Freedom Lawyers of America

By Thom Calandra, CBS.MarketWatch.com
Last Update: 10:15 AM ET Nov 7, 2002
NEW ORLEANS (CBS.MW)

Contrarians - the folks who refuse to believe the American economy can stage a lasting rebound this year or next -- are positively irreverent about the Federal Reserve's easing of U.S. interest rates.

"This cut means the credit quality of America is going to the birds," said Mark Wellesley-Wood, chief executive of South African gold miner Durban Roodepoort Deep (DROOY). "It will make junk borrowing a common practice for the American public."

Wellesley-Wood, attending a New Orleans investment conference for wealthy individuals, was commenting on the Fed's unanimous decision Wednesday to reduce its target rate on overnight loans among banks to 1.25 percent, the lowest borrowing rate since July 1961. In addition, the Federal Reserve policy makers reduced their rate on Fed loans to banks to 0.75 percent from 1.25 percent.

Many of the strategists attending the 29-year-old New Orleans conference cater to skeptical investors - the so-called perma-bear crowd that would just as soon own gold, silver or water rights before they buy a blue-chip stock.

An icon for America's Fed-bashers, Dow Theory Letters editor Richard Russell, laid it on thick. "The Fed will fight this bear (market) tooth and nail, so this will be a long, tortuous bear market," Russell told about 800 paying attendees at the conference.

At the age of 75, Russell counts himself among a handful of financial newsletter editors, including James Dines and Joseph Granville, who have been tracing markets on behalf of individual investors for more than 40 years. Russell is credited with calling the top of the bull market in stocks that ran from 1949 to 1966. About 7,000 people subscribe to Russell's newsletter.

At the New Orleans gathering, investors were hanging on Russell's every word.

"When you follow the market, you are following the money," Russell said. "You find out where the money is. It sounds easy. It's not."

Russell says the stock market is overpriced even by the lowest estimates for company profits. If America's largest companies, as measured by the Standard & Poor's 500 Index, were to earn just $18.48 a share in core profits next year, the stock market would still be terribly expensive, the newsletter editor said. (Core profits exclude income from pension funds, with the cost of stock options deducted as an expense.)

In long lasting bear markets, stocks have gotten far cheaper than they are now, Russell said. In 1946, stocks traded at about 6 times S&P 500 profits. In 1973, it cost 7 times a company's average per-share yearly profit to buy one of the S&P 500 (SPX)stocks. In 1981, it was 7.5 times earnings.

"Now it's 48 to 50 times earnings and 45 times dividends," Russell said. "How is this market going to get to under-valuation? No one knows. But it will. And we'll see a Dow (INDU) yield of 6, 7, 8 percent. It will be a very long trip down." The Dow Jones Industrial Average of 30 large companies currently yields less than 3 percent.

Russell said the losing stock market that began, by his estimates, in 1999, could last "anywhere from eight to 15 years ... maybe two decades." Most ordinary investors are best advised to keep their funds in cash, allowing it to compound slowly in ultra-safe money-market accounts or triple-A-rated municipal bonds, he said.

"This is going to be a very difficult period. It is going to be very deceptive," he said. "The ultimate concept to remember is that stocks won't be great buys until they are undervalued."

As for gold, Russell said his data showed a 20-month moving average of gold's price moving above a 40-month moving average in July, "signaling a major bull market" for the depressed metal. Technicians use moving averages to uncover what they hope will be lasting price trends for stocks, bonds, commodities and other investments.

Russell expects the price of gold, now at $320 an ounce, to equal or exceed the nominal level of the Dow average, now at 8,770, at some point. "Gold will cross at $3,000 an ounce, with the Dow at 3,000 or lower," said Russell

Russell invoked the names of stock market researchers and strategists he regards as the country's best, including Elliott Wave International's Robert Prechter, in presenting his view of a sharply lower stock market. Prechter, economist Stephen Roach and a handful of others see the possibility of a horrible financial depression in coming years.

"Unemployment will be a vicious problem," Russell said. "Before next year is out, we'll see another 20 percent drop in the dollar. China is at economic war with the West. I wouldn't be surprised if it backs (its currency) with gold."

As for specific recommendations, he pointed to Newmont Mining (NEM), the world's largest gold producer, as the "bellwether" investment in troubled fiscal times. Russell said the 18 gold mining stocks he follows demonstrated strong accumulation this week as measured by advancing prices on rising volume.

"There is going to be tremendous resistance to the idea of gold from the people who produce the junk paper. I'm talking about the Federal Reserve, of course," said Russell, to much applause. "The central banks want you to believe gold is junk and their paper is not. Gold has been in a bear market for 20 years. To many, it is only something you fill your teeth with."

What do the ordinary folks say about all this? "At some point," said Paul Collins, a Monmouth Beach, N.J., investor, "people are going to lose confidence in everything but gold."

Collins, attending the New Orleans show with his wife, said he owns shares of Tocqueville Gold Fund (TGLDX), a $150 million mutual fund whose value has risen 58 percent since the start of 2002.

"I don't know if gold's payday is going to be today, or three years from today," said Collins. "But I'm comfortable with it."

John Hathaway, New York-based manager of the Tocqueville Gold Fund, says gold's rising price in October and early November, in the face of rallying U.S. stocks, is a sign something has to give, and soon.

"In my opinion, gold is now beginning to discount at least a temporary end to the current bear market rally in stocks," Hathaway told me from New York.

In New Orleans, where attendance is double last year's showing, lots of folks welcome that scenario.