Planet Yelnick

Springtime for Venture?

With apologies to Mel Brooks:

Springtime for venture and IPOs
Winter for cram-downs and RIFs
We're investing at a faster run
Lookout, here comes the billion-dollar fund!

During this Nuclear Winter for venture, many of the megafunds said they were going back to basics and downsizing their funds. Now the billion-dollar fund is back. NEA just closed $1.1B. Other venture firms have been raising their first new funds since 2000, albeit still smaller than the bubble funds, and often with fewer general partners. Kleiner Perkins for example is finishing up a $500M fund (or a$400M fund, accounts differ), albeit with some confusion about general partner roles, perhaps befitting the Bubble Echo psychology, since they appear to have raised the capital despite some of their premier partners taking a reduced role in the new fund. Nevertheless, a massive turnaround from 2002, when the VC industry gave back over $5B of capital.

Is this renewed venture optimism a bullish sign? Perhaps smart money truly believes the bull is back?

March: In like a Lamb, Out Like a Lion?

This month's Elliot Wave Finanancial Forecast (EWFF) thinks the top is in. The Dow Transports topped first (Jan22) followed by the Naz (Jan26). The S&P hit 1159, almost precisely its wave 2 target of 1161, on Feb17, followed by the Dow bouncing off 10754, close to its target of 10774, on Feb19. Also, gold has dropped and the Dollar has strengthened, reversing their trends during wave 2. Other analysts are now weighing in on the side of the EWFF. A loyal Yelnick reader forwarded this link to Barrons, which points to Yelnick's target of late March/early April for the top. Other pundits are noting the strengthening of the Dollar and asking whether equities will now head south.

Yelnick's view is that the top is almost in but we have yet to see the impulsive nature that marks a top. Expect the Bubble Echo to go out like the Bubble. The 2000 tops were accompanied by large swings down and up. Yelnick was pitching a secondary offering during this period, and remembers that day in early April when the Nasdaq dropped 500 points and came back during the trading session. Yelnick was in NYC with a full schedule of 11 mutual funds. As the day went on and the fund managers looked more and more haggard, the image that was left was as if they had tried to jump out of their high-story windows (the ones with commanding views and high rents), but unlike in 1929, they simply bounced back off the double-paned tempered glass sealed windows, and then decided to get back to the business at hand. And so too the market bounced back. But the bruises were left.

The EWFF count leaves open one more jink and jive before the top. Watch for increased volatility as we enter March like a lamb but leave like a bear.

Bubble Echo

This month's Elliot Wave Finanancial Forecast (EWFF) has an excellent analysis of why this period is a wave 2 rather than the start of a new bull. Bull markets climb a Wall of Worry, bears slip down a Slope of Hope. In between, a wave 2 echos the psychology of the prior bull and often exceeds the excess of the prior manic peak. Hence the 'bubble echo.' The EWFF analysis is compelling.

Prechter Year in Review

2003 was good for stocks and bad for Prechter. In Sep02, he said he saw the market as clearly as he had in 1984, when he made the call that set his reputation. His expected meltdown ended well above the predicted levels, however, and his readers were caught on the wrong side of the market. He thought the bounce of the Oct02 low would reverse quickly, and he called the top prematurely a number of times before backing off to reconsider the count. He significantly changed the count he had been following since the peak in 2000. Recently, he has also changed the timelines for the Big One down. For many years he had expected a rapid drop off the peak, with a deep bottom in 2003 or 2004, similar to the fast drop from 1929 to 1932. Now, he sees the opposite: a slow decline that unfolds at 1/10th the speed of the second great crash during the Depression, in 1937-8, unwinding all the way into 2011.

It does not inspire confidence in Elliott Wave usefulness to miss the big calls this way and then change the timescale so radically. Prechter's strength has been the courage of his predictions. To his credit, he is still calling for deflation when the punditry is more worried of inflation, and making similar contrarian calls on the Dollar (bottoming), Gold (topping) and Oil (topping). His change also seems to have inspired major changes of direction from other Ellioticians. I wish I could include all of their private newsletters for you to review, but here are some examples:
* Prechter: slow slide into 2006, triangle correction into 2008, deeper drop into 2011
* Neely: an ABC flat, have ended A and are in B, and B will exceed the 2000 peaks
* Zoran: Dow still in the Bull but will end soon in a truncated 5th wave, below the peaks (Zoran sees the broader market, the S&P, as in a bear market, with a count similar to Yelnick's)

So, what gives?

Markers of the Fall: Economic Growth Slowing

Sy Harding, one of the best market watchers out there, posted an analysis of recent economic reports that show not only that the 4% growth in Q4 is well down from the stirring 8.2% of Q3, but the trendline down is even steeper. Q4 had been expected to be 4.9%, so 4% is a disappointment. December was below the Q4 average, indicating deterioration into the Christmas season. Severe weather in December may have contributed to a weak month, but retail sales fell in January when they had been expected to rise. December retail sales were also revised downward from 0.5% to 0.2% growth. We need to see if business activity picks up enough to replace slackening consumer activity and keep the economy going, but it looks right now as if the Yelnick prediction that this wave 2 sputters to an end in Q2 is still on track.

Markers of the Fall: Google IPO Buzz Topping

Pundits such as Forrester CEO George Colony are beginning to see the potential of a Google IPO as the end of the bubble echo, as per Yelnick's recent post on a flat to poor post-IPO Google stock performance as a marker of a top. This contrasts sharply with the Google IPO buzz stories of just a month ago. As a one-off comment, it is typical of the contrarian positioning the punditry loves to take. No one remembers this if Google does well, but the isolated contrarian can crow about their prescience if otherwise. If the pre-IPO buzz of Google turns more generally negative, however, it may reflect a more substantial turn in the bubble echo psychology.

Wave 2 Targets

The major market indices are all very close to satisfying certain targets for completion of wave 2. The levels to watch are:

Dow: 78% retracement - 10774
S&P: 50% retracement - 1161

Both the Dow and the S&P came close enough to these levels to satisfy the fibonacci relationships in the past two weeks, and both have faded since then. Whether the current downturn is a trend change we will have to wait and see. Yelnick still expects a relatively bouyant market - albeit one losing momentum - into Mar/Apr.