Mother of All Margin Calls

Prechter Explains All today in a his July EWT.  I have previously posted that he would have to modify his long-standing count of the Big One down, and he has:  the next major bottom is either 2010 or more likely 2014.  You can read the EWT to see the historical patterns that lead to those dates, but they are consistent with many previous posts here - and astute comments from readers, several of whom have shown themselves to be better wave analysts than the commercial services.  We now are entering the set-up for what a recent pundit (I have unfortunately lost the link) has called the Mother of All Margin Calls.

First, let's review the wave count.  The EWT is now coming to a view held by Yelnick of the timing and shape of the next few years.  Here is an excerpt from a recent blog entry:

Prechter has long speculated that the bottom of the Big One could be in the range 0f 2012.  SInce the four year bottom will be in 2010 or 2014, I expect him to push that 2012 bottom either back to 2011 (a right-shifted four year bottom) or out to 2014.  A Big One will be sharp, so it could take 3 years, ending in 2011; but given that A took 3 years and B could be 5 years, C is more likely to be another 5, ending in 2014.  Then the whole period from would fit a pattern for the market since 1949 of around 16 +/- 2 years for each major wave (major turns at 1966, 1982, 2000, and then 2014).

Prechter clarified today that his statement of timing of "2012 +/- 2 years" meant either 2010 or 2014 not a range centered on 2012.  Most readers of this blog - who know of the 4-year cycle - would concur.

Whether this will break as an ABC zigzag with a big C down (Prechter), or as a triangle (Neely), or should be viewed as 82W5 (Caldero/Dent), we shall have to see.  The ABC view is stressed in the Dow, as it has gone more than 1.382% - let's instead watch the S&P for guidance. I believe Neely has dropped the triangle view, although it is still a reasonable count from  (drop to 2003 was A, rise since is still three waves in a B; the C down would NOT be the Big One but stop above the 2002/3 bottom).   

If we get a major correction from the end of this summer rally into Sep/Oct or beyond, and then a final rally into 2009, this rise from 2003 will break as a 5 wave, and Tony C's count will be pre-eminent.  That would mark the end of the long bull from 1982, and be followed by a major fourth wave correction of the whole run-up from 1949/1950 (pick your start point).  The expected subsequent drop from 2009 to 2010 (A wave), a rally (B wave), and then 2014 (C wave), would be a fast and deep 50W4.  After that comes 50W5, a major bull market rivaling the the runup from 1982. Woo woo!

Why this timing?  The Fed has engaged in a grand experiment, and at some point either will win its bet or lose big.  The current environment is likely to continue without much rocking of the boat through the 2008 elections and the Beijing Olympics.  After that, both China and the US may change economic policy - the US because the new President (especially if it is Hillary) will want to force a sharp recession, clean out the excesses of the current administration, and set herself up for a growing economy into the 2012 election; and China to stop runaway inflation.  Indeed, China may already  be starting down that path.

The Fed's bet is that flooding the market with massive liquidity can avoid the credit trap of the Great Depression, where 20:20 hindsight held that the Fed was too slow to prop up failing banks and avoid a tremendous drop in credit (loans) that shrank the money supply by 30% and threw us into a deep disaster.  We had had depressions before - in 1837 after a canal building binge, and in 1893 after a railroad bubble burst - and came out of them in 3 - 5 years.  But that was before the Fed, and the Great Depression, which got stuck in for over a decade.  The lesson learned was that a massive flood of liquidity can keep economic activity relatively alive, and the economy would work out of the excesses which caused the problems in the first place.  The Austrian School still disagrees, but this retrospective,  post-Keynesian view has prevailed. 

But the question must be asked - why were 1837 and 1893 self-correcting, and 1929 a prolonged slump that it took a world war to get us out of?      

The Fed's bet also comes from the 1987 crash, where the flood of liquidity was first tried and seemed to work.  After 1987, the Fed under Greenspan flooded financial markets with liquidity each time a financial crisis occurred: the S&L crisis, the forex problems in the early '90s, the Asian Flu in 1997, the Y2K fears, the 9/11 market collapse, and probably other times as well.  Greenspan set an expectation that the Fed would bail out financial players from risk - the Greenspan Put - and has created the moral risk that investors will pursue excessive risk.  The low interest rates of the past five years has also caused a global scramble for yield, exacerbating the moral risk; and the vast complex of derivatives and securitized debt has obscured the real underlying risk.

