Sunday, October 31, 2004

Duratek's Lament

At SOME point, my mindless ramblings will suddenly have someimportance....or all of this is in my head leaning to delusions of grandeur? Not so, I Know I am just another come on let's clown around.

What is MISSING (MIA)in this market? WHY oh WHY can't I be convincedwe are in ANOTHER bull market and just GO LONG young man and all my troubles will be done? WHY oh why am I so damn stubborn? or worse?Let's explore my insanity shall we?....or my inability to do as toldand follow the do I always have to rock the baot?What is missing is the LACK OF DOUBT in this market, I am not talkingabout the preverbial "wall of worry" I am talking about an absence of BEARS!! a DEN of bears.....foaming about how the end is near, watchout for trouble etc....where is the PLURALITY of GRRRRRR'S???? WHY isthere a dull thud, an ECHO in the cave?During the GREAT BULL MKT of the 90's do you know we had a periodwhere we went an entire year where Bears outnumbered Bulls? From OCT EWFF ".....the significance of the optimism keeps expanding, the LONGER the BULLISH BUZZ lasts, the harsher the BUST is likely to be.

"It has been "502 WEEKS"!!!!!! (last 1995) since the bears outnumbered bulls in a period. EWFF points out that during that time, almost 10years, bears ONLY outnumbered bulls (by 5%) of the time 26 weeks!!!and this coming DURING the most devestating BEAR mkt since the great depression!ADD to that during this recent 2004 DOw series of DECLINING tops andlower lows, the SENTIMENT of bullishness has been GROWING!!!Now bulls outnumber bears 2 to 1.

After ALL that has happened, speculation in GOOG has drove it to new highs near $200 near double just a month or so ago!Both MArket VAne and Investors Intelligence readings are at levelsseen at PRIOR GOOG skyrockets (over $50 Billion mktcap!!!!!!!!!! DOUBLE GM!!) as the not important anymore DOW giantsDIVE?? AIG GM FNM??? 3M PFE !!!! at same time SPX 600 Small caps madenew highs? but have now started to decline.Coming into an uncertain election, we find the recent 5 day CPC plummeting to .70???

However, maybe annomaly but VIX spiked Friday. It is likely the TRAN index is some kind of important high RSI oversold, should put pressure on it, so we now are situated where theTrannies at LEAST need a breather, but Dow will persist higher?Like in 2000 we have the NAZ rising as the Dow has been declining....ANOTHER divergence.

This past Recession (2001) was called MILDEST on record, but theRecovery in ALL Aspects has been the WEAKEST, no one is talking aboutthat.In recent report Help Wanted ads index sunk to low of 36, missingestimates, yet not a peep in press. Wages stagnant, hours workedstagnant....employment stagnant.....COSTS are RISING.Phase I of Bear market had completed, and IMHO Phase II is about tobegin in has been seperated by a 2 YEAR CyclicalBull......the JOB of has been to set up the next phase in lullinginvestors to think the coast is clear.We KNOW what a bear market BOTTOM is supposed to look like. 6% SPXdividend yields and SINGLE digit PE ratios.The bear bottom has NOT been allowed because of stimulus and FEd has NOT eliminated its coming...ONLY delayed it.


Friday, October 29, 2004

Better SIT DOWN to read this

$20 billion added to money supply this week, but after 2 weeks totaling $79 BILLION in DECLINE, I am not too impressed.
If watching money supply is valid indicator at all, the damage has already been done.
We see CHina REALLY trying to put on the breaks to runaway economy.
WE see FNM probed. We see AIG probed.WE see MRK drug pulled from market.We see Star GAs PArtners stock obliterated.WE see almost $200 GOOGLE! Stock has doubled in less than 2 months??!!
VIX inched up today, interesting...staying above its 20 MA...we see 5 day CPC at .70
We know total credit market debt is ABOVE 300% of GDP now (well above the level which brough us a depression) excerpt FEB 2004
"What is perfectly clear from simple arithmetic is that without a sudden increase in the number of jobs and the wages they pay, individual debt can not be serviced by personal income. Worse yet, not only are people not saving, but their financial reserves are not in real cash. The only thing keeping the “national ponzi scheme” going is the illusion of wealth created by the Federal Reserve’s low interest rates and liquidity that has allowed stock market valuations and housing prices to artificially inflate." Velocity of money at LOWEST levels in over 40 years.
WILL or HOW WILL consumers "keep it up"? From THURSDAY COMSTOCK
"The negative effect of poor jobs numbers on incomes is easy to see. In past expansionary cycles personal income adjusted for inflation and transfer payments was up an average of 12 percent at this stage, compared to only 4 percent now. To maintain even the present level of tepid spending, consumers have gone into record debt in addition to getting plenty of help from tax refunds and mortgage refinancing. Now mortgage refinancing is down over 80 percent from the peak, and the tax refunds are in the past. Under these circumstances consumer spending is likely to be restrained and the economic soft patch is likely to continue. With Taiwan Semiconductor recently confirming the continuing pattern of gloomy forecasts for the chip industry from leading companies, we see no relief from the tech sector as well."
HOUSING BUBBLE? Read this from AUG 2002 iTulip
"What's "cannot afford" mean when buying a home? The historical average for the cost of a mortgage is 25% of gross income. That's what the banks used to recommend, before they got desperate for households to sell mortgages to. In bubbly real estate market like Boston's today the average mortgage has reached 44% of income.
That's a housing bubble. Period."
March 2004 headline:
Consumer debt loads at recordBy Barbara Hagenbaugh, USA TODAYWASHINGTON — U.S. consumers have taken on record levels of debt as low interest rates have lured them to buy bigger houses and fancier cars and to charge more on credit cards than ever before.
•Wheels. Borrowing for cars has jumped as consumers are lured into auto showrooms by promises of no money down and 0% interest rates. Through mid-February, the average amount financed for a new car purchase in 2004 was $24,157, up 11% from 2001, according to Power Information Network, an affiliate of consultant J.D. Power and Associates. About 40% of consumers trading in cars currently owe more than their car is worth.
***OK enough enough already......WHat I am saying is we have BORROWED from FUTURE, housing.....almost everything!
And we have managed to let our dollars flee this country to Asia, and so has INVESTMENT dollars, and we have built CHINA into a manufacturing SUPER POWER, now India and PAkastan are luring SERVICE SECTOR jobs away from this country.
With record budget deficits, and record trade would think ALL this demand for credit would drive UP Interest rates? GRandfather Economic Report
AUG 2000 Prudent Bear Debt is truly the “sword of Damocles” hanging over the American economy at this juncture. At some point, even the soothing words of Alan Greenspan about America’s productivity miracle will not be sufficient to obfuscate this reality.
WELL 4 years later and we are even more in debt...hey nothing has happened!!
Surely there is NO reason for China and Japan to stop buying our debt?
HAS the DOW REALLY recovered???
If you figure since 2002 the dollar index is down some 30%.....the dow VALUE has nosedived.
WE go from credit expansion to credit contraction...level off for many years....and begin cycle again....IMHO the period ahead of us is for contraction...K-Winter....tough long term view.
SHort term? RIPE for manipulation, be careful.


Can be found at the BOTTOM of this blog for Elliott Wave Theory.

Very interesting and FREE WEEK is coming click on any news story or link I provided to access your FREE week of EWT analysis coming NOV 3rd.



Listen to the Markets

By John H. Makin
Posted: Friday, October 22, 2004
AEI Online
Publication Date: November 1, 2004

