Category Archives: Barron’s

"What’s happening, what’s gone wrong? The answer: there's a giant squeeze in world liquidity, and it is scaring the devil out of investors, large and small, from one end of the globe to the other. Last week two German banks declared bankruptcy, while it was revealed (WSJ, June 26) that an oil-drilling "tax write-off" situation has turned into what may be the biggest swindle in US history. On June 27 trading in Westinghouse was halted at 12 1/8 (“you can be short if it’s Westinghouse”), and an hour later the President of the company announced that the outfit was solvent (all this while WX broke its 1962 low) (page 1)."

Those two German banks were Bankhaus I.D. Herstatt of Cologne and Bass & Herz Bankhaus. This was a situation where the failure of Herstatt led to the failure of Bass & Herz and a host of other substantial losses.

Chase Manhattan Bank was in possession of $156 million in Herstatt deposits. This meant that U.S. creditors (namely Citibank’s British banking unit of Hill, Samuel & Co.) were seeking claims on these funds even though Chase Manhattan had no authority to recognize the claims.

Seattle First National Bank (SeaFirst) was caught in a bind when they performed a $22.5 million transaction at their Swiss subsidiary and the funds were not transferred to the parent company hours before Herstatt was forced into bankruptcy.

In classic scam fashion, the oil-drilling "tax write-off" scheme was named Home-stake Production Company of Tulsa Oklahoma. Using the name “Homestake” tied the swindler with the success and stability of Homestake Mining while not having achieved anything of note.

What made this swindle exceptional is the fact that people like Liza Minelli, Candice Bergen, and Buddy Hackett (as well as Congressmen) were involved in the money losing fraud. The motivation for getting into these “tax write-off” schemes might have been inspired, at the peak, by articles like the following from Barron’s in March 1974.

“Bank shares at 10% yields mean that investor are scared of the banks (page 2).”

It was not long before this comment was published on banks that banks were on a mad dash to lure investors and analysts. In a Barron’s article titled “Beautiful Balloon?” it was indicated that the 1970 amendment to the Bank Holding Company Act of 1956 led banks “…into related (and some not-so-related) financial areas.”

It was those related financial areas that banks had “…been heavily engaged in financing real estate activities, and, despite the debacle among REITs, thus far have escaped essentially unscathed.” It wasn’t long before those banks almost paid the price for their foray into REITs, until the government intervened. This article from Barron’s should have been titled “Beautiful Bubble” as the collapse was in the early stages at this time and by July 5, 1974, there was more pain until December 1974, to the tune of –27.04% in the Dow Jones Industrial Average.

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Posted in Barron's, Bass & Herz, Dow Theory Letters, Herstatt, Homestake Mining, REIT, Richard Russell Review

The 2007 UBS Playbook

Posted on April 12, 2020 by nlo-admin | Leave a comment

In a SeekingAlpha posting titled “Time to dust off investing strategies from 2009 crisis, UBS says” dated April 12, 2020, it is suggested that:

“A group of deep-value stocks were winners for investors through multiple parts of the cycle during the 2008-09 financial crisis, and a UBS analyst team says it is time to revisit those investing strategies.”

The benefit of an analyst is that they give good guidance beforehand. Assessing the recommendations after the fact is necessary but using such an approach could be argued as having elements of survivor bias or data mining. After all, if the company went out of business it isn’t even being considered for the possible mistakes or bad assessment.

In order to truly learn from the past, it is best to look at published recommendations at the peak in the market and review the performance. This is where we can learn the most that isn’t biased toward favorable outcomes.

Below we rate and review published recommendations by all UBS analysts that give specific recommendations in Barron’s throughout the period from January 2007 to December 2007 (that we could find).

Safeway (SWY): UBS analyst Neil Currie

“A compelling voice of dissent comes from UBS analyst Neil Currie, who pegs Safeway's core earnings at $1.65 a share in 2006 and $1.74 in 2007 once Blackhawk is stripped out. With the Street assuming a "best-case scenario," he assigns a more moderate multiple of 15 times 2007 projected earnings of $1.90, and says Safeway should be worth about 29. Smart shoppers might want to check out another aisle for something fresher (Tan, Kopin. Safeway: Ripe for a Fall?. Barron's. January 1, 2007).”

