market has been paying attention to is the record low interest rates and the swelling supply of liquidity that is sweeping over the nation.

The stock market started out today like a race horse, with breadth up over 1400, and the Dow up over 100. If breadth is up today it will mark the 13th consecutive day that breadth has been higher, marking what we're seeing here as a true "breadth stampede." With this kind of action, you either "get with the program" or stay out all together, but what is clear is that the shorts have been led to slaughter.

Subscribers who bought the Diamonds and Spyders haven't had a "bad moment." It's been clear sailing from the day of purchase with never an anxious moment. And that's very unusual.

Amazingly, in the face of the powerful stock market advance the bonds have held quite well -- you'd expect bonds to be plunging in the face of this kind of powerful stock market action.

Why would I normally expect bonds to being swooning? Because when stocks surge, it's usually a forecast of an expanding economy. And better business means rising interest rates. Ah, that's the question. Is this stock market rally a forecast of better business -- or is the stock market simply floating up on ocean of surging liquidity and lower rates? Note that each time Greenspan speaks he dangles the promise of still lower rates in front of investors.

With business still "iffy" and unemployment rising, bond investors reason, "Why should I sell my bonds? I'll just sit and collect the interest. Hey, the Fed's my friend, and instead of threatening higher rates as the stock market surges, Greenie's talking about still lower rates."

As I write an hour after today's opening, the September Dollar Index is up .90 and the September euro is down 150. In the face of the stronger dollar, gold is backing off and is down 6.50 as I write. Gold was up 5.90 yesterday, and I get the feeling that trendlines and support and resistance for gold in this area are almost superfluous. Gold is being battered by emotions (and commercial selling) which almost defy analysis at this point.

The big picture for gold is a long-term picture of the US moving ever-closer to the "moment of truth." The moment of truth is the point where rising and continuing US deficits will run the US economy into a stone wall. Where or when is that moment of truth? The only answer is "somewhere ahead."

It all reminds me of a story one of my subscribers told me years ago. He was a Swissman name Jay Pfister. I used to meet Jay for lunch at the Plaza in NYC -- I think it was around 1959 or 1960. Jay had sold his chemical company to American Cyanamide back in the '30s for a few million and had long since retired.

Jay had a home in La Jolla, and he used to tell me, "Richard, why are you living in this City when you could live in paradise in La Jolla? Why don't you take trip out to California and look over La Jolla, you'll be glad you did."

The next winter (it was snowing in NYC) I took Jay's advice. I visited San Diego in January, and the weather was gorgeous. I promptly fell in love with the city. In 1961 I said "good bye" to New York and moved myself and my family to San Diego.

But that's not the point of this story. The point is an incident that Jay related to me. "One day", said Jay, "I glanced out of my hotel window overlooking the Hudson. and I noticed two large boats that were heading directly towards each other. I was fascinated because it was clear to me that if these two boats continued on their path, they were going to collide. And, of course, that would be ridiculous. Minute by minute the two boats continued towards each other. I was simply fixated on the scene."

"Well, what happened?" I asked.

"What happened," replied Jay, "is that they stayed on course, and by God they did collide. I couldn't believe it. The inevitable happened -- one of the boats was badly damaged and the other promptly sunk."

I never forgot that story. And I think it has a lot to do with the US and the situation that is now building. I say to myself, "If we continue to run up debts and deficits, we're going to head into major trouble. The dollar's going to collapse, and a collapsing dollar is going to throw the whole world into some sort of panic. Remember, 75% of the reserves of the world's central banks are in dollars.

So yeah, it all reminds me of Jay's two ships that are heading towards each other. It's clear that they're going to crash if they hold their courses. It's equally clear that with the US building bigger and bigger debts and deficits that somewhere ahead a disaster awaits.

Ah well, the disaster could be two years, five years, maybe even ten years away, so why worry? After all, the market isn't worried, the dollar isn't crashing, bonds are holding, gold isn't exploding, and this administration won't begin to think about debts and deficits until after the 2004 election.

CONCLUSION -- Same old some old, as breadth was down by just 12 issues. But the Dow gave back most of its gains by the close and the market act like it's tired. A lot of funds rushed in over the last week or so -- better late than never. Nevertheless, this kind of "breadth stampede" doesn't give up easily, so as I see it Monday is "up for grabs."

What I'm most fascinated with is whether this rally in the stock market is a forecast of better business ahead -- or whether it's just a lot of steam being let out of the market boiler.

As of today the Dow has recovered 40% of its 2000 to 2002 bear market losses, which is not unusual at all in bear market.

I'll add a bit more tomorrow, and guess what -- Sunday I rest.

Bye from the Southwest corner of the United States (although Southern Florida is quite a bit further south than San Diego -- -- check it out on a globeT).

Today's Commitment of Traders shows Commercials are long 161,000 gold contracts. This is the most I have seen in 3 years of my record-keeping. Large Specs on the other side.

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