This essay is also available in Adobe Acrobat PDF format.
Market behavior in 2004 has defied most predictions. Interest rates and stock prices have dropped--the reverse of most forecasts at the start of the year. The dollar has been broadly trendless despite a rising and "unsustainable" current account deficit that was supposed to have pushed it down. And, of course, the price of oil, which was widely expected in January-not to mention February, March, April, May, and June--to drop back below $30 per barrel has risen relentlessly to well above $50 per barrel.
Accompanying all of this supposedly bizarre market behavior has been a path of the U.S. and global economies that has not followed the script at the beginning of the year. Last year's deflation scare turned into a brief inflation scare during the second quarter, and by July the Federal Reserve was predicting second-half 2004 growth of well over 5 percent. As expectations for inflation and growth have drifted lower since mid-year, the Fed has boosted its interest rate (the federal funds rate) by 75 basis points and appears ready to adopt another 25-basis-point increase on November 10.
Outside of the United States, Japan's highly touted growth surge ended in the spring, while China has applied selective measures to cool off its economy and met with mixed results. Europe, especially Germany, continues to languish at low growth levels while monetary tightening by the Bank of England has cooled the housing bubble in the United Kingdom and slowed the economy. Forecasts of 2005 global growth, already set below 2004 levels, are contingent upon an oil price of $30 to $35 per barrel. Even though oil is above $50 per barrel and the effects of U.S. policy stimulus have largely run their course by now, few analysts have been discussing the likelihood of a global recession, but such an outcome is looming. Acknowledging that possibility instead of denying it is a necessary condition to avoid a recession next year. Unusual Behavior Reflects Unusual Conditions
The unconventional market behavior observed this year and over the past several years needs to be understood rather than simply characterized as irrational, unsustainable, or resulting from measurement flaws such as allegedly faulty inflation data. If we do not understand what is driving markets and the economy now, we shall be ill prepared to anticipate and to deal with future behavior. Policy mistakes could occur that destabilize rather than stabilize the U.S. and global economies. The basic distinguishing factor of the unusual global economy and attendant market behavior we have witnessed over the last several years is the existence of excess capacity--especially in global markets for traded goods. Starting in 1996, the U.S. stock market bubble drove down the cost of capital, especially in the tech sector, so that over-investment in turn drove down the return on new and existing capital. The spillover into broadly higher stock prices also artificially depressed the cost of capital and created excess capacity. Excess capacity in global goods markets has been severely exacerbated by the emergence of China's production platform, which has attracted capital from domestic and foreign investors to combine with huge reserves of cheap domestic labor. This is not a criticism of China. It is simply a fact with which policymakers and the global economy and financial markets must reckon. It is important to remember that a world where demand is scarce, rather than supply, does not fit underlying assumptions of most economic models, which are driven by assumptions of the need to allocate scarce resources in a supply-constrained world. The persistent excess-supply problem has evolved over several phases since the mid-1990s. First, both the U.S. tech bubble and accommodative Fed policy since Alan Greenspan's famous December 1996 "irrational exuberance" address to the American Enterprise Institute drove an investment boom in the United States and Asia. The Asian investment bubble almost collapsed in 1997 and 1998 but was reinflated by the Fed's rescue of Long-Term Capital Management in the fall of 1998 under the banner of avoiding "systemic risk." That event solidified the view that the Fed would indemnify financial risks attached to aggressive lending and investing. U.S. stocks soared until the bubble burst in March 2000 after the Fed started to withdraw some stimulus during the last half of 1999. U.S. Policy Boosts China's Capacity
U.S. investment spending collapsed after mid-2000 and did not turn positive until the second quarter of 2003. To deal with an extreme excess-capacity problem in the United States, massive monetary and fiscal stimulus was employed. Much of this stimulus (especially the monetary stimulus) spilled over into China by virtue of its currency peg to the dollar, which effectively makes the Fed China's central bank. During the ten quarters following the end of 2001, after sharp rate cuts by the Fed in response to fears that households would stop spending after the September 11 attacks, the U.S. economy has grown at an average rate of 3.5 percent. Over that same period, consumption growth has been somewhat lower, averaging 3 percent, suggesting that a substantial portion of the U.S. stimulus spilled over into foreign markets. Indeed, U.S. imports rose at an 8.3 percent annual rate during the same ten-quarter period since the end of 2001 after having contracted sharply for a year and a half prior to that.
The U.S. effort to alleviate excess capacity by boosting demand ironically contributed to a global capacity problem by creating a rush of lending to Asia that helped to boost global supply. This combination, of course, contributed to a surge in America's external deficit that has widely been associated with the expectation of a weaker dollar. The spillover of U.S. demand-boosting fiscal and monetary policy into Asia, awash with a swelling supply of traded goods, was accommodated and recycled by Asia's central banks. Aggressive purchase of dollars and recycling of those dollars back into U.S financial markets via purchases of U.S. government and agency securities helped to sustain U.S. demand growth at stable interest rates and prices. It is hard to overemphasize the extraordinary combination of U.S. policy stimulus, price stability, and falling interest rates over the past several years. The U.S. federal budget deficit swung from a surplus of 2.4 percent of gross domestic product in fiscal 2000 to a deficit of about 4 percent of GDP in fiscal 2004, a swing of 6.4 percentage points, far larger than the swing of 2.5 percentage points during the first four fiscal years of the Reagan administration (1981-85). On the monetary policy front, since the end of 2001, after a sharp Fed response to fears of a post-September 11 slowdown, the real (inflation-adjusted) federal funds rate averaged minus one half of one percent, the lowest level seen in a period of falling inflation since the Great Depression.
All of this stimulus held growth at an average level of 3.5 percent (which is about the Fed's estimate of the trend rate of U.S. growth) during the ten quarters following the end of 2001. Three-percent consumption growth, coupled with strong growth of imports and a surge of government dissaving (rising budget deficits), boosted the U.S. current account deficit (the amount of external borrowing necessary) from 3.5 percent of GDP, just before the March 2000 stock market crash, to 5.7 percent of GDP by mid-2004. No Inflation and Falling Interest Rates
The powerful demand boost from a combination of extremely easy fiscal and monetary policies would have created inflation, high real and nominal interest rates, and a surging current account deficit accompanied by a falling dollar if all this had occurred in a fully employed economy. Had foreign investors been unprepared to lend more to the United States to finance the rising current account deficit, either real interest rates would have had to rise or the dollar would have weakened sharply.
In fact, the activity of U.S. macroeconomic variables has been radically different from what standard analysis would have predicted. Interest rates, both real and nominal, have persistently oscillated downward to lower levels. Inflation has dropped sufficiently to have produced a deflation scare in the spring of 2003. At the time, the Fed was contemplating the purchase of long-term U.S. government bonds as traders drove yields on ten-year Treasury notes to a low of 3.1 percent while stock prices fell. The trade-weighted dollar actually rose until early 2002 and then fell irregularly, declining by about 15 percent by late 2003. Since then it has moved slightly higher, while trading in a narrow range. This year has perhaps been the most surprising year for markets since the March 2000 stock market crash. After the spring 2003 deflation scare passed, the U.S. stock market rose strongly until year-end. Economic growth was well above trend during the second-half of 2003, averaging almost 6 percent at an annual rate. By then it appeared that concerted monetary and fiscal policy stimulus had put the U.S. economy on a sustainable growth path. After a sharp jump from 3.1 percent to 4.5 percent in the yield on ten-year notes following the mid-year economic pickup and stock market rally, U.S. interest rates stabilized and fell slightly by late 2003. Ominously, the price of oil began to rise during the second half of 2003. During the first quarter of 2004, the long awaited employment rebound expected to accompany a sustainable recovery did not materialize. Stocks languished and interest rates fell. The dollar held up because Asian central banks financed virtually all of the U.S. current account deficit, with Japan alone purchasing $140 billion during the first quarter of 2004. We learned in the first quarter of 2004 that the supply-oriented producer economies in Asia simply would not let the United States reduce its current account deficit or allow the dollar to fall. In effect, by supporting the dollar, Asia exported its excess capacity to the United States by helping to sustain U.S. demand growth at levels far above U.S. income growth. The Fed's easy-money dollars that spilled abroad were simply recycled back into financial assets to help sustain the growth of U.S. demand for Asia's huge supply of traded goods.
To complicate matters further, U.S. employment growth surged briefly during the second quarter of 2004, seeming to confirm the notion of a sustainable recovery. At that time, U.S. interest rates rose again, with yields on ten-year Treasury notes reaching 4.9 percent. Higher yields and the rising price of oil kept stocks from rising by much and, in fact, most stock indices drifted broadly lower. The end of the first half of 2004 saw the U.S. economy shift from the tailwinds of policy stimulus and stable energy prices to the headwinds of stimulus removal (in the case of fiscal policy) and reversal (in the case of monetary policy), coupled with steadily rising energy prices. Fears of a resultant slowing in the U.S. and global economies caused interest rates to fall while fears of weaker earnings growth caused stocks to drift lower. The dollar held steady thanks to continued support by Asian central banks and recycling of petrodollars. Classic Post-Bubble Scenario
The unusual landscape in global markets and the global economy is a broad manifestation of excess capacity in the traded-goods sector. It represents a classic post-investment bubble scenario. The effort to sustain U.S. growth in the face of symptoms of that global excess capacity (including weak U.S. employment growth) has spilled stimulus into Asia, where substantial excess capacity still exists. Prices of commodities, especially oil, have begun to constrain growth as China and other Asian producers are driving up those prices to sustain production of finished traded goods at extraordinarily low prices. The combination of those two trends puts producers in other industrial countries in a serious terms-of-trade squeeze. The response to this scenario needs to reflect the reality behind it. Investors should bet on lower interest rates and lower equity prices. Producers should resist the temptation to add further to productive capacity, especially in the area of globally traded goods. Policymakers should be very cautious about further interest rate increases. Higher oil prices will slow growth without creating higher inflation, given the fact that substantial excess capacity produces a profit squeeze rather than higher consumer prices. If oil stays above $50 per barrel through year-end, a recession is likely to occur in 2005. The current tendency of policymakers and corporate planners simply to ignore that possible outcome is dangerous. Meanwhile, markets are flashing warning signs as interest rates and the stock market grind lower and the dollar has slipped to a six-month low.
John H. Makin is a resident scholar and the director of fiscal policy studies at AEI.

Thursday, October 28, 2004

Bernie Schaeffer on Stock Futures Manipulation?

schaeffer's on yesterday's SPX futures manipulation

Looks like we had some pretty big program buying going on yesterday in front of the Presidential election, as volume was very strong. You've got to admit that the Dow above 10,000 sure looks a lot better than it does under 10,000. Could it be manipulation? I don't know but here is something to think about before you answer. Between about 10:45 and 11:05 a.m. about 150,000 e-mini contracts traded on the S&P 500. This comes out to nearly 1/5 of the average daily volume. The bottom line is the easiest way to manipulate the stock market is through the futures market and this sure looked like what happened yesterday. It's going to be very interesting to see what happens in the market heading into the election. This I write from the conspiracy side of my brain.

"Tippin Over" PIMCO'S latest Outlook

FREE week coming NOV 3rd to Elliott Wave

Market Watch links to:

WEAKEST Recovery in History

350,000 employment report, AGAIN, missed expectations!!
Now folks, we keep hearing of SHALLOWEST recession in history...why NO PRINT on the WEAKEST recovery in history from so called Recession?
BEAR....when it decides...has a lot of making up to do.....the lemmings have IGNORED history!
We're slaves
HUFF and we're still PUFFING

MAIN impetus to increased SPX earnings have been the financials ..beneficiaries of the low interest rates and the housing BOOM/BUBBLE and hasn't that driving force peaked/topped? (SERIES of DECLINING TOPS)

FSO MArket wrap and SIGNS

The thing I harp about (long term and short term) is total crditmarket debt, another chart of such offered at fSO.I don't know where TOP is of credit expansion, but I do know every DAY it goes higher it sets NEW records as % of GDP!!I also know that broad money supply as measured by M3 FELL $79BILLION last 2 has been in leveling off falling trend formore than 2 months now.....when this happens in the past the economy weakens in the near future.

Now, I do not know whay this stock does or why the index rises whenyou think it shouldn't yada yada....I like COLD hard supply usually do economy and stocks. If adding $40 Billion in a week for money supply has beencalled "crisis" levels....what is a decline of $79 B in 2 weeks saying?

A SERIOUS low is put in DOW, then 2 days later....the bulls aredancing in the streets? NO, we haven't seen bear really get going yet again.....when I haven't a clue of certainty, but if DOW THEORY says the low comeswhen valuations BELOW KNOWN VALUES (1 X book or LESS!) and we knowlast 3 bear market BOTTOMED at around 6% dividend yields and 8-13 XSPX....what is THIS?Have another HARD look at the credit debt chart.....boggles the minddoesn't it, now let them explain it away.

