Planet Yelnick

Real Estate Bubble - Sleepless at The New York Times

Another piece on the parabolic rise in real estate in The New York Times, with this chart, whose caption is misleading, because the stock bubble has happened before, while the parabolic real estate spike is unprecedented.  This chart has led to some interesting discussion between bloggers and the source of the data, Prof. Shiller, who wrote the book Irrational Exuberance, along the lines of, is the comparison itself fairly drawn? 

Real Estate Bubble - Sleepless in Seattle, Scared in Manhattan

This piece, Be Scared--I Sell Real Estate in Manhattan, speaks for itself.

Greenspan and Beating the Kondratieff Winter

Greenspan made a remark years ago that he knew how to beat the Kondratieff Winter - the period of deflation that follows a stock crash and debt overhang - by providing massive liquidity (ie. printing money). The Mogambo Guru (pseudonym for an occasional writer for Barron's and other financial publications) opines, in his own immutable style, on the bigger mess that Greenspan may have made by following this latter-day Keynesian advice. The full piece is in today's Daily Reckoning. Here are some excerpts, with emphasis added:

"America has become more of a debt 'junkie' than ever before with total debt of $40 trillion, or $136,479 per man, woman and child. ... And then when you divide this $40 trillion cumulative debt by the 70 million people whose jobs are not government jobs or are paid with government money, then those poor 70 million private-sector workers have to work to pay off $571,428 apiece! Hahahaha! Whose idiotic idea IS this? Hahahaha!

The Turn Is In!

This may be (mercifully) the final post in this informal Turn Date series. The first turn date was a bust, as was the third; but looking back the middle turn date was pretty close to being right. The Dow peaked on the very last day of the turn window, Mar4, and had an intraday peak on the Monday following, Mar7. Similarly, the S&P peaked on Mar7. It was not clear at the time that this measured a major turn, as the drop off the top was anemic. Now it is much clearer that a five-way impulse has developed since Mar7.

The Mar4 turn also was a turn in the Dollar, which has rallied in the Dollar Index from around 81 to above 84, and is expected to continue to 89-90 before correcting again. This Dollar Rally is expected to last for as long as two years, coinciding with a serious drop in the Dow during the same period.

The STU is watching SP1163 and Dow10350 as possible ends to the current downtick. An interesting ewave site, Elliott Today, had a fairly precise prediction of SP1229 for the top, adjusted upwards from SP1161 which would have been a 50% retrace of the tumble from Mar00 to Mar03. SP1229 was reached on Mar7, and satisfies a number of Fibonacci relationships.

The EWT provided additional support for a Mar4/7 top. Prechter has been tracking a comparison of the 1937 market to the 2004 market. Ending the wave 2 (or B) bounce from Mar03 matches a similar last gasp rally in 1937 although at a 12x slower pace. Yelnick criticized this analysis as simple pattern matching in an earlier post, since given the fractal nature of ewaves similarities can be found at all levels of degree, and why would human nature change so much to correct this time so slowly? Prechter's response to why 2003-5 is unfolding so much more slowly than March to Aug 1937 is that it is a correction of two higher degrees. (A lot of you have lost money following Prechter, so here is an issue of EWT to get a hold of, whether to believe it or add grist to your anti-Prechter mill.) If the 1937 comparison holds true, the market is about to do a serious Wave 3 dive that will steadily take us down over the next two years by 50%.

Prechter also gives a 1929-33 comparison. Both the Dow and the S&P rallied after the '29 Crash by 48%, then slid over the next two years 86% and 83% respectively. The drop from 2000 and retrace are similar in magnitude to the 1929 aftermath, but unfolding more slowly, albeit less than the 12x slowness compared to 1937. If you buy into Prechter's view, expect a steady but deep slide into Mar07, then a rally, and a final bottom around 2012 +/- 2 years.

Yelnick's view is that we have an upcoming rally that gets close to the Mar7 highs, and then we enter the dreaded wave 3 of 3. Given that the Dow has tended to retrace 78% rather than the normal 61.8% - indeed this wave 2 end on Mar4/7 is just above a 78% retrace from Mar03 - we should expect a 78% retrace of whatever near-term bottom we will see in this March drop. Timing is as yet uncertain, but perhaps the retrace lasts through April and the final peak is in May. That peak in May will be the last call for the Bulls until the bottoming 2006 or 2007.

