Alan M.

Newmans Stock Market

CROSSCURRENTS
U.S. STOCK MARKET OUTLOOK for SEPTEMBER 13, 2010
DJIA 10,462 - SPX 1109 - NASDAQ 2242
UNCERTAINTY STILL TRUMPS STOCKS IN THE COMPARISON BETWEEN EQUITIES
AND BULLION. HIGH FREQUENCY TRADING NOW ACCOUNTS FOR 56% OF ALL
TRANSACTIONS, FAIR VALUATIONS NOT POSSIBLE. - NEXT ISSUE - OCTOBER 4, 2010 -

Grim Reminders.
Nine years ago, on the day
terror took down the Twin Towers
and ended the lives of 2977 innocent human beings, the world became a far more dangerous place.
The attack was the most successful
peacetime targeted attack on innocent civilians in history and as such,
made a statement that
still reverberates with
the announcement of
each new episode of
terror on the evening
news. The most recent
in Uganda (see http://
tinyurl.com/37k7q7s)
only two months ago
was a startling reminder that virtually no
one is safe. Given the
evidence of the last
decade, those who are
responsible are sufficiently financed and
organized to continue
their heinous and inhuman criminal acts and
have no incentive to
end their reign of terror. The news is not all
bad. Not all terror attempts succeed and in
fact, the U.S. has had excellent success in thwarting potential attacks.
A report by U.S. Senator James Inhofe, detailing many of these failed
attempts can be viewed at http://
tinyurl.com/2clrhbs. While we are
gratified that these particular plans
failed, their scope and the dogged
persistence of the operatives is mind

blowing and frightening. The implications are that the battle against
terror is nowhere near an end.
The tragedy of 911 catalyzed
a 180 degree shift in our views on
the precious metals market and at
the same time, served as a reminder

of the risks inherent in paper assets.

In recent years, we have covered the
potential for bullion, presenting our
case every few months, most often
with the same three charts shown in
todays issue. Our last report on
June 7th can be viewed at http://
www.cross-currents.net/k060710q.
pdf. At that time, we focused on

uncertainty and dismally broken

market mechanics as two primary
reasons to distrust stocks and trust
gold. As new evidence of the effects
of high frequency trading (HFT) come
to light, those reasons are at least as
valid today as they have ever been.
Uncertainty rules.
Ironically, our
featured chart today
again portrays a modestly improved environment for equity
investors. For several
years we had maintained an eventual
target of 5:1 for the
Dow/Gold ratio but
have since pushed
our target upwards to
6:1 as a response to
the nations ability to
monitor terrorist efforts and thereby reduce these risks to
some extent. We believe that before the
super bull market for
gold ends, the Dow
will trade at only six
times the price of bullion. As of the end of August, the
Dow/Gold ratio was 8.03. With the
exception of February 2009, this was
the lowest ratio since June 1991. Of
course, a 6:1 target for the Dow/
Gold ratio does not mean opposite
directions in price. For instance, if
golds bull market were to end at the
(Continued on page 2)

Please note: Information contained herein has been obtained from sources believed reliable but is not necessarily complete and accuracy is not
guaranteed. Any securities mentioned in this issue are not to be construed as investment or trading recommendations specifically for you. You
must consult your own advisor for investment or trading advice. This report is for informational and entertainment purposes only.

CROSSCURRENTS - Commentary - September 13, 2010 - Page 2

(Continued from page 1)

current level of $1250 per ounce, we

would expect the Dow to trade at
7500. However, if gold were to eventually trade as high as $3000 per
ounce, a 6:1 ratio would equate to
the Dow at 18,000. Either 6:1 parameter would satisfy our target. And
interestingly, although gold has almost quintupled from the lows of
April 2001, if the 6:1 target is valid,
gold remains the better play. In the
case of our first example (gold @
$1250 gold, Dow 7500), gold would
go sideways but the Dow would fall
by nearly 28%. In the case of our
second example (gold @ $3000,
Dow 18,000), gold would trade
140% higher but the Dow would
trade up by a lesser amount, 73%.
In fact, every in-between computation of a 6:1 Dow/gold ratio places
gold with the advantage.

we expected they would. The bear

market lasted more than 21 years
and we see no reason why the bull
market for gold cannot last at least
another few years. Paper assets are
definitely not what they used to be.
The grim reminders we focus on today are sufficient reasons for gold to
continue moving higher. While the
1980 peak equates to $1901 per
ounce in inflation adjusted terms, we

believe the final high for bullion will

turn out to be much higher.