EVERYTHING goes in CYCLES....LOOK at 1929-30 PEAK in that chart, lookat bottoming long it took, then LOOK WHEN the trend beganto rise (beginning of LAST great BULL MKT) and rest you weary eyes onwhere we are NOW!I am a man who uses observation to help me think....this cannot endgood.....when the CONTRACTION the declining money supplya SIGN? and who else is talking about it?Perched atop a precipice? BULL MARKETSBEGIN....well, not at 2000 TOP levels here. BULL MKT...period to period higher highs. WE NOW HAVE lower highs and lows as the trend. ZOOM ZOOM, Velocity of money is how fast it changes hands in the economyrising velocity healthy...WHAT do you see? AFTER RECORD PUMPING and stimulus?In less than 10 years we have more than DOUBLED the money stock.The store next to where we had dinner tonight sold shoes...signread...."made in USA" customers....and you know what...nobody gives a hoot!Remember all those TV ads suggesting patriotism in BUYINGAMERICAN...what happened?Something is VERY wrong folks....I think gum and string is all thatis holding it up!

Some 10/28 thoughts

I must paraphrase mostly, I will do my best to share some thoughts ..... And feel obligated to postand give credit for this update.NDX fills gap at 1481....they see perhaps odds good for one more DOWN UP sequence. It would take a close below 1425 to suggest trend hasturned back down.

**I add also note where upper trendline crosses just below 1500, italso looks like relative strength index has waned during rise.

"Despite the surge of the past few days, the bear market is not over.A short term selloff should begin some time tomorrow. How thisdecline unflods and where it finds support will provide a strong clueas to whether the downtrend has returned, or another push up isneeded to complete rally."**WILL the BLACK BOXES now buy the SPX since it is above 200 SMA?(Thebears might get skinned alive IMHO.)

Dollar reached new record for 10 day DSI of 7.2% bulls!!Bond bulls have been ABOVE 90% last 3 days! 10 day average sentimentis 86.1% bulls, the MARCH extreme was 89.8% Yields above 4.26% wouldbe sign trend change is a foot.Daily sentiment gold hit 91%! We have had a throw over of the endingdiagonal and retunr to the triangle area. 10 day RSI at 81.6% !!!

***Folks indeed, I did notice the VIX did NOT give back during thisrally much, options sellers smell something? I am sure the VIX has fallen HARD every rally after decline, you could count on it, nottoday or yesterday, I think it is still aout 20 EMA....yes, if itfalls hard.....but a rising VIX could mean selling pressure INVISABLE could pick up. Hope this helped, I Love the service for the sentiment info as I have said before.


Wednesday, October 27, 2004

Market Advance

Well, one of the reasons for my Blog, was to get on record my views and keep track of any "calls" I might make, or observations.

Above chart shows NDX at top of Bolinger Bands, RSI nearing overbought, but right now the DOW bounding off its oversold and lower BB is pulling everything up.

Falling oil does not mean bully for stocks, in fact, rising oil mirrors rise in stocks and Vice Versa.

Interest rates SHOULD be going up, and IMHO it all lays on Friday GDP report, and on thier own call is for 5%.... an UPSIDE surprise above last qtr GDP and avg estimate could send bonds tumbling (rates rise), if there is a downside surprise the opposite, the way the GOV manipulates data, this is last report BEFORE election....look at market advance BEFORE election.....not that I believe in PPT or anything...

Highest FIB retrace allowed to prior advnce is .786 which is near 1476, we are there NOW(a REVERSE COULD come from this area)....I am standing pat and considering adding to my short position, but I have been adding longs as well, trying to even out my exposure.

I have NO confidence at this time for a steep drop, tough market! But I am NOT jumping on bull bandwagon....YET.

Knowing FULL well NO year ending in FIVE (2005) has been a DOWN year for Wall is ture don't ask me why, becuase I don't know it just is.


Monday, October 25, 2004

"Surging Security Stocks May Be Dangerous"

It is always exciting to latch onto an investment idea, or react to news. But when "HERDING" occurs, they can switch directions rather abruptly.

If you are in BEFORE the "herd" bully for you. Can you maintain disciline to take profits when they are in front of you? Do you set goals BEFORE you buy something? Do you have an exit strategy?

The stock you buy for $5 can go $10, and from there it could go higher, but it is also likely to retrace a portion, many times a goodly portion of the move BEFORE the trend might continue.

SO, maybe it helps to set an area that if you are right, and or lucky enough to get that run, that you have already planned how you would deal with it, calmly, coherently.

Ye' ole' "bird in the hand......." it works with investing to, more so for speculating"


Sunday, October 24, 2004

Death of a BULL Market?

DEATH of a bull market OK one more, I decided to remove the Euro and leave the Dow in $$ (I had first run chart $INDU in euro's) It makes the recovery the bulls love to remark about look better, but it hasn't changed one thing.

And that is IMHO The bull market which WAS supported by these lengthy long term moving avg's as I input the 200 and 400 WK SMA's....rising and the 200 above the 400. WHAT do you observe happening now?IMHO, this is quite significant, no other chartist has brought this up to support their claim of a new bull mkt and rightly so!
As I choose to see this, as bitter proof the GREAT bear market which began in 2000 and was interrupted by a cyclical bull mkt now over is going to GAIN MOMENTUM going forward. The SLICING through the 400 WK by the 200 WK will be the icing on the TA cake for me....and IMHO an irrefutable one.


Looking at the Dow performance in eyes of the EURO
Looking at Dow recovery in terms of the EURO,is quite interesting. What it shows is a rather meek recovery from lows in 2002!
ANd an OMINOUS occurance of a PENDING VERY LONG TERM trend line crossover which hasn't occurred in more than 10 years . (most my chart could hold)

GDP number coming out Thursday, IMHO it will be UGLY, could roil any pity rally we get this week. 7 trading days to election.

Dollar feels like on edge of precipice, EWT reports near record lows in bullishness towards the currency.


Didier Sornette "Future of the US Stock Market"

Saturday, October 23, 2004


We not only have a Dow Theory UPSIDE non confirm but with NEW Dowlow we also have a downside non cofirm! Yikes!!!

NAZ had a reverse week, andis nowhere near oversold on the daily...JUST closing below the 200SMA. CAN it will it move counter to the Dow if the Dow begins to rally?

Here are my other observations:
Dow is at or near oversold on Rsi daily. (weekly neutral and not soIMHO ANY move will reset the daily to continue selling lower)
TRansports AUG low is 2959.60 and RSI WEEKLY and daily ovebrought(now coming down on daily) LOWS of MArch 2004 (new low for year) was2743.50 FRI CLOSE was 3371

SO for the trans to close BELOW last low is 412 points for AUG low.
Dow recent high was OCT 10,270 FEB for year was 10.753 TO closestlast high OCT is 513 POINTS!

YOU MUST ask yourself, WHICH is more likely?
Could it be any crazier? more confusing? let's make it simple.
Dow weekly is neutral MUCH room to decline IMHO but daily oversold.

Transports WEEKLY is OVERBOUGHT and DAILY is JUST coming down fromoverbought...with MUCH room to fall.
IMHO one scenario has the TRAN falling as Dow corrects oversold.ALSO NAZ has room to fall, both daily and weekly.

THEN there is this!

AND, the action of the money supply is SCREAMING lookout IMHO, when is last time it fell over $79 Billion in 2 weeks?
And guess what? nobody knows.

Yours til I have another brain cramp

READ THIS! Charts Don't lie but DO tell a story

And, defend it did, but this is OPEX DAY, if PPT was OUT, maybe "OUT" of phoney money was it.

I see as important NEW LOW in DOW was achieved just now as previous LOW OF 9783.90 was taken out, all bets are off.....I understand anything is possible.

Was it the HIGH in OIL prices that killed the market today? Weak it was, not to be explained away. Now what? STAY TUNED.

Duratek......on the PULSE, like a dog on a bone!

Friday, October 22, 2004

MEXICAN STANDOFF or PRECIPICE? or lift off And it is said, when an incumbant did not win the POPULAR vote, he doesn't win a second term. WOuld it not be fitting, if Kerry somehow PULLS it out (as he has before)but also does not win popular vote?
Without stirring who is for whom, I bring this up because, this race, like the markets seem to be LOCKED,and is there more to that than just coincidence?
8 wk insider sell/buy ratio moved up to 4.37 (bearish) but put call supports potential extended rally IMHO
Much else is neutral.BUT:
Investor's Intelligence Bulls/Bears+Bears (10 week moving average) .65 That is an EXTREME reading!
Like everything else WHAT IS most important overiding factor?
DO we NEED a point system?
BULLS:1)High PC2)High TRIN3)Transports making new highs4)Getting thru OCT with little damage5)High Beta stocks leading rally6)Pro's positioning for year end rally7)Selling pressure at LOW end.8)Interest rates still very low.
1)Low VIX (could be interpreted 2 ways though)2)Markets diverging, not moving together3)Near previous tops of bullish % and ALL sentiment readings4)3 months in row FALLING (negative)LEI5)BUsiness INventories still rising6)Low Factory CAPAC and INdustrial Production7)Falling Consumer Sentiment8)Non-Farm Payrolls continue BELOW expectations9)Record budget and Trade deficits10)Help Wanted STUCK at 3711)This chart NOTE!!! if you switch to 2 year chart you will see NOT since May of 2002 has 10WK been BELOW 40 WK!!! MACD declining! RSI neutral Compq more neutral cept OBV not yet crossed up, has stayed below during rally and stoch reaching WEKLY overbought, and market is to UNDERSIDE of top declining trendline.
NEXT chart SURPRISED ME! From a WEEKLY standpoint, this doeasn't look bullish. Trend with declining tops is bearish so IMHO convergence will lead to crossover. STochastics curling DOWN and if you switch indicator to MACD histograms you see it as zero and DECLINING!
AGAIN, this is all WEEKLY DOW MACD already declining, trend looks firm and leading the way, both SPX and Dow seem in synch....with NAZ and TRAN giving us strong divergences. TRAN RSI where it has topped before (WEEKLY) but notice MACD weaker than other tops! 3500 IMHO should CAP this rally if it can reach it, would leave ONE lower high in place, all LOWS have been LOWE lows! dating back to 2003 !!! DAily TRAN looking to blow OBV OF the charts, RSI nearing extremes of overbought... LASTLY (if you made it this far!) the NDX which is leading is also near OFF the charts on the move, though can continue, is it likely from these overbought or near so levels, OBV off the charts and HUGGING trendline, could go either way.
ALL of this I contend SHOULD lead to a coming decline.....and MAYBE that sets up year end rally, because if not....IMHO this will be like brush fire which consumes itself!

