Analysts, Gurus &amp; Pundits

Top 508. Mar 9, 2004 7:12 AM

» Normxxx - Richard Russell's DOW THEORY LETTERS

DOW THEORY LETTERS

by Richard RussellEditor-in-chief | March 8, 2004
www.dowtheoryletters.com/dtlol.nsf

US consumers continue to buy "like there's no tomorrow." According to last Friday's Fed report, consumer credit outstanding rose by a larger than expected $14.2 billion in January to a seasonally adjusted $2.016 trillion. Wall Street expected a $5.9 billion gain. At the same time, "investors" in January bought just over $40 billion in mutual funds, one of the biggest buying months in recent history.

Mark Faber notes that according to a Yale School of Management poll, 95% of individuals and close to 92% of financial institutions believe US stocks will be higher 12 months from now. People are bullish about the stock market.

The percentage of cash held by mutual funds has dropped to an historic low of 4.3%. Funds are extremely bullish regarding the stock market, at least with other people's money.

Advisors have remained bullish for 44 consecutive weeks. Bullishness is now rampant with Investor's Business Daily's poll of investment advisors showing the bullish percentage now at 59.6% while the bearish percentage is at 18.8%. The bullish percentage of advisors has prevailed for months on end.

In the face of all this bullishness, stocks continue to be drastically overvalued. And despite 45-year lows in short interest rates and the greatest spate of liquidity ever seen, none of the major stock averages, the Dow, the S&P, the Nasdaq or the Wilshire, has been able to rise to new highs. Eighteen months have passed since the bear market lows of September 2002, which is a long time for a bear market rally to remain in force.

Meanwhile, the "conventional wisdom" holds that if there's to be any trouble ahead, that trouble will be held off until "after the elections." Why? How? "Easy, the Fed won't let it happen."

But now we see important divergence in the stock averages. On January 22, the D-J Transportation recorded a closing high of 3080.32. Two trading days later on January 26, the Dow rose to a high of 10702.51. Following that high, both Averages turned down. On the rally that followed, the Industrial Average advanced to a new high of 10737.70 on February 11. The Transports failed by a wide margin to confirm.

In fact, in the face of continuing strength in the Industrials, the Transports have now formed a series of declining peaks.

January 22 -- Transports closed at 3080.32.

February 11 -- Transports closed at 2951.92.

March 1 -- Transports closed at 2916.61.

This is continuing divergence, and a very negative sign for the market. So while investors appear highly bullish and the retail public continues to buy heavily into the market -- the Averages are waving a "warning flag,"

In the face of all the above, I've advised a move to cash and gold with close stops under all common stocks that subscribers still hold.

I'm not alone in this. The cheer-leading Wall Street Journal buried it in its B-section (for shame), but it made headlines on the front page of the Financial Times. The world's greatest investor, Warren Buffett of Berkshire-Hathaway fame, states that he can find few if any stocks to buy which fit his valuation criteria. So Buffett's been building a record cash hoard of $36 billion. Writes Buffett in his annual report just released, "Our capital is under-utilized now . . . It's a painful condition to be in -- but not as painful as doing something stupid."

On top of that, Buffett has invested $13 billion in foreign currencies in a huge play against the dollar.

Writes the Financial Times today, "The last time Warren Buffett chose to sit on the sidelines with anywhere near this much cash, it was a precursor to the largest stock market bubble in history."

How about the VIX? This morning the VIX (implied volatility index) was just over 14, which is close to an historic low. The extremely low VIX tells us that there is very little desire to buy puts. Puts are insurance on the downside. Of course, the VIX could be correct -- the low VIX could be telling us that the market is not ready go down, and therefore, there's no need for puts. But the other side of the coin is this -- if this market does head lower, the VIX at a low 14 tells us that there's very little downside protection in this market. Take your choice.

The Lowry's statistics are interesting. Buying Power has been sluggish, telling us that up to now there's been a lack of desire to accumulate stocks. But at the same time, Selling Pressure is at its lowest level since late-1997. Just as there's little urge to buy, there's also little urge to sell. On this basis, we might expect the market to mill around in a trading range.

[Normxxx Here: Or, waiting for a catalyst. ]

This morning the June 30 year bond was up 22 ticks to a new high of 113.20. And I wonder, is the extraordinary strength in bonds simply a case of foreign buying of Treasuries? Or is the bond market making a bet on future deflation? I don't have the answer to this critically important question, but it sure has me wondering.

Interest rates? What does the bond market think, aside from the surging bonds? The yield on the 10-year T-note is now 3.78%. The yield on the inflation-adjusted 10-year T-note (TIPS) is 1.41%. The yield differential between the two is 2.37%. The bond market is saying that inflation over the coming 10 years will average around 2.37%.

Investment Position -- May I suggest that subscribers read or re-read my piece on the Home Page, the piece entitled "Rich Man, Poor Man." This is the time, I believe, to at least act like a rich man (Warren Buffett, for example). Yeah, I know that to be invested in T-bills or in a money market fund or a CD means that you get paid next to nothing. But to be invested in other than cash today means to be invested in something that's overvalued.

What's overvalued today? Stocks, bonds, real estate, condos -- frankly, almost everything.

Question -- Russell, why are you so worried about the stock market at this time? What's really bothering you?

Answer -- I'm worried because, as I've said, I believe the top for this market is now in. I'm worried because if the bear takes hold again here, it will be deflationary. Yes, declining stocks are deflationary. If stocks turn down here, they will be pressing against the greatest mountain of debt in world history.

What about gold? Gold is the only money with intrinsic value and which has no debt against it. As such, gold is "bankrupt-proof." This is the great value of gold. In an all-out inflationary environment, gold will tend to keep up with inflation. On the other hand, in a disastrous deflationary credit collapse, gold stands as intrinsic money that will defy bankruptcy. Should there be a panic out of all paper currency in a world deflationary collapse, there could be a panic to own the only money that is pure intrinsic value, gold.

Gold stocks are not gold. Gold stocks are the companies that produce gold. From a safety standpoint, gold stocks obviously cannot be compared with physical gold that you own. However, gold stocks do have the leverage. For instance, if the price of gold were to rise 50% from here, say to 600, many gold stocks would probably double and even triple in price. For this reason, I would suggest a 50/50 gold position, half gold and half gold stocks. An even more conservative position would be two-thirds metal to one-third stocks.

CONCLUSION -- I continue to believe that the top is in for this market. If I'm correct, it means that the bear will be tightening his grip. If that happens, it could not happen at a worse time. Why is that? Everybody is bullish, nobody has cash, debts are sky high, and nobody is prepared for trouble "this side of the election."

