(December 7, 2003)
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The Dow Industrials added 84 points
last week, the Dow Transports declined 11 points, the NASDAQ Comp declined 23
points, while the S&P 500 added 3 points. The S&P 400 mid caps and
the S&P 500 small caps, meanwhile, declined 5 points (1%) and 3 points (slightly
over 1%), respectively. The more conservative and the large cap stocks outperformed
this week, reversing a trend that we have seen for some time. One obvious reason
for this out-performance is the recent lack of insider selling of the large
caps, as the insider sell-to-buy ratio declined from 109 in November to only
17 so far this month. The current insider sell-to-buy ratio for mid caps is
at an unbelievable number of 1,244 while the ratio for small caps is 37.
Breadth, however, remains okay,
as evident by the following cumulative A/D lines on the NYSE and the NASDAQ:
While the NASDAQ remains relatively
weak, the above charts do not show a deviation from recent experience of higher
highs (and a slow grinding up, if you will) - thus showing no signs of a top.
Of more significance is the number of new 52-week highs on the NYSE. As noted
by Lowry's, the number of new highs on the NYSE established a new high of 627
on Monday, December 1st, surpassing the previous high in early June.
Since the number of new highs typically peak six to nine months before the top
of the major stock market indices, the breadth indicators are implying that
the current rally still has some ways to go.
Under classic Dow Theory, when
both the Dow Jones Industrials and the Dow Jones Transports diverge in action,
it is taken as a warning sign that the current trend may be over. Note that
there was a divergence last Thursday, along with a total of four daily divergences
during the month of November. Also note that the last closing high of the Dow
Jones Industrials was last Thursday at 9,930.82, while the Dow Jones Transports
had not bettered its closing high since November 7th (this high currently
stands at 2,979.29).
While this may sound troubling
to some of us, that fear can somewhat be dispelled by examining the following
While this divergence looks dramatic,
please note that this recent action has not been too different from the recent
action of the last eight months. The uptrend in both indices remains cautiously
intact. However, I would be more careful if the Dow Transports drop below its
recent closing low of 2,845.31 established on November 21st or if
the public starts getting more complacent (such as another huge speculative
upsurge in internet, biotech, nanotech stocks, or even space tech stocks - check
out the action on SPAB last Thursday in light of the Bush announcement to jump
star the space program again, dear readers).
The money continues to come in,
as indicated by AMG's report of $2.6 billion into equity funds for the week
ending last Wednesday. While insider selling remains generally high, the high
amount of mutual fund inflows and the lack of offerings were able to keep the market
afloat for the last few months, and there is no sign that the inflows are about
to stop. This is consistent with the sluggishness of both the buying power
and the selling pressure index as constructed by Lowry's. My current guess
is that the market should stay fine at least until the end of January. December
is shaping up to be a quiet month. Come January, year-end bonus money should
be coming into the market. At the same time, insider selling is restricted
until after the report of fourth-quarter earnings. February, however, may be
a different story. Offerings are also starting to creep back into the market,
as exemplified by an announcement of a GE filing for a $5 billion and a JNPR
filing for a $1 billion shelf offering last week. The number of offerings should
continue to increase as investors get more complacent. Ironically, because
of this, the author is suggesting that the Google IPO (rumored to be held in
April of next year) may signal the peak of the bear market rally (one which
will "suck up" all the remaining capital out there, if you will) instead of
the rebirth of a strong IPO and an overall strong market, as suggested by most
of the "experts" out there.
The short-term movements in the
markets are inherently difficult to call but it looks like a short correction
may take place here. The following chart of the McClellan Oscillator may help
to give the reader a better perspective:
The value of the NYSE McClellan
Oscillator is sitting right at +5, which means the majority of the stocks on
the NYSE are still going up - barely. Once it hits zero or below, chances are
that the momentum will favor the downside. From a short-term perspective, we
are now at a critical juncture. If the McClellan Oscillator turns negative,
then the action of the stock market for the next couple of weeks may be favored
to the downside. Conversely, if the McClellan Oscillator can stay positive,
then there should be more upside - possibly also negating the potential "heads
and shoulders" pattern on the NYSE Summation Index, which is a major positive
step for the continuation of the current stock market rally.