ALL of course JMHO


"Meltdown Dead Ahead?"

As a Bear I am shaken, but not changing stance yet. Transports hit ANOTHER new high yesterday as Dow fell! If you believe in Dow THeory, it smealls trouble, but from where?


Sunday, October 17, 2004

Time to wake up and smell the Deflation?

No gas in the Tank, or did you throw that egg in?

Bear market is gone right?
The Elliott Wave Theorist -- October 15, 2004 (just one Q and A I can share from new EWT)

An Interview by Chris Oliver, Money Editor, The South China Post
Q: Can the Federal Reserve prevent deflation?
A: No. We have a huge bond market of $30 trillion, which is debt already created. If bond investors
came to believe that the Fed would begin printing money and throwing it around, what would they do?
They would sell every bond they've got, which would lead to a decrease in the supply of credit because
bond prices would fall and interest rates would rise. So there aren't any alternatives to deflation.
Q: What will be the outcome of deflation?
A: The ultimate result is going to be a worldwide depression. There were deep depressions in the 1790s,
the 1840s and the 1930s, and I think the next one is already underway. It started in 2001. We have had one
or two every century, and we are headed into one now.

**Take the housing bubble. See FNM run, but it can't hide!

Unlike the stock market very liquid, the housing market is anything but! I think the real estate market is already SLOWING, what will start as a trickle with a leveling off of price appreciation can turn into a torrent, a cascading , an imploding of the prices.

COMMERCIAL loans are DOA< look at ANY chart.

8 months into supposed BIG year for stocks, the HOOAHH Presidential cycle....and what do we have folks? Declining tops in DOW which topped in FEB. and a historic Transportation non confirm.

But surely folks see this, and other things and are turning bearish?

HA! you kid yourself, self....bullish readings (Investors Intelligence etc) have been climbing as the dow has been declining! 2000-2002 a distant memory. Letter writers are almost unanamous in their bullishness....jumping out of their skin bullish, all the while oil is near $55.

To me, it's frightening, what is going on and more so the lah lah attitude.

Most have stuck to tried and true LTBH and if that plan has no risks.

Hardly a PEEP about what has been going on with the money supply!!?? It has been stalling/declining for almost 3 months now!! Especially the unusually large $40 billion DECLINE of last week! This kind of money action fortells a weakening economy which should lead to possible dramatically lower prices....even if it takes 2005 to show it...a supposed LOCK for a good year.

WHat has propelled the fabulous profit recovery is the financials, was the housing BOOM.....this is looking more and more as a non factor going forward.

Next qtr GDP could realy suck the air out of market should it be as weak as I think it is going be.

Caveat I see MOST still worrying about missing something(most bears I know turned bullsih) than about protecting what they got.


Poll Tracking Website

McHugh on "Financial Market Analysis"

Great site, and Mchugh has some fantastic charts.


Long Term Dow Chart and what happens Next? (Take note this chart is ex dividends and inflation adjusted)

Observations: over time the stock market ALWAYS goes up. Periods of adjustment (Bear Markets) are used to correct excessive speculation, bullishness and malinvestments.

Bottoms of Bear Markets have much in common. The past 3 Bear Markets ended with trailing SPX PE at 8- 13 and dividend yields near 6%. NO wiggle room here for interpretation, it just was. We are at about 20 X SPX and UNDER 2% dividend yield!!! The 1929 TOP had yields near 3%!

Currently Value Line stocks have landed near all time highs, so while the NAZ and SPX took mighty hits, smaller cap stocks continued higher!

Copper$COPPER,uu[w,a]daclyiay[df][pf][vc60][iut!La12,26,9!Lb14]&pref=G COpper had a "key reversal" week going to a new high and ending the week LOWER. Copper is very sensitive to the economy.

Lumber, wheat, almost all commoditites except oil have recently REVERSED lower. No one is talking about this.

AS above charts show, it can decades to return to the highs of previous BULL MARKETS after a LOW is hit in a Bear Market. These are the periods we must be MOST careful of, as depending on age, you certainly don't want to wait 20 years or so to break even! Of course averaging in during down years can help, but MOST pull in horns and sell near the lows while market regroups, they MISS that move, or certainly most don't add near lows.

What to do?

Well, that depends on individual. I am working on a plan of asset allocation for myself personally. On YHOO Finance you can set up "portfolio's" and track their performance.

I have set up 2 portfolio's so far (email me if interested). One a fuel cell, one dividend paying, about 7 stocks or funds in each. I had been more of a one stock hit or miss investor, it is obvious to me that diversification is the key, even in field of your interest. Both of my portfolio's are above water and the fuel cell one doing splendidly.

I am going to create 2 more, energy and commodity and Big cap or the best of the best corporations. Then perhaps a few scattered investments, giving me diversification to weather most markets.

My only caution to begin in earnest, is where I think we are in terms of histprical placement in that long term graph.

What strikes me as a WARNING is that the last time we hit top of graph trendline, we went down to visit the BOTTOM!

It has been roughly 70 years since that last occurred. Will it happen again? Nobody knows, but this chart leads me to believe it is possible.

I posted when I first began this Blog, an article on the Kondratief Wave/Cycle, you may want to read up on this. Can it be proven? Maybe not, as we won't know if Winter is upon us (bad times) and possible DEFLATION and severe recession of depression ahead of us, none a happy thought.

What worries me.

Total credit market debt is near 300% of GDP! It was around 275% near 1929 top. We know what followed.

We have had almost every known stimulus trick in the book: 13 rate cuts, trillion $$$ tax cuts, possible manipulation of SPX futures by PPT. (plunge protection team) and yet????? we have had WEAKEST recovery in history, weak wage growth, weak job growth, weak industrial production and factory utilization rates, you name it.

What we got:

Instead of stronger Recession where malinvestments and such get corrected, consumers were encouraged to "go out and shop!" til they drop. And they did! Household debt now at historic highs. Savings at historic LOWS!

We got ZERO interest car loans. We got 7 Year car loans. WE got car companies NOT making any money except from mortage financing arms. We got the most prolific housig BOOM (buuble?) in history, some areas experiencing 50% price increases or MORE in last few years.

More people OWN homes, the bank owns them and at todays prices, the most indebted in history, is it better to own a $200,000 home at 7% or a $300,000 home at 5% ? You still OWE $100,000 more!

HIGH oil snatching extra dollars from consumers, it is trickling down into most things.

Government has $30 trillion or more of unfunded benefits it can not pay future generations, suppose they will just PRINT IT? Down the road I suspect they will have to CUT benefits and or RAISE taxes. CUTTING taxes in time of war spending has put us at historic federal budget deficits.

Corporations not investing:

With $3 a day labor in China why bother. And service jobs at jeopardy to India and Pakastan.

NO chance for inflation IMHO when you have such world OVERCAPACITY.

No politician willing to confront the real problems, the longer they wait, the worse it will get.

WE have borrowed from future demand, nothing left to drive the economy forward, IMHO.

Consumer confidence reading just plunged and has been steadily dropping. A cut back in spending would kill off economy and could cause a world crisis.

I prefer to play it safe, while preparing for what I think is more than possible. Is it wrong to hang out in cash while the market goes nowhere? or when it may decline in earnest? Maybe it won't, but history is telling us what has happened before.

INvestment in equipment and the subsequent depreciation fuels wealth and earnings, and creates jobs, most of this has gone into hiding in this country. The consumer has born the brunt of economy.

I don't say run and hide, but I do say is think about what CAN happen, and THINK about where YOU are, a talk to professional couldn't hurt if you have worries or questions, but be prepared to think about things for yourself, and perhaps be ready not to follow the herd.

Is the Herd running for cliffs like the Lemmings or are they like the Buffalo heading to greener pastures, (or set up for ambush) I say you must decide.


Saturday, October 16, 2004

Deflation? and a loss of confidence.

Japan is STILL struggling with deacde old problem of deflation, even as their interest rates sit at zero %. But of course, it CAN'T happen here in the U.S.

Inflation: too much money chasing too few goods.

Deflation: too little money chasing too many goods.

Wages stagnant, with increasing expenses (oil/gas, healthcare, housing) and low inflation, the increased costs of living are eating up any extra taken home form the tax cuts. Spending is mainly fueled by borrowing.

Global trade, and non stop consumption has built Asia into a trading manufacturing tiger. Can we say now, we have too few of anything? Could we say we have an abundance of capapcity? Is this why we have the weakest recovery of factory utilization rates of any recovery?

Those manufacturing jobs, and thier capital equipment expenditures will not be coming back, probably until the US dollar collapses, making us competitive with the other manufacturers. Also don't forget Indonisia and Viet Nam.

SO we are 70% consumer driven economy. We are mainly a Service Sector economy. Did I mention how service jobs are being outsourced to India and Pakastan? What is it then that we Americans do better and cheaper?

Every other war was followed by tax hikes to help pay for it, during $200 billion and counting for Iraq, we had a multi trillion $$$$$ tax cut. Why the pressure of our debt has not raised interest rates, I am not sure........if not a sign of our weak economy as a flight to safety play. Sentiment towards bonds is reaching 85%.....and area which should fuel a rise in rates, also it has come off its lower rising trendline. We shall see.

It is said the dollar could strengthen if deflation hit, because debtors will need dollars to repay debts. There will be new highs in bankruptcies, in loan defaults, home loans will go unpaid and houses will get reposessed.

According to TRaders Almanac, NO incumbant President has won election if the market is down .5% or more in OCT. (below 10,000). NO President has lost if market is up 3.3% or more in OCT. GW may be ahead in most polls, but not in this one. SEE if its right again.

Auto's and housing LEAD us out of Recession, with the last 2 years of buying and housing price escallation, I fear we are spent there.

I believe we are headed for a LONG period of credit contraction, and a much weaker economy than most predict. It will begin to show up in weakening consumer spending IMHO. It is already showing up in consumer confidence. ( data)

Economic Calendar
Week of October 11, 2004


Friday, October 15, 2004

The Truth about Entitlements and Gov Spending

Both Dem's and Rupub's are as Peter G Petertson's book Running on Empty discloses taking us bankrupt. Ralph NAder is really the only one discussing the REAL ISSUES, IMHO

Shallowest Recession? Weakest Recovery!

