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.”