Financial Sense Market Wrapup (10-08-2003)

Overall for the day the markets remained calm throughout the trading session. The broad stock market averages floundered in negative territory most of the day, but in the end the losses were marginal. The Dow Jones Industrial Average dropped 23 points to close at 9,630, the NASDAQ Composite fell 0.7% or 14 points to close at 1,893, and the broader S&P 500 Index dropped 0.5% or five points to close at 1,033. In similar fashion, U.S. Treasury debt paper began the day slightly in the red, but posted very slight gains to close the day. The benchmark 10-year Treasury note finished slightly positive, dropping the yield to 4.24%. The dollar fell 0.26% today versus the euro to close at $1.18 and dropped 0.23% versus the yen to $1.094. In percentage terms, stocks, bonds and the dollar changed very little. This seems to be the standard any time the U.S. government is forced to auction more Treasury debt.

Today the U.S. Treasury auctioned off another $16 billion in five-year notes and tomorrow they plan on selling an additional $9 billion of ten-year TIPS (Treasuries indexed to inflation) to borrow more money to keep the government running. Do you realize that our government is BROKE? Yes, they are bankrupt. If the government did not have the ability to borrow money, they would have to cease operations. That is why the debt sales must take priority over everything else. In addition to the government's borrowing needs, Corporate America has increased its request to borrow more money with announcements of new corporate offerings in excess of $4 billion. Goldman Sachs Group, Inc., the third largest securities firm by capital, plans on selling $1 billion of ten-year notes. I scratch my head and wonder why Goldman wants to go so deeply into debt. Maybe they just can't resist the cheap money and will use the proceeds to generate guaranteed profits via arbitrage in the markets. That's how the big money works. They don't have to take unnecessary risks like the common investor.

Across the board today it looks like the markets were beaten into submission to get the debt sales out of the way. With the dollar on the ropes for a fresh new devaluation, they are punching it out in the commodity pits. You see, our policy makers are pushing for oil to drop to the $25 dollar area, but with the dollar losing value internationally how can oil get any cheaper? Even if the price of oil remained constant in dollar terms, as the dollar loses value oil becomes cheaper in all other currencies. Why would oil producing countries want to accept the same amount of something that is going down in value?

Just to make sure the investment community doesn't become overly concerned about rising oil prices, the Energy Department reported today of a 'hefty' and 'unexpected' climb in crude oil inventories, which was enough (at least for today) to force the price of crude back below $30 per barrel to close at $29.81, a drop of 60 cents. The pattern is almost predictable. Now we will have to see if the API confirms the inventory numbers, or if the government 'revises' their report. Likewise, we see increased concern over a falling dollar and the action in the gold and silver pits becomes restrained. Gold remained in a very narrow trading range today, never moving more than two dollars either way and closed at $374.90. Likewise, silver stayed between $4.83 and $4.87 all day with a final close of $4.84 per ounce. Platinum is a precious metal that is not as politically sensitive as gold and silver. Today platinum closed at a new 23-year high of $727 per ounce.

For all of you precious metals investors out there, please remain patient. The time is soon approaching when the metals will be rising in all currencies. When I watch the silver trading and see the critical threshold of $4.85 defended with such a vengeance, it looks like there are some desperate shorts out there that cannot let the price of silver rise at ANY cost. For those of you that have a mindset to think out another six months to a year, this recent take-down below $5.00 is a GIFT!!! Don't get scared, BUY MORE! That is the true contrarian way. If you are intimately aware of the fundamentals in the silver industry, you know this one was a gift. On pullbacks like this, use your available cash to buy quality silver stocks, and if you have the appetite, you can also use these opportunities to increase your leverage in the sector with a shift to juniors or options on the majors.

Everything in the news since the meeting of the G-7 countries portrays the need for a falling dollar. The U.S. will never resolve the problem of deficits unless we are able to pay our debts with cheaper dollars and lower the value of the dollar to a point where imported goods cost just as much as domestic goods. At that point we would stop exporting all of our capital and jobs overseas. One day, people here in the USA will actually have to work to enjoy the standard of living that exceeds almost the entire world. The currency crisis of the U.S. dollar is creating global monetary imbalances of historic proportions. Everywhere in the financial press we hear of the euro gaining strength and the dollar falling as the government is forced to go deeper into debt.

