Planet Yelnick

Can the Fed Stop Deflation?

Prechter's EWI site has posted their primary
deflation analysis. Worth studying.

Prechter defines deflation as follows: "Just as inflation is an expansion in
the supply of money and credit, deflation is a contraction in the supply of
money and credit. Deflation is not falling prices. Falling prices are a
consequence of deflation. It is dangerous to confuse the two ideas because
prices can fall without deflation." PC prices are an obvious example of
this.

Is deflation impossible because the Federal Reserve Bank can just print
money? Prechter says no, since the Fed primarily 'prints' money by
fostering the expansion of credit. Banks create money by lending. The
volume of bank money dwarfs the volume that the Fed could sensibly create on
its own. Hence the Fed has to weave its magic by trying to manage credit
markets.

Currently credit markets for business ("Main Street") are not working well -
another way of saying that it is hard to get venture capital, or go public,
or get commercial loans at reasonable rates and terms. It is virtually
impossible in certain segments, such as dot-coms, or new telecom companies.
During the Great Depression, banks simply stopped lending, and the levers
the Fed used to change behavior did not work. This was called the
'liquidity trap' since the Fed made credit available to banks but the banks
did not make it available to borrowers. The psychology had to be broken
before banks lent. Speeches about fear, big government deficits, government
job programs, Fed pump priming, cheapening the currency, failed to do so
then, just as they have failed for Japan more recently. It took WWII to
break the psychology.

(A fascinating validation of Prechter's point of view can be seen in WWII
movies. Some of the most commended early movies about WWII are actually
about the Depression; watch From Here to Eternity or In Harm's Way. These
movies start with people being bored, and when the war comes, it is
welcomed, as a way to escape the psychology of the Depression. More recent
WWII movies, such as Saving Private Ryan or Pearl Harbor, completely miss
this context, as they were made during the social mood of the '90s.)

Three credit markets have been working in lieu of Main Street: Muni's,
Mortgages and Margin, although the window on two of them appears to be
closing. Given the sorry state of California, muni borrowing is approaching
its limit. Given the recent jump in mortgage rates, after a final rush to
borrow, the real estate boom is likely to end. That leaves the stock
market. As Yelnick has reported, it appears the Fed has used any
significant event (9/11, Iraq War, blackout) to pump credit into equity
markets and keep the stock markets afloat without creating a dysfunctional
reaction from naked credit pumping.

Greenspan's strategy is use credit in these ancillary markets to keep the
economy afloat long enough for Main Street to return to normal. This means
the Fed is primarily trying to manage social mood and psychology, not more
mechanistic targets such as money supply growth.

Prechter's point is that the Fed is running out of arrows in its quiver to
affect credit market psychology, and when there is no more it can do, the
negative social mood may overwhelm all that it has tried to do, and send us
into a deflationary spiral and subsequent depression. The marker for when
the 'herd' recognizes this point of no return is a severe stock drop, or
even crash. If it happens, it will be said after that the crash caused the
subsequent depression, or 'discounted' it, when in fact, the crash only
reflects a collective "Oh, $#!@" reaction as investors head for the exit,
not knowing what may follow.

K-Wave V: The Rise of Machines

Thinking about the K Wave question: will the coming always-on world being brought to us by widespread broadband and wireless connectivity be the new factor of production that takes us out of the K-Wave Winter and starts the cycle anew? 

A broader new factor is digitization, of which the always-on world is a subset.  It may finally take us out of the 'paperless' office into a new paradigm where documents are not created with the intention to print but created for a pure digital existence.  More generally it will spawn a vast collection of web services, which are machine to machine communications.   

We have only so much attention time to give to always on communication, but our machines can talk to each other orders of magnitude more.   They will allow the scaling of an information economy beyond the bounds of the prior analog world.

Silicon Valley Tea Leaves: Signs of Hope

Two positive reports from Intel and Motorola, as reported by the NY Times. Intel sees increased demand for chips, and Moto sees stronger demand for cell phones. In tech markets, increased orders for chips reflects growing optimism by systems vendors, and so chips tend to recover first, followed by, followed by PCs/systems and then software. In the cell phone market, increased orders for phones similarly reflects the optimism of the carriers as to future business.

