Planet Yelnick

Ground Hog Market & The Super Bowl Indicator

One of the most accurate 'predictors' of the market at 92.5%, the January Effect - how goes January foretells the rest of the year - just had the worse start (down 8.6%) since 1970.  Actually, the worst ever. The Super Bowl is one of the next most accurate 'predictors" at 80% according to Snopes - if a former NFL team wins, the market is up - and given that both teams on Sunday are former NFL teams (the AFC Steelers transferred over from the NFL when the leagues merged), an up market is predicted. Now of course what good are these predictors? 

A Depression is Not Just a Bad Recession

A Recession is when your friend loses his job
A Depression is when you lose your job
A Great Depression is when an economist loses his job

They are different in kind not just size.  The rule of thumb that a Depression is a Recession of 10% or greater drop in GDP is more misleading than helpful.  A Recession is typically caused when the central bank RAISES rates to cool off an economy.  A Depression is caused by a banking crisis that comes from the central banking LOWERING rates, spurring a credit bubble which leads to the banking crisis. 

Count Clarity

A Special STU pegs us in a wave 4 descending triangle (lower tops, flat bottom), meaning the current leg d down should touch but not break the Nov21 lows (SP741, Dow7449) then bounce in a final leg e that ends lower than the Jan6 highs.   Chart here.  This leg e will SEEM like the awaited Obama Hope Rally, but it is a bear market fakeout.  After leg e ends, we have wave 5 down and THEN the big wave (2) which so many seem to be waiting for (after all, it came in the Spring of 1930 ...).  The leg e fakeout should suck the bullishness out of the market, setting up the rally after the big drop.    This all should unfold slower than the herd seems to expect. 

Hope Giving Way To Anger

Prechter likes to say that during bear markets science gives way to magic and uplifting films give way to horror.  Then I read tonight's EWT and realized I don't need to go to the movies to read a really scary script.  In his latest he lays out the unbelievable destruction of world trade that is underway.  Baltic Dry Index (ocean shipping rates) down 96%. Exports from the Asian Tigers down 27% in Japan, 30% in Korea, and 42% in Taiwan.  Toyota dropping production in Japan (!!) by half.  Japan output in Nov dropped 8% from October (which annualized is 96%).  P/E ratios in the S&P at 22 are down more than 55% but are still much higher than at market bottoms (7 in 1932, 5 in 1982) - and the P will be chasing a falling E next two years.  Little wonder his downside targets for the S&P are much lower than anyone expects, so low he has paused in printing them.  And who else expects oil to soon be back to its wave 4 level at $10/bbl?

I received a fair amount of email asking, with the new President and all the hopefulness, where is the Obama Hope Rally?  Didn't FDR just dispel fear with his inauguration speech ("The only thing we have to fear is fear itself!") in 1933?  Well, he took over after four years of a 35% drop in GDP, many times larger than anything we experienced since 1950, and much of the excess from the 1925-1929 bubble had already been worked out of the system.  Interesting, the message board at Club EWI got a similar question - their answer is here. 

A more timely question is how fast will the feelings of hope fade?  If you have watched the news, you probably saw how Iceland has already defaulted - shades of Austria in 1931 being the harbinger of a series of country defaults.  The EWT also suggests that England may be soon to follow, for the first time since the Middle Ages, due to owning $4.4T of foreign liabilities and virtually no offsetting foreign reserves.  Now we have this shocking story from The Times Online: Riots in Iceland, Latvia and Bulgaria.  They tried to shut the parliment in Iceland.  The Times opines that we may be entering a period of unrest as early as this March. Although Americans seem to feel that Europeans are looking over at our debt binge and laughing at our profligacy, the joke is really on them: European banks were even deeper into the credit bubble than US banks, and the turmoil seems to be about to rock Europe before we feel it here.  Do they expect Obama to bail out their banks?

The Kondratieff Indian Summer Brings Global Winter

If you click on the category Kondratieff Long Waves you can follow a series of posts on the coming of Kondratieff Winter, the inevitable deflationary depression that follows a credit bubble.   Back in 2005 in Kondratieff Winter and the Greenspan Indian Summer I pointed out how Greenspan was playing a Grand Experiment with History.  He faced a potential K-Winter start after 2000, and he held rates too low for too long to reflate the currency.  It worked for a time, but the prosperity generated was false ($10T debt for $6T GDP growth) and the effort created an even bigger bubble. 

