Professor Elam

Non-Confirmations

Nov 4, 2009,
London Ministers yesterday launched a £50billion bailout of Britain's crippled
banks – and warned there could be worse to come.  State-controlled lenders Royal Bank of Scotland and
Lloyds Banking Group will receive fresh injections of taxpayers' money
totalling £39billion.

Charles Dow created his Dow Theory (after no
doubt searching the universe for a suitable moniker, he found one) in 1896. The
idea was that the index for companies that move goods, Transports, should
confirm the price action for the companies that make goods, the Industrials. A
new high or low in one should be confirmed or joined by a new high or low in
the other. We have warned extreme caution lately in that these confirmations
have not happened, let’s take a look.

Tuesday November 3 Warren Buffet announced
Berkshire’s acquisition of Burlington Northern BNI. The juxtaposition of the
announcement to the non-confirmation of the Transports is just too incidental
to ignore. The Administration clearly has Goldman Sachs buying the Dow
Industrials the last half hour to rally it, especially on down days. But GS
cannot buy everything. The Transports have not made a new high as the
Industrials have. BNI is a major component of the Transport Index. That jumped
the index Tuesday but not enough to generate a new high. Similarly the Russell
and NASD indices of smaller stocks have not made new highs. This adds up to a
glaring non-confirmation.

Gold, the money politicians cannot print from
trees, made a new high Tuesday. India, the country, purchased 200 tons of gold
form the International Monetary Fund IMF for $6.7 Billion. This is a rich irony
in that the IMF is divesting gold to acquire more fiat money to ‘loan’ to
developing countries. That is another story. As we remarked last week, gold is
the last bull standing, the only ongoing bull market in the world. And so it
closed at a new high of $1,084.60. But none of the gold mining indices such as
the XAU or gold stocks went to a new high. This is a glaring non- confirmation.
It suggests that gold mining stocks will likely join the overall stock market
in a sell off, when that happens. This was the case last fall.

With India buying gold, one might think the
dollar bears drove the buck to new lows. But no they did not.  The beleaguered US Dollar inched higher
along with gold!  How can that
be?  World debt is denominated in
dollars. There is a rush to pay debt, CIT went bankrupt since we last visited.
Bank demands to pay debt (remember Lloyds and RBS?) in dollars results,
finally, in a rush to gather dollars. And so gold and the Dollar are in demand.

In the Permian Basin, the value of the Dollar
Index is more important than the temperature. Oil transactions are settled in
dollars. A dollar rally will lower the price of oil. A kilo of gold is much
more camel friendly than a barrel of oil. Exxon is off its high, and oil is
hanging around $75-80 as we suggested weeks ago. But a dollar rally will likely
lower that price in a hurry.

Volatility has finally stirred, more folks are
buying put insurance. Like the elections in Virginia and New Jersey,
complacency has been high, the markets should ‘come alive’ in November.

Finally there is the banking situation alluded
to in the opening quote. All the stimulus money has found its way into the
stock market, not into shoring up bad loans as frankly there is no way to do
that, they must be written off and the collateral taken to the real market.
That is why the efforts in England will likely fail. The most glaring
non-confirmation of all is that Citibank stock is still less than $5 after all
this FED stimulus.

Look for November 9 to be a potential turn date
for many markets. Theses glaring non-confirmations endorse our stance of
keeping the checkbook in the drawer for the time being.