The Stable Currency Dow and the Unstable Stock Market Indicators

Yelnick has oft-noted that the Constant-Dollar Dow gives a better read on the wave count in times of high inflation or deflation, or as now high Dollar fluctuation.  Prechter seems to be coming to this view as well.  In the most recent Elliott Wave Theorist, he expands on this approach and expounds on his choice for the stable-Dollar benchmark.  Using the Real Dollar as adjusted for inflation is not optimal, since the measure of inflation such as the CPI may itself be flawed, especially in times as now where the excess global liquidity is showing up in inflation of assets (real estate, commodities) not goods and services.  Using gold may not be that useful historically because the US manipulated the gold standard from 1933 to 1971; after that gold showed significant volatility like a commodity until the 1990s when it settled down.  Instead Prechter chooses a basket of four currencies: Swiss Franc, $NZ, $Sing and $US, which includes the most stable European currency, the most stable Asian currency, the most stable resource-nation currency, and the unavoidable US Dollar. 

It is informative to view the Dow against a Stable Currency Basket (and against Gold prior to 1933).

Double Down on the Dollar

Yelnick called the Dollar's first bottom in early Dec04, followed by a second bottom in late Dec04.  It has since rallied up into Feb10, and now has sunk back down to test for a third time the Dec04 bottoms.  Using the rule of three of Zoran, this strongly suggests that the Dollar is about to make a lasting bottom and start a multi-month rally. 

The STU today analyzed the plight of the Dollar and counts it as the end of a B wave of an ABC pattern off the Dec04 lows.  Alternatively, and perhaps fitting the pattern better, this B wave could instead be the final fifth wave down for a lasting bottom.  Some pundits are looking for it to go a little lower than in Dec, down to below 80 in the Dollar Index, which supports this count.  Note that the rally from Dec to Feb10 was a three-wave pattern, and has since been retraced too far to make the Dec-to-Feb move the start of the multi-month rally itself.

A Turn For The Worse

March came in like a lion in the stock market, but is getting a bit sheepish.   The 100 point drop in the Dow on Friday has woken the ewave bears out of hibernation, and emboldened them to call the top in or about in.  The STU is quite clear: they see that the small caps have topped, along with the Nasdaq, and the Dow and S&P may follow this coming week.  The S&P is sitting on the lower trendline of the Bush Election Rally since Aug04.  If it breaks below, the top is in; or we may see one more leg up next week followed by the expected drop below the trendline.   

Most wave counters see us as in a final wave 5 of the Bush Election Rally.  It does not count cleanly as such, particularly in the Dow, due to overlapping waves; hence Yelnick's view that this is a diagonal triangle.  It is possible to count this as an extended wave 4 ABC flat, with the diagonal triangle that is just ending the B wave.  Zoran points out that lasting tops and bottoms tend to show a triple top or bottom, and this purported top has only shown two tops.   If this is an extended ABC fourth wave, the final top will be several months away.

Next week is our third turn window, and is poised to throw ever more confusion on the direction of the market.

Getting to YE$

We have suggested that large US Dollar reserves may become a hot potato: the last nation to have considerable Dollar reserves will take a bath when the Dollar drops another 30%.  This is largely more fear today than reality, as the Yelnick view is that the Dollar will rally for the next year or two, and large Dollar reserves are needed to manage the oil trade, which is in Dollars; yet the fear of Dollar collapse may be causing massive shifts in central bank policy.  China was rumored to be moving to a basket, such as the YE$ basket (Yen, Euro, Dollar), and while they publicly dissembled on the topic, they hold fewer Dollar reserves (as a percentage of all reserves) today than in 2002.  Korea publicly stated a policy to lighten up on the Dollar.  Now Japan, which is the most exposed to the Dollar hot potato, is publicly talking of a basket approach, as reported in Dollar Catching Asian Flu.  The article adds:

China, India, Thailand, Indonesia, Taiwan, the Philippines and Hong Kong have already started a sell-off, despite a diplomatic show of solidarity for the greenback that is prudently designed to prevent a crisis of confidence in exchange systems.

