don't remember the last time the Dow declined six months in
a row - Bruce Stratton, Safehaven.com
September's 1000+ point decline in the Dow makes it the sixth month
in a row. Our guess is the final bottom in this bear market will
come when nobody cares. If one were to correctly deduce how far
we are from that prospect today (it would still have to be a good
distance I think) we'd argue they'd be in a better position to estimate
How many investors, for instance,
would you guess cared that the market bottomed in 1933, after falling
nearly 90% over four miserable years from its peak in 1929? It's
a question I don't think the empirical evidence could answer directly.
What I mean is where investors, after watching their investments
shrink to near nothing, choose a sitcom over the financial news
channel; where they don't return their broker's calls; where they
rarely open up their statements, or when they do, look for a cheque
with hopeful but knowingly wasted anticipation; where investors
simply give up expending any energy either looking, or willing a
This day hasn't arrived yet, or at
least such symptoms have not been evident broadly enough to resemble
a major market bottom. Richard Russell (Dow Theory) said in his
Sept 27th letter that the number of US households that own stocks
has grown between 1999 and 2002 by 7.1% (to more than half), according
to the Investment Company Institute. And this despite the 2-½ year
bear market. We have the Fed to thank for keeping them all long.
In the same letter, which illustrates our point on bottoms:
Bear markets end
with people "hating" the stock market, bemoaning their losses,
and swearing that they'll never have anything to do with Wall
Street again. Bear markets end with heads-of-households boasting
that they have nothing to do with stocks. Bear markets end on
low volume and battered blue-chips and low P/E ratios and fat
dividend returns - Dow Theory Letters 27/09/02
From anecdotal accounts as well as
the literature of the day we can surmise that by the time the Dow
put in a bottom during 1974, investors had already given up hope.
The average fell only 45% from its peak bull market value, but the
damage was much worse in the broader market, which continued to
decline until gold and oil stocks picked up the slack in the
midst of the greatest dollar devalution since 1933 - 1947 (where
the dollar fell by 40% against gold and about 80% against most commodities
after FDR delinked it from gold).
If anyone called a bottom in either
1974 or 1933 nobody today remembers. At real bear market bottoms,
almost nobody has the guts to call one, and if they do, nobody is
listening, because people don't want to own stocks, they want to
sell them. At a real bottom the vast majority of stock holdings
have more value in their potential for tax claims, or tax losses,
than for capital gains. It's far more popular to show humility than
it is to display arrogance, the camp believing such bottoms no longer
occur vanishes from influence, skirts get longer, etc., etc., you
get the drift.
Today, the bulls still argue the
economy is strong, that it's going to avoid another recessionary
dip, and that stocks will bottom soon. They still argue that profits
will rise from here on in, led by consumption. All of this nonsense
has been financed by the Fed's monetary policy in that if it weren't
possible to slash rates from over 6% to under 2%, none of these
arguments would hold any water for long, never mind exist.
Indeed, that hot air is about spent.
We feel that the real bottom has yet to arrive. The day that nobody
cares about stocks also has yet to arrive.
far, our market adage has held up with respect to gold's bottom
in 1999. I was there, and it's true, nobody cared.
The British government announced
at the time it planned to auction the remainder of its gold. The
announcement was taken very bearishly. It knocked gold prices down
to fresh post-82 lows, unintentionally of course. The bank wouldn't
have intended it to happen that way. Bankers like to play dumb when
it's convenient. But that's not our point. Our point is that the
bottom gold bulls had been waiting for finally arrived, but nobody
cared in 1999. They were all long stocks, and evidently still are.
I do not remember if we thought it was the ultimate bottom, at the
time, but I do remember that we're on record for saying it was during
2000. The verdict is still obviously out. We could be wrong.
Only markets and history can prove
our hypothesis right or wrong, and I don't think the world's banking
elite has any interest rate leverage left to alter either.
Certainly, nobody cared when oil
prices bottomed in 1998. Oil was seen as no longer essential to
the economy, relatively speaking of course. That's simply the way
At market bottoms nobody cares for
stocks, at market tops they love 'em, for the umpteenth time. We
might not be able to tell exactly how extreme these swings will
play out, but perhaps we're able to tell that the public's infatuation
with stocks has yet to turn into indifference, or even hate. I think
hate comes first, but who knows today.