How much to make of this? The Intel commentator was appropriately cautious: "Asked if he would declare a recovery in the technology sector, Mr. Bryant said, 'We'll probably be the last to call the recovery.' He said his customers had not given him a good read on what was happening to the economy. 'So what you get is no clear single picture.' Finally, he warned that although the surprising strength of sales of Intel's microprocessor chips and circuit boards compelled him to make yesterday's announcement earlier than he would have liked, he was not sure yet if the sales jump was just September orders coming in early."

Money Supply

Back in the Kondretioff Fall period of the 1980s, when Volcker dramatically limited the supply of money in order to break inflationary expectations, we watched money supply indicators slavishly for insight as to where markets might be headed.  Now as we deflate through the Kondretioff Winter, we pay little attention to the money supply.  Greenspan is continuing his massive experiment of pumping enormous liquidity into equity markets in order to fend off deflationary expectations.  Recent steps by the Fed are approaching the levels of liquidity of 9/11, an unprecedented event at the time. 

 

Is this inflationary?  Maybe not.  The velocity of money (how fast it turns in people's hands) is decreasing, so the overall impact may be minimal.  This slowing of velocity is normal behavior in the K-Wave Winter; people react to the excesses of the prior bubble by slowing spending and increasing savings. 

 

Is this good for equity markets?  Maybe not.  It seems to be keeping equities afloat through this summer, but it has not gotten them out of the trading range since June 6.  In 1929, the market peaked in early September.  In 1987, it peaked on Aug 24.  In 1998, it peaked at the end of July, and had a second top in late August.  In all these cases, a crash occurred in October. 

Kondretioff Rules

Yelnick has received some questions regarding whether the Kondretioff Wave conditions have been satisfied, which would be another supporting condition for a new bull market, or whether a major deflationary debacle awaits.  Like all cycles,  the K Wave is more descriptive than prescriptive (Elliott Waves are more prescriptive than cycles), but provides enormous insight into our current  economic condition.

The K wave was identified in the '20s by Kondretioff,  a Russian economist who studied capitalist systems.  When asked by Stalin in the '30s if the Great Depression was the collapse of capitalism predicted by Marx, he said no; based on his work, the West would rise again.   For his insight, he was sent to the Gulag.  Unfortunately for him, he never returned.  Fortunately for us, his work filtered  out.

The K wave is a 54 year cycle (+/- a year or so) with internal phases that are sometimes characterized as seasons: spring, summer, etc.  Spring   phase: a new factor of production, good economic times, rising inflation.  Summer: hubristic 'peak' war followed by societal doubts and double digit inflation.  Fall:  the financial fix of inflation leads to a credit boom which creates a false plateau of prosperity that ends in a speculative bubble.  Winter: excess capacity worked off by massive debt repudiation, commodity deflation & economic depression.  A 'trough' war breaks psychology of doom.  New factor of production emerges, happy days are here again, cycle begins  anew.

K-wave I: 1789 - 1842.  New   factor:  canals.  20 good years. 1812, peak war. US invades Canada, gets slapped back.  White House burns. 1815-1824, inflation, turmoil, weak Prez (John Quincy Adams), end of Federalist rule.  1828, Andy Jackson elected, false plateau of prosperity. 1837, Bank of US cancelled, severe depression, deflation.  Ends with trough war, Remember the Alamo! we win Texas from Mexico.

K-wave II: 1843-1896.  New factor: RRs.  1861, peak war. 1865-1873, reconstruction, inflation, Prez   impeached.  Turmoil. 1873, RR fiasco, financial panic.  First bought of deflation as Civil War inflation ended.  False plateau of growth.  1879, return to gold standard.  Second RR bubble bursts.  Deflation continues. Ends with trough war, Remember the  Maine! we conquer Spain's remaining colonies. 

K-wave III: 1897-1949.  New factor: oil/autos.  20 good years.  US becomes world economic leader.  1914, peak war to end all peak wars.  1919-1925, inflation, turmoil, scandal (teapot dome).  Coolidge becomes Prez.  False plateau. Roaring  20s.  1929, Crash.  Depression.  Severe deflation.  Ends with trough war, Remember Pearl Harbor!, Pax Americana.

K-wave IV: 1950 - 2004 (?).  New factor: aerospace.  20 great years.  American Century. 1966, peak war: Vietnam!  Rising inflation.  Wage and price controls.  Oil crisis.  Nixon resigns.  Vietnam war is lost, American innocence gone, stagflation, Prez Carter blaming malaise not on government but on the people. 1980, Reagan elected.  Morning in America.  Volcker kills inflation.  False plateau!  Greed is good.  1990s, deflation in Japan, dot-coms in US, Greatest Asset Mania of All Time, bubble bursts, now in longest bear market since 1930s.  On schedule, trough war, Remember 9/11! we go into nation building. 

