Two Views On What’s Next

On January 26 I posted an essay in which I said:

“…the market is in the process of coming to a catastrophic end.” (Newer readers can view the entire essay by scrolling down past this one.)

Shortly after reading my post, a reader emailed me to tell me that a money manager who manages endowment funds disagreed–strongly. The market, he said, was poised for a major rise, due to present conditions, which he described as a “Hundred year perfect POSITIVE storm for equities.”

On January 29th the market began a crash that caused the Dow Jones Industrial Average to fall 2,500 points.

The question is, whose gonna be right?

My assessment of the market is that the crash was the first impulse wave of a new bear market. The present reaction, therefore, is a wave 2 corrective wave. Corrective waves can retrace up to 100%  of the first wave down, but not exceed the high. This sometimes happens in slow rolling tops, but I do not believe this is one of those. Should this retracement make a new high, it would mean there is more to go on the bull market. I regard this as a low probability.

Here is how I see it now:

If my interpretation is right, the wave 2 retracement should stop around 25,600, give or take a hundred points. After that, wave three down would get underway and be violent again, crashing 5,000 points or more before the next pause. After that, much, much more decline would be coming. The source of this expectation is the Socionomic Theory of Finance, of which the Elliott Wave Principle is the foundational study. The decline will ultimately be a Grand Supercycle Bear Market. It will be an order of magnitude greater that the Bear market of 1929-1932, which was a Supercycle Bear Market.

On the other side of the argument are investment advisors, most of whom have the same view as the endowment fund manager. Investors Intelligence recorded only 12.6% bears (negative expectations) this month, the fewest bears in nearly 32 years.. The Daily Sentiment Index, an indicator of trader sentiment, hit 90.4% bulls in January, also the highest in the history of this index. According to an E-Trade survey of “experienced investors” in January, 80% of them believed the market would continue to rise. Banks and brokers are 100% bullish. The February investment report from my old firm was titled “Down, but not out.”

Individual investors have the heaviest portfolio allocation to stocks ever, and mutual funds the lowest allocation to cash. The sentiment of all participant sectors in the markets is at bullish extremes not seen in years. These lopsidedly bullish numbers are entirely consistent with major tops.

My allocation is 100% cash. It should not take long to find out who’s got it right.

Cheers,

Rod

 

 

 

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The Bull Market of 1932-2018

This wont take long: stock owners should be aware that the U.S. stock market is now in  the process of coming to a catastrophic end. Rising hundreds of points day after day turns an investment arena into a gambling den with no regard for sanity or value. A couple of weeks ago, the extent of the radical part of the advance, known as a “throw over,” looked similar to the final run up into the 1929 top, which reversed violently, cutting the market in half in days and, after a countertrend rally into early 1930, collapsed, ending in an 89% loss in the value of the Dow Jones Industrial Average.

Now, the shape of this run up is starting to look like the South Sea Bubble in the early 1700s. I will not be surprised if the market shoots up another two thousand points in just a few days. There is a valid Elliott Wave projection of 28,272 in Dow Jones Average. This is probabilistic, of course, not necessarily a firm target.

At this point, based on my studies, I allow for an acceleration in the rise, but fully expect that the top will be sudden and the reversal to be extremely violent. I do not think the reversal is very far out in time.

Who will be affected? Everyone who has stocks in retirement accounts or who will be depending on state and city government employee pension plans first. Later, businesses, professional practices, real estate investors and, well, everyone you know.

It is definitely a time to head into the bunkers. I believe that cash is the only thing to hold in investment accounts at a time like this.

Rod

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Bitcoin For Dummies

What is Bitcoin? Trying to read Wikipedia’s entry for Bitcoin will put you in a permanent state of confusion. Here’s the elevator answer to the question:

Bitcoin is a digital asset, that is, its existence is in the form of digital code. There is no physical specie. It is designed as an alternative for government issue money, serving as a unit of account, a medium of exchange, and a store of value.

Acquiring the stuff is complicated, but not impossible. Wikipedia estimates that there are over 5 million users/owners of Bitcoin, and several hundred thousand users of other cryptocurrencies (the generic term for the instrument). But the interest in these things  is  growing so rapidly that any number applied to owners  is going to be dated as soon  as it is cited.

How well does Bitcoin work as money? As a unit of account, perfectly. One Bitcoin has one million bits. As a medium of exchange? Over 100,000 businesses accept Bitcoins for goods and services. You can pay for pizza with Bitcoins at Papa John’s. As a store of value? Ah, there’s the rub.

The potential for Bitcoin to be a store of value lies in its scarcity. Only 21 million Bitcoins will ever be issued, so, as long as there is interest in owning cryptocurrencies, an owner can be assured that the coins will not be debased by more printing. However, whether it works for you depends on what you pay for it, and what it is worth when you want to sell it or use it to pay for something.