Transports closed today 212 points below their January 22 closing high of 3080.32. Transports would need to better 3080.32 to confirm the Dow. I don't think that's going to happen. Has anyone been watching the Transports at all? Does anyone follow the Dow Theory?

And so ends our Monday.

-- posted by Normxxx

Top 509. Mar 12, 2004 9:58 AM

» Normxxx - Was that a Dow Theory SELL signal?

Was that a Dow Theory SELL signal?

By Mark Hulbert, CBS.MarketWatch.com | 12:01 AM ET March 12, 2004

ANNANDALE, Va. (CBS.MW) -- The stock market may have generated a Dow Theory sell signal this past Wednesday.

I use the word "may" because only one of the three Dow Theorists tracked by the Hulbert Financial Digest believes that such a sell signal was generated. The other two remain bullish.

How can such disagreement exist among devotees of this venerable market timing system, which arguably is the oldest of any of the major market timing systems in widespread use today?

Therein lies a tale.

Ambiguity exists because the Dow Theory's creator never codified it into a set of objective rules. It was introduced over a 30-year period at the beginning of the last century in editorials in the Wall Street Journal.

Those editorials were written by William Peter Hamilton, then the editor of that newspaper, on the basis of conversations he had with Charles Dow, the founder of Dow Jones & Co., the newspaper's publisher.

Hamilton's editorials leave lots of room for followers to argue over the more esoteric points of the theory.

To be sure, there is broad agreement on its general outlines. If both the Dow Jones Industrials Average ($INDU: news, chart, profile) and the Dow Jones Transportation Average ($TRAN: news, chart, profile) jointly reach significant new highs, the stock market is likely to continue rising. Similarly, the market is likely to continue falling if both averages jointly reach significant new lows.

At a conceptual level, many Dow Theorists also agree on the three prerequisites for what it takes to signal a change in the market's trend. Consider what those three steps must be when the trend changes from bullish to bearish:

Step No. 1: Both Dow Averages must undergo a significant correction from joint new highs.

Step No. 2: In their subsequent rally attempt following that correction, either one or both of the Averages fail to rise above their pre-correction highs.

Step No. 3: Both Averages must then drop below their respective correction lows.

Richard Russell, editor of Dow Theory Letters, thinks the last of these three pieces fell into place on Wednesday.

Here's his rationale. From their January highs (set on Jan. 26 for the DJIA and Jan. 22 for the DJTA), both averages suffered a correction that lasted until Feb. 4, when the DJIA closed at 10,470.74 and the DJTA closed at 2,822.11. That fulfilled Step No. 1.

Step No. 2 was satisfied by the rally that began from those Feb. 4 lows, since in that rally only the DJIA rose above its January high. The DJTA did not.

Then, this past Tuesday, the DJIA closed below its Feb. 4 low, followed on Wednesday by the DJTA. That was Step No. 3.

Based on this, Russell believes that the market rally that began in October 2002 is now over.

Russell's track record makes it hard to disagree with him. His market timing performance since 1980, when the Hulbert Financial Digest began tracking newsletters, places him at or near the top on a risk-adjusted basis.

The reason there is room for disagreement about Russell's interpretation is that Hamilton was not precise about how serious a correction is needed to satisfy Step No. 1. Not every correction will do, of course, since some corrections last only a couple of hours, while others last weeks or months.

Some other Dow Theorists believe that the late January/early February correction was neither long enough nor deep enough to qualify. For the DJIA, that correction lasted only 7 days and shed just 2.2 percent from the average's value. For the DJTA the correction was only marginally longer (9 days) and deeper (8.4 percent).

And if that correction doesn't qualify, then no sell signal was generated on Wednesday -- leaving intact the last signal that was generated by the Dow Theory.

Both of the other Dow Theorists the HFD tracks -- Richard Moroney of Dow Theory Forecasts, and Jack Schannep of TheDowTheory.com -- believe that this last signal was a buy signal. They therefore remain bullish.

So there you have it -- one Dow Theorist bearish, two bullish.

Why, oh why, couldn't Hamilton have been clearer?

-- posted by Normxxx

Top 510. Mar 15, 2004 9:58 AM

» Normxxx - Richard Russell's DOW THEORY LETTERS

Richard Russell's DOW THEORY LETTERS--

March 12, 2004

Question -- OK, Russell, the stock market has backed off following its uncorrected rise from its March 2003 low. So why do you think this is such a serious reversal, rather than just a long overdue correction?

Answer -- At the October low of 2002. the S&P was selling at slightly over 30 times earnings while yielding 1.90%.

The Dow Theory puts emphasis on values above all else, including price movements. Bull markets start with stocks at great values. Bear markets start with stocks at overvalued levels.

Bear markets typically end with the Dow and the S&P selling at 5 to 10 times earnings while yielding 5% to 6%. At the lows of 2002, the valuation level were ridiculously high, higher than what we've seen at previous bull market tops. For this reason, I'm of the opinion that the bear market did not end at the 2002 lows. No bear market in history ever ended with stocks at overvalued levels.

If that's the case, then the rise from the September 2002 was simply an upward correction or interruption in a continuing bear market. As I see it, the recent new highs in the Dow unconfirmed by the Transports have called the top for this upward correction in a continuing bear market. If the top is indeed in place, then it stands to reason that the forces of the bear are currently in the process of taking over again.

Question -- Earnings have expanded greatly here in 2004 over 2003. Even if earnings level off some, wouldn't this suggest a higher stock market or at worst a level stock market?

Answer -- First, the stock market is a discounting mechanism, and all estimates of future earnings are simply guesses -- and very often wrong guesses. Furthermore, the major factor in the major swings in stock prices is not earnings, it's price/earnings ratios -- or what investors are willing to pay for earnings.

At previous bull market peaks, investors were very bullish and were willing to pay up to 20 times earnings for the S&P. At previous bear market lows, investors turned very bearish, and have paid as little at 5 to 7 times earnings.

The history of markets is a history of the broad, multi-year swings from extreme optimism to extreme pessimism and then back to extreme optimism again. In my studies over 50 years, these are the only guaranteed "cycle" that I have ever subscribed to. All other cycles are "iffy," or to put it more cynically, and I've said this many times before, "Cycles, where are they when you need them?"

Right now the S&P is selling at slightly above 23 times earnings. Sooner or later, one way or the other, today's extreme bullishness will give way to extreme bearishness. When this happens, my guess is that price/earnings on the S&P will decline to 5 to 8. If, for the sake of argument, this bear market ends at 8 times S&P earnings, then even if earnings hold at the current level (which is extremely doubtful), the S&P could lose two-thirds of its current value.