Most of the primary K-Wave predictions have been satified.  We have had the K-Wave false plateau followed by a speculative bubble. We have had deflation in commodities for a while, and some currency deflation (eg. Japan).  We have had enormous rolling debt repudiations: Mexico, Asian Flu, Long Term Capital  Management, Telecom bubble companies. We have started our trough war (War on Terror). NYFD is heroic again!

Is the cycle turning? In timing the K-Wave would nominally end now, in the period of 2003-2005.  But two caveats. First, in previous cycles we had much more severe economic disruption - the downturns in 1840s, 1880s and of course 1930s were considered depressions.  Second, the new factor that leads us out of economic hardship should be emerging.  It might be broadband/wireless - the always-connected world - but that was the subject of much of the bubble!  So while the new factor is apparent, the K-Wave Spring recovery is not yet emergent.  Both caveats suggest more trouble ahead, and more likely bottoming in 2004 or later than now.

Silicon Valley Tea Leaves: Mixed Signals

Sy Harding in StreetSmart has an excellent analysis here of mixed economic signals.  Summary: real estate cooling may be offset by slight uptick in manufacturing, but jobs figure took a tumble in July after a stabilizing June.  This on top of revisions in past growth rates (downwards) and expectations that Q2 growth of 2.4% is largely due to one-time Iraq war blip.  Also, increased energy prices, which should dampen economic activity, combined with the blackout, which certainly doesn't help restore confidence in future energy prices or reliability. 

 

Bush proposing to fix the antiquated electrical infrastructure was a bit of a head scratcher, coming on top on the $600B burden in Iraq, $500B deficits stretching out as far as one cares to project, a large tax cut with minimal impact on real economic activity, and other economic policies that seem mostly designed to benefit Big this and Big that.  Oh well, the lobbyists for the Big Power Industry only have asked for $50-$100B.  I guess we are all Keynesians again, George?  Funny, a Democrat could run to the right of Bush, fiscally! 

 

Confidence nevertheless is returning to Silicon Valley.  Anecdotal reports of valuation increases and VCs chasing deals.  Better, some up rounds in later stages.  Lawyers are working on some potential IPOs, which have not yet been filed so do not have visibility.  Increased m&a activitry, with some slight premiums over prior rounds - gaining $1.25 to $1.50 per $1 above the preferred stock positions.  Not much, but beats down rounds!  July & August are slow VC months, hard to generalize from this type of evidence; key will be pick up in activity and valuations in Sep & Oct. 

Count Clarity

STU has moved the count to Yelnick's: we are still in wave 2, and have a final 5th wave up to go.  We have been in either a fourth wave triangle, which ended two weeks ago, or in a fifth wave diagonal triangle since early July.  This count fits the corrective behavior of the market over the last 7 weeks.  Either way the prognosis is the same:  we should see a little more upside, then a correction that stays above Dow8997, and a final fifth wave thrust up. As the STU says, This final leg will likely break briefly above the upper trendline on a quick spike in volume, and then be swiftly reversed. One or more indexes should hold back confirmation of the Dow's final advancing leg." This then is the signal of the beginning of wave 3 of 3 etc. down. Note that it could spike as high as Dow9930.

This expectation matches broader events. Greenspan pumped substantial liquidity into the markets on Friday, to minimize any impact of the large blackout in Eastern North America. This should result in bullish activity in the near term, but should not buck a more substantial set of concerns over the economic recovery, the spike in interest rates, and now indications of a return of inflation, which, even if momentary, should cause the markets to pause.

Count Outage

I have held off announcing the count as we wend though the summer doldrums.  Where we have been is a major wave 1 down to Oct02 and a wave 2 back up to this summer.  Question has been whether wave 2 has ended, or has one final 5th wave thrust up.  STU initally held wave 2 as ending on Jun17; now they see it as ending on Jul31 with a truncated wave [v] top that barely got back to the level of the Jun17 wave [iii] top.  They leave open the possibility that we remain either in a wave [iv] triangle, or have entered a wave [v] triangle; both portend a final thrust higher after a dip next week. 

