Update For The Dow Jones, Gold and Silver

This week my focus is on the stock market, but first let’s compare how the Dow Jones has performed compared to gold and silver since their credit crisis lows.  Remember, gold and silver bottomed in October 2008, five months before the Dow Jones.  When the Dow Jones finally bottomed on 09 March 2009, both gold and silver had already seen double-digit percentage gains from their October 2008 lows; a 28% increase for gold and 43% for silver.

Of the two metals, silver (Green Plot) was the post-credit crisis star until the end of April 2011.  Since then the silver bears at the COMEX have had their way with it, but we should all note that silver’s low price of last June ($18.52) has held.  I’m not surprised; after a vicious two year 61.88% decline from its April 2011 high, anyone who wanted out of the silver market has already sold, leaving their metal in stronger hands with a much reduced price basis.  Gold’s post-credit crisis advance (Blue Plot), while subdued compared to silver’s, was in-line with or greater than the Dow Jones’ post-credit crisis advance (Red Plot) until April of last year.  Since last April the big banks have been successful in keeping the price of gold, and silver from beginning a new rising price trend.

So, after three hard years, how should one look at gold and silver as an investment in May 2014?  Well if investment risk is understood as the risk of losing money, gold and especially silver look especially attractive after their three year correction.  They are priced below the cost of production for most mines as global demand for these metals only increases.  With the Dow Jones advancing 153% from its historic March 2009 low, it really is due for significant price correction.  The risk of substantial loss to capital in the stock market increases with each new Dow Jones all-time high.

Who owns America’s great corporations?  Legally the shareholders do, but they’re no better than absentee land holders when it comes to being concerned with the long-term health of the companies they own.  I plead guilty to that.  I’m not really interested in single digit dividend payments as I’m buying stocks hoping for double digit capital gains.  This isn’t a moral failure for retail investors, but a matter of survival in our inflationary economy.  But note the disconnect between profits made by a corporation, and the profits made by its investors; dividend payouts are, or should be based on a company’s successful business operations, while capital gains are based upon someone willing to purchase your shares in the market at a higher price than you did. 

We shouldn’t be asking who owns America’s great corporations but who actually * CONTROLS * them.  The answer to that is their officers and the investment bankers and the economists who advise them, as well as government regulators whose concern for profits are nonexistent though they know who they work for: Washington.   Although there are some exceptions, it’s fair to note that most corporate officers now controlling corporate America were born long after the creators of the companies they now manage.  They are mainly self-interested caretakers of a legacy left to America by the great industrialists of the 19^th and 20^th centuries and sadly, they frequently fall short of what’s really required to preserve the companies they now control.  

I still cringe when I remember the management of General Motors and Chrysler defending their companies before Congress in 2008 and 2009.  In 2008 they were humbled by the accusations made by vile politicians for their use of corporate aircraft to attend the congressional hearings in Washington.  As I recall, in 2009 much was made in the media when these managers of multi-billion dollar companies travelled to the Washington hearings via commercial jet.  With management properly chastised, the Left leaning Obama administration then violated centuries of bankruptcy law by refusing bond holders their legal right to liquidate a bankrupt corporation’s assets.  By what lawful authority did he do this?  Instead of upholding his oath of office to enforce the law, Obama gave what belonged to General Motors and Chryslers’ bond holders to his union supporters, and then generously injected public money into the companies.   Had the legal system been allowed to work as it had for centuries, General Motors and Chrysler would still be manufacturing automobiles, but they would have been freed of their unpayable debts and allowed to renegotiate their restrictive, overly generous union contracts.

General Motors and Chrysler were managed by wimps who never saw these public hearings as an opportunity to bring the real reason their companies went bankrupt to the public’s ear: the politicians and union representatives sitting on the other side of the committee hearing room, fat cats who frequently travel in private aircraft with no comment from the media.  Well, the days of Howard Hughes taking on a petty politician at a public congressional hearing for sticking his nose into private industry’s business are no more, and that is not good for the long-term health of corporate America.

Another item detrimental to business is the big banks who advise these huge corporations in their financial dealings.  These banks see these corporations as a captive market for their derivatives and other “services” that primarily benefit the banks, and ultimately will not benefit the shareholders.  The derivatives debacle known as Enron is now long forgotten, but Enron’s shareholders certainly didn’t benefit from the financial advice and services provided to their company by J.P. Morgan who made the debacle possible, or from the accounting services of Arthur Anderson which should have discovered the ongoing fraud.  Come to think of it, Enron’s electrical power customers in California didn’t benefit either, but J.P. Morgan prospers to this day.

