The way I see it . . .
Richard Russell Big
December 22, 2006 -- Today's site is going to be a short one, [Editor's note: I took the liberty of posting most of it here, so 321gold.com readers get a Russell Big Holiday Treat!] mainly because I'm thinking of taking something approximating a three-day rest. Son Ryan is coming down from San Francisco, and I haven't seen him for months (seems he loves San Francisco), and two of my four daughters will be here. So it should be a jolly Christmas, and even better since it's starting to warm up in San Diego. Regardless of the weather, the surfers are out every day -- I don't know how they do it, particularly when they're out early in the morning (they tell me the new wetsuits are amazing at shutting out the cold).
All may be well with the guys and dolls on Wall Street with those mega-bonuses being distributed, but the situation looks increasingly "iffy" where the markets are concerned. Below we see Dr. Copper, and he's now dropped to his lowest level in six months. That can't be good, since copper has a time-honored reputation of being a barometer of world economic activity. Homebuilding will be slowing down in the US next year, and I hear that the Chinese government has ordered a slowdown in the frenzied rate of construction in China.
Once again I'm drawing subscribers' attention to the ominous pattern that the Transportation Average has taken. Yes, it's a clear head-and-shoulders top, and over the last few days support has been clearly violated. This tell me that "Something is wrong somewhere" The Transports appear to be saying that the goods are not moving fast enough -- this despite all the new highs in the Dow. Somewhere ahead the Industrials and the Transports are going to "get it together" -- either the Industrials are going to join the Transports on the downside or at the very least, the Transports are going to stop declining. What's clear is that "disagreement" reigns, and the Transports look worse than ever.
The VIX is still in a very low area below 11, and I have a feeling that this is going to change radically during the first quarter of 2007. I continue to suggest caution on the part of my subscribers. This is an overvalued and overbought market, floating on the greatest ocean of liquidity the world has ever seen.
How about the bonds? Here's a chart of the 30-year T bonds, and they've been walking up a rising trendline. Most recently the bonds tested the trendline, and it looks as though the bonds are headed higher again. Either bond-buyers are stupid or they see a slowing economy ahead. Come to think of it, the bond crowd has never had a reputation for being stupid.
Ah well, three warnings of a slowdown ahead. Of course, the market can change its mind and reverse on a dime, but so far it seems to me that it's time to be cautious. Which is a strange thought, considering that today's market is paying as little attention to risk as possible. If a meteor was to smash into the earth, Wall Street would be bidding for the hole.
Stop the Presses, I think I'm beginning to get it! Ah, here's how it works. This week Russia's Gasprom has finally pressured Shell into selling a majority stake in the Sakhalin-2 gas project in a deal that consolidates the Kremlin's power over national energy resources. Thus, all Europe now depends heavily on Russia for energy, particularly natural gas.
So Russia grows rich on energy. Money pours into Russia and the price of commercial property goes sky-high. What about China? China has become manufacturer to the world. Wait, what does the US produce? The US produces expensive high-tech weapons of war -- and debts, lots of both.
And what will the US do with its mighty military establishment? The problem is that nuclear capabilities cancels out the possibility of war with Russia or China or any other nuclear power. A further problem is that the "new wars" are fought with hundred-dollar AK-47s and cheap home-made bombs. So of what use is the US's super-expensive high-tech military? Easy, it creates jobs and profits for the defense industry, and it gives the US government a reason to keep up its big-time spending. Hats off to the military-industrial complex.
Now here's the point -- the new "war" is not going to be military at all, it's going to be economic. It's going to be a war of natural resources and manufacturing capabilities and exporting capabilities. Note: for the first time in 81 years, Toyota will be the world's biggest producer and seller of cars.
Anyway, that's the way Richard Russell sees it here as the year 2006 closes. It's not a pretty picture, but it's the picture I'm looking at.
End of year comment: Which is a bigger problem, staying in Iraq or getting out of Iraq? I have the feeling that the administration didn't think the whole thing through prior to attacking Iraq. What a quagmire, both in human lives and in multi-billions of dollars. So far, neither Hillary nor Obama has come up with the winning answer. But I hear Bloomberg is working on it. How about this -- we turn the whole problem over to Goldman Sachs and they arrange a merger with the US and the entire Mideast. If you can't beat 'em, just merge. Can we whip up the urge to merge?
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.
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