THE BLOG
03/18/2010 05:12 am ET Updated May 25, 2011

The Right Country for Old Men

Brett Favre, the aging 40-year-old quarterback of the Minnesota Vikings football team, proved to the rest of us Sunday that getting older doesn't mean you're losing it. To the contrary, demonstrating that novelist Thomas Wolfe was wrong in his belief that you can't go home again, the supposedly washed-up quarterback hurled four touchdowns to lead the Vikings to an impressive win over his former team, the Green Bay Packers.

It reminded me of another old geezer, Richard Russell, the 85-year-old editor of Dow Theory Letters, a well-regarded investment newsletter out of La Jolla, Ca., and a recent critically acclaimed film, No Country for Old Men.

It was a movie filled with violence and that's precisely what Russell thinks we confront, but in this case it's more financial and economic violence

The last time I caught up with our octogenarian was in the summer of 2007. At the time, Russell, who has written the letter since its inception in 1958 and is habitually cautious on the stock market, made what I thought was a remarkable call, telling me he thought there was a good chance "all hell could break loose."

I relayed his fears to a money manager, who criticized me, saying, "Why do you waste your time talking to the living dead?"

That was a dumb, thoughtless comment as the sharp, informed and perceptive Russell turned out to be dead on as serious strains in the financial system, a housing bust and an ensuing recession followed. In the process, the Dow Industrials plunged more than 50% from their October 2007 high by early March of 2009.

That call was by no means a fluke. Russell boasts a number of other spectacular forecasts. Among them, he urged subscribers to sell at the top in February of 1996 and correctly turned bullish at the bottom in December of 1974.

Equally impressive, in August of 2007, he once again demonstrated his visionary skills, urging subscribers to sell. Some two months later on October 19, 2007, known as Black Monday, the market got slaughtered. The Dow that day dived 508 points or 22.6 %, in process shedding about $500 billion of market value.

So the obvious question is: what next? Russell, who believes the primary trend of the stock market and the economy is bearish, doesn't think an injection of trillions of Federal Reserve-made fiat dollars can halt a bear mark and turn it into a bull market.

"The stock market is coming unglued," he says. He acknowledges that he doesn't know whether "we are facing a simple correction in a bull market rally or the collapse of a counter-trend rally in a bear market." Either way, losses are losses, observes Russell, who says that unlike other market analysts, he's not ruling out the possibility that we'll once again revisit the March low in the Dow (6547).

Addressing himself to the economy, Russell questions how we can have a real recovery while we're losing jobs and home prices continue to fall. As for the recent announcement of a 3.5% growth rate in third-quarter GDP, he notes that many analysts took this to mean that the recession is over. Russell, though, has his doubts, raising the question: Is it real GDP growth or has the GDP been manipulated by government stimulus?

Speaking of housing, Russell sees more chaos ahead. Noting that home foreclosures have leapt into the hundreds of thousands -- a situation that is likely to worsen next year--he points out that foreclosed homes tend to put banks in the real estate business, which is the last thing banks want. So they, in turn, sell or dump foreclosed homes at whatever price the market will bring (further depressing home prices).

Observing, too, that many foreclosed homes are now selling below the cost of replacement, Russell points out that as commodity prices rise, this disparity will grow.

Turning to the stock market, he rattles off a bunch of reasons as to why he doesn't like its current tone. In brief:

--Far too many distribution days.

--The bullish percentage of stocks on the New York Stock Exchange is declining.

--The percentage of stocks trading above their 50-day moving average is also declining.

--The Transportation Average, which broke below a preceding decline low on October 28, continues to fall (even on days when the Dow is up). Likewise, transports are sort of sinking out of sight on higher volume.

--Sentiment is too bullish regarding the market, and nobody expects the current rally to top out and fall apart.

--Russell's primary trend index is now only eight points above its moving average and therefore very close to a sell signal.

--The Dow, so far, has not been able to close above the 50% level (10725) of the 2007 to 2009 decline.

Russell further notes that one of his favorite stock averages -- which often tends to lead the market and is not followed by many analysts -- is also flashing bearish signs. That's the Dow Jones Composite Index, which is made up of the 30 industrial stocks, the 20 transportation stocks and the 15 utility stocks. As of now, it's completely trading completely below its 50-day moving average, strongly indicating further market weakness.

Russell wraps up, noting everyone needs protection from Federal Reserve-created credit inflation and the sinking dollar. His strategy: Be sure you own some gold, which is approaching an all-time high of $1,100 an ounce amid heavy gold buying by India and a falling dollar.

Write to Dan Dorfman at Dandordan@aol.com