Upside level to watch is Dow9361 - if breached, means more upside

Downside level to watch is Dow8997 - if breached, means we have begun a series of stacked waves i-ii down. 

Tax Cut cut

Yelnick has previously commented that the dividend tax 'cut' was a poor idea.  Double taxation on dividends is less a double tax than a tax shelter - it shelters growing companies from being asked to distribute their retained earnings in dividends.  Without the this tax shield, they either grow slower or have to go to the ever volatile capital markets for growth capital.

 

The WSJ editorialized today that dividend tax cut is not working as Bush planned, because "a higher dividend tends to be offset by a lagging stock price" due to lower growth.  Instead, it is providing a windfall for those CEOs who turned in their evil stock options for honest stock, as now they get big dividends! 

 

Worse, the overall Bush tax cuts are now being seen as too small and too stretched out to be of much help to revitalize the economy.  The dividend tax cut cost Bush political capital that could have paid dividends with a tax cut more targeted to a lagging economy. 

Silicon Valley Tea Leaves: IPO Market Cools

The Merky News reported today that: "Silicon Valley's summer fling with initial public offerings is over, making it clear an important part of the technology industry's long-awaited recovery won't unfold quickly. 

 

"Four local companies launched IPOs in just six weeks: FormFactor of Livermore on June 12, InterVideo of Fremont on July 17, iPass of Redwood Shores on July 24 and Netgear of Santa Clara on July 31.  The quartet did well, selling at or above the price ranges initially set by investment bankers. They gained 26 percent to 34 percent on the first day of trading, and mostly held on to those gains. As of Friday, the four were 25 percent to 39 percent above their IPO prices.

"This is just the kind of good news Silicon Valley needs, and should have spurred a number of other companies to take the IPO plunge.  No such luck.  After Netgear's offering, the Silicon Valley IPO pipeline again stood empty -- no other company had filed an S-1, the Securities and Exchange Commission document that starts the two- to three-month countdown to an IPO."

Silicon Valley Tea Leaves: The End of the VC Game?

Friday's WSJ ran a front-page story on how difficult it may turn for new companies to make money in WiFi.  Why?  The quickness of the market dominant tech companies to respond.  In the prior high-tech cycles, the entrenched tech leaders were often overtaken by the little furry mammal companies.  This time the entrenched leaders have stolen from the VC playbook and quickly jumped into the WiFi arena.  Cisco bought two leading comapnies, Aeronet (Clarity) and Linksys, and dominates the access-point market.  Intel is commoditizing WiFi chips so rapidly it caused the leader (Intersil) to sell out.  Verizon and SBC are jumping into the hotspot business, following T-Mobile.  Even Microsoft is involved, having launched its own consumer line of access points. 

In the mid-90s, James Fallows of The Atlantic told the tech leaders at Agenda that they were about to become a normal industry.  How right he was.  Now we are subjected to antitrust claims, get out-lobbied by the entertainment industry, get dissed by a standing President in favor of old-line industries, and are outsourcing feverishly to China, India and Russia.  PCs are a slow-growth, mature business; enterprises have cut back on tech purchasing; and a debate rages in the Harvard Business Review over whether IT matters. 

 

The implication is that the rules may have changed.  Instead of this being another cyclical downturn in Silicon Valley, it may reflect a more fundamental maturing of the tech game.  The 'normal' process of starting a company, getting VC funded, and making it rich, may be over. 

 

 

Credibility Gap

LBJ escalated US forces in Vietnam based on the Gulf of Tonkin incident, where he claimed North Vietnamese gunboats had attacked US ships.  There was almost immediate dispute over the President's version of the incident, and it led to the phrase 'Credibility Gap.'  LBJ talked of victory, TV showed a quagmire.  LBJ's Credibility Gap grew to Grand Canyonesque proportions after the Tet Offensive in 1968, and LBJ withdrew from seeking re-election. 

Something similar may be starting with W's justifications for the war in Iraq.  Whither the WMDs?   Rush Limbaugh is convinced we will find them in the next six months, but if we don't, look for the press to begin speaking of a new Credibility Gap, especially as the post-war quagmire grows.  The Elliott Wave prediction of a Big One by 2004 also suggests that W will be a one term President, hard as that may appear right now.  So far he has had an economic record unmatched in 70 years - he is the only Prez since Herbert Hoover to have had a net loss of jobs in his first term. 