The next shoe to drop may be the oil trade.  Before we 'liberated' Iraq, it was the largest oil producing nation to have switched from trading in Dollars to trading in Euros.  (No wonder the French were against the war!) The French, Germans and Russians may conspire to switch Russia to trading in Euros, and some of our less friendly oil nations may follow, such as Venezuela.  This would accelerate holding Euros over Dollars and lead to further Dollar weakness.  Before pulling the switch, the nations with high Dollar reserves - such as Japan - would be advised to lighten up on the Dollar and try to stiff some other nation with the hot potato.  It appears they are well aware of this risk.

Ending Diagonal

The drop in the last two days has gotten some ewavers to claim a top is in, but that still appears premature. The S&P appears to be in an ending diagonal triangle, meaning lower highs and higher lows in a pattern which closes to a triangle. (It is too overlapping to be counted as a normal rising impulse.) It still points to SP1245 for the end, and this may happen next week during the third turn window we have been discussing. The STU reports today that a break of SP1199 (ok, call it 1200 for convenience) or Dow10673 would confirm that a top is in. The S&P is resting on its lower channel trendline, hence should bounce tomorrow. Watch to see if the S&P breaks 1200 or bounces towards 1245.

Perhaps of more immediate interest is over in bonds. Interest rates spiked up in the 10 yr treasury bond. The Dollar has dropped down near the levels hit twice last Dec04, meaning a triple bottom may be forming, followed by a Dollar rally. This rise in rates, and possible rise in the Dollar to follow, may be the catalyst for the S&P and Dow to reverse next week. Watch for the Nasdaq to turn down first, signaling the S&P and Dow will follow. The Naz has been down since Jan05, and has been trying to rally since the Dow and S&P turned up on Jan24, but has so far only been able to run in a pathetic trading range that remains below where it was January a year ago, in 2004.

As The Wave Turns

The ewavers expecting a turn last week were once again disappointed.  Even a broken clock is right more often!  The STU went so far as to call the market 'loopy.'  Yet the market is not hard to count right now, and since Friday the STU has looped back to the consensus count: we are in a wave v of C (if you still buy that this is a wave 2 or wave B correction) or a wave v of 1 (if you see this as the first leg of a new bull, coming off the Mar03 bottom).  In either case we have a bit more to go, then the most serious correction since the Bush Election Rally began last August.  (Yes, it was clear to the market that Bush would win shortly after the first week or two of Kerry's campaign.)   The likely target for the top is just under Dow11100.  Look for it to pop through the psychological 11K level this week, and then we shall see if it stays above, since it is likely to test 11K from above and bounce off it before breaking below.  What does this mean for our turn window analysis?

Guestblog - The Greenspan Party Comes to a Close

Earlier this week in testimony before the Congress, Alan Greenspan bemoaned the fact that the long end of the market had not responded to the Fed's continued attempt to jawbone the rates higher, giving them room to move short-term rates to substantially higher levels. Today the market reacted - and the following occurred:

    Prices & Yields 03/04
Bond         Price            Change         Yield         Yld Chg

         2 yr          99 20/32          1/32         3.56%         -0.01
         5 yr          97 30/32          6/32         3.95%         -0.05
        10 yr         97 15/32         17/32         4.31%         -0.07
        30 yr       110 27/32       114/32         4.64%         -0.09

The spread between the 2 yr and 30 yr bond now is .96% and the spread between the 2 yr and 10 yr is now .69%.

Apparently, the collective wisdom of the global bond market pales by comparison to the wisdom of Mr. Greenspan's Fed - as they seem to be unable to "read the tea leaves" that are sitting prominently in the bottom of their cup. They are rapidly running out of runway for any additional hikes.

Good! Aside from a jump in global commodity prices, there's very little else to point to.   Job growth is lackluster, factory utilization is moderate, housing is cooling, pricing power is negligible and the Wal-Mart economy is in full bloom.  Any rising prices are almost immediately met with falling demand (something Wal-Mart had the pleasure of experiencing last year when Holiday pricing disappointed customers and trashed their November sales}. This is still something the CPI fails adequately to compensate for.

If, as stated, the Fed will not cause the yield curve to invert then the rate raising party is about to end. As Dirty Harry said so profoundly, "Sometimes a man has to know his limits".

Yield Curve and the Japan Carry Trade

Now even Greenspan does not know why the yield curve is flattening.  The stock market is up, the economy buoyant, and yet the long bond rates are narrowing with the short term notes.  Usually that signals economic trouble ahead.  When it inverts - the short term rates higher than the long term rates - it signals a recession.  What's going on?  Maybe it lies in the Yen Carry Trade.