I do the diggin', you do the reading, and garner your OWN opinion.


A Global Perspective


A 100-year bear market?Today's headlines confirm Prechter's dark predictions
By Paul B. Farrell, CBS.MarketWatch.comLast Update: 9:17 PM ET Oct. 13, 2004
ARROYO GRANDE, Calif. (CBS.MW) -- Ten years ago Robert Prechter, a brilliant market technician and editor of the Elliott Wave Theorist newsletter, sent me a review copy of his book "At the Crest of the Wave: A Forecast of the Great Bear Market."
I've waited long enough. It's time to review it, along with the new two-volume work on his "New Science of Socionomics." Why now? Because, unfortunately for America, reality is rapidly catching up with Prechter's dark scenario ... whether we like it or not.
Let me explain: Back as early as 1978 Prechter predicted the beginning of the "raging bull market of the 1980s." Nobody believed him then either. Yet later he was named "Guru of the Decade" by the Financial News Network. He was a credible voice.
Then in his 1995 "At the Crest of the Wave," Prechter predicted the end of this raging bull. However, the market failed to cooperate with the guru. The Dow pushed through 4,000 for the first time. The bull continued roaring. The Information Technology Revolution took off. The Dow nearly tripled in five years.
Meanwhile, here was one of America's most respected market forecasters predicting that the market was going down, not up. He predicted a historic crash, with the Dow collapsing 90 percent to 400, and the world falling into a 100-year bear market. Worse yet for Prechter, Wall Street optimists poured fuel on the fire with book titles like Dow 36,000, Dow 100,000 and The Roaring 2000s. With near religious fervor, Americans embraced the New Economy's promise of everlasting global prosperity.
Then came the sobering realities of the new millennium: A collapse of the technology engine, a devastating bear market, out-of-control government debt, massive domestic problems, a worldwide energy crisis and an accelerating deadly war on terrorism.
Blind to the coming storm
Given this rapid, dramatic shift -- from the glowing promises of the '90s to the dark realities of today -- we felt forced to re-examine Prechter's predictions of a devastating market crash and a 100-year bear market.
Prechter's message never wavered: Recently he told me: "One thing I've repeated consistently is that the great bear market will take the DJIA at least below 1,000 and likely to below 400. Precedents for this severe a decline are the English stock prices in 1720-1722 and American stock prices in 1929-1932."
No, NO! Damn it, no red-blooded American, including me, wants to admit that this doomsday scenario is possible. Even if it is! Why? Our mindset: Optimism dominates the American spirit! Always has. Negativity this profound is against our nature, alien to our soul. We instinctively reject it, deny it, tune it out. Don't look, it'll go away. Right?
Wrong! While we could easily dismiss Prechter's predictions during the manic '90s, the truth is the world is becoming more dangerous, threatening and ominous every day. This sudden and dramatic shift suggests that while the timing of Prechter's predictions was off in the short-term, his core theories may still be deadly accurate: The world is racing headlong into a catastrophic market crash and a 100-year bear market.
Ahead of his time
Prechter is now looking like a genius who simply arrived ahead of his time. In 1978 he was four years early. In 1995 he was five years ahead of his time. This was even more evident when I reviewed his "New Science of Socionomics."
In this work Prechter applies the Elliott Wave principles to mass social behavior and forces us to step out of our quarterly earnings myopia to look ahead at the long-term, for decades and even centuries. This level of thinking is difficult if not impossible for investors today.
Prechter's work reminded us of the economics prize the Nobel committee awarded to psychologist Daniel Kahneman of Princeton in 2002. Kahneman deals with relatively simple microeconomic ideas, stuff investors intuitively understand. Prechter's ideas are in a more complex macroeconomic arena. Both, however, undermine Wall Street's time-honored "rational man" theory: individual investors make irrational decisions.
The differences are stark: In contrast to Kahneman's simple approach, Prechter's Elliott Wave Theories are loaded with esoteric mathematics, Fibonacci ratios, Kondratieff cycles and robust fractals. Technicians love all this stuff and maybe someday even the Nobel committee will. But, unfortunately, most investors on Main Street and even Wall Street get turned off by all numbers and formulas technicians rely on.
So, investors reject Prechter warnings for three reasons: His methods are too esoteric for a mathematically challenged nation, his predictions too dark for America's culture of optimism and his timing was off -- he missed the tail end of the raging bull.
When Prechter's "At the Crest of the Wave" arrived back in 1995 I was publishing a financial newsletter. I dismissed the book for all three reasons. I now believe that was a big mistake. Today he makes sense, even if psychologically I do not want to believe him.
Reality catching up with dark theories
The world has gone through a historic shift in the past five years. And while the credibility he earned in the '80s would be intact if he had simply not jumped the gun and used 2000 as the start date of the great bear rather than 1995, there is, nevertheless, a chilling sense that his world view is unfolding on a daily basis with terrorist killings, oil over $50 a barrel, America's huge $51 trillion debt and independent predictions of a global cultural war that will last decades, eventually escalating to a nuclear holocaust.
Today I see Prechter as the ultimate contrarian in predicting a dark scenario -- a 100-year bear market -- at a time when America was gushing with the eternal promises of the '90s New Economy and Information Revolution. His work parallels Kahneman's Nobel effort.
But while Kahneman's work essentially confirms what we already know about the value of asset allocation, buy-and-hold and indexing strategies for individual investors, Prechter's "New Socionomics" model focuses on mass behavior that has a life of its own, creating rather than reacting to world events. In Prechter's model, individual investors may be controlled by "subjective, unconscious, pre-rational impulses to herd determine financial values," but markets are still "patterned and probabilistically predictable."
So where does that leave us? Marching headlong into a 100-year bear market says Prechter. And while his predictions may still be unacceptable to you and me, the harsh reality is that the facts seem to be rapidly catching up with his theories. And that restores his credibility.

Capacity Utilization

We hear a LOT from pundits, BUSH, and other officials of how the 2001 "recession was mildest in history".

But let me add this statistical FACT, the recovery from that recession has also been the WEAKEST in history!

Add to that the HISTORICAL stimulus and FED easing which followed the bursting of the speculative stock buuble, and you have a better feel for what we are now faced with.

Has the weakness in the market been predicted by Dow Theory as Richard Russell points out (Dow Theory Letters) we have the largest non confirmation in the Industrials and Transoorts averages, be very careful, IMHO


Take a gander at second chart.....then tell me at this level there is NO inflation.
TRansports have been surcharging for increase fuel costs...this trickles into increases for almost EVERYTHING we buy.
But, did commodities send a "chilling message" last few days?

Of course will have each days data.


Thursday, October 14, 2004


Crude, heating-oil soar to new records
By Myra P. Saefong, CBS.MarketWatch.comLast Update: 11:28 AM ET Oct. 14, 2004
SAN FRANCISCO (CBS.MW) -- Crude futures broke an intraday record high above $54 a barrel and heating-oil futures topped $1.50 a gallon for the first time ever in New York with the latest weekly U.S. inventory data feeding concerns over heating-fuel supplies ahead of the winter season.
The Energy Department reported a 2.5 million-barrel decline in distillate supplies for the week ended Oct. 8. Total stocks, which include heating oil, stand at 120.9 million barrels.
The American Petroleum Institute confirmed the decline, showing a 2.9 million-barrel fall to total 118 million barrels for the week. Most analysts expected smaller declines.
"These numbers did nothing to alleviate fears over heating-oil supplies," said Phil Flynn, a senior analyst at Alaron Trading.
Crude for November delivery rose to a high of $54.60 a barrel on the New York Mercantile Exchange, breaking above Tuesday's record of $54.45. It was last up 56 cents at $54.20 a barrel.
November heating oil climbed as high as $1.534 a gallon, also a fresh futures record. The contract has broken intraday records for at least the last week. It was last at $1.523, up 2.39 cents.
November unleaded gasoline followed suit, to trade at $1.45 a gallon, up 0.67 cent.
Last week's crude inventories were up 4.2 million barrels at 278.2 million, according to the Energy Department. The API posted a 3.7 million-barrel increase and pegged total stocks at 276.9 million. The figures came in higher than expected.
But the government's reported build in crude supplies nearly matches the number the Energy Department said it would loan to refineries from the Strategic Petroleum Reserve, Flynn said.
"We know heating oil didn't build despite the extra crude out there [because] a lot of that oil may have been loaned to the refiners," he said.
Gasoline stocks were up 1.2 million barrels at 200.6 million, according to the government data. They were up 537,000 barrels at 199.8 million, according to the API. Many analysts expected a decline in stocks.
Natural gas edge lower
Also on Nymex, natural-gas futures moved lower after a weekly update showed a rise in U.S. supplies within market expectations.
November natural gas was down 4.1 cents at $6.81 per million British thermal units.
The Energy Department said U.S. natural-gas stocks rose by 67 billion cubic feet for the week ended Oct. 8. Analysts at Global Insight expected a climb of 65 billion, while energy-forecasting firm anticipated a 66 billion cubic foot climb.
Total stocks now stand at 3.159 trillion cubic feet, up 178 billion cubic feet from the year-ago level, and up 211 billion cubic feet from the five-year average, the government data said.
In equities, oil shares were mainly higher, with the Philadelphia Oil Service Index ($OSX: news, chart, profile) leading the way among sector benchmarks. See Energy Stocks.
In Nymex metals trading, gold futures headed higher on renewed weakness in the dollar. See Metals Stocks.
The Reuters/CRB index, a broad measure of commodity futures markets, was up 0.2 percent at 283.04 points.

Light shed on HPQ and INTC

**Below is from daily email I recieve from

“What effect, if any, does all the good news that came out about HP today have on our option play?” - M.P.

You must mean the Intel announcement, because the best news I can find from HP is that clients can now use HP printers to make “personal tattoos” for their iPods. As for Intel, I warned you exactly what they would do: lower guidance a few days earlier, beat same, and then bad-mouth the next quarter.

