A Warning from Richard Russell of the Dow Theory Letter

A dire forecast from Richard Russell indeed. Its within the bounds of our own probability as we have said.

We believe it will play out in slower motion until an event triggers the actual slide. This makes timing very difficult. What makes it even more difficult is that the dynamics are progressive with time.

The magnitude of the trigger event necessary to precipitate the collapse decreases with time until it reaches the point of near triviality. At the same time the forces built up behind the crash potential dissipate with time, resulting less force behind the decline. This is the equation that determines the different profiles of a 1929 and a grinding slide of a 1973-74.

Time to button down and get into hard assets, and let's see what happens. We see 1255on the SP 500 as an important support level but not the showstopper. We have underestimated the manipulative tricks of the Merry Pranksters at the Fed and Treasury before.

August 19, 2008
Richard Russell's Dow Theory Letter

My PTI was down 6 today to 5910. Moving average was 5931. PTI remains bearish by a large 20 points!

What do we do? Where do we go? Put your money in T-bills and await the coming next great buying opportunity with good stocks scraping the bottom. The stock market is now in full crash mode, and where it ends nobody knows.

In the meantime, the US balance-of-payments continues in negative shape. As I've written so many times, we're a global empire living on borrowed money. Our goofy president insults our biggest creditors -- Russia and China -- and seems totally oblivious of the situation. No empire can continue afloat while borrowing money to do so. At some point, nobody will lend the US money, at which point the empire starts to unravel. The dollar plunges, the US becomes a paper tiger. The all-important reserve status disappears.

I'd like subscribers to get rid of all non-bullion gold items and build cash. Sell GDX, SLV, XAU, HUI, and get flush with cash for the bargains that lie ahead as this market moves towards its inevitable final low.

The Rally is Weakening and Highly Vulnerable to Event Risk

The counter trend rallies in stocks and the dollar are nearly done. We may have to wait for market volumes to pick up from the vacation doldrums to see the results.

Quite a bit of the recent market action has been technical trade in light summer volumes, as the wiseguys bat prices around while the Bosses are at the Beach.

Until we see some confirmation, the rally is the rally and the charts are the charts.

Credit spreads point to end of equity rally, Merrill says
By Deborah Levine
MarketWatch
3:21 p.m. EDT Aug. 19, 2008

NEW YORK (MarketWatch) - Credit spreads, which represent the gap between corporate debt and Treasury yields, have been a pretty good predictor of how stocks perform - and they're not looking good.

When credit spreads widen, it signals investors are attaching more risk to lending money to companies. And wider spreads tend to foreshadow the stock markets' next move, according to Merrill Lynch chief North American economist David Rosenberg.

When credit spreads rise, as they are doing now, the equity market goes the other way 88% of the time, he said.

"Credits spreads, especially in the financial sphere, may remain vulnerable to upside pressure and this will only reinforce the vulnerability of this bear market rally in equities," Rosenberg wrote in a note.

For example, in mid-June, the spread between 10-year Baa-rated bonds -- the lowest investment grade rating -- and U.S. 10 Year Treasurys narrowed to 290 basis points, or 2.90 percentage points. That came exactly a month before the S&P 500 index recovered, Rosenberg said.

Now, the spread has again widened to 326 basis points, nearly as wide as in mid-March when the near-bankruptcy of Bear Stearns sent investors fleeing corporate debt and prompted a massive government intervention, including the firm's purchase by J.P. Morgan.

Although spreads have been widening over the past month, the S&P 500 has managed to rally 7% -- as of Monday -- after hitting a intermediate low in mid-July. The shares of financial firms were leading the rally, even though their corporate bonds have continued to lag behind other debt.

"So, we feel that investors should be put on notice that the divergence we have seen take place in the past month is unlikely to be sustained, in our view," Rosenberg said.

Goldman Cuts Estimates on LEH, MER, JPM, MS

AP
Goldman cuts projections for Lehman and others
Tuesday August 19, 5:56 pm ET

NEW YORK (AP) -- Lehman Brothers Holdings Inc. received more bad news on Tuesday after another analyst projected that the investment bank will unveil a big third-quarter loss.

William Tanona, an analyst at Goldman Sachs, said after the market closed he believes Lehman will post a $2.5 billion-to-$3.5 billion loss during the quarter. He also believes that any recovery for the troubled industry is still a few quarters away, and that many Wall Street banks will focus on purging their books of risky mortgage securities.

He also lowered third quarter and full-year estimates for Merrill Lynch & Co., JPMorgan Chase & Co., and Morgan Stanley. Major investment banks have written down more than $300 billion since the credit crisis began last year, with several posting the first losses in their company's history.

Those Lazy, Hazy, Crazy Days of Summer

The market has been in a "back and forth" pattern in this light volume August market. Many senior traders and managers are taking their last vacations for the summer.

The trading programs like to churn the market back and forth, taking down the undercapitalized speculators, probing for signs of weakness among the funds.

As we are on key support we'll see if they can bounce it tomorrow. If they cannot then things may get interesting quickly, probably next week. We'll assume that something big is boiling over behind the scenes and the calls are coming in from the watering holes in the Hamptons.