This K-Autumn has been unusually long: 1982 - 2007.  The first three K-Autumns (1822-1837, 1865-1873, 1922-1929) were much shorter. Greenspan at least kept the debt-laden party going for 20 extra years (1987-2007).  Perhaps we should add a K-Indian Summer to the list of seasons.  Or perhaps after the Greenspan experiment fails so abysmally, it won't be tried for another 200 years. Let's explore this in more detail, and estimate the depths of the coming Depression.  

5 Myths of the Great Depression

We have all become Keynesians again, trying to understand how policy will work this time around. When this is all over, Keynes may be put to rest, along with Milton Friedman and Monetarism.  Austrian Economics may reign supreme.  Or not, depending how we muddle through the next five years.  Here are some key myths floating around that we would be best to put to rest as they lead to bad policies.

1. The Crash Caused the Depression.  Not really.  It had an immediate impact on growth, but by Spring 1930 we were coming out.
2. The Fed Failed to Act.  Don't know what PR firm put this out, but it is patently false.  The Fed dropped rates 2 days after the initial crash, again a couple of weeks later, and a year after it had dropped from 6% to 1.5%. It is fair to say, however, that the Fed could have done more to prevent bank runs of non-member banks.
3. Hoover Failed to Act.  Hoover was the great Policy Wonk of the '20s, and he was active all the way through.  Ever wonder why the Hoover Dam is not the Roosevelt Dam?  Hoover started public works programs very quickly when unemployment began to worsen.  When bank failures began in earnest in Sep31 Hoover first created the National Credit Corp., and when that proved inadequate, the Reconstruction Finance Corp. - the TARP of the '30s.  And he drove the biggest peacetime increase of Federal spending ever before or since - 50% over his four years.
4. The Gold Standard Made It Worse.  This is a complex issue.  In 1925 Churchill put England back on the gold standard, but at the pre-war level of $4.86 not the level gold was trading at, around $3.50.  Worse, instead of the pre-war gold standard, they came up with a hybrid system that kept the US on a strict gold standard but allowed other countries to cheat (run persistent deficits and devalue their currency).  In order to help England avoid a run on its assets, the NY Fed Governor pushed US interest rates to very low levels (while England held their levels high), causing the 1925-1929 credit bubble and stock market boom.  So you could argue the English mistake caused the bubble and the collapse.  We probably would have muddled through except in Sep31 England abandoned their gold standard, throwing the world financial system into the same sort of turmoil that rocked it in Sep2008.  
5. Keynesian Policies Got Us Out, or Would Have, Had We Spent More.  In May 1939, FDR's Treasury Secretary Henry Morgenthau testified: "We are spending more money than we have ever spent before, and it does not work. ... I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. ... I say after eight years of this administration we have just as much unemployment as when we started ... and an enormous debt, to boot."

If you rerun history, you see that British machinations forced a poor international monetary scheme on the world in 1925 and made the US foot the bill.  This caused the stock market bubble and crash.  Efforts to adjust from that may have worked, but in Sep 1931 England defaulted on its obligations and dropped their own gold standard.  Hoover, smart guy that he was, was finding his policies had severe limits in the face of a global banking crisis, much as Bush and Paulson have found with TARP.  FDR was able to get a reset to the economy, and we began recovering, but overall his policies were incoherent, and some downright destructive, such as allowing firms to collude on price and propping up wages by strengthening unions, which simply made goods too expensive and wages too high.  Unemployment rose, the economy slid. 

Consensus Count Forming

A weekend scan of ewave bloggers points to a consensus on the count alternatives:

1. Wave 5 has begun, and after an inauguration rally Tues (and possibly Wed) we fall hard.  Pivot is SP880.  If 5=1 we bottom around SP625
2. Wave 4 continues as a triangle, and leg e has begun, spurred by hope at the inauguration.  The pivot for this whole wave 4 had been SP950, and we got pretty close to that on Jan6; hence the target for e is to be a stub, ending short, around SP920.  If wave 5 then starts sharp, it too may go down where 5=1, or to SP600.  If it goes down sloppy, we may see yet another ending diagonal and a truncated fifth, with a target of SP700. 
3. Wave breaks as an ABC flat, with B having fallen 61.8% of A and therefore likely that C=A, giving it a pivot around SP1020 (1004-1040).  This would also suggest a wave 5 bottom around SP700. 

US markets are closed Monday (MLK day) and might be light volume on Tues (inauguration).  We should have clarity by Friday on which direction. 

Oil is dropping overnight; those of you who follow oil should check out the Bakken oil shale field which may now include a huge pool of crude that is extractable with current technology.   

