Tuesday, January 26, 2010

As Mentioned Yesterday

As mentioned yesterday, the consensus among Elliott Wavers is that the top is in and the next leg down to new lows is underway. Below is a story from the Financial Times

Next bear market phase starting: Prechter
26 Jan 2010, 0050 hrs IST, REUTERS

NEW YORK: The next leg of a bear market in US stocks has probably started and gold and corporate bonds are likely to slide as the US economy suffers
long-term weakness, technical analyst Robert Prechter said on Monday. Prechter has previously said he believes the 2007-2009 markets crisis and US recession were harbingers of a severe, longer economic downturn. His book "Conquer the Crash" first published in 2002 , warned about the dangers of a deflationary depression and Prechter maintains the United States economy will struggle for years to come. "We probably have begun the next phase of the bear market," said Prechter, president of research company Elliott Wave International in Gainesville, Georgia and known for predicting the 1987 stock market crash. The US S&P 500 index has fallen about 5 percent since hitting a 15-month peak on Jan. 19 as some investors started to worry about the possibility of a double-dip recession. Although many stock analysts expect a short term pullback of about 10 or 15 percent in US stocks, Prechter, known for his bearish views, expects a steeper, longer term fall. Within the bear market Prechter says started in 1999, this latest stock rally "is the third I think final peak," he said in a telephone interview with Reuters.

For investors in equities, this is "the last chance to get out with the Dow in quintuple digits," Prechter added. Prechter adhered to his earlier forecasts US stocks will fall below 12-year lows hit in March 2009, with the S&P 500 index falling below 666 points as the economy worsens, and as investors' recent optimism about risky assets fades. Last year "was a respite for anyone who was stuck in corporate paper, municipal paper, stocks and commodities," he said. Now, along with stocks, corporate bonds are set to fall to lower levels than in the market panic of 2008, he said. US corporate bonds rallied spectacularly last year as investors regained their nerve in the aftermath of the global financial crisis. Most bond analysts do not expect investment grade corporate bond yield spreads to revisit all-time wides over government bonds hit in late 2008. That was when investors panicked over a potential rerun of the Great Depression and demanded a huge premium for the risk of holding corporate debt. Prechter expects US investment grade corporate bond yield spreads to exceed the 656 basis point record of December 2008. If deflation - an environment in which prices of everything from houses, to cars, to wages fall - does set in, gold, which in some respects is a hedge against inflation, is likely to fall precipitously in value, he expects. Gold "is over-owned and overvalued and is about to resume a bear market, if hasn't already," said Prechter. "I think it could drop at least 40 percent from its peak value," he added. Spot gold was trading at about $1,095 per ounce on Monday, after hitting a record high of around $1,226 on Dec 3, hurt by a firming dollar, and investors' ebbing confidence about economic growth and inflation prospects.

Prechter reiterated his longstanding advice to investors to shelter in Treasury bills until between about 2014 and 2016 when he expects the unwinding of the biggest debt bubble in history will start to abate. "The bear market (in stocks) has a number of years left to run: four to six more years," he said. "It makes it prudent to stay in the safest cash equivalents till it's over," and perhaps keep some money under the mattress as well in case of problems in the banking system, he said. Over about the next year, the dollar should continue gaining against the euro Prechter said. In October, Prechter said the dollar was bottoming. The dollar has rallied nearly 5 percent against a basket of currencies since a Nov 26 low amid expectations of higher US interest rates given strong economic data.

Monday, January 25, 2010

Top In?

I've been busy on my other blog in a theological/ecclesiastical controversy, but I didn't want to let things go too far without commenting.

The general consensus among the Elliott Wave community is that the top is in. If so, my call of a 10,500 Dow top isn't bad. We hit 10,767+.

We are due for, at least, a healthy decline. I am expecting at a minimum a retest of the March 2009 lows. I am expecting that we will violate those lows, though we will probably bounce off of them once or twice before violating them.

If I were you, I'd be pretty much out of the stock markets for now.

Gold has begun its C wave, and should head south to $1000 or so. It will be a good buying opportunity.

Real estate has begun the next wave of its decline. Home sales were down 16+% in December. A bunch of mortgage rates are due to reset upwards this year and into next year. Commercial real estate is crashing. More bank failures are imminent.

The Depression should now begin unfolding at an accelerated pace. Stay nimble. Stay calm. Save money. Avoid spending money unnecessarily. Use it up, wear it out, make it do, or do without.