THE ODDS HAVE IT

Deflation = 20%
Recession Worsens = 30%
Terrorist Event = 10%
Derivative Event = 10%
Armed Conflict = 15%
(will hurt stock prices)

the federal reserve, our theme of uncertainty and higher prices for gold
would appear to be a lock. However,
there was one glaring omission in Peseks report, that of the effects of
high frequency trading (HFT) on the
equity markets, one of the most significant reasons for stocks to remain
a second best alternative for investors.
Another article about how
Nanex analysts are taking apart the
data appeared in the NY Times a few
weeks ago (see http://tinyurl.
com/25kwju2) and the most relevant posit was that of the founder of
Nanex, who hypothesized .the

bizarre patterns might have been the

result of a Wall Street version of cyberwarfare.
Clearly, as another
Nanex spokesperson
something is not right.

posited,

Although the SEC is somewhat cognizant of abusive market

Comparisons after the ef-Odds that none of the above will occur = 39%
mechanics, they are anything but
fects of inflation also place gold in a
fleet of foot in their response to
far better light than stocks. Below
changing conditions and are notoriOdds that at least one will occur = 61%
left, since the great gold bull market
ously glacier like in their ability to
Odds that at least two will occur = 28%protect U.S. investors. Bob Pisanis
commenced, gold is up 288%, a rate
of over 15% annualized gains AFTER
piece for CNBC mentioned SEC chief
Inflation Surge = 40%
the effects of inflation. By compariMary Shapiros recent comments
son, the Dow is down 24% after in- (will tend to support stock prices)
which left zero confidence that any
flation. The wonder is that golds
substantive action will be taken. If it
bull market is not more widely recis true (and we have no doubts on
ognized and why, after two manias
that score) that internalized trading
involving stocks and housing, gold
and dark pools now represent 26%
seems just an also run in the public
of all trading in a market where HFT
eye. Advertisements continue to run
now encompassing 56% of all transin local newspapers for the public to
actions, then clearly, we have
[Ed note:] Wikipedia maintains a list of
terrorist incidents dating far back in hissell their gold jewelry and there is no
usurped the capital formation system
tory with details of hundreds of inciclamor to buy the precious metal.
to benefit those do not INVEST in our
dents since 911 (see http://tinyurl.com/
Given the lack of public enthusiasm,
equity markets. Our principal thesis
hlu8d).
there would seem to be ample room
is that fair valuations cannot be prefor bullion to run on the upside.
sent (except by chance alone) when a
market is overwhelmed by short term
Something Is Not Right.
At bottom right, another intrading. The best example of the psyflation adjusted perspective, which
chological proof of our posit is the
Bill Peseks opinion piece
we have shown for several years
casino, where even low payout slot
(see http://tinyurl.com/29766qq) for
punctuated by resistance levels.
machines are in demand simply beBloomberg not too long ago was an
Note, only one more resistance level
cause the gratification can be instaneye opener. If bullions surge is inremains, the others have all fallen as
deed a puzzlement for the chief of
(Continued on page 3)

CROSSCURRENTS - Commentary - September 13, 2010 - Page 3

(Continued from page 2)

taneous. While we admit there must

be profitable algorithms currently utilized and in vogue amongst quants,
we are also certain they change with
the winds. We have established an
environment in which it no longer
may pay to own equity for the long
term because there is no long term
anymore. Something is definitely not
right.

Looking Far Ahead.

