By Peter Brimelow
MarketWatch.com
Sunday, August 5, 2007


The Sunday sun was still high above George’s At the Cove restaurant, overlooking the Pacific in the idyllic California beach town of La Jolla. But Richard Russell, editor of Dow Theory Letters since 1958, was ready for dinner. He would be getting up at 3:15 a.m. Monday as always, preparing to write the several thousand words of commentary he posts every day that the market is open.

Russell and his elegant wife, Faye, are regulars at George’s, which is owned by a son-in-law from a previous marriage. They just celebrated Russell’s 83rd birthday there. But the waitress says he usually arrives early and leaves quickly. Deadlines, and markets, are always on his mind.

A particularly intense week was looming for Russell. The stock market had staggered in the wake of his recanting his tenaciously-held view that the post-2002 rally was a just a blip in a primary bear market, which seriously angered many of his subscribers.

The Dow Jones Industrial Average closed on Friday, July 27, just below its June low of 13,266.73; Russell’s reaction: A Dow Jones Transportation Index close below its June low of 4994.82 will confirm a Dow Theory Sell Signal. But Russell’s been overriding Dow Theory when he feels like it.

Juncture recognition is key to Russell’s reputation. He was unrelentingly bearish after 1966, but dramatically called the 1974 bear market bottom.

He got out of stocks two months before the 1987 crash. And again he got out of stocks in late 1999, six months before the March 2000 blow-off. Russell remained stubbornly bearish right through the subsequent 2002 slump, when most advisers were faked into thinking that happy days were here again.

Of course, it’s not a completely clean picture. After 1987, Russell didn’t get back into stocks until 1989, when they were considerably higher than his exit level. Arguably, the same thing has happened now.

But the point is that Russell is not a stopped clock, as some of my Russellphobe readers, who focus only on this last decade, keep complaining. And by getting out before the big breaks, he has dramatically reduced risk for his subscribers. “In this business, it pays to hope for the best, but be prepared for the worst,” he says. According to the Hulbert Financial Digest, Russell is tied for top place as a market timer on a risk-adjusted basis since 1980.

The HFD monitors only Russell’s market timing, on the austere grounds that the rich smorgasbord of investment mutterings, musings and mentions that he serves up each day does not lend itself to systematic tracking. But these ideas are often cited gratefully by my equally numerous Russellphile readers.

Russell in his 84th year looks absolutely, extraordinarily wonderful. He’s been in La Jolla since 1961 and adores it. He apparently never travels or takes vacations, and he rarely gives interviews. His 10-minute commute is a worthwhile disruption, Faye Russell says, because the office provides him with his only social life. Russell does admit to 20 minutes on the exercise cycle after the market closes. And this week he cut back his Wednesday comment, saying he plans to rest midweek in order to “keep doing this for the next 15 or 20 years.”

It looks distinctly doable. Faye Russell, 32 years her husband’s junior and a corporate lawyer who says she went back to school because she assumed she would be a young widow, now wryly predicts he will outlive her.

Russell comes from an old South Carolina Sephardic family. He says that his father, a civil engineer, was advised by the famed financier Bernard Baruch, a friend whose background was very similar, to lose his southern accent when he came to Manhattan, where Russell was born and raised.

Russell himself served in World War II as a bombardier in the U.S. Air Force, flying more than 20 missions, an experience that obviously marked him profoundly. Then Russell worked as a textile designer, studying the stock market in his spare time. Married three times, and still on remarkably good terms with his ex-wives, he has five children, plus grandchildren who are being raised Catholic.

Russell says he is not drawn to organized religion. A sister is retired in Greenwich, Conn. An actress daughter, Betsy, who according to Wikipedia “endeared herself to young men across the globe with some nude scenes in 1983’s “Private School,” has now resumed her career in fiancΓ© Mark Burg’s hugely successful “Saw” series. Russell doesn’t particularly like these movies, but appears impressed by their return on investment.