Please take a good hard look at the two-year chart of the U.S. Dollar Index. The chart is burned into my brain, so when I read the headlines I have a solid base of what has been going on in the foreign exchange market. I couldn't believe it when I saw the following headline on CBS MarketWatch. 'White House Reiterates 'Strong Dollar' Policy' The snippet goes on to say, 'The Bush administration reiterated its 'strong dollar' policy Wednesday as the greenback stabilized near a three-year low against the Japanese yen and a three-month low against the euro. 'Our policy is the same,' White House spokesman Scott McClellan told reporters when asked about the dollar's recent decline. Pressed on the matter, McClellan told reporters, 'Our policy has always been one of a strong dollar.'

It sounds like a bunch of 'you know what' to me. Ask ANY of our officials what the strong dollar policy is all about and I guarantee that nobody can tell you. It gets even worse. If there really is a policy, where is it defined? Next, try to figure out what a dollar is. You can't do that either. It cannot be defined. Not even Alan Greenspan can define what a dollar is today. Lastly, the government maintains that the strong dollar policy is in place. Look at the chart again. If the chart represents a strong dollar policy, I shudder to think what a weak dollar policy would look like.

Most people know that a football field is 120 yards long (each end zone is ten yards) and 50 yards wide. When the coaches sit down to design various plays, they might have a running play designed to gain five yards or a passing play designed to go 15 yards downfield. The game gets started and not long into the first quarter the offensive teams find it much easier to make first downs. All of their plays seem to be going further than they are designed to go. The defense can't stop the points from running up on the scoreboard. The playing field 'looked' to be normal with each ten yards marked-off with a yard line and the smaller dashes for each individual yard at the hash-marks, but upon further inspection it is discovered that each yard only measures 32 inches. Now that's a new concept.

The yard is the measuring unit for a football field, but what would happen if the length of the yard changed on a random basis? You would never know how to 'value' or measure the potential of a given play in the book. The design would not match up to the revised measurements of the field. Likewise, the markets are trying to put a price on a barrel of oil, but the unit of measure (the dollar) keeps changing in value. It's a constantly moving target. Our unit of measure is broken. We don't really know what it is going to be worth, even a few months out from now. How can we plan our game tactics, when we don't know how big the field is going to be?

If the yard was acting like the dollar for the last 90 years, we would need to backtrack and reduce the yard by about a quarter of an inch per year. After the first four years the yard would be 35 inches and continue to decline by one inch every four years. That is exactly what has happened to the U.S. dollar since the Federal Reserve was created back in 1913. The changes have been very subtle along the way, but reality tells us that the dollar has lost over 95% of its purchasing power since its inception. If you started out with a yard equaling 36 inches and gave it the same treatment as the dollar over the years, your yard is now a whopping 1.8 inches long. Our football field that used to be 120 yards long is still 120 yards. Measured in the 'old yards' the field is actually 6 yards long.

That is why there is so much confusion about the implications of a falling dollar.

Reuters

UPDATE - Russia may switch oil prices to euros-German source

Wednesday October 8, 12:33 pm ET

YEKATERINBURG, Russia, Oct 8 (Reuters) - A German government source said on Wednesday that Russia may switch to pricing oil sales in euros rather than dollars, potentially huge news for financial markets. However, Russian energy and finance ministry officials said they were unable to confirm any change was planned.

"The question is taking on increasing significance," said a government official travelling with German Chancellor Gerhard Schroeder on an official visit to Russia, referring to the possibility of a switch in the traditional energy currency.

Any such change would be a major shift in the balance of currencies behind the world's most traded commodity and the success of a long campaign by Europe to get oil priced in euros.

It could deal a blow to U.S. economic prestige, as well as the strength of the dollar on foreign exchange markets.

Russia is the second biggest oil exporter behind Saudi Arabia with the world's largest natural gas reserves.

Schroeder meets Russian President Vladimir Putin later on Wednesday and they hold a news conference on Thursday morning.

European leaders have long sought to promote the common currency and boost price stability in the European Union (News - Websites) by getting energy contracts priced in euros as well as dollars.

Most energy contracts are settled in dollars, meaning that for European buyers, trade in gas and oil is subject to fluctuations in the U.S. currency as well as in their market prices.

MOSCOW MUTE

Officials in Moscow said that they had no knowledge that anything was going on behind the scenes.

"We cannot confirm this information. No talks are taking place on the issue. The ministry draws up export timetables, but does not deal with financial issues on oil supplies," a source at the Russian Energy Ministry told Reuters.

A Finance Ministry source also said he was unaware of any preparations for a switch.

"We have not heard anything of the sort. All information (about prices) we get is in dollars and roubles...and we do not see any tools to force companies to use the euro," he said.