Greenspan also may now be facing his own Credibility Gap.  The WSJ ran an excellent editorial by Melvyn Krauss of (coincidently) the Hoover Institution at Stanford.  (I would give a link 'cept it requires a paid subscription.)  He says bond buyers feel they were hoodwinked by Greemspan's talk of deflation and suggestion that the Fed would buy longer term bonds.  This is what led to the interest rate drop from April - June that was so stunning reversed in July.  After the June FOMC meeting, bonds began being dumped 'in earnest' as the bond market began to doubt Greenspan's statements that rates would not be raised for a considerable time. 

The devastating stagflation of the '70s was preceded by the fall from grace of US political institutions, starting with LBJ's Credibility Gap, followed by the Pentagon Papers and culminating with Watergate.  In our current economic cycle, only private institutions have fallen from grace, particularly self-aggrandizing CEOs, Wall Street analysts and the scapegoat for dot-com IPOs, Frank Quattrone.  Now with the unprecedented recall of California's governer, the shaken standing of our closest ally, Tony Blair, the incipient Credibility Gap of W, and the end of Greenspan's 'maestro-economics', the other shoe may fall. 

Bubbles' Baubles Babble

Good post, Ethan. Yes, some speculation is occurring, but this does not have the characteristic of a speculative blowoff. Bubbles burst after a speculative frenzy caused by easy credit. Credit fuels the frenzy, money is misspent on baubles, and when the bubble bursts, the money created by debt evaporates. Left behind is overcapacity, bankruptcy, fierce price competiton, deflation. Think telecomm.

But I do agree that many happy homeowners may have put themselves into a squeeze if they took variable rate mortgages and are at their limit of debt carrying capacity. Expect a firesale of baubles. And a drop in aggregate demand from consumer spending, which could make the current 'recovery' sputter and flame out.

Bubbles, speculation, and the wealth effect

In his previous post, Duncan said, "The housing increase is not really a bubble, since a bubble would reflect speculative excess, whereas we have so far seen refinancings with some $ taken off the table as opposed to borrowing to speculate (e.g., 'no down payment' types of purchases).  Bubble or not, history says it will correct & this will sap what little staying power still exists in the economy."   

I think this point is worthy of a bit more exploration.  The 'wealth effect' is a well-known artifact of rising asset values, primarily financial assets but also associated with real estate and other real asset inflation.  Simply put, when people feel like they have more wealth, the spend more money.   If we define speculation as the active attempt to make money through risk-taking, then clearly much of the increase in housing prices is not speculation.  Nonetheless, this sort of increase in asset value can have the same deleterious effect as temporarily-successful speculation -- excess consumption on non-essentials, poor financial choices, and vastly increased personal exposure to pending financial downturns.  It seems to me that the distinction between speculation- and asset-inflation- driven wealth-effect spending is moot. 

Having claimed the distinction moot, I'll go back and poke at the distinction itself a bit more; can we really claim that buying a house in today's market isn't speculation because of an absence of "borrowing to speculate"?  In California, it is not only possible to purchase with as little as 5% down in some cases, but complex financial instruments masquerading as mortgages, such as a 7-year balloon, further separate real estate transactions from the concept of "housing purchase" and push them increasingly into highly leveraged financial risks -- mostly partaken, as the highly-leveraged rubric implies, with other people's money. 

It is commonly agreed that people buy homes on the basis of total monthly housing payment; and as mortgage rates decrease, the ability to afford high list prices, and thus housing prices themselves, expand. 

This comes-out-in-the-wash thinking hides a dangerous rachet, however; If I purchase a house in a time of high interest rates, then the low list price of my asset has large potential to grow while at the same time, my ability to refinance my mortgage in a potential lower-rate future means that my monthly payment has high potential to fall.  In the opposite situation -- such as today's market -- buying in a time of high nominal list prices and low interest rates, my asset is poised to decrease in list price, and my ability to reduce my monthly payment, even if I have locked in low fixed interest rates, is nonexistent.  If I have *not* locked in low rates, choosing to go with a variable-rate instrument, my monthly payment is quite likely to rise. 

The resultant 'negative equity' trap can be terrifying -- such a rebound nearly destroyed the Southeast UK (i.e. London) housing market in the early 1990s, with dramatic social effect on the ability of the middle class to buy housing throughout much of the next decade.  I see no reason why we are not poised for a similar blowout, and can only term the willingness of some home-buyers to commit to the largest single asset-purchase and risk-assumption transaction of their lives in the face of such negative potential, as uninformed speculation at its worst.

