Friday, October 27, 2006

Bull Market?
Don't Bet on It
For edition of October 27, 2006

A few words concerning my unwontedly rosy forecast for the Dow Industrials. My prediction that the blue chip average eventually will achieve 13045 was not inspired by any particular thought, nor by events that may have occurred or which could conceivably occur, in the real world. It is in fact a coldly mechanical objective derived from the long-term charts, and in its coldly mechanical way, it implicitly acknowledges the fact that stocks can do just about anything without heed to events in what we should like to call the “real” world. They can tumble into a relentless bear market just when the economy seems to be going gangbusters; they can do essentially nothing for seven years, no matter what the news; or they can soar, as they are doing now, even with a spectacular and potentially depressionary real estate bust glowering on the horizon.

But merely because my long-term charts point to an impending 900-point rally in a handful of Dow stocks does not necessarily mean we should become hand-over-fist buyers at these levels. In fact, we are only ultra-cautious buyers on pullbacks, even as we treat every Hidden Pivot rally target, no matter how minor, as a potential very long-term top -- and a shorting opportunity.

Russell’s Observation

Headline highs aside, is it really a bull market? As Richard Russell once taught us, the fact that the stock market is making new all-time highs does not necessarily qualify it as a true bull. In his latest newsletter, Bob Prechter recalls Russell’s prescience on this point 33 years ago: “I can recall reading Richard Russell’s Dow Theory Letters in 1973, and he correctly said that the new highs in the Dow and S&P were part of a bear market. To many people this claim did not make sense, but he was correct. It was a corrective pattern under Elliott, other averages (like the NASDAQ and S&P today) were lagging, the real value of the indexes was not a new high, and the worst of the bear was yet to come.”

Just so. Prechter closes his letter with a statement that has caused me to rethink my own role as a forecaster who has predicted significantly higher stock prices: “At this point it would be dangerous to suggest the Dow will go up another 8 percent in case some people were to take it as a reason to buy,” writes Prechter. “The responsible thing to do in this psychological environment has been, and still is, to recognize every possible juncture that could signal a top…”

I completely agree. And I would add that anyone who believes that the already fatal drop in home prices is leading the economy toward a soft landing is too stupid to argue with. The stock market and the entire economic system are so very close to unraveling that we should offer up a grateful prayer for each new uneventful day on Wall Street.

Dear all,

The economic shoes are dropping furiously...

The Census Bureau announced durable goods and new home sales data today and they are unequivocally horrible - if you have the patience to shift thru the propaganda headlines.


But, plowing thru the data...

Durable goods orders minus defense and minus Boeing's orders were -1.03% month over month, or -13% annualized. Shipments (what is actually going on right now in the economy) were -2.8% (-39% annualized). Take out defense shipments and it is still -2.6% (-36% annualized). So the "real" manufacturing economy is pretty much in the toilet right now...oh, and before you cry "seasonal variations" I hasten to note that the data is seasonally adjusted to deal with just such fluctuations.

The housing data looked a bit more promising as far as sales are concerned (+5.3%), but that came at the cost of plunging median prices, -9.2% in one month alone, the sharpest drop in 36 years.

It is actually worse than that, because FROM THE TOP (reached in April 2006), house prices are now down -15.5% in just 6 mos.

I could say welcome to the recession, but Mssrs. Paulson, Bernanke and Bushtu would disagree.

But I now feel more comfortable with my timeline further above...

Posted by: Dumas | October 26, 2006 at 10:53 AM


The 3Q06 GDP figures just came in +1.6%, lower than expected (+2.0%). Bad enough..

But that is not the news..

The funny business seems to be in the GDP price deflator, i.e. the broad measure of inflation that is used to come up with the inflation-adjusted or real GDP that is being reported.

The figure for the third quarter was just 1.8% annualized, i.e. the raw numbers for GDP were discounted by just 1.8% to come up with the "real" GDP. By comparison, it was 3.3% last quarter and just about the same for 10 quarters before that.

And all of a sudden it plunges to 1.8%? Hmmmm...

But of course, if you discount raw GDP by a smaller number, the "real" number comes up bigger and presto...real GDP growth is higher. If the deflator was left at 3.3% GDP growth would have been...0.0%... aka zilch.

Not very nice right before the elections, of course.