If you stick three thousand dollars in a bank account, intending to use it to pay for the rent on a vacation condo this summer, you don’t doubt that, come July, you’ll have three grand to give the B2B owner. But if you are holding Bitcoins for the purpose, you have no earthly idea how many  you’ll have to fork over for the transaction. Take a look at the history of price changes, expressed in dollars in this chart:

Pretty wild, wouldn’t you say? Here’s Wikipedia’s brief history:

The price of bitcoins has gone through various cycles of appreciation and depreciation referred to by some as bubbles and busts.[137][138] In 2011, the value of one bitcoin rapidly rose from about US$0.30 to US$32 before returning to US$2.[139] In the latter half of 2012 and during the 2012–13 Cypriot financial crisis, the bitcoin price began to rise,[140] reaching a high of US$266 on 10 April 2013, before crashing to around US$50.[141] On 29 November 2013, the cost of one bitcoin rose to a peak of US$1,242.[142] In 2014, the price fell sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014 it was under US$600.[143]

Since Wiki’s post (last August), the price has run up to $20,000 and back down to $10,000.

Bitcoin no longer serves as a storage of value. So why own it? These days, mainly to keep asset ownership and transactions totally private, out of the view of government. It is said that the deep drug industry owns tons of cryptocurrencies.

Most of the interest today is from folks who want to get rich buying and selling the stuff. Speculative interest is exploding, and the financial industry is making it easy–you don’t even have to buy Bitcoins, you can trade futures in them, Lovely.

Because of the volatility, it truly is an excellent trading vehicle for a competent trader. Not many of those around, but there is no dearth of wannabes. Good luck, if that’s you. Buy low, sell high–that’s the idea, anyway.

Cheers,

Rod

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Manias, Past And Present

Stare at the chart below, history is being made:

A rational buy-and-hold investment strategy, cultivated by persistent increases over several decades, has come to a frightening  moment in the U. S. stock market. The Dow Jones Industrial Average has soared over ten thousand points in twenty two months, a near seventy percent increase without so much as a two percent correction, on top of a tripling in price off the lows in 2009.

This is a mania phase, where the unconscious herding impulse, always at work in uncertainty, morphs into the mindless conviction that the risk is not in owning stocks, the risk is not owning them (think about that for a minute). The great irony in bull markets is that they sometimes end in a huge spike, driven emotionally by the fear of missing the boat. Anyone who owns stocks today, while possibly somewhat concerned about the fast rise, is unwittingly possessed of this fear that, if they cash in, the market is sure to run off and leave them. This is how it ends.

When it’s over, the market crashes violently. Always. It should terrify anyone who owns stocks today. Unfortunately, if they start to fear a crash, their main concern is, can the market go higher before it crashes? Yes, of course it can, and probably will.

But when it crashes, the return to and past the 200 day moving average will happen in a few days or weeks. They will wake up with half of the value of their portfolio gone. They will scurry to their advisor, the one who has them fully invested, for advice. The advisor will say, “Don’t panic, stay the course, stick to your plan.”

But they will panic. They will agonize and hang on until the day when their holdings are down seventy percent. They will decide they can’t take anymore. They will call their advisor’s office during the lunch hour and instruct the advisor’s assistant to liquidate the account because now, the fear of missing the boat has been replaced by the fear of losing what is left.

This market top is of one degree higher in trend than the top in 1929. The next few years will be more difficult than the 30s. I’ve written about this in earlier posts and the market continued to climb. The case is very compelling for my view that a Grand Supercycle bear market will soon get underway and, after the initial crash, stage a countertrend rally for a bit, and then tail off in a poor, poor market that will last for a number of years.

In a panic, the first to panic wins.

Cheers,

Rod

 

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Soul Cake

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Quintessencially Speaking

The mind wants to know all the world,
and all eternity, even God.

The mind’s sidekick, however,
will settle for two eggs, over easy.

–Annie Dillard, The Abundance

Riffing on my favorite TV meteorologist (Look it this picture, folks, isn’t Hurricane Zenia a beauty? Great looking storm, and she’s only a cat 4 now, should be a 5 when she crushes us tomorrow), I have to tell you, this is not just any old stock market top, it’s the most phenomenal top I’ve ever seen. Ever. In all of history. When it starts down, there will be no hiding from it. Gonna send us all into the poorhouse, whether we own stock or not.

There, I’ve said it, and that’s the last pessimistic comment I’ll make until along about 2025, give or take a decade, when the ensuing bear market hits bottom. It is reasonable to lean against the prevailing view when things get over done. This is something I’ve been doing, as you know.