Speaking of mutual fund inflows
-- of some significance (especially to gold investors) is this statement from
AMG: "Gold & Natural Resources funds report an inflow rate of $142 million/week
(as measured over four weeks), the highest rate on record." Could it be that
the current rally on the HUI or XAU is getting ahead of itself? We do not know,
but we know that gold is in a primary bull market and that the US$ is still
making new lows as this is being written. Long-term investors should continue
to hold. It is interesting to note that Hong Kong Tycoon Li Ka-Shing (the wealthiest
person in Hong Kong and one of the richest people in the world with an estimated
net worth of nearly US$8 billion) has now established a gold trading company
and trading platform, both of which is designed to compete with the local gold
exchange. We may look for Warren Buffet or George Soros over here at the States
when seeking investment advice, but if you're in Asia or mainland China, Li
Ka-Shing should be one of your first people to turn to. Like all other great
businessmen or investors, Li Ka-Shing has a firm grasp of the big picture and
a bold and clear vision of what the future holds (the same cannot be said for
his son, Richard Li). He would not even think of venturing into the gold trade
unless he thinks the trading of it (and hence, the price) will get very popular.
Just what is the big picture here,
one may ask? And what separates the person who can recognize it to the person
who cannot recognize it? I will first attempt to answer the latter. Ordinary
people are so engrossed in the day-to-day events that they don't take the time
out to think about the long-term trends, nor do they want to independently think
about them and learn about financial or political history. They do not have
a grasp of major events unless they are spoon-fed by the popular media (or in
some cases, business professors who never made money in the stock market), or
only in retrospect. I recall the early days of 2000. It was obvious to me
that the greatest bull market in history was ending at the time, and I sent
a series of emails to my closest friends and associates stating my reasons why,
with the final email going out on April 2, 2000, two days before the earth-shattering
15% intraday decline of the NASDAQ market. Probably less than 20% of them listened
to me at that time, and I stood in awe of their extreme complacency. I just
could not understand why they did not grasp it. After the events that transpired
on April 4, 2000, it was obvious to me that no amount of money in the world
can make the NASDAQ, S&P or the NYSE A/D line (the latter of which peaked
as early as April, 1998) regain their former highs again. And yet, most people
still would not believe. To them, it was only clear in retrospect.
I also recall the days of late
2000, with the gold price trading at $275, the Philadelphia Gold and Silver
Index (XAU) at 40 (now at 111.33) , and the American Exchange Gold Bugs Index
(HUI) also at 40 (now at 252.60), the latter two both trading at all-time lows.
The fundamentals for gold were also bullish at the time, with the stock market
gripped in a huge bear market and with the U.S. running huge deficits month
after month. I was a frequent visitor to the message boards of the major gold
mining stocks at that time, and I noticed that long-term gold bugs at that time
were literally capitulating, with some of these people actually selling gold
or gold mining stocks which they have held for over a decade. If this was not
the bottom of the gold bear market, what is? I recognized this at the time,
and made a suggestion to some of my friends and associates to purchase some
gold and silver. Of course, other people taunt me at the time, but these purchases
have proved to be extremely rewarding. Unfortunately, most investors today
still do not recognize that there is a primary bull market in precious metals
(and still ridicule us)
A funny story is a forwarded email
that I received a couple of weeks ago from a former coworker of mine. This
email was written by a UT business professor, who criticized Warren Buffet's
position on the U.S. deficits and his subsequent bearish position on the US$.
In his email, he belittled the people who warned about Japan "owning America"
in the late 1980s (at the same time, neither suggesting that he did not have
the same view at that time) and the same people who warned that Reagan's economy
policy was leading us into disaster. He basically stated that well, if this
calamity has not happened by now, then it will never happen. Pure BS, I say.