Although we still expect considerable downside potential into an
October low for equities, we have
maintained the odds for a new secular bull market are growing as the
lost decade for stocks comes to an
end. To be more precise, although
we are unwilling to commit 100% to
the bull thesis after our downside targets are met, we do believe stocks
will rebound quite nicely and rally
strongly in 2011. Our caveat is the
next secular bull market for stocks
will in no way resemble the last secular bull market for stocks and beyond
2011, progress for years to come is
likely to be dull, uninspiring, boring
and plodding.
Below left, we present a
really long term perspective, one
which clearly implies a far more modest future is in store than the glory
years from 1982 to 2000. The 20year annualized rate of gain is now
7.5%, the highest since November
2008 and well in excess of what history has shown to be sustainable. As
seen below, 20-year returns have
been below 5% more than half the
time and have averaged only 5.1%,
despite the tremendous bull market
from 1982 to 2000. Moreover, during a vast history of 78 years from
1917 to 1995, the 20-year return was
only 4% annualized and this long history implies that we should expect a
return to at least the 5% level, proba-

bly the 4% level and perhaps even an

eventual return to the 0.7% level
achieved back in 1982. Impossible?
Remember, the Dow has actually lost
ground over the last ten years. A
glance at the circled bottoms in the
1920s, 1930s and the 1940s clearly
suggests the 0.7% level is possible.
If our thesis is correct, investors will require a great deal of patience and will have to accept that
the last secular bull market was an
aberration, not to be repeated in our
lifetimes. For instance, let us assume
three targets in which either the
5%, 4% or 0.7% levels are eventually

Dow

8400

10,500

12,000

5%

Nov. 11 Jan. 15

May. 15

4%

Dec. 13

0.7% Apr. 17

Aug. 15 Jan. 16
Dec. 18

Apr. 17

achieved for 20-year annualized returns. Furthermore, let us assume

four scenarios in which these
targets are fulfilled at either Dow
8400, Dow 10,500 or Dow 12,000.
Dow 8400 represents the top of the
range for our October low forecast.
Dow 10,500 is roughly the current
level. Dow 12,000 represents the
assumption of a relatively bullish target. Unfortunately, no matter how we
slice and dice the possibilities, it will
likely require extraordinary patience
for investors if any of the scenarios
are to occur. Clearly, the Dow 8400
scenario represents a negative return
for investors.
Dow 10,500 represents a zero return. Unfortunately,
even our Dow 12,000 scenario does
not represent anything more than
modest gains. For instance, the scenario representing 20-year annualized
gains at the 5% level in May 2015 at
Dow 12,000 results in an annualized
rate of gain from today of only 2.9%.

While we cannot deny the

possibility of much higher prices
eventually in the next secular bull
market, there seems little likelihood
that 20-year annualized returns can
be sustained anywhere near current
levels and will fall, perhaps rapidly, to
more reasonable levels. The twin
manias have come and gone and if
history is any guide at all, we should
be on the track towards normal.

One Last Grim Reminder

Many months ago, we stated
that weekly initial unemployment
claims would present the best picture
we have for recovery prospects and
dutifully, we have shown the chart in
almost every issue to accentuate that
an economic recovery was still far
away. In recent weeks, the picture
has actually worsened. As of August
21st, the four-week average was as
high as it has been since November
of last year and is currently 42%
higher than at the end of 2007, when
we first might have begun to suspect
that all was not well. While continuing claims seem to be trending down
slowly, the truth of the matter is that
many of those previously collecting
are no longer eligible to collect and
are thus, off the roster. Given the
paucity of job creation this year, they
are either still unemployed, or as the
U-6 rate of employment illustrates,
are underemployed (http://tinyurl.
com/2cev7vl). Clearly, 2008 was a
bum year. As long as weekly claims
and continuing claims remain at the
same levels as the 2008 average
highlighted below, it is highly unlikely
that the economy is making any real
progress. Were still looking for close
to 8 million jobs to replace those
lost. At the current pace of job creation, this will take a very long time,
another good reason why 20-year annualized returns for stocks should
decline to more reasonable levels.