The 1837, 1893 and 1929 depressions all came after the same type of cause: a massive bubble fueled by excitement over a new technology and excessive credit formation.  The crash removed speculators and easy credit, and the excess capacity of the bubbles got worked off.   We had the same set-up in 2000: the Internet craze financed with excessive credit.  The crash cured dot-com fever, and the Fed's policy avoided a deep and prolonged downturn.  The Fed's bet seems to have been won!  The excess capacity from the Internet has now been worked off, and Internet/Telecom investments are now flowing again into new services. 

Let's hope this is so, because the alternative is not pretty.

One consequence of the Greenspan Put is a massive extension of credit - beyond dot-com/telecom stocks into every asset category.  The Internet over-capacity has been worked off, but what about all the other categories?  Real estate for example.  Indeed, the mainstream press is finally recognizing that we are in a massive credit bubble, and it may be topping. 

We have an anomaly: every asset category has increased in value, except the Dollar.  Indeed, given so many currencies pegged to the Dollar, the increase in assets/commodities has outstripped EVERY currency, including the Euro.  One might say that ALL currencies have dropped in value against commodities and asset classes.  If this is so, the economic robustness around the world is an illusion.  Inflation has been rip roaring in assets not goods & services.  We just haven't seen the diminution of net worth all around us.  Real wages are lower, real estate ran out of reach, yields on savings are low - but it is small drop across a broad swath, and hence harder to notice than skyrocketing prices.  This asset inflation has been fed by a massive credit bubble which has generated a gaping maw of obligations, which must eventually be paid off.   When the assets drop in value, how can these obligations be covered?

The Mother of All Margin Calls comes when the bottom layer of obligations - the toxic waste of poor debt that has been dumped into securitized complexity - comes due and cannot be paid.  This has already started with subprime mortgage debt.  This may begin to work up the food chain into high-yield debt.  These calls come because the underlying instruments have limits on how much they can be leveraged, and when the limits are exceeded, the financial institutions that hold the core instruments must begin to call them in.  A global scramble for cover is beginning.  Many of these toxic debts are being repackaged and resecuritizd, continuing the musical chairs one more round.  At some point, however, the calls to cover will exceed the speed of re-securitizing and offloading onto layers of creditors who have little clue what they really have.  Then the whole Ponzi scheme will begin to fail.  Debtors will have to sell assets to cover the margin calls, creating a cascading chain of events that will emerge as a financial crisis.  Once again, financial markets will look to the Fed to bail them out.  But we are talking multi Tens of Trillions Dollar obligations!  Can the Fed sprinkle a little liquidity here and there and stop the run on the banks?  What if China leads the run by dumping Dollar holdings? Let's hope we don't have to find out.   

The setup in timing is that this chain of events begin to snowball in 2009, as the US takes a recession, China acts to lessen its own increasing inflation, the Dollar falls, interest rates rise to allow the Fed to lay off Treasuries, and the higher rates force even more margin calls.  The Fed will be in a squeeze.  How to continue the Greenspan Put when they cannot drop rates without crushing the Dollar?  The Fed may already be in that squeeze. 

Then we *might* have Prechter's long-predicted Big One down.  Hillary as the new Hoover! 

Watch the Dollar, not the Dow ...      

Comments

[EN]

IF this is a B wave up since 2002/2003, then C would be expected to equal A in time, take the amount of time of A and B combined or take half the time of A and B together. IF B finishes in late 2008, this would give projections of 2011; 2012 or 2016. The argument for a later date is that the 40 year cycle which last bottomed in 1974 is due to bottom again in 2014. Also, as you point out, the secular bull/bear cycles tend to last 16 plus or minus 2 years, which argues for at least 2014 to end the sequence starting in 2000. The move off the 2002 lows is not impulsive and neither was the move down off the 2000 highs thus it is neither a 5th wave up nor a B wave in a zig-zag. It is a B wave in a flat or triangle, which, if it is a triangle, would also allow for a low in 2010 (C wave) and another higher low in 2014 (E wave). Wow . . . this is all fun to think about but what real use is it for making money? The great trouble with using wave analysis to speculate is that it is always a coin toss and you only know after the fact what the pattern actually played out as.

Wasn't Harry Dent the guy who was predicting another Nasdaq bubble starting in 2005 that would take it to 12000 by 2007 and then a crash? Here we are at the top of the current four year cycle and the thing can barely get to 2645, which is the .382 retracement of the 2000-2002 bear market! Then Prechter has been preparing for a depression since 1988 and still trying to predict one? These guys are really off their rocker but as long as they are making money from these crazy forecasts, I guess they are pretty smart to realize the addiction of mankind to oracles.

