Planet Yelnick

Party like it’s 1999…

Yves is back!  He comes down on the camp that this is 1998 redux, not 1987 (or '29 or '07), only this time China is enjoying the bubble. Or maybe the Nikkei in 1989 again?  Enjoy his guestblog. 

Crash Free Week!

It's free week at EWI and Prechter has out his latest Elliott Wave Theorist with a crash alert.  Worth reading, and this week it is free.  His analysis is based on the confluence of the decennial pattern where the 7th year tends to be down, the seasonal pattern where Sep/Oct are bad months, and the interesting Fibonacci relationship that Aug 31 is both the 2/3 point of the year and the 2/3 point of the decade.  Curve fitting 1937 and 1987, he gets a bottom window from Aug27 to Oct26, a bit broader than my Sep12-24 range.  I am not a big fan of this sort of pattern matching, but will point out that the most prevalent pattern, the Four Year Cycle, which is driven by something in the real world (Presidential election politics), also points down: when the cycle right extends (in this case from an expected bottom in 2006 to a possible one in 2007), it tends to correct sharply and deeply.

UPDATE: some of my readers have found that they cannot get the EWT during this free week, just the intraday updates.  I am a subscriber so I do not see this when I visit EWI.  Sorry for misinforming folks.  It's too bad, since what makes this EWT particularly worth reading is its detailed analysis of the subprime fiasco and the limits on the Fed's power to prevent a bigger debacle from unfolding - which is the corresponding event that makes the crash a possibility. 

Yen Carry(ed) Away

The Yen made a huge move against the Euro in the past two weeks, rising 12%.  Currencies on the other side of the Yen Carry Trade (borrow at low interest in Yen, lend at higher interest in other currencies) such as the NZ$ have dropped 10-15%.  Look how the stronger Yen has hammered the Nikkei (chart).  John Mauldin's last post, The Panic of 2007, is a trenchant analysis of how the subprime mortgage cancer is unwinding the Yen Carry Trade:  many hedge funds borrowed in Yen to buy securitized debt that includes subprime mortgages, and as they are getting (or are expected to get) downgraded, they have to reduce their borrowings (their margin) by selling off assets and closing out the Yen debt.  As described in The Mother Of All Margin Calls:

Stuck in the Middle With Yves

Trying to make sense of it all

But I can see that it makes no sense at all

Is it cool to go to sleep on the floor

Cause I don’t think that I can take it anymore

Clowns to the left of me

Jokers to the right

Here I am, stuck in the middle with you.

  Song from Stealers Wheel

Our favorite guestblogger Yves is back.  He urged us to go to cash, seeing that financial air raids sirens were about to sound.  He now lays out his views to weather the stormy seas we are sailing. 

Dollar Short Squeeze?

Fascinating to watch the sudden change in mood.  Panic in the air in Wall Street.  Cramer's rant was just the harbinger.  Watch the Dollar: solidly on an uptrend, while the Euro is dropping like, well, the Dow.  A rush to Dollars as the hedge funds and banks scramble to pay off loans.  The Dollar Short Squeeze is not here yet - this is wil be apparent when the many derivatives and EuroDollar loans which have taken naked short positions in Dollars find that there are inadequate 'real' Dollar balances around to cover - but it looms.  First we should see the Mother of All Margin Calls, then the Dollar Squeeze.  In the meantime, the toxic waste of risky debt spreads, and the pyramid scheme of leverage is at risk of toppling. 

The STU has been cautiously bearish, a somewhat startling change, but likely due to the many times they cried Wolf! Wolf! prematurely.  Now they are back to Prechterian Clarity (often wrong, never in doubt): we have begun a wave 3 down.  Not yet The Big One, but a pretty strong down current should now sweep across global markets.  Remarkably, and in confirmation of the view that this is a credit bubble bursting (as if any more confirmation is needed), ALL assets classes are dropping: equities, debt, gold, other commodities, even oil.  The only counter-trend asset is the measuring stick, the Dollar.   Give credit to Prechter - he has predicted this situation since his last book (Conquer The Crash), and his STU has consistently been noting the unusual linkage of ALL asset classes, and how they inversely follow the Dollar. 

The Dollar should continue a strong rise, the Euro will drop, and equities will ratchet their way down towards the turn window in September.   The S&P and Naz have both broken below the lower trendline, and we see looming decisive breaks below the 200 DMA.  The Dow is approaching its lower trendline, and may simply smash through, but usually will jitter around it - either bounce off, or break below and then bounce back to where the trendline goes from a floor to a ceiling. 

Bernanke Put .. Off

Central banks worldwide pumped 1/3 of a Trillion Dollars into the banking system the last two days.  This is not quite the Bernanke Put, as they are adding liquidity to short-term bank repo's and debt exchanges, but it is MORE than went in after 9/11.  Bernanke is a student of the last great credit crunch - the Great Depression - and knows that at its first critical test, the Fed failed in 1930 to maintain liquidity in the banking system.  Tragically, they let fail a Jewish bank in New York with the unfortunate name of "The Bank of The United States," causing immigrants to make runs on other local banks due to the fear that this was THE bank of the US.  He won't let that happen.  Still, the toxic debt contagion is spreading beyond subprime,  and more may be required to avoid a market meltdown.  The student is now the master, and has to clean up the moral risk left him from the Greenspan Put. We shall see if the Bernanke Put is kaput.