Currently corporations are buying back their shares in the open market instead of increasing their dividends.  From the perspective of the company’s long term health, reducing a company’s share float may make sense at a bear-market bottom, but not when the Dow Jones is making new all-time highs.  Every time I read an article reporting that management is raising funds in the bond market for a company’s share buyback program at a market top I question the competency of the company’s management.  Why would companies do this?  No doubt it’s done on the recommendation of their investment banker who will profit from underwriting the new bond issues, and management’s compensation packages include stock options, so issuing corporate debt to ratchet up their company’s share price at the expense of their company’s balance sheet is also in their own greedy self interest.  The day is coming when this excessive debt taken on by corporate executives, as well as by deeply indebted consumers, is going to have consequences. 

Looking at the stock market, these consequences should have expressed themselves a long time ago had the price-discounting mechanism of the markets not been subverted by Washington and Wall Street after the High-Tech market top of January 2000.  Looking back at the Dow Jones Total Market Groups (DJTMG) net 52Wk Highs – 52Wk Lows, we see something a bit strange happening after January 2003; week after week, year after year the DJTMG’s 52Wk Highs outnumber its 52Wk Lows, except during cyclical bear markets.  This is especially so after the March 2009 bear market bottom.  Except for a few months during the autumn of 2011, for the past five years 52Wk Highs in the DJTMG have overwhelmed 52Wk Lows.  Nothing like this ever happened during the Greenspan bubble market.  Although by itself this isn’t a smoking gun that the market is rigged, it’s hard accepting all these 52Wk highs are happening without a little help from the Powers-that-Be.

And then there is the strange behavior of market valuation and trading volume since January 2000.  Let’s take a look at the Dow Jones (Red Plot) and NYSE trading volume (Blue Plot) from the Roaring 1920s through World War Two to see how the stock market used to work; share prices increased with rising trading volume / share prices decreased with falling trading volume.  Though the relationship between the Dow Jones’ valuation and NYSE trading volume isn’t mathematical, the relationship shows a high degree of correlation over the time period in the chart below.

What we’re looking at above is the natural workings of supply and demand in the stock market, where rising demand (increases in trading volume) results in rising stock valuations, and falling demand (decreases in trading volume) produces falling valuations.  Ever since stocks first began trading in New York this has been a fact of life, up until January 2000 when the laws of supply and demand were subverted by Washington’s politicians and their Federal Reserve, as is evident in the chart below.

Amazingly, the Dow Jones’ -38% High-Tech Crash (2000-02) and the Dow Jones’ -54% Credit Crisis Crash (2007-09) both occurred on record trading volume.  Also note that Wall Street’s current bull market (March 2009 to May 2014) is occurring on a steep decline of trading volume not seen since the Great Depression, though apparently, no one in the financial media has noticed. 

Here’s a chart plotting the Bears Eye View (BEV) of the Dow Jones with a 40 day moving average plot of its daily trading volume.  As noted previously, unlike bear markets from 1900 to 2000, both of Dow Jones’ 21^st century bear market bottoms have occurred on record high Dow Jones trading volume, meaning historic high demand for the thirty Dow Stocks as they collapsed.  This never happened before.  So, from October 2008 to March 2009 who were the buyers during the second deepest Dow Jones bear market since 1885?  It had to be Doctor Bernanke and his Plunge Protection Team.  What’s a few trillion dollars to people who can create unlimited amounts of money on a keyboard and have stated that they will never allow deflation to develop in the financial markets? 

Here’s a question that you should ask yourself: how far would the Dow Jones, and the rest of the NYSE shares have declined if the Federal Reserve hadn’t funded record trading volume during the High Tech and Credit Crisis bear markets?   Had trading volume been allowed to decline to just trickle of what it had been, as was the case during the 1930s to 1940s bear market bottoms, I believe the Dow Jones during the Credit Crisis would have seen a decline that rivaled its 89% collapse of the Great Depression sometime in 2009-10.

Below is another chart noting four peaks in NYSE trading volume, which is not the same as the Dow Jones trading volume used in the chart above (go two charts up to see the difference).

