Planet Yelnick

View From Jerusalem

You feel the weight of history in Jerusalem, some of it recent. Saturday is the Sabbath for one faith, but just another day for the others. Yelnick visited last Saturday, at the front lines of the New World Order. The Wave Principle says that during a Bull, we are peaceful, inclusive, and seek to unify. During a Bear, we are paranoid, exclusive and xenophobic. Which is it? What Jerusalem teaches is that we are only in the early stages of the grip of the Bear.

First Tipping Point

We are approaching a critical juncture. The last few trading days have seen renewed optimism by the Bulls, yet has done nothing to change the overall picture. Typical wave 2 rally after the 700 point drop in the Dow, and bouncing off Dow 10K, a symbolic level. Markets worldwide have all shown tops in the period of Jan to Mar. Visible large investors (such as Warren Buffet) have said that they can find no value stocks anymore and are staying out, sitting on large positions of cash. Some recent IPOs from China have fizzled, suggesting a leaking bubble there; similarly, the WSJ (print edition) last week reported of tech IPOs reaching deeper into less-ready companies, and some of those offerings not being well received.

The STU sees this little wave 2 as continuing through the coming week. Zoran sees this little wave 2 as already over, with serious downside ahead. The Elliott Wave Financial Forecast predicts a drop below Dow 9K beginning in early April. That would mean a 1500 point drop. This all fits Yelnick's view of a steep decline through May/June, followed by a summer rally, followed by a more serious decline into the election.

Springtime for Venture IV: Overhang or Hangover?

There has been a fair amount of analysis of the so-called venture capital overhang. CBSMarketwatch has its own 'springtime for entrepreneurs' analysis, that the overhang from 1999-2000 funds is leading to rapidly increasing deal pace, as the funds wish to invest quickly so they can raise their next fund when the gettin' is good. The commentary includes the obligatory cautionary note: "I am concerned that we may see a return of the trendy vanguard armed with inflated egos and misguided motives in pursuit of an IPO, even though others don't see it." Red Herring has run a series on the overhang, with interviews of many VCs. Interesting, the VC opinions run across the map. Tim Draper weighs in with the there-is-no-overhang opinion. Nevertheless, valuations are 'going crazy' as one VC notes, meaning overhang or not, the Venture Bubble Echo continues.

Piling on the Top

More pundits are calling the top.

The STU clearly sees the top as in. The most recent Elliott Wave Theorist gives a long list of reasons for the Wave 2 to have ended.

Barron's this week quotes from Richard Russell, the venerable publisher of The Dow Theory Letters. The Dow Theory is "that the Transports, originally called the 'rails index,' haul what the Industrials make. If the goods aren't heading to market, the economy -- and stock market -- are heading south." The transports have turned down fairly strongly while the industrials have lingered on. This causes Russell to see that the market is also headed down, with the economy to follow: "[T]he economy still is paying the price for the excesses of the late 1990s. Worse, the Fed's serial easing has created even more excesses, particularly in housing. Sooner or later the bubbles will burst, he warns, thrusting the U.S. economy into depression." Like Yelnick, he sees the recent rally as but a pause in an overall bear market. He also believes the Dollar will drop in half before this is over.

LeavittBrothers makes the Case For a Big Correction. The show a diagram of how sectors respond during an expansion, and then during the contraction. They demonstrate how this pattern has been met in the current wave 2 rally, and how we now seem to be about to fall off the cliff into a serious downturn: "We think the market is sideways to down for the next few months. Then we get a boost into the November election. Then 2005 will be down, down, down."

Zoran continues to develop his 'chaos theory' modifications to Elliott. His most recent analysis shows that the current drop has clearly gone beyond the range of the prior 'non-directional move' and thus is signaling a change of direction. Yelnick has noted that standard Elliott often loses its way during certain corrections, which Zoran prefers to call 'non-directional moves'. It is often unclear if a wave 1 is the start of a new direction or the continuation of the correction; or if a wave 5 is the end of the old move or the beginning of a new one. Zoran's distinction between 'non-directional' and 'directional' moves is much clearer in practice. He sees the markets as continuing down in a zigzag "T4" wave followed by a "T5" back up, before the Big One commences. In Elliott terms, his T4 is wave 1 down of the new move, and his T2 is wave 2 back up; the Big One is wave 3.

Finally, Hertler Market Signal, creators of the Smart Money Index, count us as about to begin the wave iii down of the current move. This is not the Big One, but a smaller degree wave 3; if right, next week should drop faster and farther than the move so far over the last few weeks.

Springtime for Venture III: Venture Bubble Echo

The evidence of a bubble echo in venture capital continues to pile in. Initally it was driven by a few hot new categories, such as the Friendster frenzy in social networking. More recently it has been driven by the scarcity of properties for IPO. Consequently, it has become fairly widely known that late-stage valuations have spiked up. Now it seems to be expanding to mid-stage deals, where it has gotten noticably easier to raise capital and where valuations are beginning to pick up.