Although Russell has ruthlessly bugged his subscribers into getting online he says he has only 500 unreconstructed snail-mailers out of some 10,000 subscribers. He turns out to be still something of a print primitive. He reads several newspapers a day. He even eschews email on weekends.

What about the market?

With Russell, what you read is what you get, not surprising when you consider how much of his life is spent writing. But what you get is nuanced and Delphic, which I believe is an honest reflection of his subtle and sensitive intellect. And, importantly, his intuition.

I asked Russell directly: Is there a “Greenspan put”? Have the authorities been committed to maintaining the markets, risking ultimate collapse?

In his esoteric way, Russell has excited his readers, who tend to become devoted Russellologists, by hinting that he thinks equity markets in general and the gold market in particular are being manipulated in the interests of an inflationary boom.

But, needless to say, Russell didn’t answer me directly.

He said he does read Lemetropolecafe.com, the leading proponent of the manipulation theory. But Russell’s not about to endorse it. He pointedly says that his favorite columnist right now is Bloomberg.com’s Caroline Baum, a vociferous critic of the view that official-sector intervention, in the form of the rumored “Plunge Protection Team,” exists at all.

On the other hand, Russell says flatly that “the central banks won’t let deflation happen.” (Hmmm … and how, exactly, will they do that?)

If there’s a put, Russell quips, it’s a “China put,” the unprecedented demand unleashed by China’s economic awakening.

But Russell instantly agrees when I challenge him with the argument that no one really knows what’s happening in China.

Maybe my questions had an influence. Looking at the dramatic last-hour rally on Wednesday night, Russell wrote: “Amazing action but the session was not a total triumph for the bulls. Breadth was about even, and new highs rose to 492. I had the distinct feeling that near the close of today’s session somebody or some group decided to ‘save the day.’ Who could that be? Who would have the power to buy, say, a few thousand S&P futures? It doesn’t matter. The true and decisive direction of the market will become clear as we move along.”

And on Thursday night: “The sudden buying, seemingly ‘out of nowhere,’ left me just a bit suspicious.”

Russell really doesn’t like this bull market. He has repeatedly said that it can’t be justified in terms of fundamentals, such as price-earnings ratios.

He does respect the fact that it has happened anyway. As he said recently: “Join the TV cowboys and ride the bull.”

But it’s not a surprise that he’s worried now.

Russell wrote during this last week: “Fundamentally, the big question is the action of U.S. consumers. Will they pull back on their buying and maybe even start to save? If they do, it will be bearish for the economy and the markets? And oh yes, thanks Alan Greenspan for loading America up with loans, credit and debt!”

As Russell often does, he posed a question to himself: “Question: Russell, do you think we’re at the beginning of a primary bear market?”

“Answer” Of course, this is the most important question that can possibly be asked today. And my answer is, ‘No, I don’t believe we are in a primary bear market. But this is too important a question to be arrogant about. And that’s the reason I bring up the 50% Principle (i.e. the primary trend is intact as long as stocks don’t give up more than half their gains since the bull market began). The 50% Principle will tell us whether we are experiencing a correction a primary bull market or whether the bull has indeed died.’

“Of course, a major problem is that the 50% or halfway level of the entire rise from the 2002 comes in at Dow 10,643. Will we have to wait for a huge decline to Dow 10,643 to find out whether it’s a bear market or not. All I can say is that ‘I hope not.’ There will be indications along the way.”

Last word: After a wild week of routs and rallies, the stock market finally broke down badly late Friday. After the close, Russell wrote:

“This is turning into one mean-looking decline. The Dow and the Transports BOTH closed at new lows for the move today. From a Dow Theory standpoint, that an ugly picture and calls for defensive action on the part of investors.”

Russellologists note that he hasn’t actually proclaimed a Dow Theory signal, but if you go by his earlier comments, Friday’s close was one.

Stocks are now right at or below the point at which Russell recanted his bearishness. Torturing thought: at this point in his brilliant career, could Russell have been a contrary indicator?

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