My response was basically this:
The period from the 1980s to today
is only a little over 20 years. You can't extrapolate recent experience
(the last 50 years or so) into the indefinite future. Look at a time line
from the peak of the Roman Empire to its decline and final wipeout. Did
it only take 10 years? Or 20 years? The answer is "no." If
a Roman citizen even suggested that the Empire's arrogance, lavishness, laziness,
and excessiveness (and the debasement of the currency) would lead to the ultimate
collapse of the Roman Empire some time after its peak in power, then he or she
would probably have been hung. A collapse of the economy or decline of an empire
takes a long time and only a few visionaries can really catch it. Buffet
is one example. Look at the experience of Britain. Its power peaked
in the 19th century and it took over 100 years for it to lose its
world power status and finally be relegated to a second class country.
The Japanese and Chinese are now the largest and second largest (respectively)
of Treasury bond holders. Foreigners today own 46% of all treasury bonds.
And like I have said before, the debt to GDP ratio is now over 300%. Make
no mistake, Japan and China does own America. We are at their mercy.
If they choose to sell even a small portion of their U.S. Treasury bonds, then
interest rates will go sky high and no amount of intervention by Alan Greenspan
will be able to stop it. And more:
This is something that hardly anyone
can grasp. I find this quite shocking since it is such a simple concept:
The current account deficit
does not matter until it does.
One can put everything on credit
and pay the minimum payments and rack up more debt in the meantime. The
United States is just doing it at an infinitely slower process. Buffet
tried to simplify it so laymen can have an attempt in understanding it, and
yet this professor at UT is criticizing him for it. Deny it all you want.
I was labeled as a "chicken little" when I told everyone to sell their stocks
in spring of 2000. Did this professor ever "help" his readers make money
or help them make economically sound decisions? The answer is probably a resounding
"No." If you told me that he warned his readers to get out of stocks in January
to March 2000, then maybe he will sound more convincing. If you told me that
he bought gold or gold mining stocks in the winter of 2000, then maybe his arguments
may actually be sensical. In fact, he probably has 0% of his assets in gold
and 0% of his assets in foreign currencies and does not even know that there
is a primary bull market in gold.
He then stated that Buffet should
be more concerned with the growing asset bubble in China, our blocking of agricultural
imports, and the poorly thought-out steel tariffs. I agree with the latter
two but while there may be a bit of a bubble in China right now, this is nothing
compared to the stocks, housing, debt, and derivatives bubbles we have in the
U.S. Don't say we didn't warn him. One day, he will wake up and find
his house taken over by a Chinese bank and his daughters and granddaughters
being married off to China or India and will never see them again. Maybe
he will then change his view.
So whose advice would you take?
Buffet, the richest man in America (Bill Gates has now been surpassed) or a
professor from UT Austin who really does not have much real-world experience
compared to Buffet, Soros, Sir John Templeton and Jim Rogers (all who share
the same stance). And finally, to quote John F. Kennedy from his speech
at Rice Stadium on September 12, 1962: "William Bradford, speaking in 1630
of the founding of the Plymouth Bay Colony, said that all great and honorable
actions are accompanied with great difficulties, and both must be enterprised
and overcome with answerable courage."
In doing what he did and making
it public, Buffet has chosen the most difficult path, for obvious reasons.
The professor at UT has not. It is easy to sit back and go along with the consensus,
isn't it? Wasn't it easy to be bullish in spring of 2000? Isn't it easy to
be bullish on America and the US$ right now? People will come and slap you
on the back and tell you how "patriotic" you are. What Buffet stated in his
article is not and will never be the popular view, even if he is proven to be
correct. By stating the facts and bravely speaking out against the consensus,
Warren Buffet is doing a great service to America. The professor has chosen
the easy path, one which is stained with great dishonor and one which will ultimately
be a great disservice to America.
Today's big picture is: There is
a primary bear market in the US$, U.S. stocks, and U.S. bonds. There is a primary
bull market in precious metals and commodities. Sell all the former and buy
all the latter, hold them for five to ten years and I bet you will make a killing
in them. At some point down the road, we will see who was right.
More: In light of President Bush's
plans to jump start the space program once again, I recommend my readers to
listen to the following speech delivered by John F. Kennedy at Rice Stadium
on September 12, 1962. It is an awesome speech which I think should be required
listening in all schools and colleges today. It is in very good quality and
is actually in color. You can find it at the following link:
Henry K. To, CFA