I’m going to jump the gun (and quite possibly be wrong) this afternoon. It appears that the last few squiggles in the Dow Jones Industrial Average are tracing out an ending diagonal triangle. It is a news based rally, the news being that the tax bill has enough votes to pass. Hooray, you say–more money for rich people who will do nothing for the economy, more money for corporations, who will pay out more dividends to rich people and do nothing for job creation, and, of course, less money for anyone who works for a living.

Adding to the “good” news is the consensus of Wall Street economists and strategists that the economy and the markets will do swimmingly well in 2018. Investor optimism  has not been this high since 2007. Valuations are in the clouds. investment portfolios have the highest allocation to stocks, and the lowest to cash since records have been kept. And, as always in a major speculative market top, there is an irresistible bubble to stir the animal spirits. Bitcoin, a cryptocurrency, can now be traded in the futures exchanges, a sure marker for a long term top in something that millions want to buy, even they don’t know what it is.

The package, extremely high valuations, universal bullishness, and wild trading in a bizarre speculation is exactly what to expect if the market is, indeed, going to complete an ending diagonal triangle in the next few hours. Should this happen, here’s what the text says:

“Dramatic reversal ahead!” 

Merry Christmas,

Rod

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On The Eve Of A 200 Year Top In The U.S. Market

The following is quoted from the August 4, 2017 issue of The Elliott Wave Theorist. Permission granted by  Bob Prechter, author.

“…the setup is reminiscent of 1929, which kicked off the biggest bear market in U.S. history with a crash that erased nearly 50% of the Dow’s value in less than three months. The difference this time is that the top is of one higher degree. So the bear market will be deeper than that of 1929-1932 in the DJIA, and last longer that that of the 1929-1949 Dow/PPI. It is likely, moreover, to begin with a crash, perhaps one bigger than that of 1929.”

We should note that, while the initial crash took 50% off the value of the Dow, the ultimate low in 1932 resulted in an 89% loss in the Average, and hundreds of bankruptcies in both public and private companies in the depression that followed. None of this was forecasted by the general population of market analysts and strategists. Quite to the contrary, the majority of them were optimistic, and bullish in the extreme right up to the end. It is the same today. The very same.

The ideal time for the top is now. The ideal price range for the Dow Jones Industrial Average is 23,000 plus or minus a couple hundred points, the range it is in now. October is a popular month for crashes.

The last line of Bob’s e-mail to me yesterday: “The market is ever so close…”

Good luck, everyone.

Rod

 

 

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A Sense of Place

Saying the NFL kneeling is about the flag
is like saying Rosa Parks staying seated on the bus in Montgomery
was about transportation

–Overheard somewhere, yesterday

It’s now sixty-four years since I saw what I saw, and nothing’s changed. Nothing.

It was 1953, I was 14, visiting my sister in New Orleans. Late one night, I board a street car on Canal Street. A stop or two down Canal, a drunk Negro boards, shuffles half-way down the isle and slumps down in front of the placard on the seat back that reads Whites Only.
“Get back a the sign,” the driver says. Drunk doesn’t move.
“Boy, you better move,” the driver says. Surly stare from the Negro.
Driver gets off the trolley, walks over to a phone booth and calls the cops. Minutes later, a paddy wagon with four cops arrives. The cops rush aboard, jerk the Negro off the Whites Only seat, drag him off the trolley, slam him onto the pavement and beat the living shit out of him with night sticks. They truss him in a straight-jacket, throw him in the back of the paddy wagon and drag his ass off to who knows where–fling him in the Mississippi river, for all I know.

It is frightening. I nearly vomit. I’ve never seen such violence done to a human being. I feel somehow violated myself.

Well, something has changed. The violence done to blacks, seemingly because they are blacks, is still a matter of sad record. You do not hear about a white mother telling her son, “No matter what happens, DO NOT RUN!” For a black mother, this is a survival strategy she must teach her young men, and pray they listen.

The change is that America’s persistent, shameful racism is out of the closet because a thoughtful young man demonstrated his  resistance to the status quo a year ago. And now it is in our face, and we are, one hopes, beginning a reasoned conversation about it.

At bible study this morning, Pastor Bob directed us to open our minds. In the circumstance, what should we do? Respect the nation’s flag, our most hallowed symbol of our values, some said. Respect the right that our constitution gives to lawful citizens to protest, said others (there is no law prohibiting burning or defacing or spitting or urinating on the flag).

Then we heard what, for me, was the real deal from a seventy-something, self-admitted Good Ole Boy.

He said, “My Granddaddy was mustard-gassed in Germany during WWI, my Daddy fought the Japs on Iwo Jima, and when I smarted off about the anti-war protesters during the Viet Nam war, my Daddy said “You just hold it, right there, son. Yore Granddaddy and I did what we did so that they would have the right to raise hell if they didn’t like things the way they were. Don’t you forget it!”

