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Richard Russell’s latest letter is something that most investors can probably empathize with to some degree.  While it’s clear that the equity markets are in the midst of a bull market, it’s less clear whether now is still a good time to be buying.  Russell, while acknowledging that this is certainly a bull market, prefers not to be overweight equities for one single reason – the values just aren’t that good:

“So is it really a bull market? I think it is. Then shouldn’t we be up to our necks in stocks? I choose not to be, mainly because I don’t like the values. Dividend yields are low in my estimate, and I’m in no hurry to rush into the arms of an anxious and waiting Wall Street.

I know that the potential for great and safe profits in the stock market are created when one buys stocks when they’re on the “bargain counter.” When the Dow’s’ dividends are below 3%, then historically the Dow is far away from the bargain counter.

Sure the Dow and stocks can rally from here. But like the batter who is facing a gifted and clever pitcher, I prefer not to swing on this pitch. So be it, I guess I’m just a stubborn old fool who has too much respect for RISK and values.

Today QE2 ends, and supposedly the Fed steps back. The Treasuries are now on their own, and the Fed has stopped buying. The smart boys are sticking to this scenario. With the Fed no longer buying Treasuries, the Treasuries start falling while interest rates rise. This tends to throw the economy into the dumps. The Fed will watch for a while as the edge is taken off inflation. But as the economy worsens, the Fed will be forced to stimulate again. Once stimulation is back, the precious metals will boom. That’s the line and scenario that I hear.

The Russell reaction — It bothers me that it’s all so pat and so widely accepted. So far, the Treasuries are acting according to script and so is gold. The stock market is acting as if something better is riding on the winds of the future. Could something be amiss with the accepted scenario? Could Bennie Bernanke have it right? And why is Treasury Secretary Geithner ready to say “bye” to the administration? What can he see ahead that he doesn’t like? Geithner’s been Obama’s leading economic confidant. Certainly, an unusual time to exit.”

Clearly, this is an argument that is backed by years of data and market practitioners who seem to have made their reputations by remaining prudent through these times when the markets are excessively expensive….Russell is no exception.

Source: Dow Theory Letters

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