CROSSCURRENTS - Market Indicators - September 13, 2010 - Page 4

the 21-day incarnation of our Emotional Intensity indicator never wound up
issuing a buy signal but it
may be on the verge of issuing a new sell signal by late
this week, if activity is even
modestly retrained. It would
take fairly large expansion in
optimism to prevent the new
signal. The recent sell signal
was registered on August
10th, the day after the Dow
and S&P peak and we note
with great interest that all major indexes are still trading
lower, despite enormous media play on the rally. As we
suggested in the last issue,
we still expect the levels of
late May to be exceeded as
we turn into a really rough
patch in October.
While Speculative intensity certainly backed off,
this indicator has crept up
again and is at levels consistent with a significant peak in
prices. Although well shy of
the peak seen earlier in the
year, the resurgence to current high levels strongly implies there is excessive enthusiasm for stocks and in particular, Nasdaq stocks. Ironically, Nasdaq finally shows
signs of under performance
and we believe that mode will
not only continue but will be
accentuated in the weeks
ahead.

Alan M. Newmans Stock Market

CROSSCURRENTS
entire contents 2010 Crosscurrents Publishing, LLC
3280 Sunrise Highway #125
Wantagh, NY 11793
(516) 557-7171

Alan M. Newman, Editor

Information contained herein has been obtained from sources
believed reliable but is not necessarily complete and accuracy is not guaranteed. Any securities that are mentioned in this issue are not to be
construed as investment or trading recommendations specifically for you.
You must consult your own advisor for investment or trading advice.
The entire contents of CROSSCURRENTS are protected by
federal copyright laws. The federal Copyright Act imposes liability for
violations of this law, including any unauthorized reproduction of this
issue, in part or in whole.

You cant have a bull

market without participation
by the players playing the
game to the hilt and despite
the speculation desire shown
in our second indicator for
Nasdaq, too many players
have simply gone home to
nap while HFT rules the
arena. Who can compete?
The exchanges are killing the
golden goose. In any event,
low volume like you see at
bottom left, is the kiss of
death for bulls.

A Larger Perspective
Sentiment, as measured by the Investors Intelligence tally of investment advisers, turned quite negative
in March of 2008. At one
point, there were close to

three bears for every two

bulls and bears exceeded
bulls for six straight weeks.
Although
pessimism
may
have been the catalyst for
much of the nine week rally
that took the Dow up 7.4%,
those who had turned pessimistic turned out to be quite
correct, just a bit ahead of
the mark.
Within another
four weeks, they were proved
insightful and before another
five months had elapsed the
Dow was down over 4000
points and 33% lower. Thus,
we believe the recent turn of
events in which this indicator
has taken a turn towards pessimism, should be viewed in
a larger perspective.
As well, in the 2008
timeframe, investment advisers were consistently more
negative about the markets
prospects than now. Both the
26 and 52-week moving average of the bull to bear ratio
hovered around 1. We seem
to remember comments how
the consistently
somewhat
pessimistic sentiment would
play out well for the bulls. It
did not. However, given the
economic background, the 26
and 52 week ratio are currently rather optimistic at 1.5
and 1.8 (bulls to bears) respectively. For a long time,
bulls have been far more in
evidence than bears. It will
take more than the current
blip to create a bottom based
on sentiment. More importantly, with mutual funds now
at an all-time low of only
3.4% cash-to-assets, the larger perspective shows excessive, perhaps even euphoria.
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BARRONS

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CROSSCURRENTS - The Three Weeks Ahead - September 13, 2010