Then he cited the Constitution and its amendments, all of them. And he asked the question to the fifty white guys in the class, “Do we have any idea what it’s like not to be a privileged white man, something we had nothing to do with?”

Author Annie Dillard, In her book, Teaching a Stone To Talk, would have us think about these things:

In the deeps are the violence and terror of which psychology has warned us. But if you ride these monsters down, if you drop with them farther over the world’s rim, you find what our sciences cannot locate or name, the substrate, the ocean or matrix or ether which buoys the rest, which gives goodness its power for good, and evil its power of evil, the unified field: our complex and inexplicable caring for each other, and for our life together here. This is given. it is not learned.

Cheers,

Rod

 

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What’s Not To Like?

Killing me softly, killing me softly,
with his song…

–Roberta Flack

It’s September 14th. Cindy’s birthday is the 18th. I think, “You know what? I’d love to give her the new Amazon 8″ Kindle Fire with built-in Alexa.” Did I put the order in? Or just think about it? Either way, it’s on my doorstep in two days. I’m mildly distraught about this because, of course, I’ve come to expect next day delivery from Amazon, even though Hurricane Irma is still raging over my house.

Fucking Jeff Bezos, strumming my face with his fingers.

Without question, Amazon is the retail industry disrupter non pareil. On price (the Website said $79.95, but when I entered the order it was discounted to $59.95 for Prime members), on delivery speed, and on follow up service, the globe has never seen its equal. As a consumer, ya gotta love it, until you peak under the hood and see how it’s done.

How do you sell a twenty-seven dollar book for seventeen bucks?

  1. You persuade your investors to accept a business model that generates no profits for years in order to push thousands of neighborhood booksellers into bankruptcy.
  2. You squeeze both the authors and publishers unmercifully, forcing them to go along or get left off the juggernaut that is scooping up all the business with predatory pricing.
  3. You treat your employees callously, making them work in un-air conditioned fulfillment centers for lousy pay with the assurance that robots will take their place as soon as available.

Not a new story. Wal-Mart on steroids, actually. But I’m elitist. I have no problem hating WMT. I’d rather be horse-whipped than venture into one of their smarmy stores and deal with their surly, morbidly obese employees, just to pay less for my Fruit Of The Looms.

My bookseller? That’s another matter. Used to be, I’d be in every week to browse and buy. But as time has gone by, I have come to realize that I go local maybe two-three times a year. Always buy a book or two, but, Jeez, it’s a crime!

So, do I resist? Do I insist on paying full-boat in order to keep my local indie afloat? No. Commerce is Darwinian. The vitality of free markets depends on innovation, and the innovator wins, at least short term. So my store adapts by hosting authors for book signings, keeping an eye out for the books his local clients favor, and giving excellent service. Still, it’s a shrinking enterprise and it makes me sad.

The steady concentration of business, where a few companies, through innovation, financial heft, and/or political influence get the lion’s share is a normal feature of rising economies. Monopolies flourish late in the cycle, contributing to the ultimate weakening of the economy when competitors fail and put their workers on the street. Trust-busting follows, causing even more unemployment. It’s a mess, but that’s how it works.

Strictly speaking, Amazon is not a monopoly, in that it does not create content or manufacture products. It is a platform to distribute the produce of other entities. In traditional economics, Amazon is a classic rent-seeker. It derives its income by controlling a scarce commodity, the ability to distribute vast amounts of product, skimming profits off the top at the expense of the producers.

Rent-seekers have a shorter life than the average corporate entity. They wreak so much havoc on the general economy that they force the next wave of innovation as producers figure out a way to get their product to market more profitably by circumventing the rent-seeker’s channel of distribution.

Amazon is one of the most widely held stocks in the world. They are held to be a great company today, but as markets and social mood turn down, we can expect to see Amazon treated in an increasingly negative light. For now, I will enjoy my Prime Membership, but I damn sure wouldn’t own a stock this popular. Who’s left to buy?

Cheers,

Rod

 

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Indian Summer

It is said that the market climbs a wall of worry. That is certainly so in the first leg up. Just when it seems the problems of the recent depression are being dealt with, a break in the action pulls the market down to reassert pessimism.

The second leg features more widespread improvement. Good mood seeps in and crests at the second peak. This happened in 2000.

Underlying weaknesses in the economy and the financial system become apparent during the third and final leg of a great bull market. In spite of this, stocks keep going up. Inertia keeps the trend alive, despite a steady decline in social mood. You may recognize this as what we have now.

Perversely, there ought to be some good news to accompany the absolute top. Some political, economic or financial occurrence that makes you feel like things aren’t as bad as you thought. You’ll breathe a sigh of relief.

That’ll be your personal signal that the bull market is over.

Cheers,

Rod

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