What do you think is going to happen when all those folks who bought on the headline return home tonight and read the fine print, which points out that Intel’s much-ballyhooed inventory drop may actually fall somewhere between wishful thinking and accounting fraud?

Think I’m exaggerating? Get out a pencil and work with me for a minute:

Intel reported earnings of US$1.9 billion or US$0.30 per share, some 5% higher than a year ago.

Now back out of the gains from a fall in Intel’s quarterly effective tax rate of 21% (one third less than the projected 31%) and their earnings are basically flat.

Revenue came in at US$8.47 billion for the third quarter, a mere 5% over the previous quarter and substantially lower than Intel’s normal third-quarter sequential gains of over 7%.

Now let’s talk about that inventory for a moment. They had been running at record levels for most of 2004, as have their customers. Might be good, might be bad. One could certainly make the argument that manufacturers should build up inventory when they foresee rising demand.

But that ain’t what happened here. Five percent sequential revenue gains means only one thing: No one wants the stuff, and soon it will become technologically outmoded.

So Intel resorts to bleeding off inventories, and their gross margins drop from a traditional 59% to 55.7%, where they anticipate they will remain for at least the rest of 2004.

It gets worse the deeper you look, but I’m not going to get into any more here, as I didn’t recommend it. Rather, I recommended shorting HPQ, which went along for today’s ride without even the vague excuses INTC traders could lay claim to.

“Is there enough time left on this contract to have any play to the down side? Seems to me this is cutting too close to the expiration date.” - D.E.

They’re November options, people, and they already made as much as 32% a mere 24 hours or so after we bought them. I tell you what: Tomorrow, expect to see a tech hangover that will push these things way back into positive territory.

Also, watch for another post debate pop, after which I will begin to sharpen my knives for the S&P.


News Driven market ?

**(let me add.....This AM data EX OIL import prices rose 2.9%!)

Now we are "news driven"? No longer a normal functioning market? One that "looks" like it has "defenders"?
So far, the rally from the last decling is near the .382 Fib retrace, should it fail here, we should find out, would make it the weakest FIB retrace of the still open of course.
Trading is as oil does? When has a single component been eyeballed as deciding factor?
OIL has already done its damage IMHO.
Trucking exec commented he didn't get effected by higher oil because he just "passed the extra expense on to his customers in the form of an oil surcharge"....of about 10%. Then that would make the delivery to the dock or location where the good would be sold or distributed from MORE expensive (landed cost) then ANY MARKUP would be based from the LANDED COST.
As I see it, net of any tax CUT from the BUsh administartion, average Americans because of added costs due to price increases for almost everything are NET LOSERS.
Independant org. concluded that the top 10% of the tax payers got 80% of the tax cut, the bottom 90% got that good for AMerica, consumption and fair and equitable?
Remember, the dividend tax cut hardly effects the avg investor, IMHO.......and that is where 50% of the $1 trillion or so STIMULUS went.
As we see, US BUsinesses for whatever reason find VERY LITTLE reason to invest HERE.
It has been left up to the US consumer, he HAD been responding, and now that has left him DEEP in debt, from this level of indebtedness etc? we launch a major BULL MKT?
where is the argument that we a ren't coming to or are at the END of this cyclical bull mkt?


Wednesday, October 13, 2004

Dr Kurt Richebacher "The Kindness of Strangers"

Daily Reckoning PRESENTS:
The United States has broken a lot of records recently...unfortunately, they aren't the kind that will win us any gold medals. How long will our neighbors in the Far East continue to bail us out? Dr. Richebächer investigates...

Renewed weakness in the U.S. economy has hardly come as a surprise to us. It is the inexorable outgrowth of an economic recovery that has been of highly dubious quality right from the start. The U.S. economy is plagued by an extraordinary array of growth-impairing imbalances: a record-high trade deficit, a record-high budget deficit, record-high household indebtedness, record-low national saving and asset price bubbles supporting record-high consumer spending.
Any other country faced with these monstrous domestic and external imbalances would have endured panicky capital flight and a collapsing currency, forcing its central bank to drastic monetary tightening. But the U.S. central bank and the dollar were spared this fate because the central banks of the Asian surplus countries stepped in, accumulating any amount of dollars needed to avoid an undesired rise of their currencies.
In 2003, such dollar purchases by foreign central banks amounted to a stunning $616.6 billion, after $351.9 billion the year before. The total reserves of emerging Asia rose by over $350 billion between the beginning of 2003 and March 2004. Over the same time, Japan's central bank purchased $316 billion worth of U.S. assets. The biggest buyer in emerging Asia was the central bank of China.
These huge and soaring dollar purchases by foreign central banks were crucial in allowing the U.S. Federal Reserve to pursue its ultra-loose monetary policy with ultra-low interest rates. As we have often stressed, this in combination with equally loose fiscal policy has prevented a deeper recession, but the question is whether or not these policies have laid the foundation for sustained economic growth in the longer run.
In our view, it is bad policy on both sides. The Asian central banks accommodate the credit excesses in the United States, and in doing so, fuel rampant credit excesses in their own countries. Japan's horrible aftermath over more than a decade after its credit excesses in the late 1980s does not seem to deter anybody. The United States, on the other hand, is losing jobs to Asia.
Both are courting extraordinary credit excess, but with a crucial difference: In the United States, the credit excess went and continues to go overwhelmingly into asset prices and personal consumption; in Asia, it goes overwhelmingly into capital investment and production, essentially creating a mass of overcapacity and malinvestments. The result is an unprecedented symbiosis between the two continents: The Americans borrow and consume, and the Asians produce.
The U.S. economy has abruptly weakened. Is this weakness just a short-lived "soft patch" caused by higher oil prices, as emphasized by Fed Chairman Alan Greenspan and readily believed by the eternally bullish consensus? Or does it represent the beginning of a more severe downshift to subpar corporate and economic performance, if not worse?
An issue in particular is a slowdown in consumer spending. From the start of 2004 through July, real consumer spending rose by $122.2 billion. That is $209.5 billion, or 2.8% at annual rate, and compares with an overall increase of $232.2 billion (3.3%) in 2003 and of $213 billion (3.1%) in 2002. For perspective, during the boom years 1999-2000, it had growth rates of 5.1% and 4.7%.
Though this deterioration is not dramatic, it also does not suggest an ongoing recovery. Yet the aggregates hide one rather dramatic change in the current year, namely, sharply lower growth in spending on consumer durables. At annual rate, it was down to $23.5 billion in the first seven months of 2004, after $71 billion in 2003 and $58 billion in 2002.
Still, there has been a dramatic change for the worse in the consumer's earning power. Since January 2004, the three-month annualized growth rate for real disposable personal income has literally collapsed: 5.7%, 4.6%, 4.5%, 3.7%, 2.5% and 0.8% for July. Over the seven months to July 2004, real disposable income was up a mere $77.4 billion, or $132.7 billion at annual rate. It grew by $174.3 billion in 2003 and by $226.2 billion in 2002.
Presenting these numbers, we have to mention that they have been jolted by tremendous revisions. Earlier data showed a pronounced rise in personal saving. Now there is a steep plunge. The crucial fact to see is that the consumer stepped up his borrowing to compensate for slowing income growth. The rise since 2000 is 74%. Yet the net effect has been gradual retrenchment in spending.
The success or failure of the massive monetary and fiscal stimuli over the past few years is one of the most controversial questions about the U.S. economy. Using the much slower economic growth in the Eurozone as a yardstick, as is the general American practice, U.S. policies look most successful. But using the previous six postwar U.S. business cycles as a measure of success, the U.S. economy's performance during the last two to three years has been by far the poorest ever, despite the unprecedented amount of fiscal and monetary stimuli.
Annualized growth of real GDP has averaged 3.4% over the first 10 quarters of this upturn, far below the 5.4% norm of the recoveries in the previous business cycles. Real wage and salary disbursements - the grist of healthy, sustainable economic growth - over the same period have recorded a cumulative increase of just 2.2%. This compares with an average cumulative increase of 10.6% over the same period in past postwar business cycles.
Even more important is the further question of whether or not the economy has gained the "traction" it needs for the recovery to become self-sustaining and self-reinforcing without further artificial monetary and fiscal stimuli. It would have to show particularly in much faster employment and income growth than it has so far.
In his congressional testimony, Mr. Greenspan stated, "The expansion has regained some traction" after having gone through an oil price-induced "soft patch" last spring. In general, this has been interpreted as an upbeat statement. To us, the word "some" is strictly diminutive, implying less than full traction, which is realized when an economic recovery has gained self-sustaining, if not self-reinforcing, dynamism.
As a matter of fact, there was a very different reading about consumer spending in the Fed's Sept. 8 Beige Book: "Household spending was reported to have softened in many parts of the nation, reflecting lackluster retail sales and some cooling in new and existing home sales." They certainly knew what happened in August.
In past cycles, the usual vigorous traction used to come mainly from pent-up demand that, due to prior monetary tightness, had accumulated during the recession mainly in residential building, consumer durables and business investment in equipment. Key to the present subpar recovery has been the exact opposite - heavy consumer borrowing from the future.
During the three years 2000-03, disposable incomes of private households grew, in current dollars, a cumulative $965.9 billion. They increased their spending by $1,023.7 billion and their debts by a stunning $2,726.9 billion. In this regard, the monetary and fiscal stimuli appear to have worked so far. But the problem is that a growing part of domestic spending exits to foreign producers, fueling the U.S. trade deficit, instead of U.S. domestic production.
Regards, Kurt Richebacher, for The Daily Reckoning
Editor's note: Former Fed Chairman Paul Volcker once said: "Sometimes I think that the job of central bankers is to prove Kurt Richebächer wrong." A regular contributor to The Wall Street Journal, Strategic Investment and several other respected financial publications, Dr. Richebächer's insightful analysis stems from the Austrian School of economics. France's Le Figaro magazine has done a feature story on him as "the man who predicted the Asian crisis."
This essay was adapted from an article in the October edition of: The Richebächer Letter

Dr Marc Faber "Smells Like Desperation"

**(Also interesting action today considering message Futures were sending, sort of OPPOSITE of yesterdays action, something VERY wrong IMHO Duratek)