LUKOIL (LKOH.RTS), Russia's second biggest oil company, said that it was continuing to work in the U.S. currency.

"LUKOIL draws up its accounts based on the dollar. The company has not yet reviewed its position to change its functional currency to prepare reports," said head of investor relations Gennady Krasovsky.

A source in a large Western trading company was downright dismissive of the talk.

"This is a complete nonsense. The market has been trading in dollars for dozens of years. Until companies which buy oil do not want to do this, the Russian Federation will not be able to do anything," he said.

I got this off Yahoo. I imagine, if this comes to pass, that there will be enormous repurcussions for the dollar.

And to add some more fuel to the fire, here's Richard Russell's take on the dollar from 10/4/2003:

href="http://www.theaureport.com">www.theaureport.com

Just a few words today. I want to talk fundamentals.

The economic fundamentals are as follows –

China and Asia can, and are, producing merchandise far below the cost of what that merchandise can be produced for here in the U.S. Now the service industry too (think India) is moving towards Asia.

This is creating huge imbalances in the transfer of funds. It’s producing half a trillion dollars a year in a U.S. negative trade balance.

On top of this, the U.S. Federal budget is out of control to the tune of another half trillion dollars.

These enormous imbalances must be addressed sooner or later. They are unsustainable.

This means that either the U.S. accepts a major recession, which cuts consumer buying way back in the U.S. or –

The U.S. dollar sustains a huge drop in value against other currencies, particularly the Asia currencies or –

The Chinese and most of Asia agree to a major revaluation upwards of their currencies and particularly the Chinese renminbi.

Or the U.S. puts up stiff tariffs.

Which of these are the most likely to occur?

We know the U.S. administration, backed by the Fed, will not accept a recession or even a slowdown in business. Thus, we see the Fed fighting any recessionary tendencies with everything in its arsenal. The main idea is to keep consumers buying, and this adds to the problem, since it keeps the negative trade balance going and even increasing.

The U.S. authorities would like a weaker dollar, but Asia has been fighting this by buying dollars in an attempt to keep the dollar strong.

Tariffs would lead to retaliations and a trade war.

The Chinese have no intention of allowing a major revaluation upwards of the renminbi. They like matters the way they are, since they have the acute problem of putting millions of Chinese unemployed to work.

My belief is that ultimately the dollar must fall, maybe 30%, 40% or even more against a basket of all currencies including the Asian currencies. This is a fundamental market solution.

Even if this happens it may not solve the trade imbalance problem. But it would be a fundamental move in a situation that is unsustainable.

The longer the dollar solution is held off, the worse the situation. The twin problems of the Iraq and Afghanistan are pushing the U.S. budget imbalances even further and further into the red. The U.S. policy of being policeman to the world, I believe, will prove to be unsustainable over time. It is also an added pressure on the dollar.

From my subscriber’s standpoint, we need insurance. We take out insurance against car trouble, we take out insurance against home trouble, we take out insurance against our lives.

What about insurance against the item that everything we own is denominated in – and obviously I’m talking about the dollar?

Insurance against the dollar consists of gold, to a lesser extent gold stocks, and another currency. The main competing currency to the dollar, as I see it, is the euro.

Thus I believe it is wise, if not mandatory, to own gold, gold stocks and probably euros in the form of German short-term bonds denominated in euros.

The above are the fundamentals, as I see them. Two and two equals four. Yet if you tell people that two and two equals five often enough and with authority, in time many people will believe you.

Many years ago the dollar “was as good as gold,” since you could turn your dollars into the government and receive gold. Today the government is implying that the dollar is still “as good as gold.” After all, you and I continue to work for dollars, don’t we?

Yet today the dollar is simply as good as our confidence in the dollar. Intrinsically, the dollar is worth nothing, and dollars can and are printed by the billions every week by the government. Yet by law we must accept dollars because the U.S. government states that they are “legal tender.”

Logically, this tells us (at least it tells me) that the dollar as a store of value is doomed. It’s only a matter of time before the dollar falls, and falls big time.

The above are the fundamentals as Richard Russell sees them. Only God knows the timing of the dollar’s fall, but the ultimate fall of the dollar should be understood by every one of my subscribers. And that’s all I have to say for this weekend. Mull it over, guys and gals, because I firmly believe that it’s the truth.

As for gold, it will fluctuate, but head generally higher, since gold is in a primary bull market.