The only thing I am pretty certain about it that there will be at LEAST a 10 percent correction into this fall from the summer highs, whatever they end up being. Looks like we are getting close as we approach the end of the 2nd quarter.

[shawn]

"The setup in timing is that this chain of events begin to snowball in 2009, as the US takes a recession ..."

Well, the bear stern and merrill lynch has already engaged in selling and calling in the CDOs. I think the cycle already started, and recession has very likely started in Q1 2007 if not by the massive data massaging by the government in inflation, jobs (through "voluntary" drop out of labour participation thus reducing unemployment rate) and GDP economic activities (go read last week business week of Phantom GDP when companies outsource production oversea and commerce dept incorrectly calculate more GDP).

The only conclusion I can come up with this stock market discounting economies, is really FED.

1) They dumped the M3 statistically right when housing turned and they ramped up the credit bubble to +14% M3 creation.

2) The only thing in Greenspan and Bernanke mind, is definitely the LESSON of Mightty Japan in the 1990. NEVER, NEVER, NEVER allowed housing and stock to decline at the same time. NEVER! Else, you got this debt laden american and government plunge into deep Depression, worse than Japan.

Anywhere you looked, the same conclusion -- the money is too much and too cheap out there. FED is desperately flooding everywhere with money, and acted naive as they do not understand why there is high inflation. Here is the quote from Mish site:

------------------------------------------------
Bally Total Fitness Holding Corp., a Chicago health-club operator, is deep in debt and has periodically been considered a candidate for bankruptcy.

That didn't prevent Bally from borrowing $284 million last October. A unit of J.P. Morgan Chase & Co. arranged the loan, with investment banks and a hedge fund participating.

"I'll never forget being in a board meeting and saying to our investment bankers: 'How on God's earth was this so easy?' says Steven Rogers, a finance professor at Northwestern University who was then a Bally director. "They said: 'There's a lot of money out there.'"
-------------------------------------------------

Greenspan, and Bernanke, together with Bush, belong to perpetual hell burning. Keep them in your curse and pray for their demise.

[Werner Merthens]

Good old Greenie...
From hero to zero in a flash. He could do no wrong during the bull market. It was all his fault during the kiddy bear of 2000 to 2002.

[Werner Merthens]

Good old Greenie...
From hero to zero in a flash. He could do no wrong during the bull market. It was all his fault during the kiddy bear of 2000 to 2002.
Will Benny share his fate. What a nice diversion by the mainstream media. What you should be asking is this:

What is the true nature of inflation? What is the root cause of inflation? What are the long term effects of inflation?

Follow this link for possible answers:

http://MusingsofaSpeculator.blogspot.com

[skierwaver]

30 min SPX --- we see a 5-3-5 rally which started at the June 8 low. Second "5" was 1.62 times the first. The last 2 days were spent in a rambling tight range. The two possibilities are 1) it is a W4 consolidation, and 2) the market will roll over and go down. 1) is more likely, but who knows.

A breakout here would be a good long swing entry. A W5=W1 would project to about 1557 - new ATH.

Otoh, a(n unexpected) decline under 1515 would suggest that not all is well in the bullish kingdom.

[EN]

I have seen sideways patterns like today collapse out of the blue while everybody was expecting a fourth wave consolidation. In retrospect it usually turns out to be a triangle which ends the move at a lower high. At times like this, you can take a little stab at the long side during the pullback in case it is a small fourth wave with 5 up to follow. But you can't go crazy bearish even if it does break the purported wave 1 high at 1515 spx because the entire 5-3-5 up can still be the 1st wave in a larger ending diagonal pointed up. No matter what the market does, there is a way to count it according to Elliott - kind of like a Rorshak Ink Blot - there is no absolute. If we do get the pop up to slight new highs, I will be selling it hard.

[cstradingman]

Secular trend change in bonds? Well not confirmed yet, but this is the second attempt by the bears to change the long term trend on bonds. The last levels of resistence in yields on the 30 year treasury are 5.60 and 5.87 in yields. In my opinion if we breach 5.60 we should quickly take it back, otherwise the bear case has a upper hand. If we breach 5.87 in yields on the 30 year the secular trend in bonds has confirmed a change, we will be in a bond bear market! I feel the 30 year at some point will come close to 5.60% and then the bond bull market will resume. It is also a posibility we have already seen the high in yields. I guess we needed a quick selloff the scare away the last few bulls out there. I certainly surprised me! I hope we get the pullback I am expecting so I cen get long. It would be a low risk trade because I know exactly where to set my stops. I believe bonds are still in a secular bull. But this cyclical bear is certainly getting long in the tooth. Good luck!