Tuesday, January 5, 2010

Credit Contracts at Accelerated Pace

The latest figures from the U.S. and Europe show that the money supply is still contracting, and did so at an accelerated pace in November.

In a fiat system, money is created when a loan is taken out. It is literally "loaned into existence." When you go to the bank and borrow $1000, the bank only has to have $100 in actual money in reserve to loan you. It creates, with the flick of a pen or a keystroke, the other $900 When the debt is paid off or written off because of default, then that money is destroyed. In spite of the fact that governments are creating (i.e. borrowing) unprecedented amounts of money and the various central banks are pouring it into their member banks at basically zero percent interest, the money supply is still shrinking. It is still shrinking because businesses and individual consumers are either unable or unwilling to borrow. Those that can borrow don't want to. Those who need to borrow to stay afloat can't find anyone to lend them money. When this happens, demand for goods and services shrinks. Fewer dollars are chasing a relatively fixed amount of goods and services. This has the net effect of lowering the prices of the goods and services. When that happens for very long, then you get an entrenched psychology of deflation. People put off purchases because they believe that whatever they want to buy will be cheaper next month. When enough people do that, it becomes a self-fulfilling prophesy. This is the genesis of a deflationary spiral. Central bankers and political leaders are absolutely terrified of this scenario. It seems to be coming true before our eyes, however.

So the question before us is why are commodities and stocks rising in this environment? For three reasons, I think.

1. People see all of the money being borrowed into existence via the various stimulus packages and bailouts and conclude that there will be inflation or hyperinflation. So people who have inflationary expectations are buying things like stocks, commodities, minerals, etc. This is not normally a bad strategy, for there would be inflation if all of this money made its way into the economy in significant amounts. However, that is not happening. The banks are sitting on it instead, or using it to cover losses in their own porfolios. If the money is not circulating through the economy, we don't have inflation.

2. The foreigners who sell things to us receive dollars in exchange for their goods. There are only so many dollars that they can exchange for their own home currency or another country's currency without upsetting the delicate balance of currency exchange rates. Since the dollar is the world's reserve currency, it has a special status. Part of what that means is that all commodities are bought and sold in dollars on the international markets. Oil, gold, silver, copper, wheat, soybeans, etc are all bought and sold in dollars. You have to have dollars to purchase on the wholesale international markets. You have to take dollars for your commodities and are not allowed, by common agreement, to take any other currency. Saddam Hussein tried to say that he was only going sell his oil in Euros. Amazingly, soon after that we invaded Iraq. The Iranians have made noise about doing the same thing. An attack upon Iran is widely anticipated.

So foreigners, particularly the Chinese, are trying to get rid of their dollars, and are buying stuff with them. This raises the price of the stuff, at least temporarily.

3. Banks that are taking the money they are borrowing from the Fed at essentially 0% interest and putting it to work, trying to find another revenue stream. They are investing in stocks and commodities. That also raises the price of the stuff, at least temporarily.

But when it becomes clear that consumer and business demand is not there, and all of those piles of iron will not be turned into shiny new cars, and the piles of copper won't be turned into wiring for new houses, then the price of those commodities will collapse. Agricultural commodities might be different because of intermediate term shortages due to weather related poor harvests. I was just in Iowa and there are many fields with corn still standing because the farmers couldn't get into the fields to harvest this past fall. It was too wet for too long, then it turned bitterly cold and snowed. The same is true of southern Minnesota and eastern South Dakota. I have no idea if letting the corn stand all winter and trying to harvest it in the spring has no real effect on it, or if it damages the corn, or if it is just a total loss and needs to be plowed under this spring. It probably has to do with how much moisture was still in the corn kernel when the freeze hit. Regardless, I'd estimate that somewhere between 5-10% of the corn harvest has not been brought in in the regions I traveled through. That's not good.

The long and short of it is that key evidence still supports a deflationary scenario. You should plan accordingly. Debt is bad. Cash and savings are good. As a general rule, investing in stuff is probably not wise at this juncture. Really safe bonds are a reasonable alternative to stocks. Do not expect much of a return. If someone is offering you a high rate of interest on a bond portfolio, then it is risky debt and you should avoid it. Municipal bonds, for instance, are a very risky bet right now. State and local government revenues are shrinking quickly, pension funds for their employees are radically underfunded, and bloated governments are very slow to readjust to new realities. There will be defaults.

2010 should be the year that we see if my predictions substantially come true. It could be a wild ride. I will either be a hero or a goat. Think for yourself. Do your due diligence. Be wise and prudent.