Safeway, as reflected in the chart, was expected to be value not much more than $29 and that the stock price would likely decline in value from there. UBS analyst Neil Currie was right on the mark as Safeway rose slightly in 2007 and then fell as low as $15 by 2012. A later buyout offer of reached for Safeway as the stock traded as high as $35 in 2015.

DBS Group Holdings (DBSDF): UBS analyst Jaj Singh

“Despite last year's rally, bank valuations remain reasonable at 1.75 times book, or accounting, value. UBS analyst Jaj Singh argues that they should be higher because average valuations over the past eight years tracked a deflationary period, and "a more relevant period is the early 1990s." Then, banks traded at 2.6 times book value; UBS' target ratio today is 1.9. In the banking group, DBS, or Development Bank of Singapore (DBS.Singapore), boasts strong deposits, low funding costs and a 67% loan-to-deposit ratio that leaves much room for expansion. Tan, Kopin. Singapore: the Safest Route to Asia's Riches. Barron's. Feb 12, 2007).”

The crosshair in the chart above, from February 12, 2007, should be all that needs to be said on this topic. At roughly $14.85, the price of DBS declined as much as -64%. Currently, DBS Group sits at nearly -7% below the 2007 recommendation.

Weyerhaeuser (WY): UBS analyst Richard Schneider

“Shareholders are pressuring Weyerhaeuser to change its status as a corporation to a REIT with better tax benefits and where gains are passed on to investors, but it is unclear whether the push will succeed. One hurdle: The company "may have to sell everything but timberland to qualify" for RE IT status, according to UBS analyst Richard Schneider. The analyst, who rates the stock Neutral, says Weyerhaeuser may seek to partially restructure and split off its containerboard business (Malik, Naureen S. Forest Grumps. Barron’s. March 19, 2007.).”

From the March 19, 2007 recommendation to the low of March 6, 2009, WY fell approximately -75.44%. Weyerhaeuser currently sits –29.61% below the 2007 recommendation.

Daimler AG (DDAIF): UBS analyst Max Warburton

“Notes Max Warburton, a UBS analyst in London: ‘Ex-Chrysler, Daimler is already an 8% margin business. Management is committed to unlocking value and the 'new Daimler' is set to be a high-margin, high-cashflow business.’ The stock, Jonas and Warburton argue, is worth over $100 (Palmer, Jay. If You Can Find a Better Stock, Buy It. Barron’s. May 21, 2007.).”

From May 21, 2007 to the low of 2009, Daimler AG declined approximately –76%. Currently, Daimler AG sits –63% below the 2007 recommended level.

CSL (CSL.AX): UBS analyst Andrew Goodsall

“The outlook for CSL wasn't always so bullish. In 2003, its plasma business threatened to unravel when prices crashed due to oversupply; CSL shares plummeted from A$52 to a low of A$11.57. The glut spurred Aventis, now Sanofi-Aventis (SNY), to seek a buyer for its plasma unit. CSL Chief Executive Brian McNamee stepped in, paying almost A$1 billion to acquire the business-twice the size of his own plasma division-and the bet paid off.

“The deal helped improve the dynamics for the whole industry, as U.S. collection centers were consolidated. With several key barriers to entering the market, including a three-to-four-year lead time in setting up new centers, UBS analyst Andrew Goodsall estimates demand for plasma product should be "tight" until at least 2010 (Murdoch, Susan. Australia's First $100 Stock? Barron’s. May 21, 2007.).”

From May 21, 2007 to March 9, 2009, CSL increased +10%. More importantly, CSL increased +997% from May 21, 2007 to April 10, 2020.

Ameriprise Financial (AMP): UBS analyst Andrew Kligerman

“UBS analyst Andrew Kligerman predicted in our story that Ameriprise shares, then 45, would surge once investors realized what a money spinner the company was. He has a Buy rating with a target price of 73, or about 30% above recent levels (Willoughby, Jack. Ameriprise Shares Look Lofty. Barron’s. August 6, 2007.) ”

From August 6, 2007 to the low of November 2008, AMP declined -78%. As of April 9, 2020, AMP is up +109%.

Gold/GLD: UBS analyst John Reade

“Analysts say that buyers are set to return as the urge to avoid risk revives. Add to this an increasing physical demand from consumers, particularly in India, and gold's outlook is all the more bullish and its current price all the more attractive. Says UBS analyst John Reade: "In this environment, there's a meaningful chance that gold will attract the safe-haven bid that has been so far mostly absent during the credit crunch (Hotter, Andrea.Glimmers of Hope for Gold. Barron’s. August 27, 2007)."