[aa]

I think bonds are in a secular bear market - the bull ended in 2003.

And yes, on the 10 year, once we get to roughly 5.45%, it is possible that we get a cyclical bull market, lasting about 1 to 1.5 years.

[skierwaver]

EN -- "the entire 5-3-5 up can still be the 1st wave in a larger ending diagonal pointed up. No matter what the market does, there is a way to count it according to Elliott - kind of like a Rorshak Ink Blot - there is no absolute. If we do get the pop up to slight new highs, I will be selling it hard."

All true. Actually, an ED - which would be, apparently, the 5th looking from the March low - would be "nice". The odds would be better that a reversal would indeed occur. Regular impulses, "fivers", are a bit harder to play, because they are more likely to go on subdividing and extending.

Near 1521 we have the 38.2% retracement of the "fiver" from the 6/12 low - as well as the territory of the W4 of the same impulse. This would make a good potential target for the pullback... if that's what the index "decides" to do... :)

If we get a breakout at any time from this tight range, I'll try to go a long for a swing.

[EN]

Good luck Skierwaver! I too play a little bit here and there on shorts and longs until I feel that the big move is upon us. I have orders to short ND at 1991.25 for a position trade. Let's see if we can't get a nice reversal by mid-week. If this thing does not sell-off into October, I will eat my hat . . .

All the best,

EN

[Voice of Reason]

Did anyone notice that Bob Prechter has added commentary about Global Warming to the latest EWT?

Apparently mankind is not responsible for Global Warming and the entire human race is herding on this issue.

Who knew?

[EN]

You mean I just bought a Prius because of my stupid limbic system? Damn! That Leonardo DiCaprio fooled me . . . Damn!

Here is some speculation. Seems like the majority of EW guys are thinking an ending diagonal given today's action. If this is not an ending diagonal in the blue chips, and it maintains a triangular shape with no new highs, then it could be a triangle that breaks down (non-limiting variety); something which Neely has theorized ends a complex correction. I have, on many occasions, in different time frames, observed what I thought to be a triangle, which would thrust up, with a target as the widest leg of the triangle, only to see it collapse into oblivion from a lower high. It happens at bottoms as well such as the March 03 bottom when everybody thought they were shorting the E wave of a triangle and the E wave had actually ended the correction and we got an insane spring rally. They were shorting the breakout from the triangle. In this scenario, it would be possible for tech to make an ending diagonal and the blue chips to make a triangle that ends the move up. The collapse that would follow would be an unmistakable slaughter of at least 8 straight days down.

The SOX made a triangle several week's back. Had a 5 wave rally out of it to an almost perfect target, retraced .62 percent and now has taken out the high. In that case, the triangle would have been an X wave and we had AB and are now in the final C wave of it. This means a top in stox is at most a few weeks away.

Okay that is enough craziness for tonight. Santa, The Tooth Fairy and the Easter Bunny need some attention before bedtime. You gotta take all this with a grain of pepper.

[UnderABigW]

EN,

I have been a lurker here for a while. I like your work and wanted to encourage you to continue to post. I know this board has been slow lately and wanted you to know that there were people who were interested in and read your post.

Do you post on any other blogs?

Thanks.

[EN]

Thanks for the encouragement UnderABigW.

I don't really post much elsewhere. I like EW theory and speculation about the count even though I find it hard to use for controlling risk in trading. It seems to work often but often it fools one into fighting the trend by thinking each new low is a major low and each new high is THE HIGH. Then there are times you are waiting for the perfect target and the market misses it by a few ticks and then reverses. . . Arggr! If you couple EW with time cycles (see Fibonacciman) and market internals (if you trade the indexes) it seems to improve the speculation. The most profitable trading I have had is to find a strong trend, jump into it, get ahead, and then set a breakeven stop. If the direction keeps going, you make a tidy sum and if not, you lose no money. Very simple works better I find.

I sometimes chime in over at Oscar Carboni's site under the name FastEddy. I find Oscar Carboni's Omni system to be interesting and quite good at controling risk for the short time he has been posting his results. Although I don't know the exact mechanics of it, it appears to find the overall trend, then jumps on to that trend on any slight countertrend move. There are some other things he has come up with that are of interest such as mirror image patterns, new contract high characteristics of the ES, etc.