Massaging of numbers? Naaaaaaah...

Posted by: Dumas | October 27, 2006 at 10:31 AM

The current state of the stock market has remained pretty flat when compared to the six billion dollars in new monies created and borrowed by Congress every day.

That money has to go somewhere. It can't all be used to buy physical goods or inflation will be driven up faster than hedonistic adjustments can keep up.

In the 1990s, the US government was able to account for where most of the money went. But that's no longer the case. The GAO reports that they can no longer say with any certainty where all the money goes. The same goes for the Pentagon, which is unable to report how it spends money.

Homeland security has blown spending wide open, and it seems that the money can only be tracked when it hits the local level.

The money flowing through the financial sectors keeps growing. We've seen the end of a tech and market bubble, the rise and fall of a Real Estate bubble, now it looks like its the market's turn to be bubbled again.

I'm not ready to call a bear market or to predict a DOW of 4k. This is because the stock market no longer rests on fundamentals.

It's kept at it's current levels by the sheer flow of monies that are traded on it. Billions a second are traded on the market, in computerized trading between the financial giants.

This inflates the value of the market in the same way you can keep a leaky bucket full so long as you keep water flowing into it.

If it weren't for the computer trades, the market would quickly deflate.

The money powering the computer trades doesn't represent any assets except for ones and zeros in the data streams. Through the magic of fiat currency and derivative trading, the quantity of money in the system continually grows.

As long as that money stays in the computers and doesn't hit the streets, we won't be flooded in inflation.

Since the quantity of money that can be represented in computers is essentially infinite, the quantity of money flowing through our financial systems could grow from its current level of enough to buy more than eight planet Earths, to being enough to buy billions of universes. And the market will remain stable so long as that money is never used to buy anything.

But such things can't last forever. Someone will blink, or there will some financial disaster that will unleash a flood of money onto the markets and the value of the dollar will be reduced to twelve cents as the disaster produces a domino effect throughout the world financial community.

The ultra rich will still be rich. But those in debt will suffer horribly. Credit card companies have the right to change your balance owed to anything they desire, once you miss a payment. Its legal and its in the small print on your application.

I don't know what will trigger this. A war in the strait of Hormuz with supertankers sinking, and the gulf turning into a lake of burning oil would probably do the trick.

Short of that, its a matter of ratcheting the pressure until something splinters and breaks.

I think the market can continue to see increases. But there's no long term value in these numbers. They aren't keeping up with real inflation.

Now is the time to putting money into Real Estate at distress sales.

Posted by: Weaseldog | October 27, 2006 at 11:48 AM

OEO, here is a recent example of manipulation. The most important professional commodity index is the GSCI. On August 10, 2006 Goldman Sachs reduced the unleaded gasoline weighting from 8.72% to 2.30 %. This completely upset the very large funds trading commodities and forced unwinding of massive amounts of hedges. The oil price collapse is part of this unwinding of $6 trillion of contracts because of the weight change. During August actual daily gasoline production varied by a tiny 0.12 million bbl a day.

Yet we had a price collapse. Oh, the military, the largest single user on the planet of gasoline and diesel fuel chose just now to really liquidate a high inventory of stocks. Keep in mind, that gasoline and diesel have a short shelf life. This was a completely out of synch liquidation.

JP Morgan Chase and Goldman Sachs with their predecessors have been literal government partners since 1914 at the latest. Morgan and GS have made a killing buying hedge fund unwindings at a steep discount these past two months .

Note this suspicious fact. The losses to the oil stocks and prifit declines were timed to have a weighted effect of 50% or so in the third quarter with respect to earnings effect and decreased stock value. Similarly, the loss will be made up in the last half of the fourth quarter plus a huge killing to boot.

Wall street makes money on the movement of monetized securitized debt. They do not own the debt, they just profit on the movement in either direction. This is made quite easy from programmed buying and selling. The debt market is many, many times the size of the stock market. This particular stock market rally is about as narrow as any old timers have ever seen.

It's first about making money , then paying off a political debt. The political debt payoff involves losing no money but the opposite... cleaning up!

Here is specifics about just the energy area. It ain't the little guy buying and selling. He is not even the froth in the beer.

Posted by: Jerry Johnson | October 27, 2006 at 12:57 PM