When To Stay Out

Downside risk is much higher after the last two days.  Today has more than a 90% down - a 97% down day.  The trading range since Dec has been broken to the downside.  Tonight's STU notes that a 5-wave impulse is emerging, meaning the trend has changed from the sloppy upwards move since Nov21.   We *may* have ended wave (4), and are now about to retest the Nov21 lows.  First there is major resistance just ahead, around Dow8K, where we shall see how this breaks.  The 5-wave impulse means the count has moved off the triangle (the legs should break as 3s not 5s).  The alt count is a flat, where we have entered a B wave that should break Dow8K easily and head to the Nov21 lows around Dow7.4K and SP750.  If it bounces off that, a large C wave will seem like the Obama Hope Rally, but hope will be dashed.   If it crashes through, a possible end level is where (1) = (5) or around SP630 (Dow6300).  Tomorrow it may pull a head fake with a small technical bounce.

The Coming Debacle is Closer Than You Think

Sometimes the STU drops a brilliant little insight amidst the daily churn of the market.  Tonight it showed this chart on the Dollar Index going up even as the Fed has massively increased its reserves in any effort to reflate the currency - meaning the Dollar should be dropping.  Indeed, read the blogosphere and you can see scads of pundits urging you into gold or whatever claiming a Dollar Debacle is around the corner.  Yet up it goes, as the T-Bill rates go to essentially zero. 

I am preparing a longer analysis of why the bailouts are going to fail, and how they make matters worse - one cannot get out of the aftermath of a credit bubble with more credit.  Yet how to explain how quantitative easing on a massive scale is having no effect?  The little nugget tonight: the total credit that is rapidly diminishing is $52T, down from $64T; how can a mere $1.25T of Fed reserves stem a tidal wave of that magnitude?  Even the US Treasury cannot paper over the whole world's excesses at that scale. 

Prechter's service is one of the few which is correctly pointing out that with credit destruction of this magnitude, the world will continue to rush to Dollars, and it will appreciate (deflate!) despite the Fed's efforts.

Oil in Super Contango!

MarketWatch reports on a peculiar situation developing in crude: super contango.  Right before the July 2007 peak I blogged about how contango could cause oil to rise and rise beyond supply/demand, until the bubble bursts.  Contango is normal for commodities markets, where the curve of spot delivery price to the next futures delivery price, and out towards later futures dates, is upwards sloping, reflecting the costs of storage and risk of demand fluctuation.  Oil insiders play the "basis" between the spot price and the next futures price (and there are other bases for farther out futures).  We now have a very steep contango, where the spot price to the next delivery is pronounced.  The basis between Feb and July delivery is an astounding $15 or almost a 40% premium ($37 to $52).  The basis at the just prior options expiration date, Dec19, between the expiring January contract ($33.87) and the February contract was $8.49, the widest contango between two successive months' contracts.

I was watching this, and on Dec22 the spot price got below $31, and then ran up in two weeks over 60% to crest $50.  In the past week it has fallen to under $38.  I have a friendly bet that before Obama's inauguration it will go below $28.  Since the options for the Feb contract expire this Friday, it will probaby make or break that bet either Friday or the following Monday.  Of course, a lot more can be made actually trading oil, but it is a very volatile commodity! 

What is driving super contango is falling demand, an incredible over-supply, and expectations of higher prices this summer.  The storage bins in Cushing, OK are rapidly filling up.  I understand that many tankers are idling or coming very slowly, so more is stored on the sea.  Does it make sense that prices will rise to the levels above $50 when so much excess crude is coming in?   The curve seems more poised to collapse. 

How Low Could It Go

The prior post has several questions relating to the count - specifically, if Prechter (and Hochberg of the STU) see the coming wave (5) as merely ending a wave 1 of a much larger five waves down, how low can this go?  I believe the Prechter view (which he has kept close to his vest) is we will most likely end in the range of the prior 4th wave (4th of the 3rd), which he counts as the 1987 crash:  Dow fell from 2700 to 1700; S&P from 336 to 220.  But they have not pushed this view, since it seems extreme; and they have kept their options open on when such levels could be reached.  Let's take a deeper look. 

The Beginning of the End of the Beginning

This month's Financial Forecast begins with a broader view of where we are, and is a continuation of the many signals in many media that Prechter has been sending to prepare us for the coming deflationary depression.   I will continue on this theme as 2009 unfolds, but suffice to say that the first quarter will not be a time of Hope but another time of fear.  In the near term, the EWFF has a succinct summary of where we are, which I paraphrase:  Stocks probably ended the rise since Nov21 last week.  The recent rise has been on waning volume, and with overlapping waves, both signs of a correction nearing an end.  This wave down might be a d leg of a fourth wave triangle, or the final fifth wave of the first wave down of the drop off Oct07, but it won't really matter.  Even if a triangle, the period from now until we retest the lows will feel like a general down wave; the e leg up that ends the triangle will feel like a brief Spike of Hope on some news that fades quickly into a deeper drop.  After that we have the Wave 2 rally, which should be a doozy.  Hence, The Beginning (Wave 1) is nearing an end. 