At the time this was written, the iShares Gold ETF was trading at $65.98. The ETF went as high as $184.82 and settled at $70 at the lowest point in October 2008, gaining +6.09%. Currently, GLD sits below the 2011 peak but comfortably above the 2007 recommendation level.

British Airways (BA) or (IAG.L): UBS analyst Tim Marshall

“BA (British Airways) however, does have an ace up its sleeve: a new state-of-the-art terminal at Heathrow that opens in March. Known as Terminal 5, the huge facility will be for BA exclusively and offer travelers unusual comfort and speed in everything from security checks to baggage claims. The new terminal will ‘make the airline far more competitive and, in the end, will be a far greater positive for the airline than Open Skies will be a negative,’ maintains Tim Marshall, a UBS analyst in London. If he's right, the stock could actually rebound over the next 12 months (Palmer, Jay. Opening the Skies. Barron’s. December 3, 2007.).”

From December 3, 2007 to the low of October 10, 2008, IAG.L declined -68.02%. IAG.L sits

Thoughts

The winners, and still champions, are Safeway, CSL Limited and gold. The analysts, Neil Currie, Andrew Goodsall and John Reade, made calls that have stood the test of a major bear market and thrived through the subsequent bull market. These are analysts that should be tracked down and followed as their assessment may have been a function of timing, luck, or solid hard work.

Our favorite call is the Safeway assessment by Neil Currie because the price target given was very accurate and even after a buyout offer (years later) the stock did not get priced far above the 2007 valuation.

Those that didn’t do so well were at the mercy of the markets. Andrew Kligerman gets a mention for recommending Ameriprise Financial which crashed and recovered.

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Posted in Analyst Estimate, Barron's, Barron's Data

FedEx as the Canary for the Economy

Posted on April 8, 2020 by nlo-admin | Leave a comment

This from September 24, 2019 Barron’s:

Pandemics occur from time to time, so while they are hard to predict they are not unexpected. At around the same time, there was a serious bout of swine flu in China.

For now, based on what has occurred so far, we’ll continue to run on the view that FedEx, and more specifically the Dow Jones Transportation Average, are potential early indicators for the economy.

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Posted in Barron's, DJT, FDX

Curse of the Magazine Cover

Posted on February 2, 2013 by nlo-admin | Comments Off

Barron’s exuberance over their ability to predict where we currently are in the market based on an article from October 2012 may come back to bite them, especially when they put it on the magazine cover. We’ve been sufficiently warned.

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Dow Theory: Not Broken, Just Misunderstood

Posted on October 1, 2012 by nlo-admin | Comments Off

Barron’s attempts at Dow Theory has failed miserably…again. In the September 29, 2012 article by Jacqueline Doherty titled “Broken Dow Theory,” it is suggested that “A lagging transportation sector historically has been considered a bad omen…” and then recites the standard, sub-standard nomenclature “…less shipping means fewer goods are being produced and purchased, which means the economy is slowing and the stock market could be headed for a fall.” Doherty goes on to cite data from Bespoke Investment Group asserting that even though the Transportation index has fallen behind the market in general, it may not mean that the stock market, as represented by the S&P 500, necessarily needs to follow the same script.

Fortunately, Dow Theory is very specific about how to interpret the Dow Jones Industrial and Transportation Averages since the publication of Robert Rhea’s book The Dow Theory. Nowhere in the rules of Dow Theory is there any indication that the vacillations of the S&P 500 are remotely part of the interpretation of the theory. Especially since the S&P 500 came onto the scene over 60 years after the creation of the Dow Industrials.

Despite the fact that there are some Dow Theorists who frequently use the S&P 500 as a substitute for indications of a rising or falling market (this isn’t Dow Theory), there is little evidence that using the additional index is necessary. Alternate indexes are only necessary when and if the Dow Jones Industrial and Transportation Averages no longer exist.

While the prevailing opinion is that the Dow Industrials isn’t a relevant index reflective of the market as a whole, a distinction should be made between a “lagging” index and a “divergent” index. A lagging index is one which is going in the same direction as the other but is not increasing/decreasing at the same rate. A divergence is when one index goes up while the other index is going down. The chart below shows two failures and one divergence between the Industrials and Transports.

When one index cannot make new highs in accordance with the other index, it should be considered a significant failure and a warning sign. A perfect example is when the Transportation Index made a new high in 2008 and the Industrial Index could not follow through. The subsequent decline in both indexes was staggering.

