Bert Dohmen

THE MESSAGE OF THE MARKETS

From Bert Dohmen (excerpt from website) April 2005

The following is from a STRATEGY ADVISORY to our subscribers, issued on April 14, 2005. Market action has confirmed the validity of this analysis. The remarks are as relevant today as they were at that time.

The major indices are breaking down, much as our indicators warned us over one month ago. Wall Street analysts are apparently puzzled, and continue to grind out their ruinous “buy” recommendations. In the meantime, our PRIVATE PORTFOLIOS subscribers are sitting safely on the sidelines, 100% in cash equivalents.

In our ACTION ALERTS one month ago we wrote: “It’s not the higher oil prices that are bothering the market. Consumers aren’t concerned, as is seen in the strong retail and housing sales, as well as restaurant results. The market may be looking at what I consider to be the most serious problem this year, namely the results of a credit squeeze in China. Investors will finally read that many of the beautiful skyscrapers over there are empty, that more than 50% of car loans are in default, that the banking system is insolvent, etc.”

Market commentators every day tell the investing public that the markets are concerned about inflation, higher interest rates, the trade deficit, current account deficit, and the budget deficit.

Believe me, that’s all irrelevant.
If the smart money were really serious concerned about inflation, the traditional inflation hedges, such as gold and silver, would be soaring. Real estate companies would be making new highs, and commodities would not be breaking down. Currently, commodity producers, such as steel, non-ferrous metals, agricultural products, etc. have broken major support levels. The transportation indices have plunged severely, indicating that the economy is slowing sharply.

If the smart money were really fearing significantly higher interest rates, and I am referring to the long-term rates, those rates would not be declining. People who do not
look at charts don’t realize that the yields on 10-year and 30-year T-Bonds are now lower than in July and August of last year.

The triple-deficits have nothing to do with the markets. The biggest stock market crash in a century, namely the 2000-2002 NASDAQ crash in which over $9 trillion of wealth was wiped out, took place while these deficits were shrinking or in surplus.

That leaves us with two important explanations for the significant market decline this year:
A looming problem in the huge, world-wide derivative market, which could implode, and/or
The China boom turning to bust, which would take most of the world’s markets down with it.
Either of these is very serious by themselves. If these two negatives occur at the same time, which is a definite possibility, we're looking at an eventual crash sometime this year.

The vast majority of analysts you see in the media are not seriously considering these eventualities. But it’s a fact that the serious problems are always surprises. That’s why they result in crashes: because they are unexpected. If the majority knew it was coming, preparations could be made, and it would not occur.

The message of the markets: the big profits this year will be made by short selling. We have not taken positions in the bear funds lately because we thought the seasonal April rally would occur. But once again, just as in January, so far seasonal strength has been a “no-show,” which is a very negative indication by itself. If we get a late-April rally, it would give us a great short selling opportunity.

Greetings,
Bert Dohmen