The Daily Reckoning PRESENTS: Something stinks in the stock market. Marc Faber explores the impact of America's decline in excess money. Read on...
For the last few months, we have argued that U.S. economic growth was more likely to disappoint on the downside than surprise on the upside. We therefore recommended initiating trading positions in long-term U.S. government bonds, which were at the time oversold and almost totally out of favor. We also felt that, contrary to expectations, a weakening U.S. economy was likely to strengthen the dollar, as the foreign exchange market would begin to discount trade and current account deficits, which were likely to be less ominous than was widely expected. Our view was largely based on the sharp deceleration in the growth of U.S. monetary aggregates.
The 12-month rate of growth in M2 is, at 3.6% year over year, at the lowest level since 1995. As a result of the decline in the rate of growth of money supply, "excess money," as defined by the growth in money supply in excess of nominal GDP, has also plunged over the last 18 months
The impact of decelerating money supply growth is not only leading to disappointing economic growth figures, but usually also precedes a poor, or at least indifferent, environment for equities. As our friend Gerard Minack of ABN AMRO explains, "When there is too much money around, it often works its way into asset prices - which is why high levels of excess money growth usually lead to strong equity markets. Conversely, when excess money shrinks, it usually bodes ill for stocks."
On the other hand, for as long as money supply growth continues to be muted and, ideally, decelerates, the U.S. dollar has further recovery potential. And while I admit that I cannot see anything particularly positive about the U.S. dollar, I feel that the euro has, for now, even worse fundamentals and could, as a result, break down against the dollar.
With regard to bonds, we continue to be reluctant holders of U.S. dollar bonds. Bonds are no longer oversold the way they were two months ago, but should the economic news continue to deteriorate, as we expect, a further simultaneous advance with the U.S. dollar seems likely. The deceleration in money supply growth, negative real personal income gains, uninspiring employment gains and the end of the impact of the tax cuts are all bringing about a deteriorating consumer environment, which is evident from a slowdown in the growth of retail sales and now also, for the first time, some deteriorating trends in the housing market.
In addition, weakness in consumer durable stocks, such as General Motors, and the ultimate discretionary spending beneficiaries, such as Coca-Cola and Starbucks, as well as the recent collapse in the shares of Krispy Kreme certainly don't augur well for consumers' staying power or for the entire stock market! In fact, what I find most remarkable about the most recent weakness in consumption is that this weakness coincided with another upside explosion in consumer loans. To me this smells like desperation!
Given these unattractive fundamentals, I would use any strength in equities as a selling opportunity. Still, I am also reluctant to be overly negative about equities and to sell them short too aggressively. I am concerned that parties interested in a Bush election victory, as well as the momentum players, might have another attempt to push stock prices higher, which in the present low-volume environment might succeed - at least for a short while.
Turning to commodities, we note that some prices have come off rather abruptly. Soybeans are a good example of what happens when the Chinese suddenly step aside from their normal buying pattern. Of our recommended breakfast commodities, sugar and coffee have recently entered a correction phase. (Coffee, however, seems to have again stabilized and is likely to resume its bull market.) In the meantime, it looks as if orange juice has made a major low and we would use any weakness to add to positions.
We still remain confident that oil prices will rise in the long run, as demand is likely to continue to increase, while supplies will level off or decline. However, prices may have temporarily overshot, and some caution is in order. Oil shares have not confirmed the most recent strength in oil prices, and this negative divergence should raise some concerns about the potential for immediate further price gains.
In general, I see limited opportunities for large capital gains with low risks. For me, being at best just an average investor, there are far too many insiders and smart people operating in the financial markets. In this environment, it is difficult to take advantage of any inefficiency without exposing oneself to undue risks.
As most of my readers will know, every year, I visit numerous financial institutions and attend quite a few conferences. As a contrarian, I am always interested in the most frequently and least frequently asked questions. During the last three years, I have never been at any conference or company presentation at which a question was raised about Africa! I was recently in South Africa and was actually surprised by how well the transition from apartheid to black majority had worked. And I was quite interested to hear about the numerous positive developments on this largely overlooked continent, which will be one of the prime beneficiaries of rising commodity prices and of trade with China.
Marc Faber, for The Daily Reckoning

Pimco "Con Job Redux"

Access to Pimco site, 2 new posts available, you can sign up as I did for email updates and access to site.


Tuesday, October 12, 2004

A Word with Hugh Hendry and friends

Emerging markets fear effects of sabre-rattling **(from Business day Oct 12th)

As anniversary of September 11 attacks looms, US threat against Iraq not welcome
WITH the anniversary of the September 11 attacks on the US this Wednesday, the sabre-rattling in the US over Iraq could not have come at a worse time for US and world markets, and psychologically the next few weeks are likely be scary for many investors.
Bearish sentiment weighed heavily on markets last week, a stark reminder of the havoc the terror attacks played with investor confidence last year, probably marking the beginning of the prolonged bear market in the US and elsewhere.
It was especially bad for emerging markets like SA, and probably marked the beginning of the slide that saw the rand lose 37% of its value against the dollar by year-end.
The bear market reasserted its grip on share prices last week, with little to calm nerves. The US market fell 4% on Tuesday last week, while Japanese share prices touched 19year lows on Wednesday.
Brokers returned from their holidays to see no clear upturn in the US economy as yet, and the corporate earnings outlook has worsened.
Ironically, in times of such turbulence, the US is seen as a safe haven and so sucks capital out of other areas. Fundamentals count for little and emerging market currencies such as the rand are likely to come under renewed pressure.
If that, and the threat of war between the US and Iraq, were not enough, investors will have to deal with other feared anniversaries: the Wall Street crashes of October 1929 and 1987. Investors are generally uneasy about these anniversaries and especially so this year. That is also likely to prove to be a curse for emerging market currencies.
And all this will be happening in the context of a bear market that shows little sign of springing to life. The upturn in global prices over the summer has been patchy. "It was the least-quality stocks that led the way over the summer, such as the insurers, small firms, Japanese banks," says Michael Hughes, chief investment officer at Baring Asset Management. "We need to see the money coming back into better long-term investments."
Another aspect of the summer run-up in price was that markets rose on the back of very low volumes. Much of the activity has been led by hedge funds exploiting shortterm price discrepancies. Longerterm buyers, meanwhile, have proved few and far between.
"The feeling in the market has been to seize on any rally in prices as a sign of a turning-point in the market or a longer-term rally rather than to be sceptical," says Chris Carter, chief strategist at Investec Asset Management. "History shows us that severe bear markets reach the bottom when no one is looking."
That cautious optimism now seems to have evaporated. Traders have seized on a series of economic data demonstrating weakness in the US economy as a reason for a further sell-off.
The influential Institute of Supply Management's survey of US manufacturing activity showed US output was flat last month for the second consecutive month. This intensified economists' fears of a double-dip recession in the US and traders also picked up on the more pessimistic outlook for new orders, at its lowest since last November.
Emerging markets are caught in a difficult, lose-lose situation. On a psychological level, there are so many reasons why investors should desert them for safe havens like the dollar or Swiss frank.
Now, with the US economy standing on shaky ground, the fundamentals are also stacked against markets like SA. If the US does fall into recession again, that will mean there will be less demand for SA's commodity exports.
Likewise, for much of east Asia. If their economies falter on slower US demand they have less need for SA's commodities. There seems to be little or no good news on the horizon. As if to reinforce the change in mood, UK share prices have also weakened, in spite of data released this week showing that the economy was improving modestly.
Followers of historic trends point out September is often a weak month for share prices. For example, of the past 100 years, 58 have seen a sell-off in September.
Another negative pointer is the fact that the Dow Jones blue-chip index closed down at the end of August the fifth consecutive month US stock prices showed an overall decline. The last time that occurred was more than 20 years ago, in 1981.
"I have watched those US traders try to push the market up and they couldn't do it," says Hugh Hendry, who runs hedge funds at CF Odey, an asset management company. "It confirmed the bear market. That meant I was out selling aggressively on Monday and buying bonds."
Bears such as Hendry cite company dividend yields as a sign share prices are not particularly cheap and could fall further. The yield on US stocks about 1,8% is still far too low to entice buyers, who typically seek a yield of 5% or more.
Corporate earnings forecasts are also being marked down, adding to the sense of gloom about the global business outlook.
The problem for European investors is UK and European share prices now look more in line with historical valuations and yet these markets cannot shake off the powerful influence of US pessimism.
US economic prospects are expected largely to determine share prices in coming weeks as fears of a double-dip recession reverberate in dealing rooms. "Last year it was a corporate recession and I can't see how you can avoid a consumer recession this year," says Carter.
In particular, weaker consumer confidence in the US and any downturn in the housing market in the US and UK are likely to have a powerful effect on share prices.
Global share prices are also being influenced by the bleak outlook for the Japanese economy, where the government's budget deficit continues to grow and banks' capital ratios are under extreme pressure as share prices tumble. With Financial Times

Some Dr Richebacher missives

October 8, 2004
Renewed weakness in the U.S. economy has hardly come as a surprise to us. It is the inexorable outgrowth of an economic recovery that has been of highly dubious quality right from the start. The U.S. economy is plagued by an extraordinary array of growth-impairing imbalances: a record-high trade deficit, a record-high budget deficit, record-high household indebtedness, record-low national saving and asset price bubbles supporting record-high consumer spending.
Any other country faced with these monstrous domestic and external imbalances would have endured panicky capital flight and a collapsing currency, forcing its central bank to drastic monetary tightening. But the U.S. central bank and the dollar were spared this fate because the central banks of the Asian surplus countries stepped in, accumulating any amount of dollars needed to avoid an undesired rise of their currencies.
In 2003, such dollar purchases by foreign central banks amounted to a stunning $616.6 billion, after $351.9 billion the year before. The total reserves of emerging Asia rose by over $350 billion between the beginning of 2003 and March 2004. Over the same time, Japan’s central bank purchased $316 billion worth of U.S. assets. The biggest buyer in emerging Asia was the central bank of China.
These huge and soaring dollar purchases by foreign central banks were crucial in allowing the U.S. Federal Reserve to pursue its ultra-loose monetary policy with ultra-low interest rates. As we have often stressed, this in combination with equally loose fiscal policy has prevented a deeper recession, but the question is whether or not these policies have laid the foundation for sustained economic growth in the longer run.
In our view, it is bad policy on both sides. The Asian central banks accommodate the credit excesses in the United States, and in doing so, fuel rampant credit excesses in their own countries. Japan’s horrible aftermath over more than a decade after its credit excesses in the late 1980s does not seem to deter anybody. The United States, on the other hand, is losing jobs to Asia.
Both are courting extraordinary credit excess, but with a crucial difference: In the United States, the credit excess went and continues to go overwhelmingly into asset prices and personal consumption; in Asia, it goes overwhelmingly into capital investment and production, essentially creating a mass of overcapacity and malinvestments. The result is an unprecedented symbiosis between the two continents: The Americans borrow and consume, and the Asians produce.