Will The Real Market Please Stand Up?

We have come through a period of low volume, and it is risky to extrapolate market trends during those periods.  Now traders get back to work and we shall see where this market intends to go.  This is the positive season, where the first few days of January tend to be positive.  Hence maybe we wait until Tues or Wed to reveal the direction.  The STU expects that leg C of their wave 4 triangle has ended or will end around SP950, perhaps in a day or two.  Sy Harding thinks we have already entered the seasonal positive pattern (since Nov21) and expects it to continue into the spring.  He is watching the VIX drop, a bullish sign.  Tony Caldero concurs, albeit sees the market as overbought and so would expect a short term pullback before a rise towards a 50% retracement of the whole drop.  Tony has a very good Elliott Wave approach, and recently changed his big picture wave count.  I recommend you persue his recent Weekend Updates. 

Predictions 2009

This is the time of year for predictions, so let me lay mine out and solicit your predictions in comments. 

1. A Hope Rally to Dow10500 (SP1100) by this summer.  After the type of fall we had, there is always a rebound in the range of 38-62%.  Midpoint (50%) is Dow10500.  Main worry I have is this view has become the consensus in the financial blogosphere; if too many expect it the market may confound.
2. A Retest of the Nov Lows (Dow7449, SP741) by Feb.  There is less of a consensus on this; while the Santa Rally was a bit of a disappointment, the general rise in the market since Nov21 has emboldened the opinion that the bottom is in. 
3. The Meltdown is delayed to 2010.  The retest carries the risk of a general market slide to much lower levels.  Oddities abound, such as Gold Backwardation in December, that gives one pause as to the Hope Rally.  Nevertheless, hope in the new administration should keep markets up.
4. 2009 will be bad, but not as bad as expected.  Hard to quantify this, but across the board pundits have lowered their expectations for 2009, seeing a serious downturn in the US, with a recovery in Q3.  I expect them to be somewhat relieved as the year develops, but then shocked when the Q3 recovery recedes into the future.  While the many bailouts will not stem the overwhelming tidal wave, they will at least postpone the worst of it.  2010 will be much much worse.
5. Obama's first 100 days will be disappointing.  Since FDR, new Democrat Presidents are expected to launch a flurry of changes in their first 100 days, and the expectations surrounding our Change President are extraordinarily high.  Surely he will have a $1T bailout/stimulus bill on his desk quickly, but will he get much more than that done?  Someone opined that there are people who do, and people who write about it.  Obama's major accomplishments so far have been two books about how he feels.  His personality is one of caution and debate, not action.  Events will overtake his plans and programs.  
6. Deflation not hyperinflation arrives, despite the Fed's efforts to reflate.  We already see deflation in both the PPI and CPI. It will accelerate.  Perhaps paradoxically, since Gold is a haven in times of risk, deflation should push the Dollar higher and Gold lower.  The Fed's actions will not cause the type of behavioral change needed for reflation until asset values bottom (stocks, houses).  The US consumer is saving again, to be ready for this rainy day.  The savings rate should skyrocket in 2009, to 5% or higher.  Hence consumers are as loathe to borrow as the banks are loathe to lend.  Consumer credit standards are rising rapidly. 
7. Oil breaks below $28 in the first few months of 2009.  A prediction I made privately last year was that oil would break below $42.  I now have a further bet that it will go below $28. Cash price got below $31 on Dec22 and has since bounced to well above $40.  We'll see if I win this bet; as with stocks, a bounce in oil is overdue, and may have already started.  Still, I discount any market action during the holiday trading period as on light volume and little real attention.
8. Housing continues to fall.  It is about halfway down.  The bigger shock will be a collapse in commercial real estate. 
9. The Summer of Disillusionment comes next summer (2010).  This is the point of recognition that all the hopes in Obama will be dashed, all the efforts of the Fed will be for naught and all the bailouts cannot put Humpty Dumpty back together again.  The question is not if, but when: whether we lose hope in the summer of 2009 or the summer of 2010.  I suspect the temporary salve of the huge $1T bailout will delay this moment for at least a year. 

That's it so far.  I may add a few more.  How about some predictions from readers?