It's my guess that some time over the coming ten years we will see investor sentiment swing from today's current extreme optimism to a period of extreme pessimism. This alone suggests that holding stocks here is a long-term LOSING proposition. This leaves us with two reasonable choices -- become an expert trader, or sit with cash and gold until this bear market ends.

Question -- Russell, that is one very boring scenario.

Answer -- Are you in this business for excitement or for handling your money intelligently. If you want excitement, my suggestion is -- go to the nearest Indian casino or to Las Vegas. There you can lose your money in a few hours or less. My job is to offer investment advice, not excitement. But wait -- it can be exciting. It's sad but exciting to see a great bear market wipe out trillions of dollar of assets -- particularly if what's being wiped out is not your own assets.

Question -- I'm writing this in the morning half an hour after the opening, and the Dow is up 64 points already. What do you make of this? Is the decline over?

Answer -- Five trading days ago on March 5 the Dow closed at 10595. Yesterday the Dow closed at 10128. That a loss of 467 points in four days. At that rate of decline, the Dow WOULD DISAPPEAR in a little over 80 days. I don't think that is going to happen. Which is why we have upward corrections in primary bear markets. Bear markets don't go down in straight lines, they go down deceptively and erratically. Of course, bull markets rise in the same way.

This, by the way, is why I've said that the single hardest thing to do is to buy early in a bull market and ride the bull market all the way to somewhere near the top. By the same token, its extremely hard to get out of a bull market near the top and then stay out of the bear market that follows -- until somewhere near the bottom.

Question -- OK, the McClellan Oscillator plunged to minus 202 yesterday, and the market is severely oversold. Now a rally is on. What will you be watching?

Answer -- I'll be watching my PTI, my Big Money Breadth Index, my Most Active Stock Index, the histograms on the various averages, and obviously I'll be watching for any discrepancies and divergences. In other words, I want to judge the strength of the rally compared with the strength of the preceding decline.

You'll note in my reports over recent weeks that I didn't say that the market is now ready to collapse. I said that I believe "the top is in," meaning that we've seen the best of the upside. The market should now enter a broad decline -- while taking the most number of people with it. To do that, the market must somehow keep people hoping. The bear is expert at keeping investors hoping.

I want to included two charts on this site. The first is the Wilshire 5000 Index which will give us an overall view of the entire market since the Wilshire is made up of actually 6000 stocks on the NYSE, the Nasdaq and the Amex.

Below we see the Wilshire. I analyze the action as a "triple top," and then a sharp break below two previous lows and below the 50-day moving average (blue line). Note that each peak was accompanied by a lower peak in the RSI. MACD at the bottom of the chart shows the same three declining peaks. The Wilshire has topped out.

The second chart is a very important one -- here we see the Morgan Stanley Consumer Index. As you know, consumer buying has been the backbone of the so-called "recovery" in the stock market. On that basis, we have to take the action of this chart seriously. The Consumer Index has now dived below its 50-day MA, and the Index looks to me as though it's in trouble. Note how far the Index is above its 200-day MA (the rising red line). I'd be surprised if this Index could work its way back to the highs. The last thing Greenspan wants is US consumers pulling back on the excessive buying. This chart says that's just what consumers may be doing.

TODAY'S MARKET ACTION -- I said yesterday that with the McClellan Oscillator at minus 202, the market was severely oversold, and that turned out to be the case. Result -- a rally today. I should have remembered that when the downside pressure is strong enough to push my PTI into it bearish mode, the market is usually oversold -- thus, PTI "sell signals" often tend to be followed by rallies -- which was the case today. Next week we'll see just how good the rebound turns out to be.

My PTI was up 6 today to 5401, which takes it 1 point above its moving average. I call the PTI neutral to negative (negative because of yesterday's sell signal).

-- posted by Normxxx

Top 511. Mar 21, 2004 7:21 PM

» Normxxx - DOW THEORY LETTERS: THE BIG PICTURE

DOW THEORY LETTERS: THE BIG PICTURE

by Richard Russell, Editor-in-chief | March 5, 2004
www.dowtheoryletters.com/dtlol.nsf

Every day I'm inundated with information, opinions, facts, scenarios. It's a huge task to plow through it all, and an even bigger task to form any sort of conclusion based on what I read and hear. In the end, I turn to the markets as I always do.

First, I want to discuss my PTI. My PTI is providing us with what I call "an early warning signal." No, the PTI has not yet turned clearly bearish. To turn bearish the PTI will have to break below and hold below its 89-day moving average.

Why do I use an 89-day moving average? The answer is trial and error. I've tested all kinds and varieties of moving averages, and over a period of 35 years I've found that a simple 89-day moving average works best (with the least number of whip-saws).

What about the "early warning signal?" Here's what I'm talking about. The PTI advanced to a high of 5438 on January 21. From there it turned down and sank to a low of 5414 on February 4. From its 5414 low, the PTI again rallied, and on February 11 the PTI rose to 5439, exactly 1 point above its previous January 21 high of 5438. At this juncture I see a "double top."

From its second high at 5439, the PTI turned down again. By February 24 the PTI had declined below its 5414 low of February 4 - to a low 5409. So here's the picture - the PTI formed a "double top" at 5438 and 5439, and more recently the PTI has broken below its intervening low at 5414.

This is a weak looking pattern, and for this reason I call it an "early warning signal." But for the PTI to turn clearly bearish I still would want it to break decisively below its moving average.

Next, please don't forget those Dow Theory levels that I want us to watch. The levels are 10470.74 for the Industrials and 2822.11 for the Transports.

If both Averages violate those levels, the bear market will be reconfirmed under Dow Theory.

[Normxxx Here: The DJI closed Friday at 10,186 or about 284 points below Russell's critical level, and the DJT closed at 2786, 86 points down from Russell's critical level. ]

A few weeks ago, Greenspan warned against our huge budget deficits, and he also warned against the massive unfunded liabilities coming up "within four years" as millions of baby boomers enter the Social Security system. The system won't be able to handle these coming expenses so cuts in Social Security and Medicare will be necessary. Those cuts will be deflationary.

Now think about this. The process of building up debt is basically inflationary. In building debt you're spending more than you're taking in or more than you have. Thus, the process of building debt can be compared to a balloon that's inflating. But at some point the rising edifice of debt cannot be inflated any further. From that point on, the inflationary forces of the debt build-up become deflationary.

