From Richard Russell's Dow Theory Newsletter

March 16, 2001 - I sit here just after the opening, and I'm listening to Maria Baritaroma's hysterical voice on CNBC, and I think, "investors are just beginning to get scared. I feel just the edge of hysteria creeping into this market. Maybe Maria is the best barometer of current sentiment -creeping, slowly creeping towards the edge of hysteria.

Today the New York Times featured an article telling how the sliding stock market has changed people's lives. Plans are being changed, trips are being canceled, house purchases are kaput, lay-offs are rising. The bursting bubble is beginning to exert it's tragic effect on the populace.

It's also rubbing off on corporations. For instance, Goldman Sachs has abandoned its plans for a 13-story $850 million trading complex in New York. Writes the NY Observer, the decision to cancel the plans for the complex "is one of the first signs that the drowning stock market may pull Manhattan's real estate market down with it."

It is now widely known that one of Alan Greenspan's test of fair value is when the earnings yield on the S&P (price divided by earnings) is roughly equal to the yield on the 10-year Treasury note. The S&P now earns about 56. Divide 56 by 1163 and you get 4.81. This is about where the yield on the 10 year note is, so on that basis stocks are now fairly priced.

We old timers know that this measure of valuing stocks is strictly the bunk. It's "good time valuation." We geezers think in terms of real money, or the return on our investment. In the old days stocks were valued on their own - in terms of price/earnings ratios and dividend yields. If the S&P today was valued at say 12 times earnings it would sell for 672, about half its current price.

The S&P now pays out 15.54 dollars in dividends. If the S&P was to go to a 5% dividend yield it would have to go to - are you ready? The S&P would have to collapse to 310. That would require a 74% decline from where the S&P is now.

So we old-timers know how dangerous this market is. They know that if this market was to return to anything close to former valuations, we are in for a vicious bear market. In other words, if one ignores stocks relationship with bonds and value them "the old way," brother, we have a long way to go on the downside.

One last comment on valuation. On a 30 year average, the S&P has traded at 16.2 times earnings with a dividend yield of 3.5%. If the S&P in this bear market was only to drop to its average valuation of the last 30 years, we're talking a major bear market in which the S&P could easily lose half its value. If the S&P was to hit previous bear market valuation, well - you don't even want to know where it could go on the downside.

Today in the New York Times veteran business columnist, Floyd Norris, writes as follows: "Many still deny that the end of the bubble is a fundamental change for the American economy. Companies and investors expect their stocks to recover. The economy may be down, but surely that is just an inventory correction that the Federal Reserve will be able to fix in a quarter or two.

"It won't be that easy. By the time the economy really hits bottom, there is likely to be talk that the Fed has failed, is 'pushing on a string.' Companies are starting to take serious steps to cut expenses, but the process is not far along, in part because the profit squeeze that began with the technology companies is only beginning to spread.

"After the corporate sector begins to be really worried, consumers, fearful of layoffs, are likely to do the same, further damaging profits as they cut back on purchases."

Yeah, Floyd Norris and Richard Russell have been around a long time, and we remember what can happen when a big bubble bursts. It doesn't make for happy reading, but what the hell, if you can't talk the truth why be in this crazy business.

In a big bear market whatever rotten that can happen -- usually will happen. For instance, take the new tougher bankruptcy bill that was just passed. In a bull market that might have been a pleasant surprise. In this bear market it's not going to be pleasant at all. It's going to make it harder for people to "get rid of their debts and start over again" simply by declaring bankruptcy.

A good buddy of mine, a fellow who I talk to every day, said to me, "You know, I keep worrying about a panic, a crash. Do you think it could happen?"

I answered, "Honestly, I really don't know. People still seem to be confident that somehow, everything is going to come out all right. People still seem to feel that the Fed has everything in control. But at some point, confidence is going to collapse - the problem is that I don't know where that point is. Maybe it's when the Dow breaks below last year's low of 9796.03. Maybe it's even lower. I wish I knew. But yes, I think there's a panic somewhere ahead

"I've said all along that I believe this is 'the big one,' the bear market that takes prices below anything that people are thinking about now." This is the bear market that corrects the entire bull market from the old 1000 area to the recent Dow 11722 high.

"But if or where the panic or the crash occurs I just don't know. So far, we haven't even seen "selling climax" type numbers.

One interesting fact. The S&P has been down every Friday this year. What does that mean? It means that the "smart guys" don't want to hold stocks through the weekend.

Another phenomenon that I've observed. On CNBC the talk is still of "what stocks to buy." The long (sad) line of fund managers and strategists are still talking about "what areas looks good" and "what stocks look like reasonable values." Nobody, repeat nobody, talks about "This is a bear market and the place to be is OUT of the market." The fact that people are still even listening to the "what stocks to buy" nonsense tells me that this bear market has a long way to go.

