Stop worrying

Richard Russell 'snippet'
Dow Theory Letters
Mar 19, 2007

Extracted from the Mar 16, 2007 edition of Richard's Remarks

Gold -- I gather many subscribers are worried about gold. The recent sharp decline, I believe, was a result of investors selling gold (which is always extremely liquid) in order to raise cash to cover losses in other areas. The daily chart below show RSI now turning up, and the histograms also rising from negative territory. Prognosis -- gold looks fine. Stop worrying.

Still worried about gold? Below is a monthly chart of the yellow metal covering the whole bull market that started in 1999. So far, the recent "big correction" in gold hardly makes a blip on the monthly chart. Gold's in good shape, as it has been for the last 5000 years. And oh yes, the gold bull market is still only in its early second phase.

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Important --The five paragraphs below are from a article by Barron's Randall Forsythe, who, to my mind, is one of the best columnists writing today. Please read these five paragraphs carefully, they are critically important and reveal the dilemma that the Fed now faces.

"According to Goldman's Hatzius, ARMs that aren't subprime are going down the tube even faster than riskier loans. Prime ARM delinquencies are above their worst levels of the 2001 recession, he points out. By contrast, Subprime fixed-rate delinquencies are well below their recession levels.

"But here's a key point: prime-quality and so-called alt-A mortgages (middling credits, lower than prime but better than sub-prime) have longer reset periods -- two years or more -- than subprime. That means we haven't seen the full impact of the sharply borrowing higher costs on many ARMs yet.

"As teaser rates on ARMs get adjusted, Hatzius suggests the teaser-rate problem could turn out to be bigger than the subprime problem. Clearly, lenders didn't take care whether their borrowers would be able to shoulder the higher costs once the teaser rates ended.

"Will the Fed ease soon enough and by enough to bail these borrowers out? If it does, it effectively bails out feckless speculators, just as it did after the tech debacle. If it doesn't, the Fed risks a new downturn worse than that resulting from the Nasdaq collapse.

"Once again, debtors borrowed well, at the time, if not wisely. The consequences are becoming apparent."

Russell Comment -- Many commentators are now voicing the opinion that the worst of the housing mess is behind us. I disagree, I believe the worst of the housing mess lies ahead.

lots more follows for subscribers...

Mar 16, 2007
Richard Russell
website: Dow Theory Letters
email: Dow Theory Letters
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