Advice from 60-year Market Veteran Richard Russell

What is the man who publishes the longest running investment newsletter thinking right now?  In his June 30 missive, Richard Russell of Dow Theory Letters offered his overview of the equities markets, and isn’t too sanguine on the idea of jumping aboard.

At this time, the stock market has been giving clues about the dollar’s next move, while the dollar has been giving clues about the next likely move in stocks, recons Russell.

The La Jolla, Calif-based octogenarian is no fan of the U.S. dollar in the long run, and has repeatedly opined of its progressive failure as the world’s reserve currency.

Russell watches stocks for a heads up to any impending doom for the dollar.  We can surmise from Russell’s latest letter that he’s bullish on stocks as the dollar devalues, but is bearish on equities if the dollar is expected to fall too far, too fast.  So far, nothing he sees in stocks has him concerned about the dollar.

“Currently, the Averages had every opportunity to break below their last secondary lows,” wrote Russell.  “The Averages refused to break down — instead both Industrials and Transports rallied above their preceding June highs. I took this action to be bullish, and with a bow to the advertisers of ‘The dollar crash’  I can say that a dollar crash is not going to occur any time in the near future. If the crash was near, the D-J Averages, in their uncanny wisdom, would have sensed it and given us the news by breaking below their June lows.”

According to Dow Theory, Russell believes stocks are in a bull market, but he doesn’t want to buy any for reasons of valuation.  Analysts citing historically cheap stock valuations relative to bond prices (going back to 1958) don’t fool Russell.  He was busy writing his first newsletters in 1958, but doesn’t remember a Fed buying 70% of newly issued Treasuries to artificially lower interest rates during Ike’s second term.

Instead, Russell looks to the dividend yield of the markets 30 bellwethers.  The current dividend rate of under 3% in the Dow “is far away from the bargain counter” in his assessment.

“So is it really a bull market? I think it is,” added Russell.  “Then shouldn’t we be up to our necks in stocks? I choose not to be, mainly because I don’t like the values. Dividend yields are low in my estimate, and I’m in no hurry to rush into the arms of an anxious and waiting Wall Street.”

Like a salesman who senses a deal is closing too easily to be true, Russell smells something foul from Bernanke’s scripted economic outlook for the remainder of the year.  The WWII veteran has seen too much to be lulled into “some believable fairy tale” told by the Fed and the perma-bulls on Wall Street.

“It bothers me that it’s all so pat and so widely accepted. So far, the Treasuries are acting according to script and so is gold,” mused Russell.  “The stock market is acting as if something better is riding on the winds of the future. Could something be amiss with the accepted scenario? Could Bennie Bernanke have it right? And why is Treasury Secretary Geithner ready to say ‘bye’ to the administration? What can he see ahead that he doesn’t like? Geithner’s been Obama’s leading economic confidant. Certainly, an unusual time to exit.”

When Russell is convinced of a low-risk/high return trade, he states it flat out.  But today’s market prevents him from giving the green light on stocks.  Instead, he’s on the sidelines with his gold and cash until the stock market true fundamentals match the technicals.

With debt levels in the West remaining at record levels as percent of GDPs, Europe still in a quandary with the PIIGS, and a deadline for raising of the U.S. debt ceiling still a month away, a game-changing event could be just around the corner.

“June went out like a lion and today another powerful 90% up day,” wrote Russell. “As the old song goes, ‘Who could ask for anything more.’ Hopefully, today’s [June 30] verdict of the Averages are a forecast of better times ahead. But in this business, it’s always wise to stay alert. With the planet staggering under the greatest load of debt ever seen in human history, anything can happen and probably will.”

QE3 “Coming back on in Spades,” says Jim Sinclair

Bullion expert Jim Sinclair has no doubt that Bernanke and Fed will come in with QE3.  Languishing stocks, downgrading GDP projections, and record wide credit spreads in Europe evolved from investor expectations that the ECB and the Fed are done printing money, said Sinclair.

The former adviser to the billionaire Hunt brothers of Texas said the Fed has no choice but to embark on QE3, or whatever it will be called when an announcement is finally made.  In the meantime, investors taking the Fed at its word could find themselves in a whipsaw trade.

“You’ve got to continue what you’ve been doing,” warned Sinclair.  “The slightest indication that you wouldn’t continue has brought this crisis on.  But you see QE is the kind of thing that puts some sort of balm on the sore of fear.  Whether they call it QE or not, it’s coming back on in spades.”