Which I think is close to where we are now. Greenspan literally said it yesterday. At this point, we're in that unclear area between the peak of the debt build-up, and the beginning of deflation. And this is the reason why everything seems so unclear; this is the reason why price-action in almost every area seems to have turned "fuzzy". In some areas (housing, sectors of the stock market, oil) we continue to see signs of inflation. But in other areas (jobs, prices in a variety of items) we see signs of deflation.

I've stated repeatedly that "In a bear market everyone loses, and the winner is the one who loses the least." In my opinion, we are now entering that area, the area where everyone will begin to show losses somewhere. The losses will ripple back-and-forth across every sector from stocks to bonds to housing to commercial real estate to gold to silver to the currencies. The process will start slowly and subtly, but it will accelerate as time moves along.

The fact is that "we've spent it." In order to keep our false standard of living intact, we've spent what we don't have, and we've done it for years. What comes after a binge? In my experience following a binge comes a painful sobering-up. And that's what the bear market ahead will be all about.

Below I have included a few paragraphs from Doug Noland's latest report. He writes an excellent site called the PrudentBear (www.prudent bear.com). Doug does a terrific job on the whole economy, where it is and where it's probably going.

While the Fed has quite limited control over the quantity and quality of Money & Credit creation, it does retain the powerful brute force of artificially low pegged interest rates. This capacity to set artificially low borrowing costs is the power to offer enticing speculative profits. And this power swells with the size and attentiveness of the speculating community. When it comes to the Fed's incredible power, these days it is truly The Best of Times and The Worst of Times.

The Fed may not hold sway over the mechanics of Money and Credit expansion, but these days it does much better. It dictates speculative returns for a community of unprecedented global stature. Importantly, however, a monetary system actively managed by transmitting policy through leveraged speculation is anathema to Sound Money & Credit. It is the ultimate Ponzi Finance on a systemic, global level.

So the big picture, as I see it, is a world close to unraveling as the wild and crazy financing done with irredeemable paper money finally comes apart. In the mess that follows, the price of everything will deflate, and the real meaning of unsustainable debt will surface. The question then will be - "What's around that is a value? What can I hold that is a true value?" And the answer will be, as it always has been - gold. Gold the ultimate money will be the value that everyone will want to own.

DEBT AND DR. COPPER - I want to discuss two items. First, I checked our national debt and what's happening to it. The latest figure is that the current US national debt is $7.080 trillion dollars. Twelve months ago the national debt was $6.446 trillion dollars. That means over the last year we've added $634 billion to the national debt or $1.73 billion a DAY- 365 days a year. The US federal debt is running wild. This means explosive deficit financing.

The second item I want to talk about is Dr. Copper. They call copper Doctor because copper is "smart," it's used everywhere for everything, and it's been much better than the economists at telling us about the world economy. But what's so interesting now is that copper has gone parabolic. Going parabolic means that the trend is accelerating to the point where the item is heading almost vertically higher. The problem is that all parabolas ultimately fall apart, and when they do they tend to come down hard.

Here I include a daily chart of copper. You can see at the top of the chart (shaded area) that copper is drastically overbought. Nevertheless, this is a parabolic rise, and it will surge until it's exhausted. As I write this morning, May copper is down 2.25 to 138.20. Copper could be in the process of topping out. In the past, when a big copper rise tops out, it's a sign that the economy is at or near a turn. So let's watch Dr. Copper. Copper "knows."

"March madness?" Prechter, Shilling, and now we have another outspoken member of the deflation-group, Peter Thiel. An interview with Thiel (he runs the very successful Clarium Capital hedge fund) appears in the Feb. 29 issue of Barron's, and I urge all subscribers to read the interview.

As you know, I've been writing about the possibility of deflation, rather than the widely-accepted thesis of inflation and then even more inflation. The truth is that at this point I can make a good case for inflation, hyper-inflation, stagnation or deflation - or inflation and THEN deflation. Nobody, absolutely nobody knows how it's all going to work out.

But first let's talk about Thiel. Peter Thiel believes the real estate "bubble" is cooling down. For that reason he believes that "construction, housing, the service sector, all that will come under enormous pressure." So Thiel is investing based on four themes - deflation meaning getting out of common stocks. With deflation he sees LOWER interest rates, and therefore he's buying 10 year T-notes. He also believes "the world is running out of cheap oil, and that the price of a barrel should be nearer to 50 to 60 dollars a barrel." Therefore, own quality oil stocks such as Exxon. Finally, Thiel believes the dollar could drop in half - thus, diversify into a basket of foreign currencies such as the Australian and New Zealand dollars, the yen, etc.

What do I think? I've been saying there is a good case for coming deflation. The US economy never eliminated the excesses of the '90s. The Fed fought the bear "tooth and nail" and never allowed the economy to contract as it normally would following the collapse of the greatest bull market in history.

But I have questions. I've noted that there is now about $32 trillion of debt built into the US economy - debt in every area of the economy from individuals to cities to corporations. I consider that this debt constitutes a huge short position against the dollar. I say that because it takes billions of dollars to carry and to pay off this debt. This is something that nobody considers or even thinks about during good times. But if the US economy even "tires," it doesn't have to turn down, this giant mountain of debt becomes a great deflationary force, and a desperate search (panic?) for dollars begins.

THE KEY DOLLAR - Now for a KEY chart, and I'm talking about the US dollar. I've been saying in recent reports that the whole world seems to be on the opposing side of the dollar - meaning that everyone is short the dollar. The almost universal opinion has been that "the weak dollar must continue heading down." But the dollar has been going down for a long time, and the question is - "Are too many people on the short side of the dollar?" When that happens, I don't care what the fundamentals are, you can get a "surprising" reversal.

The other item that I want to state again is that debt represents a potential short position against the dollar. The other side of debt is cash, and it's cash (dollars) you need to carry or to pay off your debt. And as we all know, the US has a lot of debt, around $32 trillion of it at present. Of course, when the economy is in good shape, there's no problem in paying off debt. It's when things go bad that debt becomes a menace. That's when cash is needed, as old-timers who went through the Great Depression remember very well.

Greenspan is well aware of this, which is why he is so frantically shoveling out the liquidity. But at the same time Greenie's creating a giant debt bubble - a bubble which somewhere ahead will burst.

It's for that reason that I, personally, am becoming more and more interested in accumulating and holding cash.

But never mind what I think, let's look at the chart. What interests me here is the formation that the dollar has carved out. If the Dollar index would back off a bit, then turn up and break out to the upside, we'd have a head-and-shoulders bottom, and a strong pattern. Actually, the Dollar doesn't even have to do that - it could move out from here. The huge "short position" against the dollar could then propel it higher (and as I write, that's exactly what's happening).