Hmmm, so what about Friday's action? Not really too bullish in the short term if we are to get back up to new highs for the year. But why is tech holding up so well? Most of the significant intermediate tops tend to start from a point where SPX and DOW are hitting slight new highs and this is unconfirmed by tech and small cap markets such as NDX, Russel and SOX. Usually when we get a range of 20 ES points in one day, the NQ moves 40-50 but it is holding up pretty well. One thing I have noticed though is that all this volatility in a range tends to be bearish at tops and bullish at bottoms. Remember Late April/Early May 2006 when the SPX moved up and down in a 40 point range for a few weeks and collapsed. Same thing happened back in October of 2005 where it moved in a 30 point range for a few weeks and then took off north. Come to thing of it, same thing happened at last summer's bottom too. Thus, I observe that markets tend to get choppy at tops and as well as bottoms and trend strongly in the middle of the move, which is consistent with wave theory in the sense that third waves are the strongest part of the trend right in the middle of it.

Good luck.

[UnderABigW]

EN,

Thanks for the info and the update on where things are. I will be watching for your posts.

Good Luck to you as well!

[JJ]

How about a value player that can realistically give you 2000% return in 4 years, based on reasonable P/E of only 10, and the fact that palladium metal price doubled in past 2 years, and should double again in another two years.

http://stockology.blogspot.com/2007/06/swc-is-next-apple-20-folds-in-4-years.html

Do your own DD.

[The Nooge]

Someone needs to give credit to Glenn Neely's bond timing which lately has been nothing less than phenomenal. NEoWave count nailed the latest sharp bond drop and gave warning several months ago well in advance of impending c-wave drop.

[THE TRADER GUY]

11 AM JUNE 15TH TOP WAS 2 DAYS 2 HOURS WITHIN MY TOP CALL FOR JUNE 12TH. CURRENTLY LONG TERM INVESTORS SHOULD BE FLAT AND AGGRESSIVE TRADERS SHOULD BE SHORT INTO JULY 5TH.

(MAY SEE LARGE BEARISH NEWS ITEMS APPEAR FROM NOW INTO JULY 5TH +/- 2 DAYS)

[THE TRADER GUY]

SELL THESE RALLIES

[EN]

Bulls last chance here appears to be a gap down tomorrow morning to SPX 1485 and strong rally from there. Tomorrow would make an 18 day Lucas high to high to low cycle to finish a flat. If so, the C wave of the flat would be a fibo 8 days and 1.618 longer than the A wave down in time which took 5 days. Now A=C at 1485 cash. A fifth wave rally would then take us back up to slight new highs at 1560 SPX cash. That would be enough to get the bullish consensus back in check and create a nice top by July 9 - July 13.

My confidence is such a scenario is low because it seems way too obvious and I feel really bearish but the NDX held a daily trendline from the March lows this afternoon and the SOX is holding up pretty good. Let's see if she can turn back up tomorrow. On second thought, maybe simpler is better and you can forget Elliott and just call this a double top M formation with a target of another 55 points south. I would neither like to be short nor long at this critical juncture.

[skierwaver]

On 15 min chart the action of the past few days looks like it may have been an Ending Diagonal. Alternatively (and very bearishly) it may have been a series of 1's and 2's - which would be a good setup for an acceleration downward. The latter possibility is (somewhat) supported by the fact that the declines were rather impulsive. Also, this may have been a "running correction" of some sort... which would also be potentially bearish.

In the bullish side, all recent volatility - as you mentioned - may have been a correction with C=A near SPX 1485.

If it's an ED, it should be "allowed" a brief overshoot. I think somewhere below SPX 1480 I would become uncomfortable with the ED hypothesis.

In order to get a trading setup it would be nice to have a... bounce. At some point it would become clear whether the "bounce" is in fact the start of a rally to new highs. If, otoh, the index will just bounce around for a while - and then accelerate to new lows -- then, it's likely to become a bearish story.

[cstradingman]

The 30 year bond yield looks to eventually be heading to 4%. The only question is if we test the highs in yield once more.

[aa]

cs,
I take the other side - i think we are headed to 5.45%, only question is do we even tick below 4.99% (1 bp leeway below 5%) before getting there.

[President D Svaselinovic]

In 1995, I said the bottom of the big one was due 2008 +- 2 years.
Now in 2007 I say it is 2008 +- 2 years.
In 2010 I will say it is 2012 +- 2 years.
Some day I will be right. I'll just keep rolling my forecast.