The following table lists the dates when these peaks in volume occurred noting the associated decline in the Dow Jones that followed shortly after.  Seeing significant volume peaks during market corrections (#3 & #4) suggests that the market’s “policy makers” have an attitude of zero tolerance when it comes to lower price trends developing in the stock market.  Officials at the Federal Reserve have frequently admitted as much on TV; that when the market experiences selling pressure they come into the market and purchase stocks at prices higher than the free market is willing to bear. 

“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20% plus and the Russell 2000, which is about small cap stocks, is up 30% plus.”

- Doctor Benjamin Bernanke, CNBC Interview with Steve Liesman 13 Jan 2011 (1:40 PM).

If the Federal Reserve is willing to monetize worthless mortgages, why not monetize the stock market too?

Returning to my first chart, where after April 2013 the Dow Jones has finally outperformed gold and silver bullion since their credit crisis lows, I wouldn’t argue that the Dow’s outperformance of gold and silver isn’t a fact, but without the active and ongoing support of the Federal Reserve I doubt this would have happened.

It’s been a while since I published step sum charts for gold and silver, so let’s take a look at them.  Gold’s price plot has formed a bullish inverted head and shoulders pattern going back to last summer.  Gold’s step sum plot is interesting.  Both the price and step sum plot began declining around March 13^th, but since March 27^th gold’s price plot has been confined in a tight trading range as its step sum plot actually began to plummet.   Keep in mind, the step sum is an indication of market sentiment.  When market sentiment and price trends diverge, typically it is the price trend that holds the key to what is to come, and gold appears to what to go up as market sentiment is becoming bearish.

Look at the step sum plot for the past few months; not since September 2011 has it declined so much in so little time, with so little effect on the price of gold.  A collapsing step sum is exactly the chart action I would expect to see just before a major break out in the price of gold.  But when we step back and look at these plots from 1998 to present with the chart below we see just how stubbornly bullish market sentiment has remained since August 2011.

Ideally I’d like to see our current bear box terminate as gold’s 2008 bear box did, where after four months of divergence between its price and step sum trends gold’s step sum finally collapsed with the price trend signaling the coming end of the 2008 price correction.  So far I can’t say that has happen with our current bear box – not yet.  And then it’s possible for the price of gold to begin its next major advance without a collapse in the step sum, though it would be unusual if it did.  Keep in mind that like the stock market, the price of gold is constantly being manipulated and prevented from finding its true market price.  So any excitement I may have based upon any technical chart work I keep under control, unless I see a big surge in the price of gold’s well above its current trading range, say above $1500.

However, a market can be manipulated for only so long before Mr Bear comes in and kicks some butt, and yes, Mr Bear is the biggest gold and silver bull out there!  He isn’t pro gold because he’s happy that you or I will make some money, he hates even thinking about that, but he’s happy for the misery $3000 gold and $150 silver will create for the “policy makers.” 

Can you imagine being the President of the United States and having to inform the American people that the gold in Fort Knox is gone?  As the dollar’s purchasing power collapses because of inflationary policy of the Federal Reserve the world’s attention will naturally begin to focus on the US Treasury’s bullion reserve.  The bullion vault is guarded by the US Tank Corps, how could it be missing?  Someday the president will have to say something!  So who knows, in a world where the US Treasury and Federal Reserve can’t locate a few measly tonnes of Germany’s 1500 tonnes of gold supposedly on deposit at the NY Federal Reserve bank, maybe the step-sum bear boxes in charts above are marking the genesis of the next phase of gold’s bull market, with or without a collapsing step sum plot.

Like gold, silver’s step sum has been collapsing since early March with little effect on its price plot.  I love seeing market sentiment (step-sum plot) crumble as the price trend holds steady, as is the case for both gold and silver.  Note also that silver’s lows of last summer are still holding; $19 silver is a real line in the sand drawn by the bulls.

If you’re like me, you can’t watch CNBC without tossing popcorn at the television once or twice an hour, so I just go on with life without it.  I pretty much ignore the markets except when I perform my nightly ritual of updating my files with the day’s data.  But all the current silliness will soon be coming to an end, and Mr Bear will have his day with the bond and stock markets; and as much as he hates the thought of it, gold and silver will be going to levels that are unthinkable by most market watchers.   Because in a world controlled by a gang of lying thieves who happen to be the counterparty to most financial assets trading in the markets, gold and silver are real assets with no counterparty risk.

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