KILL JOY IS HERE
RIGHT ON SCHEDULE
Now that all of Wall Streets analysts in Barron's year end survey, have virtually all agreed that a 10 to 15% advance for the S & P 500 during 2007 is in the bag; the market, right on schedule promptly began 2007 with an impressive quick 150 point rally only to be followed by an equally impressive sell-off finishing 2007's first week Ѕ% in the RED. Now, we all know analysts of every flavor are very quick to point out past stock market relationships but some how they all forgot to mention the one about: How the Market goes the first week sets the stage for the rest of the year. I guess that must have just been an oversight since all that doesn't jive with their week earlier forecasts Oh well "cest la vie"
Anyway it is my humble (maybe not so humble) opinion that aside from a blast up to new highs, any choppy market action over the next two weeks to two months will be a consolidation WAVE 4 preceding the expected Wave 5 explosion to new highs, marking the end of this Rally, that began last July and will create that giant HOOK that I have been talking about, that will trap most everybody as the Market begins it first major plunge of the Century.
LET THE GOOD TIMES ROLL
"Let the Good Times Roll"; are the latest headlines in Newsweek, Is it just my imagination but is that not eerily similar to the famous headline that signified the exact market bottom, "The Death Of Equities" Can we be looking for the Crash to end all Crashes?
Another astonishing and eerie similarity is 'The Take-over craze" that always seems to coincide with market Tops and just as in 2000 the analysts use this rush to buy at the top to justify why the market will remain strong. Why just look at all the ready cash that is floating around and the ultra lax lending standards of the Banks; how could the market do anything else but go up? It seems like once again our erstwhile analysts have concluded that the Business Cycle has become an anachronism.
The US DOLLAR
What's Happenin? Just as everyone in the World was finally convinced that the US Dollar has no place else to go but down, It Rallies. Most probably the Dec. 82.25 low for the dollar was hit because of the near unanimous forecasts calling for a falling dollar into year end. What we saw was probably wave b of an ABC consolidation. One that will be big enough to break up the near one side forecasts and shake them up enough before the Dollar continues on its merry way to the bottom.
PAPER ASSETS vs. REAL ASSETS
Just a thought; but paper assets as a percentage of GDP have risen to an extraordinary 38%. Is it just me or is there something definitely wrong? Is it possible that 38% can produce nothing except paper used for trading only? Is it all just a game? To make matters worse it is considered by those in the know (?); that the 38% will grow to 45% in 2007. With the expected soft landing in real estate claiming 25% of the economy; That would mean that everything else, including Food, Clothing, transportation, and everything else will all come under the remaining 30%? Let us all just take a step back and try to get a proper perspective before taking these analysts projections seriously. Even if we stay at the present 38% something has got to give. By the way, I almost forgot; all this paper trading is going on under the guise of the lowest Risk projection in history. Am I the only one that is crazy, perhaps its time to lock me away so I could be accepted into the loving arms of the "Happy Basket Weavers"?
BUT: THIS TIME ITS DIFFERENT
Financial Institutions, now dramatically increased by new financial players, such as Freddy and Fanny Mac, Mortgage Brokers, the financial arms of the likes of GE GM Ford Chrysler and others now all competing with the FED to create money out of thin Air means that the FED has now lost control of the money supply and a flood of fiat money is sloshing all over the world.. However I'm told that the new Financial Technology has been able to dissipate the risk and spread it all around so that this time, the Banks will not be the only ones that suffer. This time around even the interest rate risks have been insured against through the use of derivatives. That's terrific but has anyone noticed that all these Trillions in derivative risk is being held by only two banks , JP MORGAN and CITI Corp, and they are risking upwards of 50 times their net worth? Seems to me a lot like the sure fire Portfolio Insurance of the 1987 debacle. But not to worry these two banks are too big to fail; or are they?
