Placer Dome cuts hedging by 20 percent


9:41p ET Thursday, August 29, 2002

Dear Friend of GATA and Gold:

GATA was mentioned prominently again today in
Thom Calandra's commentary at Our message is getting
around in a big way. That commentary is
appended here.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *


By Thom Calandra, Editor
Thursday, August 29, 2002

Years from now, when the carnage in stocks is
over, a handful of U.S. researchers will get
passing grades for sticking to their guns
about the overpriced market.

Bernie Schaeffer belongs in that small group.
Schaeffer's views at Schaeffer's Investment
Research make him an easy target for the
millions of Americans who are suffering deep
portfolio losses in this, the third losing
year for U.S. stocks.

"Pessimist, fear-monger, anti-American -- I
hear it all," Schaeffer told me over
breakfast in San Francisco. "But in 1994 they
were calling me Bernie the Bull on CNBC."

Back then, if Schaeffer had tried explaining
the technical research that is his Cincinnati
company's specialty, the public's eyes would
have glazed over. "Imagine my bringing up the
VIX in 1995. No one knew about it or cared,"
Schaeffer said about the so-called fear
indicator that measures stock market
volatility (VIX) on the Chicago Board Options

At 55 Schaeffer is just as direct over a meal
as his regular written commentaries, which
tell investors they are being way too
forgiving of overvalued stock indexes. His
main course these days is the Dow 30 stocks
that likely will become chopped liver when
the stock market falls off its perch.

"I call the Dow the headline index," he says
about the Dow Jones Industrial Average that
is destined for toast. "It's what we see
every day in the newspaper, have seen for
decades. There still is nothing tremendously
scary about a Dow number that starts with 8."

That's 8 as in 8,580, which is where the
index was Thursday morning. Schaeffer's case
against the Dow is practically airtight.
Stock market believers had best stop reading

Schaeffer sees the Dow as a "stupid" product
of a long-gone age, when a small group of
industrial companies could somehow represent
the entire American stock market.

The Dow is a price-weighted index, unlike
other major gauges, such as the Standard &
Poor's 500 Index. Essentially, that means
that stocks with high dollar prices wield
enormous influence. Right now, there is one
stock that is holding up the Dow: the only
one with a price above $100.

"The single most important stock is a company
in Minnesota," Schaeffer says about 3M Co.
(MMM). "It's an industrial company with what,
a 30 P/E? If 3M stops levitating, just maybe
people start getting scared."

Schaeffer calculates that 3M stock, not far
from an all-time high of $130 or so, could
wreck the Dow if investors end their love
affair with the company's shares. If 3M
shares were to return to their 1997-'98 lows,
roughly half their current level, the Dow
would get a 425-point haircut.

That's still not scary enough, says
Schaeffer. He believes that investors are
still far too accepting of their portfolio
losses since the Dow peak of January 2000.
Schaeffer Investment Research relies heavily
on "fear" indicators in options trading, such
as the VIX and so-called put-call ratios.

"I get a chuckle about everyone getting so
excited when the VIX made it to the 50s" in
the July sell-off, he says. "They figured
that was plenty scary, and a good sign that
we had reached a bottom."

Nonsense. The VIX, a volatility index for the
country's 100 hundred largest company stocks,
was back-tested into the rough waters of
1987. In October that year, during that
horrible week of selling, the fear gauge hit
175. The indicator Thursday morning, as the
Dow resumed its inevitable sell-off, was an
easy-peasy, hakuna-mattata (no worries, mate)

"October '87 gives you an idea of what true
panic really is," Schaeffer says.

The New York University mathematics major
puts a lot of faith in the idea of a full-
scale retreat from stocks. In that regard,
his expectation of a market washout, complete
with tears, jangled nerves, and tremendous
point declines, is similar to those of
several other pure technicians, including
Paul Desmond at Lowry's Reports and his own
senior quantitative analyst, Christopher
Johnson in Cincinnati.

"I want to see three to six months of heavy
mutual fund outflows, not this business of
one month of sharp outflows," Schaeffer says,
between bites of scrambled eggs and toast.
"Look at it like this: The S&P 500 in this
selloff got cut in half. Nasdaq got cut in
half twice. For that to happen to the Dow, it
has to be at 5,875. It happened in 1973 to
'76, so why not now?"

Schaeffer says the Dow's superior performance
to the rest of the stock market -- since the
January 2000 Dow peak, the Dow is beating the
S&P 500 by more than 15 percentage points --
is "curious."

Does Schaeffer believe in market
manipulation? "I'm not going to go as far as
Bill Murphy and the gold folks about that
subject," Schaeffer says, referring to the
chairman of the Gold Anti-Trust Action
Committee and a growing belief that
commercial banks and governments work behind
the scenes to inflate paper values and
deflate hard assets, like gold. "But if you
are going to manipulate an index, it would be
the headline index."

Schaeffer sees gold -- and gold mining stocks
-- as investments that will fare well in what
inevitably will be turmoil in coming months
or years for the stock market. "Whether it's
a panic or a grind-'em-down bear market, it's
going lower," he says.

He recommends buying put options on the
Diamonds (DIA), a trust security that trades
like a stock and represents the Dow index.
Put options increase in value as the
underlying security, in this case the bloated
Dow, declines.

Schaeffer's business in Cincinnati employs 60
people, thanks to a growing awareness of
equity options among Main Street investors.
The former insurance executive is quick to
admit he makes mistakes.

"My biggest goof of late was being caught
flat-footed by counter-trend rallies, in the
1994 and 1998 sell-offs, when I was a bull,
and the September 2001 rally," he says. "Oh,
and before I got it right, I got clobbered by
airline puts."

In February and March, airline stocks soared,
leading Wall Street to believe the worst was
over for the battered industry. Schaeffer was
amazed at the rally, but stuck to his guns.
"I travel, and I know the airlines are in
pain," he says.

Today, the airline stocks are, collectively,
at half their highs from February. "What was
with that rally? I want to know. Leave it to
Wall Street to parse the travel figures and
say, 'Oh, capacity was worse last month than
it is now.'"

No wonder no one listens to Wall Street these
days, Schaeffer says.

The veteran stock market researcher's views
can be found online at


Thom Calandra is editor of