In situations where there has been a divergence between the Dow Industrials and Transports, it is the Transports that typically leads the divergence to the upside or downside, meaning that the Transports will provide a clue as to the potential market direction in spite of the action of the Dow Industrials. Although historically this has been the case, Barron’s has unwittingly legitimized the view that the spread between the Dow Industrials and Dow Transports is some form of Dow Theory. In no way is this the case. In fact, in the period from 1896 to 1984, the Transports have exceeded the Industrials, on a percentage basis, 15 out of 25 Dow Theory bull and bear market moves.

Year	DJI beat by	DJT beat by	Year	DJI lost by	DJT lost by
1896	33.50%		1899	-13.30%
1900		51.00%	1902	-6.40%
1903	88.60%		1906	-7.30%
1907	24.50%		1909	-5.30%
1910	10.10%		1912	-13.80%
1914	78.70%		1916	-3.10%
1917	64.80%		1919	-26.00%
1921	18.40%		1922		-2.30%
1923	192.30%		1929		-3.80%
1932		15.60%	1937		-21.40%
1938		20.60%	1938		-6.40%
1939		20.30%	1939	-5.30%
1942		64.40%	1946		-16.50%
1947		39.40%	1948		-20.50%
1949		92.50%	1953		-6.50%
1953	3.80%		1956		-27.80%
1957		819.90%	1959		-12.40%
1960	5.80%		1961	-2.90%
1962		48.80%	1966		-7.00%
1966		19.20%	1968		-22.30%
1970		82.40%	1972		-14.50%
1974		10.00%	1976	-13.10%
1978		86.50%	1981		-10.60%
1982		44.00%	1983		-9.70%
1984		177.80%	1984		-31.00%

	DJI	DJT		DJI	DJT
Total	520.50%	1592.40%	Average:	-9.65%	-14.18%

The table above reflects the percentage by which the respective indexes exceeded the other from either the bull market low or the bear market top. In the timeframe indicated above, the Transports have routinely exceeded the Industrials to the upside by nearly three times. The same is true for Dow Theory bear market moves where the Transports have excessive downside moves as compared to the Dow Jones Industrial average by nearly 50%.

The pattern of excessive gains and losses in the Transports versus the Industrials has remained the case since 1984. As an example, at the peak in 2007, the Dow Industrials declined –54% while the Transports declined –60%. On the rise from the 2009 bottom, the Industrials and Transports registered gains of +110% and +162% based on their respective peaks. Excessive gains and losses, by the Transports above that of the Industrials, demonstrates that the Transports usually act as a leading indicator of market direction.

It should be noted that before the work of Wall Street Journal editor William Peter Hamilton and author Robert Rhea on the topic of Dow Theory, Charles H. Dow (co-founder of the Wall Street Journal) created and analyzed the Rail Index (now Transports) without the existence of the Dow Industrials for 12 years, from 1884 to 1896, for indications of market direction. Those 12 years are the basis of what Dow was able to formulate his observations on the market.

Unfortunately, the Barron’s article goes on to quote a CIO who states that the “…Nasdaq 100 and S&P 500 are better leading indicators than the transports.” Based on the available data, the Nasdaq 100 has not been able to exceed the all-time high set in January 2000. Additionally, the S&P 500 has not managed to exceed the all-time high set in October 2007. In the bull market run since the 2009 low, the Transportation Average has managed to exceed its all-time high unlike the Nasdaq 100 and S&P 500.

Finally, Barron’s quotes data from Bespoke which reviews, “…periods when the S&P 500 exceeded the transport index by 10 percentage points over a 50-day trading period. Going back to 1928, the S&P 500 gained 1% in the subsequent six months, not awful although below the average six-month gain of 3.5%.” Using a “50-day trading period” to arrive a conclusion about the next six months is inadequate in making even a cyclical determination of a bull or bear market based on Dow Theory, let alone a secular indication. Dow Theory is about the primary trend of the market which tends to last from 3-4 1/2 years at a time.