The central banks will do everything they can to halt the rise of gold, since rising gold, particularly fast-rising gold, constitutes a red flag for the central banks. It’s a red flag that tells the world that intrinsic wealth is preferable to fantasy wealth, and fantasy wealth is what the central banks are now offering to the world in the form of fiat currencies, or paper. (October 4, 2003)

Russell's record speaks for itself...those who ignore his opinions on the dollar do so at their own peril.

THE SCARIEST SCENARIO IMAGINABLE
By Steve Sjuggerud-[courtesy Gold Seek & Daily Reckoning]

I never thought we'd see the day...the day when wild speculation actually exceeded the excesses of the late 1990s. And I really didn't think it would just take four years to get there. But here we are...

Investors are actually borrowing money to buy Nasdaq stocks. In fact, more people are borrowing more money to buy stocks today than at any time in history, including the "Great Bubble" of early 2000.

The result? Just like in the days of the Great Bubble, the 'garbage' stocks have soared, while sounder stocks have struggled. A $10,000 investment a year ago in AskJeeves.com (do you know anyone on the planet that actually uses AskJeeves.com?) would be worth $220,000 today. Or how about NetEase.com? $10,000 invested a year ago would be worth even more than AskJeeves...

NetEase.com is valued in the stock market for over $2 billion (with a "b") dollars. Yet sales...yes, sales...over the last 12 months were only $27 million (with an "m") dollars. Who's buying this garbage at these prices? It appears to be individual investors at online brokers...

Trading activity at online brokers in the most recent quarter is up 40% from the same quarter last year. And this is clearly 'hot' money...speculative money... At online broker E-Trade, the level of margin debt in the latest quarter (ended June 30, 2003) among E-Trade customers rose by 31% over the previous quarter (ended March 31, 2003).

It's rampant speculation at its finest.

By contrast, look what corporate insiders - the 'smart money' - are up to. Obviously corporate insiders know more about their businesses than anyone else. Insiders are generally right, but a little early in their selling. Recently, they've been selling at a rate not seen since 1986. They were early back then...but they got out ahead of the Crash of 1987, when stocks fell 22.6% in one day.

Looking at the latest data, corporate insiders set a dollar record for the last decade...insiders sold $44.53 dollars of stock for every dollar of stock they bought. That is unbelievable.

More from same article (as posted on gold-eagle):

What these folks don't know is that these figures actually EXCLUDE insider trades over $50 million - so the Bill Gateses of the world are NOT included in this figure.) It gets even worse when you look at tech stocks alone. Kevin Schwenger, the insider data research analyst at Thomson Financial, who puts out these numbers, told the story in the Wall Street Journal... In August, $644 dollars of stock were sold for every dollar of stock bought by insiders at semiconductor companies. As a frame of reference, $20 sold for every dollar bought is considered bearish... Yikes... While the 'smart money' sells tech stocks in record amounts...the 'dumb money' is taking on debt to buy these stocks on margin. By my studies, the 'dumb money' is at an extreme of optimism not seen since, well, right before the 1987 crash... In the last few months, individual investors have become more bullish than at any time in history (as measured by the American Association of Individual Investors sentiment poll), except in 1987. And the same is true of newsletter writers. The folks who write investment advisory letters (like me), as a group, are now as bullish as they've been since 1987 (as measured by Investor's Intelligence, who has been monitoring these things since the 1960s). When optimism reaches extremes, as it has right now, quite frankly, there is nobody left to buy... Individual investors have been buying...newsletter writers and analysts have been buying...and the pros have been buying. There is no 'greater fool' left to buy and hope for a higher price.
There is nobody left to buy. We're extremely close to the scariest scenario imaginable, at least from my perspective. There are three major ways to size up the markets to get some clues on where it might be headed: fundamental analysis, technical analysis, and analyzing the market sentiment. All three reveal a gruesome spectacle. We've already made the case about market sentiment - the dumb money is at a record level of optimism, while the smart money is at a record of pessimism.
Which crowd do you want to be with? In the case of fundamentals, stocks are still more expensive than they've been at any time in history. We are still at 30 times earnings and three times book value in the case of the S&P 500 Index of the big, boring stocks. And of the tech stocks, oh my...by my calculation, the companies of the Nasdaq 100 are trading at a price-to- earnings ratio of 49. To explain this in plain English, if you were buying a stock with a P/E ratio of 49 as a business, it would take you 49 years to break even on your investment. Why would anybody in their right mind borrow money to invest in that? The Nasdaq 100 Index is trading at 8 times sales.

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