The RSI at the top of the chart is on the plus side and not yet overbought. Note also at the Dollar's March low the MACD (heavy black line) did not confirm. This was a strong plus. Finally, the blue histograms have been rising, although over the last few days they have leveled off. The action of the histograms will tell us whether the dollar is headed higher, or whether this is just another "fake-out" on the part of the world's reserve currency. The stronger dollar has put temporary pressure on gold and silver. This will give subscribers a chance to take positions in the metals or add to their positions in this general area.

Question - "Russell, if you are correct, if the dollar is headed higher, how will this affect the markets?"

Answer - You are aware that business and almost everyone in government has been complaining that the dollar is too strong, and that the strong dollar is hurting US international competitiveness. So I guess the last thing they want now is a stronger dollar. But business and government don't always get what they want.

If the dollar does head north from here, it will make US exports more expensive and consequently hurt our trade balance. A stronger dollar will take some pressure off commodity prices in the US, many of which are traded in dollars. A lot depends on the strength and duration of any dollar advance. But I'll repeat - I believe there's a huge and unrecognized short position against the dollar. The short position is both real and synthetic, but it's there.

Question - "What do you think the recent surge in the dollar means?"

Answer - Ah, the trillion dollar question. It could simply mean that the dollar got severely oversold, and that it's simply correcting. Or more ominously, it could be the first hint of deflation. As I've said over and over again - somewhere ahead the debt bubble is going to burst. When that happens, we could see a panic for dollars. We'd also see prices of almost everything head lower, as the rush to get liquid begins.

How do most people get liquid? They sell something - a house, a car, stocks, bonds, anything - for cash. That's how most people get liquid. The result - deflation.

SAVIOR - President Bush has an enormous chest of $100 million with which to back his forthcoming eight-month battle for a second term. You think that $100 million is going to put him in the White House for a second term? Think again. The key to the fight for the White House could lie with Zembei Mizoguchi, who is vice-minister to Japan's Ministry of Finance, a super-powerful position, to say the least.

Mizoguchi is the man who decides how many US dollars Japan will buy each and every week. Japan has been buying US dollars by the tens of billions, in order to keep the dollar strong against the yen. In that way, Japan can continue to sell its goods at a competitive price, due to a "cheaper yen." What does Japan do with all the dollars it buys? It turns around and "invests" the money in US Treasury bonds.

The numbers are mind-blowing. Last year Japan bought over $250 billion and put much of it in US bonds. In January of this year alone, Japan bought a record $70 billion and put almost all of it in Treasury bonds. Mizoguchi has authority to buy $100 billion more dollars this year, and a bill going through Japan's parliament would give him authority to double that to $200 billion! Without Japan's wild buying of Treasury bonds, the US would have to look for other buyers, and it's almost certain in that case that rates in the US would surge.

If interest rates surged, that would hit US homeowners and prospective home buyers hard. Since most home-buyers have chosen variable-rate mortgages, higher rates could put the brakes on the whole housing industry. And as you know, housing has been the savior of the US economy ever since the Fed drove short rates down to 45-year lows.

So saying, let's study one of the most important charts at this time, a daily chart of the 30-year T-bond. On last Friday's rotten employment news, the bond surged to a new high. RSI moved to a slightly overbought status, while at the bottom of the chart we see MACD surging above its MA. The blue histogram rose above zero, with the implication that the bonds are in a positive mode with a new low in the long rates.

INVESTMENT POSITION AND COMMENTS - Yes, the bear goes in the box, and yes, I do believe that what we're experiencing is a correction in an ongoing primary bear market. So, say hello to bruin, our long-lived fuzzy bear. I like cash more and more, and by that I mean dollars or euros or even real money, which we call gold. I believe gold is at or near a bottom, and if you want to add to your gold positions, the metal or the stocks, this is a reasonable time to do it.

With interest rates held artificially low and with the bond market depending on Japanese and Chinese buying of Treasuries, and with stock valuations in the bleachers, my feeling is that any stocks you buy now will probably be handing you losses by the end of the year. As I see it, the Fed and the administration are in a race to keep things going until election time. After elections, the president (who ever he is) will have to get serious about our $1.7 billion a DAY deficits.

In the meantime, what I would like subscribers to do - is basically avoid losing money here in the year 2004. We've got nine months to go to get through this year. And it may not be as easy as it looks. Anyway, that's the Russell view.

-- posted by Normxxx

Top 512. Mar 27, 2004 12:03 PM

» Normxxx - Richard Russell Says. . .

BEST OF RICHARD RUSSELL

www.dowtheoryletters.com | March 22, 2004

I want to go over one thesis again, and it is the thesis of the primary trend of an item being held back -- or I should say manipulated back. I see this in three main areas, stocks, bonds and gold.

In stocks it's the Fed with it's highly stimulative actions that has held back the normal corrective forces of the bear market.

In bonds its the fact that Japan, in its almost endless efforts to keep the yen low, that has bought tens of billions of dollars, and then turned around and bought US Treasuries with those dollars. And, of course, it's the Fed's actions in keeping short rates at one percent, which also militated toward keeping long rates down.

Finally, central bank action and the constant threat of more gold sales has gone a long way in keeping gold down. The fact that gold hit a high of 850 in 1980, and here it is 24 years later, and gold is half its 1980 peak price, attests to manipulation. If gold were simply adjusted for inflation, the price of gold now would be substantially higher than its peak 1980 price.

The point I want to make is that the longer and more strenuously the primary trend of an item is thwarted due to manipulation, the more powerful the ultimate move once the forces of manipulation are released or overpowered. The closest comparison I can think of is a spring that has been pressed down. Once the pressure is removed or overcome, the spring will expand violently -- as all its pent-up energy is released.

-- posted by Normxxx

Top 513. Mar 27, 2004 12:13 PM

» Normxxx - Legendary Investors are Drowning in Cash

"Legendary Investors are Drowning in Cash," observes Morningstar's Gregg Wolper. "When several of the very best managers all say they are having an extremely difficult time finding anything to buy at prices that make sense - not just in the U.S. stock market, but in the bond arena and foreign markets, too - it's worth paying attention. In fact, it's remarkable how many top-flight managers currently have more than 20% of assets in cash and say they find compelling opportunities scarce to nonexistent."

Warren Buffett, chairman of Berkshire Hathaway, made his billions by buying low and selling high. So is it not significant that the Oracle of Omaha is finding almost nothing to buy? At the end of 2003, Berkshire Hathaway held 23% of its assets in cash - up sharply from the single-digit levels of the previous four years.