The dollar continues to be strong. Why, with our record current account deficit and our chronic trade deficit is the dollar strong? My guess - the euro is a new and untested currency, and the yen is doing a swan dive. The US is still seen as the "island of safety," and still sporting the strongest economy on the globe. How long the dollar remains strong is anyone's guess. But for the time being the world loves the dollar. The strong dollar is one of the few happy surprises (so far) of this bear market.

I feel that the forces of world deflation are strengthening. The competition to export, to produce goods at a price, is very powerful. There's no pricing power, even in the US retail markets. Probably the last bastion of strength is in US real estate. But even here events are turning ominous. A year ago here in La Jolla when a million dollar house came on the market, it was "gone in sixty seconds."

I talked to a real estate agent yesterday. She told me that today there are 22 million dollar homes on the market, none of which have yet sold. She said she had a five million dollar home sold and in escrow. Yesterday, she told me, the house fell out of escrow. The people "had lost a pile in the stock market, and changed their minds about buying the house."

TODAY'S MARKET ACTION: In a word -- tragic.

My PTI was down 6 today to 5232 with its 89-day moving average at 3213. The PTI has topped, but the decline has been just too fast for the PTI to even register this catastrophe. It's an old story, and I saw it last in 1973-74. When you're standing on the track and the Cannon Ball Special is bearing down on you -- you don't argue about whether its coming at you at 75 MPH or 90 MPH, you get the hell off the track. Which I'm very much afraid is where we are now from a financial standpoint.

The Dow was down 207.87 to 9823.41 and over 817 points for the week. The Dow is now only 26 points above last year's closing low of 9796.03. If we break 9796.03, it will be the first time in 19 years that the Dow has broken below the closing low of a preceding year.

If that happens, the Dow will have violated the third of the three critical levels that I have outlined, the first being last year's December low, the second being 10000, and the third being 9796.03.

If we violate 9796.03 I believe that will mark the death knell for the greatest bull market in US history. From here, this ferocious bear will stand full on his hind legs - and brother and sister, at that point you're on your own. There isn't a person on the face of this green earth who knows where this bear market is headed from below 9796.03.

Most bear markets in history have wiped out at least half of the gains of the preceding bull market. I figure the bull market gained around 10000 points. Half of that is 5000. Knock off 5000 from 11722 and you get around 6700. I would expect that Dow to come down to at least that area, but probably lower. Remember, these are all guesses, but at this point that's the best I can offer.

At any rate, Dow movers today were BA down 2.10, HWP down 2.19, IBM down 5.46, MMM down 3.23, UTX down 4.32.

April crude was up 19 to 26.74. Transports were down 71.64 to 2631.37.

Utilities were down 7.04 to 368.46.

There were 996 advances and 2049 declines. I took .32 off the A-D ratio, bringing it to minus 5.01.

There were 77 new highs and 114 new lows.

Big Board volume was 1.54 billion shares.

The S&P was down 23.14 to 1150.42.

The Nasdaq was down 49.65 to 1891.06 on 2.07 billion shares.

My Big Money Breadth Index was down a full 10 to 890, another three year low.

The dollar, is seems, is the world's safe haven, at least that's the way it's acting. June Dollar Index up 66 to 115.53. June euro breaking 90, down 47 to 89.63. June yen down 35 to 82.35.

If the dollar is the safe haven what the safest place for dollars? BILLS, NOTES, BONDS all manufacture by the USA. The bellwether 10 year T-note (June futures) was up 9 ticks to a new high of 106.24 to yield 4.75% (will it break 4%???). The June muni futures were up 10 ticks to 105.00. Municipalities can't print money the way the government can, but I like TOP grade munis - they provide you with real cash, and by that I mean cash without the greedy hands of the government in your pocket.

The other money, gold, is sliding. June gold down 1.90 to 260.40. May silver down 3.8 to 4.31. April platinum unch at 580.40. June palladium up 9.50 to 810.50.

XAU down a large 208 to 48.43. HM down 19, NEM down 66, ASA down 45.

You hate to lose on anything, but you know the old Russell adage, "IN A BEAR MARKET EVERYONE LOSES, BUT THE ONE WHO LOSES THE LEAST IS THE WINNER."

If you own a house, a business, a condo, a stock, a farm, you name it - the bear is out to cost you. The single exception may be the one item I've been advocating in large amounts - top-grade bonds.

In the place where we're going, the operative word is going to be INCOME. Where do you get safe, guaranteed income? The only place I know is bills, notes, bonds.

I don't know whether it even makes sense to list stocks here. If they're tradeable, they probably went down today or certainly this week. During the 1929-32 disaster, they said that people who owned private businesses were lucky - their stocks weren't listed, and therefore they didn't have to watch their stocks collapse. The same thing might be said today.

Well, OK, let take a look at the NYSE volume leaders. This is probably where a lot of the institutional action was today and every day.