In order to make a “complete” secular and cyclical analysis based on Dow Theory, interpretation should begin at the prior dual Industrial and Transport peaks in 2007/2008, at minimum. Until there is a dual Industrial and Transport new high, cyclical new highs in one index or the other would be a bear market reaction as indicated in our August 9, 2011 note titled “Bear Market Rally Targets.” Our indication that a bear market rally was about to take place was with 2% of the October 3, 2011 low, giving full opportunity to seek out new investment opportunities before the bear market rally to the current peak in the Industrials. The current divergence of the two indexes is confirmation of the fact that we’re still in a bear market rally until the prior 2009-2011/2012 highs are exceeded for a cyclical bull market and all-time highs for a new secular bull market.

Until 1956, Barron’swould include Dow Theory analysis in the Market Laboratory section every week. Since 1956, Dow Theory would show up only in feature articles from experts on the topic. Now, it seems that anyone making mention of either the Dow Industrials or Dow Transports can suffice as knowledgeable on the topic of Dow Theory.

Naturally, there are many critics who adamantly speak out against Dow Theory, which is surprising since Charles H. Dow’s work of creating the Wall Street Journalalong with his theories of the stock market are the foundation of both fundamental and technical analysis in the United States. However, the critics, even without knowing the nuances of Dow Theory, are justified in their claims especially when the “analysis” is so incomplete and inaccurate.

If the goal is to do away with Dow Theory and eliminate the indexes then that is fine. However, if the goal is to actually interpret the theory in some mediocre fashion then it should be done by someone who has actually studied the topic extensively. Barron’s, a place where William Peter Hamilton and many other great Dow Theorists were prominently featured, is doing a disservice by connecting unrelated and disparate themes and suggesting that somehow the theory is “broken.”

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Posted in Barron's, Charles H. Dow, Dow Industrials, Dow Theory, Dow Transports

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A Contrarian Indicator That Says the Gold Run Isn’t Over…Yet

Posted on September 14, 2011 by NLObserver Team | Leave a comment

As the saying goes, “once something becomes mainstream the investment opportunity probably has passed.” In some instances, the magazine cover is the most recognized way to tell if a concept, idea or person has gone mainstream. But how do we know this is really the case? Except for the anecdotal evidence that fits someone fancy or the less than anecdotal evidence that was published here, there has been little proof to demonstrate that such a contrarian indicator is reliable or accurate.

The recent rise in the price of gold has many wondering if we have reached the stage where, as an investment theme, it has gone mainstream. Since July 1999, the average price of gold has risen from $255.81 to the most recent high of $1,900. For any commodity price to rise so much, let alone the dramatic increase in the stocks represented in that industry, should warrant some cause for concern.

As a contrarian indicator, we could look at the many magazine covers out there to make our determination of whether gold has gone mainstream. However, using such an indicator can take a lot of cover stories and a substantial amount of time before we eventually could consider ourselves correct. The number of missed opportunities and inaccurate calls for a market top would be many.

However, with the advent of keyword searches and proprietary databases, we can look at the historical significance of all mentions of gold. We have chosen to use the Proquest Complete database covering Barron’s from May 1921 until the present. Although this will likely include advertisements, we’re willing to believe that the increase in ads about gold would correspondingly increase when there is more interest in the precious metal. Not surprisingly, advertisers spend more when they shouldn’t and spend less when they should spend more.

In the chart below we see, on a 10-year basis, the number of times that gold is mentioned in Barron’s from May 1921 until August 2011. For reasons that shall be explained, the decade of the 1930’s and 1980’s were periods when the number of gold mentions peaked.

Our observation is that the peak in the number of mentions on the topic of gold occurred after major turning points in the price of gold. The bar chart below shows the decade of the 1930’s in greater detail. The year of 1932 shows the most articles written on gold. The decline in interest after 1932 reflects the herd mentality of diminished expectations for gold after England’s September 21,1931 departure from the gold standard.

The impact of England’s suspension of the gold standard led to a domino effect of countries abandoning the gold standard. Denmark, Norway and Sweden abandoned the standard by the end of the same month. In October 1931, Finland was next to go off the gold standard. Those that remained on the gold standard in Europe suffered huge losses due to the devaluation of their large holdings of British pounds in their treasury. The belief at the time was that the currency would always be backed by the set price of gold.

However, after many countries departed from the gold standard, the price of gold stocks began to bottom. With fewer articles on the topic of gold after 1932, the bull market in precious metal stocks was just beginning as demonstrated in the chart below of gold and silver stocks from 1924 to 1933.

During the financial crisis from 1929 to 1932, it seems as if gold was popular in Barron’s until it was no longer being propped by governments through the use of a gold standard. Once freely able to find a price, the process of gold stocks bottoming was inevitable.

