Richard Russell – “After the calm comes the storm”

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I often quote Richard Russell, the 85-year-old writer of the Dow Theory Letters, in my blog posts. Although I may not necessarily always agree with his views, they are always stimulating and important to consider when piecing together the financial puzzle.

Here is the latest from the long-timer:

(1)  Goldman Sachs, the “smartest guys on Wall Street,” are under siege. What’s the complaint? These guys sold poisoned pill-products to their customers, and then made billions of dollars selling short the products they sold to their customers. Goldman has to decide whether to plead dumb and innocent or smart and sleazy. Of course, they’ll plead dumb and decent (“they had no idea of what was going on”).

(2)  Gold is no longer seen as “just another commodity,” but increasingly it is accepted as the “only safe currency” (this is increasingly the big money view).

(3)  The Greek situation is far from being solved. Should Europe and the IMF bail out Greece? Germany is taking a hard stand against a bailout without very harsh new disciplines for Greece. Germany’s lady leader, Ms. Merkel, is proving to be one tough baby, and she’ll do what, in the end, is best for the fatherland. If Greece is bailed, will Portugal and Italy and Ireland be next?

(4) Managers of sovereign funds don’t know where safety is. They know it’s not in euros, and they suspect it’s not in US dollars. What’s left? Could it be gold? China and Russia think it is. And Richard Russell thinks it is.

(5)  My suspicion is that the stock market is tracing out a major top is becoming stronger. The stock market is loaded with amateurs who have been hoping to recoup their losses. If the stock market is actually topping out here, the public is going to turn black bearish. In the past month or two, many Americans have returned to the stock market, and others have bought foreclosed property under the belief that real estate has hit bottom and finally turned up. The Russell opinion – if the stock market is topping here, I believe that the real estate market will sink to new lows (and this time we’ll see the commercial real estate market collapse along with the housing market). If you’re thinking of buying a real estate bargain, wait a while.

(6)  Since March 2009, the stock market has staged a dramatic recovery. Thinking that a new bull market has started, many Americans have leveraged up again, while others have loaded up with stocks for the first time. A major stock market decline now would play havoc with the still shaky US economy.

(7)  If the stock market turns down here, unemployment will rise again. This will drive the Obama administration up the wall and scare hell out of every Democrat. The odds of cutting the national deficit will then be zero.

(8)  The action of gold during this period is superb. I’ve asked my subscribers to be in gold and cash, and to await developments. That’s still my preferred position – cash and gold.

(9) The reason I’m so focused on the stock market now is that if the market is topping, it’s doing so in the face of rosy news in every area (except for employment). There’s nothing more ominous than a stock market turning down in the face of a “bright” economy. At such times, nobody is ready or positioned for a sudden reversal (I hope this is NOT the case with my subscribers).

(10) Gold is rising in the face of weakening oil. It would be dramatic and bullish if gold detached itself from oil and all other commodities.

(11)  I also note the high number of “distribution days” – available in Investor’s Business Daily every day. Latest on distribution days. 6 for the NYSE. 5 for S&P Composite, 4 for the Dow and 2 for the Nasdaq. That’s too many for comfort.

(12)  I’ve been saying, “After the calm comes the storm.” We’ve had the calm with VIX sinking into the 15 area. But very recently, the VIX has risen to the 21 area, and this may be the early start of a coming storm.
Final message – gold and cash, cash and gold. This is not the time to be “cute”.

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2 comments to Richard Russell – “After the calm comes the storm”

  • Not that I disagree with his reasoning. But a lot of people who have been gold and cash at various points in the last 1 year are a lot poorer compared to guys who invested in risky assets. Jeremy Grantham says that we can touch new highs. Given how the markets keep going up despite extremely bad news who knows that we say another 20-30% rally from here

  • Frank W

    Company earnings predictions for 2010 over 2009 have been upgraded from the previous 31% to 37%, depending on the analyst, to 50%. All or almost all the cluey guys are bearish as hell, including Rosenberg, Shilling, Casey, Hussman, etc. However, Mauldin, who a few months ago was saying that a double dip recession was for sure, is now saying that there only something more than a 50% chance of a double dipper.

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