In equities, Friday felt like a bottoming day. Neely has notified his subscribers to watch for an alert after the market opens on Monday - be prepared to go long!  The STU stands resolute that the top is in.  Will those on the Neely River cascade down the Prechter Precipice?  Perhaps instead they will navigate more rapids.  The massive liquidity injection may stabilize markets for the next week or two.  If so, the wave count will look like wave 3 down got momentarily truncated, and we are stil in a wave 2 that may break as an irregular flat and take us all the way back to Dow13800 or so.  Next week has options expiration, and should be quite a ride.

Stealth Rate Cut

The Fed added $24B to bank reserves today, following the ECB adding $130B.  Central banks have several levers to add liquidity: rate cuts, adding reserves, changing reserve requirements, among others.  Despite Bernanke's statements about fighting inflation, they are now getting concerned over the coming credit crunch.  A rate cut in Sep looks more likely.  Timing: Sep 18, right in the Sep12-Sep21 turn window mentioned in the prior post.   

Die Hard With a Vengeance!

Well, I told you that when it would turn, it would turn with a vengeance.  Today is what that feels like.  Get ready for more.  The Great Credit Crunch that always follows a liquidity bubble is starting. 

We saw volatility - broad swings - like this around the 2000 top.   The STU sees the interim top as in: a completed 5 waves up and a clear break beyond a normal correction - meaning wave iii is underway and should go at least 1000 points.  The recent leg of the bull since Oct06 has also shown a completed 5 wave pattern, with wave 5 in time (not distance) at a fib 62% of wave 1.   

Are we done with the whole rally from 2002?  Not clear - watch first for a break of the previous wave 4 (Dow12K) and then a break of the larger wave 4 from 2002 (Dow10K).   Most likely we still have more upside ahead, after a serious drop into Sep/Oct - the final election rally before the Hillary Bear Market of 2009.  Fibonacciman points out today that there is a cluster of time relationship around Sep21 - this might be the end of this correction and the time to jump in for one final rush.   

For those of you who like 1987 parallels, the crash of '87 was 55 days after the August peak.  The crash of '29 was also 55 days after the September peak.  Sep12 is 55 days after the recent July peak.  So maybe the Sep12-Sep21 period will be the bottoming of this downturn.  Look for a triple bottom across those days, marking in rapid succession the ends of wave 3, wave 5, and wave 2 of the coming upswing. 

On the path to Sep/Oct, we should see more of these sharp up/down days, with quick snap-back rallies giving momentary hope to the Bulls.  The recent bull run climbed a Wall of Worry; this near-term bear correction will fall down a Slope of Hope. 

"Down With A Vengeance"

The market may feel like a Die Hard movie to many of you.  The bounce seems strong - are we back on a bull track?  Neely's River says we may have bottomed off this correction and have a crackin' good rally right ahead of us.  In contrast, the STU held firm today, and explained how we have seen this movie before: all the way down from 2000 to 2002 we saw countertrend bounces that retraced 78% or more before reversing. 

I remember the Nasdaq bounce in April 2000, which retraced 92% of the drop off the February peak.  I was on a roadshow for a secondary offering of a dot-com I had taken public in Oct99.  In October it was priced at $18, opened at $39, and ended at $54 on the first day.  It was $135 three weeks later.  We did a split, but it kept running to $200 ($100 post split).  On the secondary roadshow we started at $80 ($160 pre split) and watched it sink to $25 in a week, then bounce up to $50.  What a ride!   

Treat the next few days similarly:  what a ride!  The wave structure gives three target levels: the rally has retraced 62%, and could drop tomorrow; it could go to 1.618x the A wave up, to 13760, and fall; or go to 78% level , to 13813, before falling.  The S&P has also retraced 62%, but has a gap down it hasn't covered, so may have a little more retrace to do.  The Naz has not quite retraced to the 62% level, so it too may have a bit more to go. Thus, I suspect the Dow also has a bit more to go before the reversal with a vengeance.  When it comes, you won't miss it. 

Waiting For The Bernanke Put

The market's bounce today was predictable, and the STU sees another 80-150 points or so of additional upside before we turn down with a vengeance.  Tomorrow the Fed Open Market Committee meets, and the main topic will be a rate cut to answer Cramer's impassioned plea.  A lower rate will postpone the reckoning of ARMs, and may bolster the Repub's chance to avoid a debacle in the 2008 election, but will not stop the spreading cancer of toxic debt.  The Dollar also dropped below 80 in the Dollar Index, and the Fed needs to worry over whether to avoid the credit crunch or support the Dollar.

Cramer Freaks Out

You gotta watch this video.  He loses it since he sees how bad the subprime cancer is becoming.  He wants Bernanke to act.  Where is the PPT when you need it?