Jean-Marie Eveillard and Charles de Vaulx, the legendary managers of First Eagle Global Fund, are also piling up cash. "Eveillard can't find anyplace to invest the fund's cash," Wolper reports, "which [stands] at 23% of assets. And this for a fund that can freely invest in bonds, too. Sounding like Buffett, [Eveillard's partner], Charles de Vaulx said high-yield bonds are overpriced now, too.

"De Vaulx added that while bargains are scarce everywhere right now, the U.S. market is the most barren of all. As a result, First Eagle Global currently has a smaller percentage of assets devoted to U.S. stocks - less than 20% - than at any other time in the 25 years that Eveillard has been running the fund.

"The cash-heavy club [also] includes Clipper Fund, run by other former Managers of the Year, and Longleaf Partners, managed by past runners-up for that award...When so many justly respected managers are sounding the same cautious note, it makes sense to listen," Wolper concludes. "Even the greatest managers can't consistently predict the direction of the markets - and by and large, they don't try to. But right now, their words - and deeds - speak volumes."

-- posted by Normxxx

Top 514. Mar 30, 2004 9:53 PM

» Normxxx - Richard Russell's DOW THEORY LETTERS

Richard Russell's DOW THEORY LETTERS
<img src="http://www.gold-eagle.com/gold_digest_04..." width="322" height="118" border="0">

PERCEPTIONS -- Recently on my website I offered a number of perceptions about the market and about current events. I want to add another perception. And it's this - I sense that people are beginning to turn angry and even nasty about the world around them. I see Donald Trump and his "Apprentice" program on TV, and people love it when Trump looks at some poor participant and snaps - "You're fired." Yeah, it's really a sweet touch.

And then I see people gloat and rub their hands as Martha Stewart is convicted. Sweet. Then I look at the really nasty comments coming from both Bush and Kerry as they confront each other. And I wonder, can they keep up this mud-slinging until November? Ugh, it's disgusting. What about the issues?

And I'm thinking, what happens if the Dow breaks below 10000 and heads down from there? And what happens if people start taking big hits on their stocks - and even on the prices of their homes? What happens if unemployment heads higher? It could get down and dirty. I sense we're on the very edge of that now. I just don't get a feeling that this is going to be a pleasant bear market. And the pain hasn't even started yet.

THE POWER -The hardest thing to get across to people, and this includes professionals and money managers, is the power and the inevitability of the primary trend. And the concept of major change.

As my older subscribers know, I subscribe in full to only one cycle theory, and it's the theory that has held true over time (I'm aware that there are many other cycles, but there is only one that has always held true). In fact, Charles H. Dow described this cycle 100 years ago - it's the cycle from extreme pessimism and undervaluation in stocks to extreme optimism and overvaluation in stocks - and then back to extreme pessimism and undervaluation in stocks. These are the cycles that never change. Even the Bible talks about "the seven fat years and the seven lean years."

Here is the cycle-story in Dow's own words -

"There is always a disposition in people's minds to think that existing conditions will be permanent. When the market is down and dull, it's hard to make people believe that this is the prelude to a period of activity and advance. When prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one which make it unlike its predecessors and gives assurance of permanency. The one fact pertaining to all conditions is that they will change."

This is the one thesis that I find almost impossible to get across to people. Once a bull market dies and a bear market takes over - then one way or another, then by hook or by crook, then despite the efforts of the Fed, the Congress, the President, Merrill, Goldman or Morgan Stanley - the bear market will go to its conclusion. The conclusion will find investors enveloped in black pessimism while stocks are selling at great values. At the bottom of the bear market "experts" will tell us that capitalism as we know it is finished, that stocks will never rise again, and that there is no future in investing.

How does this pertain to the present situation? Let's recount a bit of history. We rode through a great bull market that began in 1974 and ended in 1999-2000. The first bear wave of this new bear market carried from 2000 to 2002. Following the end of the first bear wave, the market turned up and a corrective advance took the market to highs in January-February of 2004.

Now the upward correction is breaking up - and the top is in. The bear market has now lasted a little over four years, but the Dow is still above 10000 and the S&P is trading just below a 50% retracement of its 2000 to 2002 bear market losses. The Nasdaq recovered about 25% of its bear market losses and is now turning down again.

Values in a primary bear market deteriorate through time, and as I said - the bear market is now a bit over four years old. Underlying values have deteriorated, but prices have not declined that much.

For this reason, the bear may want to make up for lost time. If this occurs and the top is in, then the year 2004 could turn out to be a rather nasty affair. That's the way I see it from a Dow Theory standpoint. Based on my studies, we're now early in a long journey that will ultimately take stocks down to extreme undervaluation. This is the change (or cycle if you prefer) that 98% of the population is not ready for - this is the change that 98% of the population can't even conceive of.

I want to emphasize again that the essence of Dow Theory concerns VALUES. Besides the consideration of values, Dow Theory includes the identification of phases, levels of sentiment, plus the over-emphasized confirmation principle.

But Dow above all emphasized the necessity of recognizing values. Wrote Dow, "The tendency of prices over a considerable time will always be toward values." Again Dow wrote, "To know values is to know the meaning of the market." Amateurs who have never read a word of Dow's writings might keep this firmly in mind when mouthing their theories about "Dow's Theory."

PARADE - A few weeks ago I presented my "Second Top-Out Parade" of indices and averages. Now I want to include a new longer list with help - courtesy of the brilliant Paul Macrae Montgomery.

But first, this interesting notation from my old friend, Joe Granville. Referring to the NYSE, there were 627 new highs on December 1st, there were 623 new highs on December 29, and 615 new highs on January 5. Since then, there have never been as many as 700 new highs on the NYSE. Joe figures that we'd seen the highs or at least the "internal high" for the market back in December. From then on, it was just a matter of how the market would come down.
At any rate, here's the updated "Top-Out Parade" list for the year 2004.

COMMENTS & VIEWS - It's a strange, strange world. What's America worrying about? It's worried about whether to put God in or out of the Pledge of Allegiance. And oh yeah, it's worried about whether gays and lesbians should be allowed to marry. Frankly, I'm not losing any sleep over either of those two momentous issues.

Over the weekend I looked over maybe a hundred charts - and what I see is a worldwide movement OUT of equities. Everywhere I look I see tops - huge tops, medium-sized tops, small tops, even smaller tops. What these charts tell me is that US and global investors are moving out of equities. Where's the money going? I believe it's going to liquidity (cash) and safety.