Where We Are: Dog Days of August

When Sirius, the Dog Star, rose in the evening sky, the Romans called the time the Dog Days of August.  As we entered August, the market, which had doggedly kept afloat all summer, has begun to roll over, and now may be turning into a serious dog. The key level of SP962 was breached today, and although the market rebounded, it presages a further drop into next week.

 

We have now reached an interesting moment of history.  Greenspan is trying massive liquidity as a way to stave off deflation & deep recession.  So far it is working, but the interest spike this summer may dampen it before the economy truly turns.

 

The housing increase is not really a bubble, since a bubble would reflect speculative excess, whereas we have so far seen refinancings with some $ taken off the table as opposed to borrowing to speculate (e.g., 'no down payment' types of purchases).  Bubble or not, history says it will correct & this will sap what little staying power still exists in the economy.  Question is when?

 

The Kondratieff wave predicted deflation in commodity prices, which we have had since mid '80s, and debt repudiation, which has been happening altho not dramatically due to modern bankruptcy law, into 2003-4.  Thus we may be headed for a re-inflation period in 2004-05.  This will fleece one side of the bond speculators, since it will cause long term rates to spike up even more.  If this is what occurs, it will fit the 4-yr cycle (driven by Presidential elections) that predicts a generally up market into 2004 followed by a sweeping downturn into 2006. 

 

The Elliott community still leans towards the Big One this Fall.  The count would say a wave 1 down into Aug, and a reversal into early Sep, followed by the Big One down.  The market still seems corrective (seeking to figure out which way to go) rather than impulsive, although the last few days have begun to look impulsive.  Being watched is whether the hoped for upturn is truly coming later this year. 

 

A downturn of the sort they predict would not come out of thin air.  Likely would be associated with some event that furthers distrust of US institutions, such as a quickening of the concerns over Bush's stated reasons to go into Iraq, or an increase in the Iraqi quagmire due to US blundering, or shrinking polls in Bush's favor indicating he may not win the election.  These are events which might have more momentum and impact in 2004 than now. 

 

Consider the Big One scenario the prime count, but keep in mind the alt count that would have the market remain relatively corrective into Spring 2004 with the Big One slashing the life out of the Bush campaign sometime in election season into Fall 2004. 

Deficit Away!

The Federal budget deficit will be $455 billion, roughly 50 percent larger than the White House estimated in February, the President's Office of Management and Budget said this afternoon. The projected deficit announced today, for the fiscal year ending Sept. 30, is up sharply from the $304 billion deficit the budget office foresaw six months ago. Unless conditions change significantly over the next few months, private analysts said the number could be even bigger. 

The economy, which has not grown anywhere near as rapidly as the administration forecast back in February, has also contributed to the rising deficit, as tax revenues have declined.  However, most of the increase is due to "war and taxes," Mr. Wyss said.

The White House is projecting a strong recovery during the coming fiscal year, but even that will not prevent the deficit from widening further.  According to the statistics released this afternoon, the economy is projected to grow at a 3.6 percent rate for the twelve months beginning in October. Still, the deficit is forecast to widen to $475 billion.   War-related costs "could easily push the 2004 budget deficit over half a trillion dollars," Mr. Spratt said.

 

Many economists and most Republicans argue that the more important measure is the deficit as a percentage of the overall economy. At about 4.2 percent of gross domestic product, the deficit remains less than it was in 1983, when it hit a post World War II peak of 6.0 percent.  Nonetheless, in nominal terms the deficit for the 2003 fiscal year will be a record, easily eclipsing the $290 billion deficit recorded in 1992, when President Bush's father was president.

 

Silicon Valley Tea Leaves: Iced Tea

> Tech results don't augur well for spending recovery - Reuters

Results from several major tech companies suggest the long-awaited tech
recovery hasn't arrived yet. Motorola posted weaker-than-expected
quarterly revenue and reduced its forecasts. Lucent said it would miss its
profit targets. Intel's results beat expectations, but CFO Andy Bryant
said he saw no signs of companies increasing their PC spending. "Until the
corporate upgrade cycle starts in earnest, particularly in the United
States, any recovery in technology will be muted," said one analyst.
http://www.corante.com/personal/redir/26436.html

 

 

Silicon Valley Tea Leaves: Green Tea?