INTC Reports tonight and more

Where is the earnings MOMENTUM of previous qtrs??


WHat is wrong with Walmart stock?,uu[w,a]daclyiay[de][pd20,2!b50!f][vc60][iut!La12,26,9!Lb14]&pref=G

Why did WMT price peak in early March? Is it a proxy for consumer spending? What is wrong with Walmart? Notice sequence of declining tops since it $61.


"All Trends Down" ??

Seek and ye' shall find? Not many bears left in the den, fact, I froze my ass off last night because I had nobody to snuggle with!

Friday "Louis Ruykeyser" shown on NPTV (Louis is out for season ill) had 3 guests, each in succession said BULLY...."I hate to ditto but BULLY! me too".....what was I expecting?

What is worth taking note is thatwhile we have declining tops on DOW, while we have 50 SMA crossed down the 200 SMA, we have overwhelming bullish sentiment, IMHO in Market Vane polls and Investors intelligence which has record record 110 weeks or so plurality of bullish sentiment.

Going into, what can be treacherous month of OCT....with $54 oil.......hardly a bear to be found, and is one of many reasons I personally refuse to lay down my fur coat! (oh...historic non confirmations of the Dow and the Transports) Hard to tell if my blog is reaching out to people, because of lack of search engine support as I see it, but for now I will continue to add to it as I can.


Inflaton or Deflation argument

Helicopter Money Is Path to Deflation ***(note: either deflation or inflation are like poison to stocks, D)
By: Rick Ackerman, Rick's Picks
Rick’s Picks
Tuesday, October 12, 2004
For investors who’d rather be smart than lucky

I’m not yet blue in the face from trying to explain, over the last dozen years, why all roads lead to deflation, but splotches of symptomatic yellow and green have begun to mottle my cheeks. As far as I’m concerned, those who remain skeptical of deflation’s irresistible power have yet to raise an argument that is not easily refuted. Some questions keep popping up, though, mostly from lurkers who evidently are unaware that I’ve answered those same questions dozens of times in Rick’s Picks and in its predecessor, Black Box Forecasts. The most commonly asked question is: How can we have deflation if the Fed is able to bail out debtors by creating money out of thin air?
Here’s how Paul M., a lurker who works for Nomura Bank, asked this question in an e-mail I received from him recently:
“I enjoy your articles and analysis but I don't think you addressed Jonathon O's question that well. How can we have deflation in a fiat currency world. There is no limit to the potential increases in money supply. It does not entirely depend on private sector borrowing as surely the Fed can 1) monetize their own debt and 2) continue to spend heavily on defense/war, space programs etc.
Consumer ‘Tapped Out’
“The way I see it, Greenspan hasn't even started to really crank up the money supply yet ,as clearly the consumer has done enough borrowing for him up to now. But I agree that this phase is surely close to an end – i.e., the consumer is close to being tapped out.
“I imagine we will suffer severe deflation in the not too distant future. But that will be the end-game, when the dollar and/or financial system collapse. Under the current fiat/dollar confidence regime there are plenty more ways to for the Fed to continue inflating.”
I have always respond to this argument as follows, and will continue to do so: Sure, the Fed could continue inflating and even run amok via direct monetization. But that will only make the already cosmically large debt bubble even larger, and trying to arrest its eventual collapse implies not mere inflation but hyperinflation. Since hyperinflation is by definition unsustainable, the end result could only be…a deflationary collapse.
Here’s a variation on Paul’s argument from Geoff P:
“I am one of your ‘lurkers’ who has enjoyed the free articles you've posted. In particular, thank you for your thoughts re the inflation/deflation question. This is a key question for me because my family has suffered the last few years as I have refused to put our entire savings into buying a house in what I have believed to be a grossly overpriced market. I have been cautious in part because I am in an industry with a future that may not be very good, particularly if the economy goes into the can, as I believe it will. The lack of a house, as prices have sky-rocketed, has been extremely painful and lately I have begun to waiver, probably at exactly the wrong time of course! [Side note to Geoff: You are most wise to rent right now. The only thing that prevents some of the deflationists I know from doing so is that their spouses just won’t go for it. Rents are entering a downward spiral and will become an increasing drag on home prices as we get closer to an outright collapse in real estate values.]
Fannie Meltdown
“But back to the issue” Geoff continues. “I believe you are clearly right in the deflation/inflation question up to a point, but then you fail to address (my apologies if I missed it) the inflation camp's key argument. That is, what is to prevent the Fed from simply monetizing massive amounts of debt. Steve Saville has strongly argued that inflation will be our doom based on this near certainty, as he sees it. He postulates for example that when the GSEs meltdown, the Fed might simply offer to buy all GSE debt for 95 cents on the dollar. Such a radical move would accomplish several objectives for the banksters and politicians - it would prevent or postpone a housing collapse and it would vastly boost the money supply, thereby also making other debts easier to pay and the voters happy. There would certainly be adverse consequences - such as a collapsing dollar - if such a policy were carried out but it does seem likely that today's politicians and banksters would choose such a course. “
RA: No one who asks this question seems to have considered what those “adverse consequences” will be. Very simply, when you choose to bail out all debtors, you are necessarily choosing to destroy savers and creditors as a class. This means not only bondholders, pensioners, future pensioners and the like, but the institutions that conduce savings and lending, such as bond markets, banks and S&Ls. If the value of the average home were to skyrocket to a quadrillion dollars because of hyperinflation, can you not see where mortgage lenders, most particularly Fannie and Ginnie Mae, would go down in flames?
Ben to the Rescue?
Geoff: “After all, most of today's ‘leading economists’ and Helicopter Ben will be urging them on, saying that we should not repeat the mistakes of the '30s.”
RA: Helicopter Ben and his cronies at the Fed must surely know better – must know that dumping money from the sky will not return the economy to balance. Or rather, it just might – via hyperinflation leading to a deflationary collapse.
Geoff: “Thus it seems that Mises' crack-up inflationary boom followed by a deflationary bust when our currency fails would be our future. I have no clue how long such a process would take but have been absolutely amazed at how long they have been able to hold this mess up so far with easy money and credit.”
RA: Don’t rule out another possibility I’ve written about here many times before -- that deflation is coming next, catalyzed by falling home prices (and wages) that will make servicing a 6 percent mortgage difficult or impossible for many millions of homeowners. Will six percent nominal rates seem cheap to the debtor whose $400,000 house loses 25 percent of its value? More to the point, will many who have borrowed against their homes survive financially if real estate prices merely flatten out for a spell, as appears to be the rosiest possible scenario for the next couple of years?
Credit Dwarfs M’s
Here’s a very insightful note from “Fencer Fred” that supports my point of view:
“As always, I enjoy your comments, particularly regarding the great inflation/deflation ‘debate’. The most difficult thing that I have found (as you obviously have too) is to get people to understand that the Fed has primarily been expanding CREDIT since its inception in 1913, and that the supply of credit completely dwarfs the M's of the money supply. When people begin paying this back and reducing the amount of credit (either voluntarily or involuntarily through bankruptcies), the change in the various M's will be irrelevant.
“Your sentence, ‘An epic wave of bankruptcies will cause zeroes to disappear from the global balance sheet much faster than the central banks can get us to borrow those zeroes back into existence’ is one of the more perfect summations that I have ever seen.”
To Summarize…
And finally, from Harry H., a summation that that offers food for further thought:
“I'm an economics graduate from Cambridge, running an IT business. Interesting reading your articles on deflation vs. inflation. It all hinges on the speed and effectiveness of the Fed's response to the first signs of deflation. Anyway here's a summary of the arguments:
Things we all agree on:
1. The "real" US economy is in a nosedive, disguised by a) dodgy government figures and b) deficit spending and consumer credit.
2. Interest rates are artificially low and interest-rate-sensitive assets are artificially high, housing but also stocks & bonds.
3. Asian central banks are mopping up excess US dollars at the rate of $500bn/year to keep their currencies undervalued.
4. The US dollar is overvalued against, for one, gold.
5. The Fed is ready to print more dollars if deflation threatens.
Things we probably agree on:
a) Interest rates and the US dollar will eventually revert to their natural values.
b) The usual penalty for excess money-printing is a currency collapse and hyperinflation.
c) When a country is not a banana-republic but an industrial giant, such as Germany in 1921, loss of confidence in the currency may take longer than anyone can imagine.
Things we don't agree on:
1a. The supply of greater fools will naturally dry up, as housing/stocks/bonds become unaffordable in a retreating economy, or
1b. House/stock/bond prices will be pumped up indefinitely by a profligate Fed.
2a. US consumers will stop borrowing and start to clear debt by selling their stocks/bonds/rental-condos/SUVs, or
2b. Logically, consumers must continue to borrow at below-inflation-interest to buy real assets. And if this policy hits the theoretical limit of "pushing on a string" (where eventually no one takes up the offered credit) the Fed will take more drastic action, Helicopter-Ben will come to the rescue.
3a. There will be a "US-dollar-short-squeeze" meaning sudden high demand for dollars as consumers seek funds to repay their loans, or
3b. The central banks of China and Japan control the demand for US dollars. The day they stop buying is the day the US dollar will collapse.
And the conclusions:
A. DEFLATION Due to forced sales of houses/stocks/bonds/SUVs, or
B. INFLATION as the Fed goes berserk and the US dollar collapses.
RA: Thanks for your Inflation/Deflation “Cliff’s Notes,” Harry.
[Rick’s Picks offers more than a dozen detailed forecasts and recommendations each day, along with intraday trading strategies for the S&P mini, commodity futures, stocks, options and indexes. You can get free access and a no-risk trial subscription by clicking here or by pasting the following URL into your browser:
By: Rick Ackerman, Rick's Picks