Home   Links   Contact   Editorials

Get with the program

Richard Russell (big) snippet
Dow Theory Letters
February 24, 2006

Extracted from the February 23, 2006 edition of Richard's Remarks

February 23, 2006 -- News: Today's WSJ notes that "individual investors are coming into the stock market in greater numbers than anything seen in years." Russell Comment -- Is there a contrary opinion here?

In the WSJ's "Ahead of the Tape" column today, the Journal notes that first quarter corporate earnings are coming in below forecasts.

From reports today I gather that Iraq is on the verge of civil war, as Shiites and Sunnis continue to clash, following the Sunni blowing up of a Shiite mosque. Meanwhile, it appears that Shiite "death squads" have been killing Sunni men.

Irony -- Bush finally gets something right (allowing a Dubai company to manage certain US ports), and an ignorant Congress fights him on it.

One thing you learn early in this business. It's stupid and expensive to fight a trend, and I don't care whether it's a secondary trend or the primary trend. Everybody has some kind of market scenario in his mind, but when the facts clash with your scenario, you had better "get with the program."

I've had to learn this lesson the hard way, and any time I've ignored this lesson I've spent sleepless nights playing the "tossing game." I've learned that it's a lot easier to exit the market when market action isn't in harmony with my scenario than it is to sit tight and hope. Fighting the market when the action isn't going the way you want it to -- is a sure ticket to patched pants and a shrinking bank account.

For instance, there's a lot about the current stock market that I don't care for. I've listed the items that bother me many times over. Nevertheless, the stock market, or at least the major averages, have been pushing higher, and except for my energy and gold shares, the major stock averages have been pushing up without me.

Physical gold I place in a separate category. I don't care which way gold goes, I'm staying with it. I'm staying with it because the US had trillions of dollars in debts and liabilities and unless the US reneges on those debts and liabilities (I can't see that happening) it will have to print the paper to finance this mess. This will mean inflation and pressure on the dollar. My defense against a declining dollar or possibly a collapse of the entire fiat currency system is gold.

Meanwhile, T-bills are becoming increasingly attractive. It's no punishment to hold T-bills today, although this was not true two years ago or even a year ago. The yield (free of state taxes) on a 91-day T-bill is now 4.56%, and if I want to go out six months the yield climbs to 4.68%. And that's fine with me. After all, that's better than twice the skimpy 1.85% yield on the S&P -- which means that if I buy the S&P (SPX) I'd have to pray that the market will climb higher, higher enough to compensate me for the risk of buying the S&P at a fat 18 times earnings with almost no yield. Aw, why should I deal with stress -- I'll just buy the T-bills and sleep tight.

As an aside, I'll tell you what helps me sleep tight. I've always kept the radio on all night (wife Faye has even become used to it). I picked up this weird habit back in NYC during the '50s listening to the dulcet tones of Frank Sinatra or Ella Fitzgerald. And my habit followed me to California. A few months ago we subscribed to Serius Satellite radio, and now I can keep CNN or Bloomberg or National Public Radio on all night. These programs put me to sleep five minutes after I hit the sack, and if I wake up at 1AM or 2AM in the morning, I listen to Bloomberg, and presto, I'm fast asleep again. Ah science, what would I do without it. [Barb's note: I'm right there with you, Richard. I need to go to sleep watching a video or DVD. If Bob needs an early night - for a zero dark early flight for a trip next day - it's always 'video/lights out early,' and I stay awake tossing and turning all night, grrr]

One of the things that you have to decide and deal with in this business is RISK. No matter what you buy, you first have to decide how much risk is involved and how much risk you're willing to assume. The really tough part of this is that taking intelligent action in the market is always counter-intuitive. By that I mean that it always feels easier and more comfortable to buy stocks at or near the peak of a move -- when the actual risk is high.

Conversely, it always feels difficult and dangerous to buy stocks near the bottom of a move when values are attractive and the risk is low.

It reminds me of the situation in late-1974 at the beginning of the great bull market. When I urged subscribers to take positions in stocks at that time, I received angry letters from subscribers telling me that I was "crazy" or that "I was not seeing the real picture." I was recommending the purchase of stocks at a time when it looked like we were facing the end of the world.

Yet many blue-chip stocks in late-1974 were selling with yields of 6% to 10%, but, of course, it "felt" scary to put money into the stock market at that time. Yet, the actual risk was very low. Stocks had been declining for almost three years, good stocks had been "thrown over," Wall Street was black bearish and people were saying that "the stock market, as we knew it, was finished." Late-1974 represented a great buying opportunity, although at the time it felt terribly risky.

Again, during the year 2000 when gold was down in the 250s, that was a very low-risk time to load up with gold and gold shares. Gold had been declining for 20 years, and the yellow metal was selling "cheaper than dirt." Many of the gold shares were selling at such absurdly low prices that I wrote at the time that buying them was like buying "perpetual warrants." Gold and gold shares were literally being given away. But buying anything in gold felt wildly risky at the time, and, of course, just the opposite was true.

Right now the stock market looks strong, the major averages have been climbing, individual investors are pouring into the market, analysts are bullish, and volatility is extremely low. It "feels" like a great time to buy stocks, even if they appear statistically expensive. However, in this area with high price/earning ratios and low dividend yields, history would deem buying stocks here as a risky move.

Funny, I'm reminded of an old adage I once heard -- an adage that helped me to stop smoking. It ran, "Anybody can stop smoking, but it takes a real man to face cancer."

Let's turn that ironic adage around and apply it to stocks at this time. It might run, "Anybody can buy stocks when they're expensive and look inviting -- but it takes a real investor to step aside and wait for the bargains."

lots more follows for subscribers...

February 23, 2006
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters

© Copyright 1958-2014 Dow Theory Letters, Inc.

Richard Russell began publishing Dow Theory Letters in 1958, and he has been writing the Letters ever since (never once having skipped a Letter). Dow Theory Letters is the oldest service continuously written by one person in the business.

He offers a TRIAL (two consecutive up-to-date issues) for $1.00 (same price that was originally charged in 1958). Trials, please one time only. Mail your $1.00 check to: Dow Theory Letters, PO Box 1759, La Jolla, CA 92038 (annual cost of a subscription is $300, tax deductible if ordered through your business).

321gold Inc