The print edition of the WSJ on Friday had a number of articles which collectively built the bullish case, and represent the consensus view. The Ahead Of The Tape column calls this a Durable Recovery, and says: "The April Shower of powerful March data has turned around almost every last bear on the economy." The three most important indicators - employment, retail sales and CPI - scored a " 'triple double' " meaning all three were twice as high as expected. (Not sure why CPI increase is good news, but more on that below.) The front page ran an article called Companies Regain Pricing Power, suggesting that deflation is ending and predicting inflation ahead. The Money section had several articles on how to deal with the expected rate boost as the Fed heads off the now-anticipated inflation. The Heard On The Street column is entitled Bulls Argue Higher Rates Won't Hurt Techs and Financials. The bad news on inflation is said to be good news because it indicates that "the economy is heating up."
The key to the bullish case is business spending. The economy has stayed relatively bouyant due to increased government and consumer borrowing and spending. Government spending seems to have exceeded all bounds, and in a campaign year the pressure is on to constrain it. As the consumers' capacity to continue borrowing and spending abates, the economy needs business spending to pick up the slack. The key indicator to watch is durable goods orders. The consensus view was for a 1% rise in March - the reported number is 3.4%. Quite impressive. But not all bears went into hibernation. Bob Bronson reports in his private newsletter that the peak in these numbers actually occurred last December, indicating a slowing not accelerating economy. The reported number for March included revisions upwards for February; the impressive Mar numbers were actually lower than the revised Feb numbers, supporting Bronson's case.
The prudent bear would wait to see how these reports pan out over the next quarter. Even if we have begun a major drop, it will have its normal corrective reversal in late summer; and one can always get out (or short) then if need be. The imprudent bull should be buying on dips.
The wave count for the bullish case is as follows. We are in a major bull market since 1950. 50W1 went into the Swingin' '60s, 50W2 was the stagflationary '70s, and we entered 50W3 with Reagan's Morning in America in 1982. Within 50W3 we have had 82W1 up to the '87 crash, 82W2 which is the crash and its aftermath, and 82W3, the great mania of the '90s. Arguably 82W4 was the Asian Flu of 1997-8, and 82W5 was the final manic blowoff in '99 and '00, meaning the whole 50W3 has ended; or those were smaller wave actions within 82W3.
The question right now is whether the correction since the 2000 peak is 50W4, a major correction of the magnitude of 50W2, which lasted 16 years; or 82W4, a smaller correction in a continuing bull market. So far the broader market is down 50% from the 2000 peak as compared to the beginning of 82W3, a normal wave 4 correction that would fit the view that we are in 82W4. If so, 82W4 could have ended in Oct02 or Mar03, and we have begun 82W5; or 82W4 is still proceeding, and we have another wave down ahead of us. (It would count as an ABC, with the A wave down to Oct02 or Mar03, the B wave having possibly ended recently, and we would be in the beginnings of wave C down.)
Hence we have the three scenarios laid out recently:
> Mad Bull means we are in 82W5
> Cycles Rule means we are still in 82W4
> The Big One means we are in 50W4.
2004 is the year to sort this out.
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