- Rationales & Targets -

We were correct in our assumption of a respite, were wrong

about the duration of the respite but thus far, were also correct in our
gauge of strong resistance at Dow 10,500. However, time is beginning to
run out on both a bear outcome for stocks and a continued rally in bullion.
Long term, we are still ridiculously bullish on gold but a pullback from the
recent record highs is a growing possibility. If our expected correction for
stocks is going to occur, it needs to get started in earnest soon. Seasonal
effects will begin to turn positive in another month. The August lows at
Dow 9900 now appear to have taken on more significance as an important
support and given the environment of mechanically driven trading and low
volume, potential for a very rapid downside remains. The odds for our
most bearish scenario are clearly dwindling and we are too close in time to
the bottom, thus Dow 8400 is now our worst case scenario and Dow 91009200 now looms larger as an eventual reversal point. Bank stocks are
needed for any bull push but the entire group looks barely alive.
Last issues comments on pharmaceuticals is a lot more relevant
now with the recent activity and new high in Bristol Myers (BMY) and last
weeks breakout in Pfizer (PFE). Even Merck (MRK) is on the verge of a
breakout, so the group may finally be ready for a much larger push. Another that looks quite promising is Allergan (AGN).
On the other hand, the semi-conductor group looks awful and we
wonder how an economic recovery can be posited if this important group is
under performing. Advanced Micro (AMD), Applied Materials (AMAT) and
even giant Intel (INTC) are in the dumps and appear poised for a breakdown. Below, PFE and AMAT are presented as samples for their peers.

PFE

FAIR WARNING & DISCLAIMER:

The publisher of this newsletter and one or more of its affiliated

persons and entities may have positions in the securities or sectors
recommended in this newsletter and may therefore have a conflict
of interest in making the recommendations herein. For example, if
an affiliate has an existing long position in a security that this newsletter recommends for a long position, the buying activity that recommendation generates may cause the price of such securities to
rise, potentially allowing the affiliate to exit the position at a profit.
Any securities mentioned in this issue are not to be construed as
investment or trading recommendations specifically for you. You
must consult your own advisor for investment or trading advice.

The Psychology of the Market

Invest. Intel.: 3 Wk. Bull/Bear Ratio 1.0 Skeptical

AAII: 3 Week Bull/Bear Ratio: 0.8 Skeptical
Mutual Funds: 3.4% cash: Euphoric

Crosscurrents Emotion-Based Indicators:

ANOTHER SELL SIGNAL POSSIBLE

LATE THIS WEEK

Short Term Forecast

RALLY NEARING END

WE STILL EXPECT DOWNSIDE

TO RESUME WITH UNEXPECTED FORCE
STRONG RESISTANCE AT DOW 10,500-10,600
IMPORTANT SUPPORT: DOW 9900

Intermediate Term Forecast

THROUGH OCTOBER 2010

REWARD/RISK RATIO: AWFUL

UPSIDE POTENTIAL = 1 to 2%
EXPECTED DOWNSIDE RISK = 13%
MAXIMUM DOWNSIDE RISK = 20%

Crosscurrents 10 Investment Stance

RETAINED FROM PREVIOUS YEAR OR EARLIER

Newmont Mining (NEM) 10% LONG +46.7%

China Medical Tech. (CMED) 5% LONG 3582%
Goldcorp (GG) 5% LONG +5.7%
Newmont Mining (NEM-closed) +51.4%

AVERAGE GAIN +23.0%

Vs. DJIA +0.3% SPX 0.6% Nasdaq 1.3%

AMAT

Retained ideas priced from inception

Percentage gains (losses) include dividends
AVERAGE GAIN IS WEIGHTED

POSSIBLE FUTURE ADDITIONS

Mindray Medical (MR) - forward P/E 18
Pfizer Inc. (PFE) 4.3% dividend yield
Altria Group (MO) 6.5% dividend yield
AT&T Inc. (T) 6.1% dividend yield
ShengaTech Inc. (SDTH) - China/Speculative
TRADING STANCESTILL OPEN

Powershares QQQ Trust (QQQQ) 10% SHORT 37.9%

This hedge will be eliminated before the end of October.

Pictures of a Stock Market Mania

http://www.cross-currents.net/charts.htm
NEW UPDATE - SEPTEMBER 4th