As the Fed’s so-called QE2 comes to an end on June 30, investors have voted no confidence in Bernanke’s plan to end the easy money policies instituted in April 2009.  After peaking at a high of 12,876 on May 2, the Dow shed nearly 1,000 points in anticipation of a shut down of cash flowing through its 18-primary dealer network.

Beyond the monetary realities confronting the Fed, Sinclair is betting that the presidential election cycle adds to his conviction of a Fed reflation announcement this summer.  The bond king, Bill Gross of PIMCO, agrees, and suggested on his Twitter account that Bernanke is likely to plant a hint of a QE3 plan in August during the Fed’s annual symposium in Jackson Hole, Wyoming.

“Next Jackson Hole in August will likely hint at QE3/interest rate caps,” Gross tweeted.

The timing of an announcement (or hint) in August would line up nicely to a September kickoff to the 2012 presidential race.  And after a CNN poll released Jun. 8, indicating that the electorate is losing confidence in the Obama recovery, a nervous White House will sure be pressuring the Fed to do something to keep the house of cards up a little longer.

From CNN:

“CNN Poll: Obama approval rating drops as fears of depression rise”

“President Barack Obama’s overall approval rating has dropped below 50% as a growing number of Americans worry that the U.S. is likely to slip into another Great Depression within the next 12 months,” according to CNN.

Confidence in the nation’s leaders to solve the financial crisis is paramount to the Fed’s goal of debasing the U.S. dollar in an orderly manner.  Without the confidence that the Fed will continue supporting asset prices (stocks), the economy and the dollar move into what George Soros calls the “Act II” of the global financial crisis.  No official (either governmental or quasi-governmental) wants to end up at the helm when the system collapses.

“If people lose confidence, it isn’t the country that suffers, it’s the currency of the country that suffers,” Sinclair explains.  “This whole thing is put together with mirrors, smoke and spit.  You can’t afford to have any kind of financial crisis or all of the old wounds will open up and hemorrhage because of the investment that’s already been made, you’re stuck in a bad investment, the dollar.  All currencies are going into oblivion and that’s why they (investors) are buying gold.”

With the crisis in Europe and the looming problems in the United States coming to a head all over again, Sinclair told Eric King of King World News earlier in the week, “You’re out of your mind if you sell gold assets now.”

Jim Rogers says to Expect Currency Crises

Jim Rogers, Quantum Fund founder and former partner with George Soros, told Russia Today he forecasts turmoil in the currency market within two years.

“Well, I would expect to see more crises in the currency market, maybe as soon as this fall, or certainly by the fall 2012-13,” Rogers said.  “And you’re going to see serious turmoil in the currency market, which is going to force the world and force America to do something about it.”

The legendary 68-year-old commodities trader doesn’t foresee a smooth end to the U.S. dollar as the premiere reserve currency, noting in previous interviews that Congress’ inaction to cut spending or raise taxes to stem the tide of $1.6 trillion annual budget deficits is evidence of the policy of kicking the fiscal can down the road.

“But that’s the way it’s going to wind up,” Rogers said of the disastrous course charted for the U.S. dollar, “because nobody is taking any serious action except talking about it.”

When asked why he thinks no meaningful action has been taken to reign in federal spending, especially this fiscal year, Rogers began to lay blame on the American press as a contributing factor.

“I am stunned by how little there seems to be in the American press about it,” Rogers opined.  “The American press seems to be more worried about wish TV star is divorcing which TV star more than anything else.”

Moving onto one of the root causes of runaway federal spending, the Pentagon, the American turned Singaporean resident faults U.S. wars in three foreign countries—presumably to mean the wars in Iraq, Afghanistan and Libya—as an example of America’s lack of resolve on the fiscal front.

“We have wars going on in three different countries right now. We’d like to have wars in four or five more if we could figure out a way to do it,” Rogers said.  “We’ve got troops stationed in 120 countries around the world that aren’t doing anything except making enemies for us and costing us a staggering amount of money.  This is all going to come to an end.”

Monetary history is replete with counts of superpowers falling from power through a steady debauching of their nations’ currencies, with France’s franc and Great Britain’s sterling during the 18th and 19th centuries, respectively, as the most recent past examples of what happens to countries that engage in overreaching foreign entanglements.

“Unfortunately, no country that’s gotten itself into this kind of situation gets out of the problem without a crisis or a semi-crisis.  We’re rapidly, more and more rapidly approaching a crisis that’s going to be bad for all of us,” he said.

“2008 was bad,” Rogers concluded.  “But wait until the next time around, it’s going to be even worse.”