THEY WHO REFUSE TO STUDY THE PAST…
When it comes to the stock market and or the economy anyone with any kind of memory or even just making a cursory examination of the past would quickly discover that all Boom and Busts are all born and all die for the exact same reasons: First the FED lowers interest rates and adds tremendous reserves to the Banking system, the Fed then Monetizes a good portion of the Governments Debt; then as the economy starts to boom both the Government and the FED encourage the Banks , through Moral Suasion (read force) to lower their lending standards, so that minorities can fully participate in the boom, until they are issuing undocumented mortgages to people that have no credit for amounts larger than the total value of their price inflated homes. Then, as the bubble bursts; they, in a vain attempt to keep from writing off their bad loans, they make negative amortization loans to the very people that are behind in their mortgage payments, booking phony profits along the way, as they attempt to shore up their balance sheets. The final straw comes when the Banks compound their errors, in their drive to maintain their abnormal profits, by lending huge sums of money to any and all deal makers: Who want to take over companies at 25 to 50% premiums, above their all time highs. This game, means pouring more and more money into the stock market and fueling massive speculation in both the real estate and stock markets; that inevitably leads to a massive bust with the Banks being the final Bag Holders. But not really some of them may fail but the final losers are we the tax payers.
Has anybody noticed how many sub-prime mortgage lenders and brokers have shut their doors recently? Yet they all sold off most of their mortgages with a buy back guaranty; but with most of them out of business who will be left holding the bag? Who else but the same people who always end up paying the freight; the tax payers and the consumers?
The last time we were fortunate enough to appoint Mr. Sideman to handle the S & L crises and due to his decisiveness and wisdom it ended up only costing us $ 500 Billion instead of the Trillions that were projected. This time the Bubble is much much bigger. So the main question is; is there another Harold Sideman waiting in the wings and can our intensely divided government agree to anything long enough to appoint him or will partisan politics rule out anyone with a strong personality and definite ideas, capable enough to do the job?
LIQUIDITY AND CONFIDENCE
The essence of every Bull Market is not only liquidity but more importantly Confidence. You can have all the liquidity in the world but with out the confidence of entrepreneurs who are willing to borrow or the Banks willing to lend the ball game comes to a crashing end. The banks have already started to tighten their lending standards and with confidence levels approaching 95% there is not much more to go on the up-side. Without the continuing and ever increasing liquidity and confidence the market is now quickly approaching its exhaustion point to be followed by reversal.
INSIDERS what have they been doing lately? Can they save us? I'm afraid not; they are doing exactly the opposite as what you would expect if we were in an undervalued market. Their Sell/Buy ratios are at the highest levels in over 20 years.
And if all that is not enough to convince you of the dangers that lie ahead, the Hedge Funds and Commodities have now gone retail. Anyone can now speculate on anything, just like the big guys buy simply buying the latest ETF's. As far as the leverage that the big boys use; why you can go them one better; you can buy options on ETF's. How is that for increasing Risk. There is just not enough smart people out there to manage all that money floating around out there in Mutual and Hedge funds as well as in all those buy-out pools. It seems that all you need is a Diploma from an Ivy League school and you're an expert.
There is more but there is no point in beating a dead horse. Just do what you have to do to protect yourself: Get Liquid: Now is not the time to try and squeeze out a few percent in extra returns. Find yourself an advisor who sees the dangers as you do and who has a plan of action the you feel comfortable with. Now is not the time to be "Penny Wise and Pound Foolish" when getting investment advice.
When in doubt, when you become afraid enough, when you don't know what to do; go to short term Treasuries and GOLD; So far Gold is behaving almost exactly as expected. The choppy action is exactly the kind of action you would expect when tracing out the last (e) Wave of an ABCDE declining triangle of an eight and a half month 38% correction: Which will be sufficient enough to correct an 85 month 300% (500 point) move and set the stage for the next up wave: The explosive third wave, with a minimum price objective of $1,230.
CONFIRMATION: That Wave III has begun and that the 8Ѕ month Consolidation or Correction or what ever you want to call it; is finally over would occur as soon as $640 (the wave d high) is decisively penetrated. Happy Hunting!
GOOD LUCK AND GOD BLESS
Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL
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