Meanwhile, the Dollar is holding its own. Do you remember that I said that the massive US edifice of debt constitutes a "synthetic short" against the dollar? I believe that's what could be beginning to take place today.

Question - Russell, what do you mean, a "synthetic short" against the dollar?

Answer - To carry debt, to pay off debt in the US you need dollars. The US public, the cities, the counties, the states, the corporations, the government - they're all loaded up to their eyeballs with debt. To carry or pay off this debt you must have income or savings in the form of dollars. If you can't carry your debt, you're facing bankruptcy. This is the reason I call debt a short against the dollar. As this bear market moves on, as an increasing number of people and corporations run into trouble, the dollar is going to be a wanted item. Maybe it won't be wanted outside the US (the dollar actually could weaken internationally) but it's going to be wanted in the US. In fact, as the bear's grip tightens in the weeks and months ahead, we could even see a panic for dollars.

I've said all along that this bear market will be international in scope. The US has been the world's engine of growth. Sure the growth has been phoney in that it's been generated by Fed-manipulated 45-year lows in interest rates plus a veritable ocean of liquidity. But it's the US that the world has depended on as the place to sell its goods and services. If the US is sick, the rest of the world will also head for the hospital.

What, you don't believe what I'm saying? Let me show you a few choice charts. At the top we see a daily chart of the European 100, which is composed of the 100 biggest stocks in Europe. What we see is a big gap break below its 50-day moving average - and then another gap to a new low for the move. The EUR is now heading down to test its 200-day moving average. Not a pretty chart.

Next I show the Footsie, which is Britain's widely-followed Index comparable to our Dow. The Footsie has plunged below its 50-day MA, and is this morning just on its 200-day MA. What we see here again is money moving out of equities.

The third chart shows our own S&P Composite. And here it's the same story, money moving OUT of equities. The S&P, following a "triple top," has plunged below its 50-day MA, and the 50-day MA has now turned down. End of demonstration.

So I call the current situation the "Global Stealth Top." Are you reading about any of this in your local paper or in the WSJ or in Investor's Business Daily or in Forbes or Fortune? So far I haven't see anything suggesting that what's happening is a world move out of stocks and into cash. Maybe we should call it the "Secret Journey," the global move out of stocks and into cash.

A FEW MORE PERCEPTIONS - The cover of a recent Economist magazine shows four playing cards. The cards are labeled George W . Bush, Tony Blair, John Howard (Australia's Prime Minister) and Jose Aznar (Spain's Prime Minister). There's a big red cross slashed over Aznar's face. The cover's headline reads, "One Down, Three To Go?"

The meaning of the cover - If you backed the US on Iraq, you may be looking for a new job come next election.

The Spanish people voted heavily against Spain sending troops to Iraq. Aznar did it anyway. Then came the explosion in Madrid - 200 dead and 1000 injured. Three days before the election. Result - Aznar is gone. Quote from Spain's new Prime Minister - "Mr. Blair and Mr. Bush must do some reflection and self-criticism... You can't organize a war with lies." Last week Poland's President spoke out, "Iraq without Saddam is a truly better Iraq (but) We were misled with the information on the weapons of mass destruction."

Perception - The world is turning against the US, the Bush administration and the US takeover of Iraq. The perception is that Bush had personal reasons for attacking Saddam and invading Iraq. Invading Iraq was on Bush's mind from day-one. There were no WMDs in Iraq, and Iraq was not allied with Al Qaeda.

Perception - The "job-loss" recovery and the nonsense coming out of the government is beginning to anger the US public. It's becoming almost fashionable to laugh at the government's "revised" statistics and bullish news releases.

Perception - The US press, which up to now has been very timid and fearful of attacking the administration on Iraq, is becoming bolder now. I read an increasing amount of material attacking the administration on its spending and on its handling of Iraq.

Perception - People seem to have just a hazy idea of who Kerry is. The coming election will be based mainly on - "Are you for or against Bush?"

Perception - Bush is in increasing political trouble. My old friend, Elliot Janeway (former business editor of Time magazine) once told me, "Dick, when the President is in trouble, the economy is in trouble."

Note - the "perceptions" above are NOT my opinions, they are my unemotional view of what people are thinking in the US and around the world.

A FEW QUESTIONS- Russell, I note on your site that you said that a number of items that normally appear prior to a top have been missing. For instance, prior to important tops, the advance-decline ratio tends to top out well before the big stock averages. And the same is true of the Utility Average, but both of these have advanced to new highs very recently - Utilities hit a new high on March 17. Therefore, have we really had any distribution over the last month or so?

Answer - The main distribution took place at the 1999-2000 top. It's already happened. Big, sophisticated, value-savvy money exited this market at or near the bull market highs of 1999-2000, and they've been unloading ever since. The bear market rally that started in September 2002 was mainly traders and speculators who jumped in as "momentum traders." They weren't buying values, they were buying the Fed's low interest rates and the Fed-created liquidity. The great investors, the investors who know and buy values are largely low on stock inventory or entirely OUT of this market. I'm talking about Sir John Templeton, Soros, Buffett, Bill Gross. And I'm talking, I hope, about my own sophisticated subscribers.

Question - For the sake of argument, what would it mean if the Dow closes below 10000?

Answer - I believe a close below 10000 would have psychological implications. The whole world watches the Dow. If the Dow were to close below 10000 I think that would be like an alarm clock ringing. People would know that there is "something wrong." If the US consumer and retail public starts thinking that something is wrong, they are apt to cut back on their buying and their borrowing. In a bear market one negative sets off the next negative. It's the domino effect.

Question - You say that Dow 10000 is an important "sentiment" number. Won't the Fed come in and try to hold the Dow above 10000?

Answer - I don't think the Fed will interfere with the market. But I do believe one or more of the big outfits like Merrill or Morgan Stanley or Goldman could come in, say near the close, and buy a load of S&P futures in an effort to hold [up] the market and particularly the Dow above 10000. After all, it's to their interest, and a rally above 10000 would allow them and their customers to unload more stocks. In the end, manipulation simply buys time. The primary trend can't be manipulated away, it can only be held back. Ultimately the bear will have his way, and ultimately stocks will decline to the point where they once again represent "great values." We aren't anywhere near that yet. And the more manipulation that is introduced into this market, the worse the final bear market decline - and the more extreme the values as stocks sink to the ultimate bear market lows.

INVESTMENT POSITION - Why is the bear in the box? The bear's in the box because we're in a primary bear market - and furthermore in the early phase of the bear market. Bullishness is still rampant, amateur investors are combing the pages of Barron's or Investor's Business Daily for stocks to buy. The newspapers are filled with advertisements about "How you can get in on this or that fortune making method of beating the stock market." I've seen this all before, seen it many times. It's part of the distribution process by which the big money unloads its stocks to the small money. So what do we do about it - how do we operate?