After the peak in the price of gold in 1979/1980, Barron’s was again late in the most mentions of gold. However, the period that followed the 1980’s peak in mentions of gold held at very high levels as the die-hard gold bugs were unwilling to accept the reality of the disinflationary environment that the world economy was entering.

In the chart below, we observed that a significant drop-off in mentions of gold after 1987 may have to do with the fact that gold stocks declined equally as much as the Dow in the same period of time. Since the decline in gold stocks couldn’t offset the losses of stocks as anticipated, anyone who would have claimed that gold stocks were a refuge during a declining market had all the evidence to demonstrate that such a notion was foolhardy.

In light of the fact that we believe that we’re in a secular bull market in gold stocks, as indicated in our 2010 article (found here) or in our September 2009 article on silver being the best play on the rise of gold (article here), our expectation is that the number of mentions in gold need to match the levels of 1980 or 1932 before we’d be concerned that the lagging contrarian indicator of Barron’s mentions of gold has any relevance on future long-term price declines in the metal and gold stocks.

Because we believe that gold stocks act like perpetual options on the price of gold, we’d select the gold stocks from the Philadelphia Gold and Silver Stock Index (XAU). The following are our top choices from the XAU index:

1. Freeport-McMoran (FCX)- Freeport-McMoRan is within 10% of the 52-week low and has a dividend payout ratio of 17%. The P/E ratio is at a modest level of 7 times earnings. Value Line indicates that FCX is selling at least 35% below historical fair value. Since 2004, FCX has traded up to its estimated fair value and then retrenched. Investors in FCX should expect to sell at the $62 level and rotate into other relatively underpriced gold stocks at that time.

2. AngloGold Ashanti (AU)- At the end of last year (2010) AngloGold's total reserves amounted to 71.2 million ounces. The stock is within 15% of the 52-week low and has a dividend payout ratio of 13%. The trailing P/E is 22 but they are expected to grow their earning next year, which brings their forward P/E to 9.5. According to Value Line, AU is trading only 6% below its historical fair value. Using the 5-year historical book value of 4 as a benchmark, the current book value of 3.8 suggests a 5% discount to the average.

3. Kinross Gold (KGC)- Kinross operates in hte Americas, Africa, and Russia. At the end of 2010, its proven reserves were 62.4 million ounces of gold, 90.9 million ounces of silver, and 1.4 billion pounds of copper. The stock is currently trading just 1.3x its book value. If the 5-year history is any measure, the stock should rise 77% and trade at 2.3x book value. The company continued to increase its dividend over the years. Started in 2008, Kinross paid $0.08 per share and now it pays $0.10. The current payout ratio of 10% along with current gold price implies that dividend increases maybe around the corner.

4.Gold Fields (GFI)- Gold Fields engages in acquisition, exploration, development, and production of gold. At the end of 2010, their gold equivalent reserves stood at 78 million ounces. The company's P/E of 40 is high and price-to-book ratio is fair. While the current dividend yield of 1.7% appears to be high for a gold stock, that dividend is heavily dependent upon the profitability of their business. GFI's dividend policy is to pay out 50% of its cash earnings depending upon investment opportunities.

5. Barrick Gold (ABX)- According to Value Line investment survey, Barrick Gold is fairly valued at 10 times cashflow. With an estimated 2011 cash flow of $6.10 per share, Barrick Gold (ABX) is selling 13.72% below fair value as of September 13, 2011. Despite having a low dividend yield, Barrick has a sustainable dividend payout ratio of 12%, allowing for a substantial decline in earnings if necessary.

Our ranking of the gold stocks above is strictly based on those that are closest to the low and part of the Philadelphia Gold and Silver Stock Index (XAU). Aggressive precious metal investors can also participate in the extremely popular SPDRGold Share (GLD) ETF or the highly volatile iShares Silver Trust (SLV) for greater potential gain and/or loss.

We believe that a correction in gold stocks, beyond the trading range that has been established in the XAU since October 2010, is still on the horizon. Therefore, we believe that these stocks and funds can be bought at lower prices.

Please consider donating to the New Low Observer. Thank you.

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Richard Russell Review: Wrong About the Industrial Production Index

Posted on June 12, 2011 by NLObserver Team | Leave a comment

On June 6^th, Richard Russell wrote an article on the Financial Sense website titled “Are We Fated to Live 1929-1930 All Over Again?” In that article, Russell discussed the Barron’s Monthly Index of Physical Volume of Industrial Production [BMIPVIP] reflecting on the movements of the index as compared to the Dow Jones Industrial Average in the period from the peak of the stock market in 1929 to the bottom in 1932.