More indications of a turn in eCommerce Times. "This Valley seems to function in 15-year waves -- and we're at the beginning of the next cycle," says Bill Tai, general manager at Charles River Ventures. Mood lifters include:

* Better business conditions.
* Surging tech stocks.
* A "back-to-the-lab" movement.

The glimmers of hope have lured back entrepreneurs like Joe Kraus, who co-founded Internet portal Excite in 1994. After "going dark" for more than a year following the dot-com meltdown, Kraus, 32, has plunged back into tech with two start-ups and investments in another pair. "It was nuclear winter," Kraus says, recounting tech's prolonged slump at a sidewalk cafe in Palo Alto, home of Stanford University. "Now, there's a spark in the air."

Despite positive signs, the watchword is caution. "For surviving companies, there is an upturn," Oracle (Nasdaq: ORCL) CEO Larry Ellison recently told analysts. "But there are a number of Silicon Valley companies that need to go out of business."

"Because everyone talks to each other in the Valley, this could be massive self-delusion," Kraus says.

More Stocks Away!

The wave action since July 31 is fairly clear: we have done a little wave 1 down, a wave 2 back, and are now part of the way through a sharp wave 3 down.  Tomorrow should continue down to finish this wave 3, then reverse.  The reversal will tell a lot to resolve whether we are still have further upside this summer, or whether Jun17 is truly the end of wave 2 since October.  We still could be in a 4th wave triangle, with a final 5th wave to go.  Watch key indicators:

• STU view: S&P breaking 962 would vitiate the triangle count; it is now at 965
• Wavespeak view: Dow dropping and then reversing above 9104 (the subwave 1 level) would turn this downtick into a 3 wave pattern, which keeps the trangle alive; alternatively, if it drops, reverses below 9104 and continues down below the subwave 3 bottom, this would confirm a five wave [pattern and vitiate the triangle (triangles are made up by a series of 3 waves.)  
• Zoran view: sees us in a topping pattern since Jun6, and marks jul31 as a potential bifurcation point.  He was looking for a decisive break of the recent trendline and downside mometum.  We appear to have that.  The lower trendline of the recent triangle, the trendline for the full upmove since March, and the 50 DMA in most indexes, have all been breached. 

Looking for a cause?  Look no farther than Bonds Away!  The interest rate spike is causing rotation out of stocks into bonds. 

Silicon Valley Tea Leaves: VC hit rock bottom?

AlwaysOn reports that Jim Breyer of Accel thinks "that we’re near the bottom of the venture capital cycle. We’re not quite there yet, but we’re getting close."  He adds:

 

"Our best experiences have been with startups that deliver their first product to market within 12 to 18 months ... If the product development cycle is longer than 18 months, then the chances of matching the product to the customer are greatly reduced. On the other hand, if it’s under 12 months, one really questions the defensibility of the product. In our experience, that 12- to 18-month new product development sweet spot, with a group of 10 to 30 engineers or developers, is the ideal model."

Stocks Away!

The developing triangle appears to have ended, impulsively down, on Thurs/Fri.  This triangle could be a wave 4 with a 5 to follow, but the consensus of ewavers is that it was a wave B triangle within a subwave 2 reversal of the peak on Jun17,  and the uptrend since last March, and indeed last October has ended.  Next week should tell.   

The Bonds Away!  reversal (rates spiking up) means herd money will flow back into bonds.  Higher rates may end the hime refi game, which has kept the economny afloat for three years.  Not clear whether Greenspan's gamble to reinflate the currency will succeed in turning the economy in time to avoid the consequences of further credit bubbles.   

Bonds Away!

CBS Marketwatch reported that they don't know when previously the T bond gained 150 bp in 6 weeks. The 10-year Treasury bond hit 4.6% Friday from 3.076% on June 16. Of course, six weeks ago the US deficit wasn't headed towards $450B or higher per year for the foreseeable future. The PIMCO bond fund has been returning 9% for the past two years, but the party appears to be over. the Elliott Wave analysis says bonds have ended a 20 year bull market since Volcker began killing inflation in the early '80s.

Recommened response: go short term bullish on bonds! After such a fall, a rebound is inevitable.

Cautionary note: it turns out the last time we saw such a bond drop was in May 1987, before the October crash.