The stock market is in the process of building a top to this counter-trend rally. The top has got to "look good." Why? Because the better the top looks, the longer the big money has to move out of stocks and the longer the retail public has to absorb what the big money sells. It's ironic, it's sad, it's mean - it's the way of the world on Wall Street.

My suggestion - move into cash and hold gold. What kind of cash? Dollars, euros, yen. Maybe just dollars if you are an American. Gold? Two-thirds in the metal and one third in the stocks. What gold stocks? Newmont, GSS, PDG, WHT. That in a few sentences is my best advice. Please do it.

-- posted by Normxxx

Top 515. Mar 31, 2004 4:55 PM

» pbradford6 - John Bogle

This is an interesting article suggesting that the Vanguard Total Stock Market Index fund may not be what it purports to be.

PAUL MERRIMAN

Where's the 'total' in Vanguard fund?
Short shrift for small caps in Total Stock Market portfolio

By Paul Merriman, CBS.MarketWatch.com
Last Update: 12:02 AM ET March 31, 2004

SEATTLE (CBS.MW) -- John Bogle, founder and retired chairman at Vanguard Group, has done a great deal for individual investors over the past 30 years.

Back in the 1970s, Bogle pioneered index funds and no-load mutual funds, and his actions put pressure on many other fund families to keep costs low and offer no-load funds. I think it's safe to say that because of John Bogle, individual investors have kept billions of dollars that would otherwise have been eaten away by the investment industry.

Vanguard remains true to Bogle's vision of keeping costs down and shareholders in the driver's seat. And you haven't found Vanguard implicated in any of the mutual fund scandals of the past six months.

Nevertheless, Bogle does appear to have a blind spot -- or at least it's fair to say he and I disagree on one very fundamental premise: wide diversification is in the best interests of investors.

I was asked about this in a message from Donald in Connecticut, who had listened to a recent radio show interview I had with Bogle. In the interview, I challenged Bogle on his tireless promotion of the Vanguard Total Stock Market Index Fund (VTSMX: news, chart, profile) as essentially the only investment vehicle investors need.

Donald wrote: "How can a person of John Bogle's knowledge and experience believe that the Total Market Index Fund has enough small-cap representation to give the average investor the correct equity diversification?"

Donald pointed out that the Total Stock Market Fund is about 65 percent invested in large-cap companies, 25 percent in mid-cap companies and 9 percent in small-cap companies. Actually, Morningstar breaks it down this way: giant companies, 40 percent; large companies, 30 percent; medium companies, 20 percent; small companies, 7 percent; and micro-cap companies, 2 percent.

My own recommendation, based on market returns that go back nearly 80 years, is that investors split their U.S. equity investments equally, having half in large-cap funds and half in micro-cap funds. By that standard, John Bogle's favorite fund has far too much large-cap exposure and far too little small-cap exposure.

In answer to Donald, I can say only that while I admire Bogle immensely, his attitude seems to be that he believes what he believes, and that is essentially the end of the story.

When I interviewed John, we talked about value funds, which over the years have generated returns of 2 to 5 percentage points per year higher than the Standard & Poor's 500 Index.

Bogle said the Total Stock Market Index Fund "is half value and half growth. You own every value stock in America."

But he then went on to argue against value investing, saying he doesn't think there are many "great value managers out there, and they charge a lot of money" in fees. Even if value stocks were dominant in the past, he said, their popularity has bid up their prices so much that "They won't be dominant in the future."

Bogle apparently believes millions of other investors can't be wrong. He maintains most of his own money in index funds that mimic the composite choices of all other investors.

Bogle doesn't have much use for balancing large with small, dismissing that approach as "other things" that some investors try in order to get ahead. "Work your special strategies at the margin," while keeping 80 percent of your equity investments in the total market index, he said.

When I cited statistics showing how small-cap stocks have out-performed large-cap ones over long periods, Bogle dismissed this. Every comparison of past investment returns pertains only to the specific period chosen for the study, he said. That's true, but it's no reason to ignore the facts.

I doubt that John and I are ever going to agree on this topic, and that's OK. But I think he is leaving money on the table by not using a few of the Vanguard index funds he helped to start.

For years, my firm has recommended that a U.S. equity portfolio be divided equally into four asset classes: large-cap, large-cap value, small-cap and small-cap value. Each of those is represented very well by a Vanguard index fund. (These include the Index 500 (VFINX: news, chart, profile), Value Index (VIVAX: news, chart, profile), Small-Cap Index (NAESX: news, chart, profile) and Small-Cap Value Index (VISVX: news, chart, profile).

It's easy to compare this very simple four-fund strategy with the total stock market fund. To do so, I looked back to the start of 1999 for a five-calendar-year period that includes a raging bull market, then three years of the worst bear market in most people's memory and finally a strong recovery last year.

The table below shows year-by year comparisons of the returns of the total stock market fund with the four-index-fund approach we recommend. These returns go back to 1999, the first full calendar year in which the Vanguard Small-Cap Value Index Fund was operational.

Comparing annual returns

Total Stock Market Fund Four-fund mix
1999 -23.8% 15.1%
2000 -10.6% 4.1%
2001 -11% -1.3%
2002 -21% -7.2%
2003 -31.4% 35.9%

The Total Stock Market Fund outperformed this four-fund combination in only one of these years. A $20,000 investment in the Total Stock Market Fund at the start of 1999 would have grown to $20,450 by the end of 2003. The same investment in the four-fund combo, with annual rebalancing, would have grown to $29,829.

The combination I advocate is not fancy or expensive. It is built on four Vanguard index funds. Why John Bogle doesn't like it remains a mystery to me.

-- posted by pbradford6

Top 516. Mar 31, 2004 7:10 PM

» bob90245 - Re: John Bogle

In response to message posted by pbradford6:

I have such high regard for Jack Bogle that I find it sad that he performed so poorly in the interview with Paul Merriman. It's like going to the ballpark to see your favorite hitter hoping to see a homerun. But instead he strikes out 4 times. Maybe he was just having a bad day.

It does make sense that a portfolio tilted to small caps (as Merriman's does) will outperform the total market over time.

A point in defense of the total market fund that Bogle failed to mention was the issue of tax efficiency. In a period when both strategies perform equally well, Merriman's portfolio when rebalanced will have to give up a part of it's gains to the tax man (assuming a taxable account).

-- posted by bob90245