At any rate, several Dow components over the past two weeks have
issued earnings warnings for the third quarter. The warning by Wal-Mart
on Monday, from Philip Morris on Friday, and the bearish Wall Street
research issued on GE were only the latest in a long line of third
quarter frights that have resulted in new bear market lows for the
stock in question. 13 Dow components are now below their low in
July (before Monday). Philip Morris, SBC, and GM fell through this
low just last week. Morris and SBC just on Friday. And several others
appear to be telegraphing bearish technical behaviors. Here are
JP Morgan landed right at its July
low on Friday, and could be ready to take the average lower. Most
of the main US stock market averages are holding their July lows
at the moment. But they are weakening technically from the inside.
Important leaders are giving in to the bearish chart arguments,
one at a time. I think an important selling climax lies just ahead,
which will turn into a rout for the dollar. It could be this week
or the third week in October, but our radar says it's close.
Bears should be mindful, however,
of two facts. First, the bond bubble during the past few months
will have boosted profits for those banks with large dealings in
fixed income operations. Goldman Sachs revealed that in its third
quarter report, which ended in August. Citigroup and JP Morgan's
quarter end in September. I'm no expert in the specifics of their
business, but I doubt they were short T-bonds.
The second factor to consider is
Citigroup's settlement (or plea bargain), which involves groundbreaking
guidelines that promise to separate its research from its investment
banking activities. That's all subject to Spitzer's approval apparently.
He's been reviewing the offer since Friday we understand.
There's always the chance that if
it were a good enough plan to get approval, stocks would rally on
the news. For although GE is still a leading Dow component, any
relief in the bank sector could force a brief correction in bearish
sentiment. Whether it's ignited by a bullish outcome in the Spitzer
offer, or by the prospect for not as bad as expected profits
for the bank stocks' third quarter, or strictly technical arguments
for a bounce, the rally wouldn't have much substance either way.
With respect to a postive settlement
with Spitzer, it would probably
involve a greater cost burden to the industry one way or another
(even if it might settle some investor's minds about near term liability
issues). With respect to earnings, the bond rally is just a temporary
offsetting factor... one of those stabilization things Greenspan
has received credit for recently.
Moreover, we are skeptical Citigroup
is able to come up with a way to do what is impossible, and we're
skeptical that Spitzer will be happy with whatever settlement the
bank is offering at this point. Isn't it too early in the fact-finding
Furthermore, the negative contributions
to earnings from rising default rates, collapsing investment values
(which the bank is exposed to), and a shrinking investment-banking
business are more than likely to ultimately overpower any temporary
good news. Though the bulls probably hope otherwise.
Undoubtedly, the bulls hope this
is the worst of it and that "all the kids with the good report
cards" are going to announce bullish earnings news from here
We don't think so. It would be sound
to bet on a few bearish surprises in light of events and indications
I think. And it is unlikely that bulls can persuade anyone to bet
on bullish earnings reports this time around. The best bullish argument
is the fact that the averages have yet to pierce July's lows, and
are trading at critical bullish chart support on Monday. The case
can be made that a short term victory for the bank sector could
postpone the break down for a few more weeks.
But beyond that, we think Dow 6000
is closer than ever. There's still a lot of riff-raff to weed out
in this market's healing process… speaking of which…
I guess the Queen doesn't agree with our assessment and charge that
it's the central bank's monetary policies, which are responsible
for the biggest bull market in history followed by the longest bear
market in at least 3 decades… and counting. Either that or we've
hit the nail so square on the head they figure a Royal stamp of
approval will keep the public from figuring it out a while longer.
For, despite the obvious volatility in world capital markets, the
Queen has given Alan Greenspan credit for stabilizing it all. Go
figure. I'm so confuzed.
I think Alan should change his name
to Arthur. It sounds better.
Sir Arthur Greenspan. I too would
like to thank him for the stability he's brought to the world's
economic system. As the Queen of England knighted him, last Thursday,
it would have probably been appropriate to hear her say, 'well
done Alan, you've accomplished peacefully what we failed to forcefully
226 years ago.' Controversial?
It might sound so, but I doubt it
would be entirely inaccurate to contend the visions of America's
founding fathers, for limited government, have been all but lost.
More arguable perhaps would be the statement that it's an entirely
new America today. One where limited government has been replaced
with limited economic freedom, and one that is only notionally connected
with its original Constitution. It would have to be a good arguer
to prove otherwise though, and the best I think they would be able
to do is to argue that our freedom hasn't actually been limited.
It's still a democracy after all.
Of course it is, unless you're a
producer. The concept of economic freedom applies to the system
of production, not the consumer. Consumer sovereignty is a different,
but associated matter. It's what producers depend on to determine
what to produce. If the consumer didn't have sovereignty the state
would necessarily have to plan production. If by democracy people
mean the state has the free choice of whether to interfere with
the private system of production or not... well.