Views From the Top

Two differing views of the current market from the punditry:

* "It's a top": CBS Marketwatch's Guru Corner provides a good summary of the many markers of a top in this 'echo bubble' and its possible demise over the next two quarters

* "It's manipulation": Sy Harding's Being Street Smart notes a curious and clever market manipulation around triple witching days (tomorrow): program traders dump the week before the options expire, driving them down (which would account for the sharp drops last week), then buy back in the week of the expiration (which accounts for the bounce this week), then dump their positions the week after.

Hence next week could be down, but the whole move down/up/down could be a result of manipulation rather than fundamental changes in the wave 2 echo bubble.

Snap Back!

Markets have impulsed down the past two trading days, a sign of a top. After a bit more downside, STU is now calling for a snap back (little wave 2) rally. That would be a good time to get out for now. We are entering the period when Yelnick thought we might end the big wave 2 from Oct02. After the snap back, we should have a more dramatic little wave 3 down. Time to snap back to watching this market closely.

Springtime for Venture II: Valuations A' Bloomin'

A veritable plethora of stories have noted the swing in venture activity, some even calling this 'springtime for venture' (although without the theme song of Yelnick's post ...). ZDNet reports the venture market as "blistering hot," noting that "the first two months of 2004 have brought with them more tech companies looking for venture capital, and more venture capitalists looking to invest, than any time since the dot-com bubble burst in 2000." Corante reports that 48% of VC firms are currently in the process of raising new funds. At the Innovation Summit in London, Joe Schoendorf of Accel Partners said he was seeing "another gold rush now in its very earliest stages," expecting venture capitalists to be more willing to invest in speculative start-ups now than at any time in the past 24 months. At the Asia Business Conference sponsored by Harvard Business School, a VC panelist noted that: "Asia's growth in population and spending is attracting VC interest from all over the world—even from die-hard California firms that once invested only in Silicon Valley companies."

The other 'springtime for venture' post reported from fund managers that the "stronger pulse" in the VC industry may be due to "compelling valuations in the venture capital asset class," as valuations today are similar to those during 1984-1985 and 1992-1993, approximately two times forward estimated pre-money revenues. These valuations are beginning to move upwards, particularly at later stages. Yelnick is aware of some recent deals floating around (several not yet announced) with private values around $400M, a number not seen since the end of the bubble. The expectation with them is a fairly rapid IPO.

If sounds as if, if this continues, it will soon be 'summer for venture' with valuation temperatures rising enough to set this bubble echo 'a boilin'. Several items have suggested that there is still a venture overhang, including a recent McKinsey study. The implication is the excess money will chase deals, driving values up somewhat foolishly. ("What do you get when you cross a sheep and a lemming? A venture capitalist.”)

Overall, however, the pundits are getting ahead of the market. Valuations are picking up, as is competition for deals, but it is still relatively selective compared to the 'real' bubble.

Constant-Dollar Dow

In a recent post, Yelnick described the strikingly different view of our current wave count one would see under a Constant-Dollar Dow rather than the Nominal-Dollar Dow we are so familiar with. The Constant-Dollar or inflation-adjusted Dow is discussed in Prechter's book At The Crest of The Tidal Wave (New Classics Library 1995). The Elliott Wave Theorist periodically uses the Constant-Dollar Dow to make a point. The Dec 15, 2003 issue updates the attached chart from that book to draw conclusions about the next major turning in point in the market.

We can also use the inflation-adjusted Dow to draw some conclusions about the current wave count.

Groundhog Day for Tech Stocks

The New York Times reports that much of the revival in networking gear that has helped fuel the rise in tech stocks may be due largely to government buying, not a broader-based change in the carrier and enterprise markets. This spending was one of the many methods used by the government to kick-start the economy. It is leveling and is insufficent to support sustained growth for networking companies such as Cisco and Foundry. Ity is still unclear of commercial spending will fil the gap.

Like the Punxsutawney groundhog, the NYT has risen up near the end of the Telecom Nuclear Winter and seen its shadow, foreshadowing more stormy weather ahead.

Does Tech Selloff Darken IPO Window?

Forbes has a good summary of the IPO window re-opening and speculate whether it may close prematurely due to the recent weakness in ther Nasdaq. The investment bankers who are driving this re-opening are still re-hiring as fast as they can, and are reaching downwards into the venture portfolio to deals with more modest revenues than they would have insisted upon just a quarter ago. They obviously are hearing from the mutual funds increasing demand for new issues. One month's pause does not a sell-off make, especially amidst the Bubble Echo psychology. Expect this window to remain open at least through the summer. Even if Yelnick's predicted top in late-Mar/early-Apr happens, the normal pattern of the market would be a drop then a rebound before wave 3 hits with a vengeance. Prechter would call this waves 1 and 2 down; Zoran would call this T4 and T5 of a terminal pattern.