GE down .53, LU down 1.05, NT up .98, PFE down 1.18, EMC down 2.02, CPQ down .50, IBM down 5.46, C down .90, AOL down 1.24, T down .45, TYC down 2.05, CSC down 21.4 to 32.70 (that's no misprint), MOT down .41m WMT down .92, SLR down 1.19, NOK down .24 and so forth. Did you notice that they're still selling the techs.

Why? Because these stocks have little or no earning and no dividends. Many sell for X times something or other but nobody's sure what. This is fast becoming a value market, and the values are still far too expensive.

CONCLUSION: When a market liquidates the way this one is liquidating, it's telling me that the economy is in the process of getting whacked big time. We don't even know what's happening in the economy right now (the statistics are always very late) but the great unconscious of the market knows. And it sure doesn't like it.

I want to warn subscribers once again that the usual bull market methods do NOT work in a primary bear market. The normal oversolds don't work, on-balance-volume doesn't work, cycles don't work, short interest statistics don't work - an awful lot of the methods that you used in the bull market DON'T WORK.

What works. VALUES work and Dow Theory works. When, in a bear market, stocks get down to the point where knowledgeable investors are again ready to BUY, that works. The problem today - people have forgotten (or they never knew) what or when stocks were real values in the time honored, traditional sense.

As for the Green man, I said at the time that he should not have accepted another term - he could have retired a blasted hero. He won't be a hero coming up - believe me he won't.

I'm genuinely sorry for George Bush Jr. He didn't cause this, but somehow I suspect he knew that we were in it (is he reading my stuff or what?). His tax cut is far too little and far too late.

As far as rate cuts, rate cuts won't do much good, and besides the Fed is far behind the curve (the bonds are already making the cuts).

The bear is now in charge. Our job - to use our noggins and protect ourselves, so that when the bear market ends we'll be ready to buy great values. Thus we'll be the patriots, the heroes of the game. We and others like us will be the buyers at the bottom when buyers are sorely needed.

And let's hope that the anguish and pain of this bear market will result in our leaders learning something and using their brains. As far as the Federal Reserve is concerned, I've always considered it an engine of inflation, a disaster, and basically a institution that has thwarted the Constitution and the wishes of the great and brave men who put their lives on the line when they founded this nation.

Whew, that does it for Friday.

http://pub5.ezboard.com/fyourdontimebomb2000.showMessage?topicID=26497.topic

-- Carl Jenkins (somewherepress@aol.com), March 17, 2001

Answers

Excellent take on our rapid entrance into the lair of the bear! If anything, though, the comments re the Fed are much too kind. It is a national disgrace we don't have an honest banking system.

While the similarities to 1929 are scary, there are some differences that may be more so! Consider:

1. There was a gold standard in '29, so there was no currency float with attendent speculation

2. There were far fewer of the public "investing" in the market.

3. For the most part the business slowdown came after the crash, not before and during.

4. The nation was not running a huge balance of payments deficit.

5.The "national debt" and, therefore interest payments on it were modest.

6. With the enormous debt owed the Federal Reserve. who and how is the interest to be paid?

7. In '29 individuals had savings, now they have debt.

8. What happens if the Japanese decide to improve their liquidity by selling the stash of U.S. Treasury bonds they hold?

Sure like to hear some comments on the subject.

-- Warren Ketler (wrkttl@earthlink.net), March 17, 2001.

I saw this same article posted on the "Bear Forum." I sent it to several friends who have been severely impacted with losses. Bob Brinker wasn't quite sure what to think today on his radio broadcast, and he refused to speculate on any "short term" predictions for the market. He did say that AG is in a good position to reduce rates up to .75%. My opinion is, it won't matter at this point in time what AG does. The last two interest rate reductions have resulted in the markets going lower. Consumers are maxed out on credit cards, mortgages, car loans, etc., and it will be harder for them to file for bankruptcy. What a coincidence that the bankruptcy bill passed just in time for a recession.......

-- CAkidd (CAkidd_94520@yahoo.com), March 17, 2001.

"The Stock Market Crash of 1929, in terms of sheer price drop, was not the largest crash the stock market has sustained. "Black Monday" in 1987 was considerably larger. The Crash of '29 did not even cause the great depression. It was as much an effect of the economic instability that did cause the Depression as the Depression itself. There was ample warning of the coming fall - warning that may have actually contributed to the panic. There was blind folly - like the predictions of Professor Irving. And there were attempts during and after the panic to remind investors that the state of the stock market was not necessarily tied to the state of the economy. But as one of the landmark events of the century, it stands as a monument to the human "herd instinct" and to the dangers of greed and folly."

http://sac.uky.edu/~msunde00/hon202/p4/after.html

-- CAkidd (CAkidd_94520@yahoo.com), March 17, 2001.