Economic freedom is limited under
a planned system because the state (whether it's leaders are democratically
elected or not) decides what to produce, rather than the private
owners of property and capital. A democratic election would be reduced
to a choice of the candidate with the best economic "plan."
Of course the 'consumer' in such
a system is free to cast a vote in the marketplace with whatever
wealth he or she may possess, and among the various (necessarily)
limited choices, but the votes would not really count, because to
the planners of the system of production, it doesn't matter what
the consumer actually wants. It only matters what the politicians
deem correct (or want) to produce. In most planned economies, the
concentration of power is thus necessarily in fewer hands. The more
centrally planned they are, the more this is true. It's the ugly
truth all socialists will work hard to hide from the public.
Unlike the political system, and
despite the similarities on the surface, a free market economy is
founded on the system of private property, anarchistic
production, and of the consumer's sovereignty in the actual market
place in determining production. Although it's true that the consumer's
market choices are akin to votes, they cannot be equal, and only
mean anything at all to the extent producers respond to them.
It may indeed be arguable whether
the free market system of production has been displaced, or subjugated,
as the increasing clamor for government intervention has us believing,
but it is inarguable that we've become dependent on it (government
Why for instance do so many analysts,
journalists, and corporate executives today clamor for their "government"
to do more about the weak economy, as if the government could actually
do anything? I know our views seem outmoded. I don't know what to
say for being so young and believing in such outmoded things, as
these. The government, after all, continues to receive credit for
what it has done for the economy. It has replaced the market in
this role (else the knighthood would have gone to an entrepreneur?).
The economy around us is supported by policy, rather than real stuff.
It's true, we keep saying so. Many disbelieve us, yet the next day
they ask their government to do something about the economy.
Thus, the question today is whether
we're producing what the market wants or what the government wants.
In case you weren't aware, the Federal Reserve's mandate, which
expired in 1999, was full employment.
Thanking a civil servant for the
accomplishments that capitalism is supposed to achieve is perverse,
and really only proves that we are right about the state of the
market system. It proves that it wasn't capitalism that achieved
full employment in the nineties, it was government.
Cutting tax rates is terrific. It
means smaller government. But when people at the same time say,
"the Fed should've done more to sustain the boom," then essentially
they're making those tax cuts unsustainable. It's hardly outmoded
to observe the irony in the fact that the Fed is widely perceived
as a symbol of capitalism because it issues what people largely
(and maybe wrongly but that's besides the point) perceive as money.
If this is what people do in fact believe today - and why else would
the protestors of capitalism be following the World Bank and IMF
around the globe - then our thinking will not stay outmoded for
long. For, the breadth of that kind of ignorance surely must be
Personally, I think the Fed's "risks
are weighted towards economic weakness" speak is destined to
compete with Bush Sr.'s "read my lips, no more taxes" speech
for the western political world's most palpable lies. The Greenspan
Fed is utterly responsible for the market volatility today. Markets
are not inherently unstable. They are made so by the special interest
groups that citizens empower, owing to the misguided dual belief
that markets are unstable, and that the government can do something
to stabilize them.
My favorite quote below illustrates
the principle we consider to be at the root of the entire economic
and constitutional problem today, or more accurately, the principle
that has proved impossible to uphold.
Those who give up liberty for
the sake of security deserve neither liberty nor security -
This is as true of the birth of the
Federal Reserve (thought of as a lender of last resort) as it may
be of Bush's Homeland Security plan, and it is even truer when one
considers the empirical evidence supporting the claim that government
is no longer limited in the land of the free. An old vampire myth
has it that a vampire can only come into your home if you invite
him. It's uncanny how our fantasies relate to real circumstances.
Governments can't help the economy,
they can't help the individual, their resources are not unlimited,
they can't protect you from the animosity of foreigners whose ire
they raise without your consent. They certainly are not the individual's
friends and if the individual ever had an enemy that justified protection
it would be the government.
They cost money, start wars, and
engage in the process of wealth reduction, whether wittingly or
I wonder what Benjamin Franklin would
think about his picture on a Federal Reserve note? It seems to me
like the kind of mocking of America's roots reminiscent of the current
aristocracy. I bet he's turning over in his grave at the thought.
For, these notes are the epitomy of a false sense of security. And
Greenspan's knighthood is the epitomy of the world's contemporary
economic ignorance. No shame belongs to the Queen. The shame belongs
to the ignorance of America's new order for betraying the principles
of limited government that made America the symbol of freedom and
Just Say No!
The country is engulfed by a despotic government at a time when
the winds of totalitarian sentiment
are on the rise. If the individual won't make a stand now (just
say no to more government help), the most dire social consequences
will necessarily follow America's economic demise.