March 15, 2001


The Final Breakdown
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Here's a thought: how much (Fiat credit) money could you place on a Monopoly board before everything else becomes scarce relative to it? No wonder Oil has never looked as scarce is it does today, in our new economy, where oil is still priced in (relative to) money.

So if the money supply has grown tenfold since the early 1970's, is it any wonder that stock prices have increased fifteen fold? Since 1991 alone, the market capitalization of the S&P 500 has increased by 500%, while the main money aggregates have doubled. From 1970 to 1990, on the other hand, stock prices measured by the S&P 500 index, which accounts for 85% of the total market value of US shares, had quadrupled while the money stock had also quadrupled. Thus, it would seem that since 1990 every dollar created by the Fed could propel stock prices with the same potency as every 2- dollars used to. We would argue, however, that the greater apparent efficacy of monetary policy on stock prices in the nineties has more to do with a broadening in the definition of money than it does with the incalculable concept of productivity.

Stock Index Commodity Index

Are we promoting erroneous facts or statistics? Nope. Are we using statistics to mislead you? We haven't said much yet. Are we making use of the shock value in the graphs above to support our opening argument? Hell yes! Though we don't need to do we? The argument is a basic truth. Seriously, think it through, and then find someone who can discredit it if you still aren't sure.

Productivity cannot make stock prices go up any more than the invisible hand can stimulate aggregate demand. Money makes the world go 'round, remember? That means that for stock prices to go up, the visible hand has got to reach into the wallet and pull out a fresh bill, then hand it over to the broker who gets to take a cut almost immediately as he puts the money to work. If there is no money in the wallet, not only will you not get past the receptionist, but also stock prices will ignore your will too & no matter how productive you've become at work.

Extreme nonsense calls for extreme measures

AGE on the TSE

The choice to show you Agnico-Eagle's chart here is arbitrary. Our goal is to highlight what is going on beneath the surface in the gold shares that have minimal hedge book exposure, and thus (off balance sheet) liability, against their future production. We could have equally used Newmont, but felt that the technicals stood out better here.

The one below isn't bad either. Note the break out from the elegant Head and Shoulders class bottom on the chart of the XAU below. Furthermore, note that the last lowest high preceding a new low was made in September at around 55. That's the reversal point for the down trend, which began right after the Washington Agreement was first signed, which could in turn infer a move back up to the 70 level on a whisper. Shhhhhhh &

Gold Stock Index

But this stock sector will require a little more than a whisper in order to turn the primary down trend around. We're confident that it will get it. In the meantime, we've got another question for you. Have a look at the close up of the above breakout in the XAU below:

close up shot

This Week:

>> Exploring the interaction between Fed policy and other market variables today to those that existed in 1998 for insight into some of the important differences
>> Are the bears about to strike a fatal blow at blue chip stock markets? Undoubtedly. And we're going to highlight the sectors that we feel are imminent breakdown candidates
>> One old Wall Street trading axiom holds that the stocks, and stock sectors, which hold up best in a bear leg are the ones that will lead the market out of the bear leg
>> Despite collapsing global share values, recessing economies & and with all of this talk about deflation and government bond buybacks in the United States, how can we interpret the relative inaction in the long bond today?
>> Which way is the Dollar/Gold price going to go now & and will US gold stocks outperform foreign gold stocks?


Primary Trend Reversals
There is a lot of talk about capitulation, oversold stock markets, and too excessive pessimism. Unfortunately the talk is geared toward looking for these characteristics. Everyone is looking for a sign that the next sell off is the capitulative one. Speculators are hurtin' to make some money. And many of them are new to the business of speculation. Our sense is that they have been sold so many bottoms now that they are running out of excuses to give to the rapidly aging credit manager at whichever brokerage firm their dealings are with. And so far, there really hasn't been any reprieve for them.

SP 500 Stock Index
click on the link to retrieve chart
NASDAQ Composite Index

It is our view that the Nasdaq Composite has now become oversold & technology shares have been accelerating into no bid. With the exceptions of Messrs. Galvin and Yardeni, who are still allowed on TV to prospect for new accounts, most analysts have now become afraid to call a bottom. Note the volume peak in the Nasdaq Composite (above link) in January, which suggests the potential for a real V bottom in an environment where it seems as if there was not a single buyer to be found. But don't get too excited, for we don't see a real bottom in the broader market, Nasdaq or otherwise, anywhere in sight.

In fact, the S&P500, Wilshire 5000, and some of the European markets are just now accelerating out of their rounding tops and appear to have had little trouble in knocking over key primary support levels on Monday. The TSE (Toronto Stock Exchange) 300 is staring at fresh lows after painting a beautiful Head & Shoulders top on the chart and gapping beneath it. The Nikkei average is in a steep one-year bear market, having made new multi year lows on media misinformation and exaggerations of important political developments. Folks, this is a real bear market & and it has only begun.

Wilshire 5000
click on the link to retrieve chart
CAC 40
TSE 300 Composite

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