Richard Russell pointed out that from November 1929 Barron’s Monthly Index of Physical Volume of Industrial Production [BMIPVIP] gave ample warning that the direction of the U.S. economy was still headed lower despite the rebound of the Dow Jones Industrial Average from November 1929 to April 1930 as depicted in the chart below.

Source: Persons, Warren. Barron's. May 15, 1933; pg. 18

Because the BMIPVIP was discontinued in 1938, we’ve used the closest approximation which is the Federal Reserve’s Industrial Production Index (INDPRO) found at the St. Louis Federal Reserve website. In order to make a comparison to the two indexes, we checked the performance of the INDPRO to the BMIPVIP. Below is the chart of the Barron’s adjusted and unadjusted BMIPVIP index and the Federal Reserve’s INDPRO from 1919 to 1933.

It can clearly be seen that the Federal Reserve’s index (INDPRO), which is still in use today, can be used to measure against the Dow Jones Industrial Average. Whenever the Barron’s index zigged the Fed’s index zigged, whenever the Barron’s index zagged so too did the Fed’s index. We believe that using the Fed’s Industrial Production Index is the best and most consistent approximation to compare to 1929 to 1934 (shown below) as well as today’s market.

source: Person, Warren. Barron's. May 15, 1933. pg. 18.

According to Russell, the BMIPVIP hit its high in the month of June 1929. This was a full 3 months before the peak in the Dow Industrials in September 1929. The Federal Reserve index actually peak in July 1929 however, this was still ample enough time to gain inferences from the index’s movement.

Russell correctly observed that the BMIPVIP was critical in the evaluation of whether or not the economy and the stock market were on a rebound. The great Dow Theorist Robert Rhea first introduced the use of Barron’s Industrial Production Index in his book Dow’s Theory Applied to Business and Banking. Rhea used BMIPVIP as a means to confirm the signal provided by Dow Theory which contributed to his accurate call of a market bottom in July 1932.

Richard Russell’s point was that even though the stock market rallied strongly after the initial crash from the September 1929 high to the November 1929 low, the subsequent rebound was unsustainable when viewed from the perspective of the BMIPVIP or the INDPRO. Unfortunately for Russell, his analysis of the BMIPVIP index and the Dow Jones Industrial Average comes to the wrong conclusion when attempting to bring actions of the past to market activity of the present.

Russell closes his article with the following thoughts:

“After April 1930, the post-crash rally ended, and a great bear market began. As the market turned down again, the US economy crumbled. By July 1930, Barron's Index of Industrial Activity had fallen to 85.5. The Great Depression was on.

“And I'm wondering about the comparison with today's action. Recently, we've seen the Dow climbing steadily from its March 2009 low, all the while with the economy neutral to weak. Then we see the Dow hitting a high last month in May with business today sluggish and even weaker than it was in January.

“And I'm wondering, ‘Are we fated to live 1929-1930 all over again?’ Is the stock market rally of March 2009 to May 2011 a repeat of the stock market rally of November 1929 to April 1930? In both instances, business weakened as the market climbed higher.

“But the scary part is that in 1930 when the Dow broke support, the Great Depression began and Barron's Business Index continued to plunge. Let's keep an eye on the March 2011 lows -- Dow......11613.30 and Transports ....4950.17.”

We’re disappointed that Russell’s remarks are uninformed and misleading with the intent of creating fear. First, Russell withholds the data necessary to test whether his assessment is accurate. Next, Russell implies that the Dow Industrials of today may be rising in spite of the Industrial Production Index falling. However, the Fed’s INDPRO has been in perfect alignment with the rise of the Industrial Average since 2007 as shown in the chart below.

Finally, Russell closes his article with an attempt at drawing the events of the past to the present. Russell's effort lacks all substance when he speaks of targets for the Dow Industrials to watch for but doesn't introduce the Industrial Production Index nor it's relationship to 1929 and today.

While the true test may come when the Dow Industrials and Industrial Production Index (INDPRO) attempt to exceed the prior high of 2007, there is little indication that Russell’s assessment is correct.

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Posted in Barron's, Dow Theory, Industrial Production Index, Richard Russell, Richard Russell Review

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