Crystal Balls

Richard Russell 'snippet'
Dow Theory Letters
Jan 23, 2007

Extracted from the Jan 22, 2007 edition of Richard's Remarks

I'm going to open today's site rather differently. Real estate genius Sam Zell has put his New Year's card on the Net. Sam has also put his real estate empire up for sale. The bids are a staggering $38 billion. The Zell New Year's card is extremely clever, it contains a mountain of truths. I suggest you listen to it. Please open this link -- http://www.yieldsz.com/.

As usual, I've read a lot over the weekend. Well-known economist Art Laffer (he of the "Laffer Curve") thinks the background for stocks has never been better. He thinks the dollar is headed higher, gold is headed lower, and oil is going to sink to $35 a barrel. But Jim Rogers, former Soros partner, believes after the current correction, oil is headed for $100 or even $150. He believes commodities are in a long-term (10 to 15 years) bull market, and gold and the rest of the commodities are headed much, much higher. Rogers says he has no way of timing how the bull market will progress -- but the important consideration is that it IS a bull market.

Meanwhile, Lowry's work shows that we should expect a higher stock market for at least the next four months. Lowry's detects none of the classic signs of a major stock market top. Lowry isn't interested in the news, the theories, the economics. Lowry's only measures supply and demand in the markets, and demand has been rising while supply has been contracting.

Dr. John Hussman of the Hussman funds identified four items that, when taken together, call for extreme caution. Here they are. When the S&P sells at greater than 18 times peak earnings that's the first item. The second item is in place when the stock market is technically overbought, which it now is. The third item occurs when advisors are too optimistic as judged by the percentage of bullish analysts (now very high at 53%). The fourth item is in place when interest rate pressure is increasing, as measured when the yield on the 3-month T-bill is higher than it was 6 months prior.

All four of these items are now in place. In contrast, the public and the great majority of Wall Street analysts are optimistic regarding the stock market for the year ahead.

Around this time of the year, I receive the usual mass of forecasts and predictions. Since nobody can predict the future, I read all these crystal-ball predictions, and then I just put 'em aside. However, I am interested in intelligent reports about market conditions and values. One of the very best comes out of the UK from Pyrford International, PLC, who are asset managers (www.Pyrford.co.uk).

Pyrford starts by noting that the greatest part of world liquidity now comes, not from central banks, but from derivatives. Pyrford then presents their "somber view" on the values offered by the world's asset markets.

Following are some of Pyrford's conclusions --

"Corporate profit margins are at or close to record highs and will mean-revert. The process is likely to start this year. Share-markets are unprepared for this outcome.

"Property is in a bubble in many countries. It will not remain so.

"Bond prices make no allowance for any inflationary increase. This is overly optimistic.

"Credit spreads are around record lows. This is overly optimistic.

"Geopolitical problems have gone away. Ditto.

"China will never stumble. Ditto.

"Private equity financiers know something the rest of don't. Ditto.

"Americans, Australians, Canadians, New Zealanders and the British don't really need to save anything out of current income. This is not just overly optimistic but delusional.

"The world has changed, and we simply don't 'get it.' Or to put it another familiar way, 'this time it's different.' We'll let you decide on this one."

Russell Comment -- I can't say I disagree with any of the above, although maybe you do. But that's OK -- to each his own.

Russell's big picture in a few paragraphs. The world (Asia in particular) is producing far too much in the way of goods and merchandise. In turn, US stores are piled up to their ying-yang with merchandise. Really? Then why isn't this production of "too much" merchandise deflationary?

The reason it isn't deflationary is because there's even more money than merchandise being created. The ocean of fiat money is overcoming the river of production. It's a situation that's never been seen before. And it's the product of two phenomena -- the rapid entrance of one-third of the world into the global economy. And the fact that every nation (again, the Asians in particular) wants a "cheap" competitive currency. And the way to make your currency cheap is to print "too much" of it.

The net result is that the price of everything -- real estate, stocks, bonds, commodities -- is floated higher. The result of all this "levitation" is that yields are ridiculously and synthetically low. Stocks are overpriced and provide micro-yields. Bonds are overpriced and provide unnaturally low yields.

Low returns mean that projected income for insurance companies, annuities, pensions plans, are all going to run short of needed or promised money. Everybody is forced to speculate in order to make up the difference. Unless, of course, the whole inflationary balloon collapses and securities return to known or historical values.

Since value investing is so difficult today (lack of great values), investors of necessity are speculating on growth. The result -- who cares about values or dividends, just find me stocks that are going to grow.

What's the scariest phrase in the economic world today? I'll tell you what it is -- it's regression to the mean. They can't let this happen. But how do you hold it off? You continue to inflate.

lots more follows for subscribers...

Jan 22, 2007
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
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