Saturday, September 15, 2007

Max Whitmore: They Are All Watching The Wrong Numbers

Below is a newsletter written by Max Whitmore. I find his writings different then all the gloom and doom you hear about.

Whitmore: They Are All Watching
The Wrong Numbers

So, the wait for next week's FOMC meeting begins. And the power of the suspense is like nothing we have seen for years! Will the FOMC group lower rates or leave them unchanged? Will they change the FOMC statement implications? Will it be bullish or bearish? Will the Fed bail out the "bad guys?" Will we go into recession? Will my new suit be back from the cleaners in time for me to go to next Saturday's wedding?

Oh come on!! This is all bordering on the silly! Most of the questions that are being asked are superfluous to the real question before the nation. That real question is, "Are we seeing the beginning of a major decline in the stock market."

All the other questions are of little importance. If the market buyers have lost confidence, they should be exiting the market by the millions. Are they? Hardly! Will they? Well, that one requires a bit more examination, so let's look at this last question and see what really solid information we can glean from what is going on.

First of all, the major money investors are not running away. Yes, we are seeing a correction. That is as sure to happen in the stock market every now and then as it is that they will ring the opening gong at the NYSE every weekday morning at precisely 9:30 a.m.

I have shown you many times in the last six to seven weeks that my SUPER CHART KEYLINE is still well below the current market activity. As I write this column on Sept. 11th, my KEYLINE for the DOW closed at Dow 12,017 and the KEYLINE for the S&P at S&P 1369. The actual Dow closed today at 13,308, above my KEYLINE by 1,291 points!! The S&P closed today at 1, 471, above my KEYLINE by a huge 102 points!

Now, you may ask, is this final proof that we will not see what I term a Major Market Reversal — in this instance a crossing below my KEYLINE for six weeks in a row. The answer is clearly no. But, the KEYLINE has only been crossed up and down a total of 16 times since 1963. It crossed UP the KEYLINE in June 2003 at DOW 9120. The S&P crossed up at 988. With current prices so far above the KEYLINE, it only tells us that any near term reversal is clearly not in the card for many weeks, so long as some sort of totally unexpected political or societal event does not intervene. The financials DO NOT call out any danger at this point at all.

OK, you ask, why are so many financial writers suggesting a huge collapse is near? Why are some even predicting a recession? To be honest, I just don't know. What they read as indications of such a disaster is beyond me. All I do is read charts. Charts are dispassionate, absolute, totally uninfluenced evidence of what EVERY investor is thinking today. At the end of each day, ALL these investors have made up their minds that things are either very bad, very good, or somewhere in between those two opposite poles. At the moment, it is clear they do not see a market collapse in the near term — a period I usually define as three to five months.

Understand this. The market as a whole cares little for what the just released data says. Yes, they do respond to monthly employment data and such, but be clear that this constant release of data requires a CLEAR TREND to be emerging before a TREND in the stock market occurs. The current stock market TREND is still UP or the selling would be far greater and my KEYLINE would clearly be in the process of being challenged. Today, it is a long way from being challenged in any way.

So, what does the coming FOMC meeting really mean? Isn't that where I started when we began the column today?

Well, to me it means this. The world of investors (but not all) are watching the interest rates as if the financial world will rise or fall on what happens to interest rates. How far from the real truth this is. Oh my, how far!

Do you really what to know where the market might go in the next three to five months? Then, I would point you to this Web site: What's there? Well, in Table 2 a bit down the list (look at the "week average" column under M-2) you will see that the data released the week of Sept. 6 shows that for the week ending August 20, the M-2 increased from the week before by a total of about $48 billion.

It also shows that the M-2 money supply for the next week ending August 27 increased by $65 billion, ASTOUNDING!!! I do not recall any such HUGE two week increase for all the years I have been in this business. It may have happened, but I can't recall it and the data I can get hold of as I write this does not go back to 1967, the year I began my stock market career. Folks, it is all about MONEY SUPPLY — MONEY SUPPLY — MONEY SUPPLY!!

What so astounds me is that the Fed has just kicked in $112-113 BILLION to the money supply at a time when it seems to be conservatively approaching the interest rate question and sending all the pundits off on a wild goose chase about where interest rates are going and thus where the economy is going. Want to really know where the economy is going? With what the Fed just did, it is about to get a kick in the pants that will send it into a HUGE stock market rally and a huge prolonged economic boom!

Do I sound a bit over the top to you? Well, believe me I am standing on the most solid ground there is — the words of Dr. Ben Bernanke himself, the Fed Chairman, the one guy who can make it all happen.

Take a moment and read this quote from his book published in 2000. The title of the book is "Essays on The Great Depression." On page 34 under the paragraph heading titled "3. Conclusion" line 3 to line 7 of this paragraph reads: "Comparative studies of a large set of countries have greatly improved our ability to identify the forces that drove the world (my bold) into depression in the 1930s. In particular, the evidence for monetary contraction as an important cause (my bold) of the Depression, and for monetary reflation (my bold and note: meaning adding money to the economy) as a leading component of recovery (my bold), has been greatly strengthened."

Today, this is precisely what is going on — Reflation! Notice that Dr. Ben never mentioned interest rates as even a consideration of being important. To be fair, he does suggest in one of the later essays that confidence of the population in the steps being taken to improve or stabilize an economy is important, too. In other words, if the money supply goes up, but no one wants to use it, there can be problems.

While some writers suggest that is happening now, I need only look at the chart to see that, so far, that is NOT happening — not even close!

So, what is the bottom line for me? Simply this. Corrections like this one, with charts remaining strong, are the time to accumulate good stocks at bargain prices. I called for a MAJOR BUY last week and stand by that call. I said that only if the SUPER CHART KEYINE were broken to the downside would I change that call. After all, I can't see more than the current chart shows and it usually is a look into the future of three to five months, as I said above, and every now and then even as far as six to eight months. Right now, my opinion is that the three to five months look is what I am seeing.

So, go ahead and read the doomsayers if you want. But, do do this. Watch the charts, too. When the major averages begin to break major supports (we are a LONG way from this at the moment) then get concerned. Want to protect your portfolio cash until you know if I am right? Well, you might use stock index's (short selling or puts) to "freeze" your portfolio values (I wrote about that three weeks ago). Or if your not sleeping well at night, go to 80 percent cash and just wait.

The other 20 percent? Well, half in bonds, which I see continuinge to climb, and the other half into big cap major corporations (again, see last week's column — I suggest defense and major consumer goods types).

You know, all this seems to me to be the fulfillment of a very old Chinese (no pun intended here) proverb my good friend uses now and then, "May you live in interesting times." Boy, you couldn't ask for more interesting than these!!

So, that's all for this week. Hope your coming investment week is a good one. Meanwhile, you keep in touch. I do! See you next week.

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