3 July 2009
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New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
Bear Markets and Horror Movies
As noted before, horror movies are a metaphor for Bear Markets. The first scene of a horror movie is equivalent to the Bull's BEV Terminal Zero, the last all-time high for the now dead Bull Market. For the price of a ticket and a box of popcorn, we watch the movie's first scene where happy people enjoy the good life, totally oblivious of the horror that will soon consume them.
No horror movie takes its victims directly from their happy Terminal Zero scene directly to their doom. No Bear Market takes investors from the last all-time high of a Bull Market to a Bear Market's low in a single day, week, or month. Movie horror and Bear Markets are a slow, agonizing process of despair and forlorn hope.
Attractive Teenage Girl #2: In a panic she screams "There is no way out!"
Attractive Teenage Guy #2: Reassures her "No its okay. I know a secret way out. Quick, down to the basement!"
Camera shot of still warm bodies of Attractive Teenage Girl and Guy #1. Pan camera up to table top. Show bloody hand reaching from the shadows for his chainsaw, then pan camera upwards to the top of stairs as basement door opens.
In horror movies, never listen to the advice of a teenage kid who believes safety is possible in a basement! The final scene in many horror movies are filmed in the basement, because at the bottom of the steps, we find the place where attractive teenagers must accept their doom in the final scene. But in the movies, at the very end of the last scene, someone always comes to the rescue. This is not so with big Bear Markets. The Bulls finally accept their fate at the very bottom. Frequently they leave the market, and never return to it.
Gold & DJIA Bull and Bear Markets Compared
The last BEV -40% Bear Market bottom, before March 2009, was in December 1974. From a high of 1051.70 in Jan 1973, the Bear took the DJIA down to 577.60 in 100 weeks. The 1973-74 Bear is #9 on the All-Time Bear Markets list with a decline of -45.08%. Oh by the way, in Jan 1973 the DJIA Dividend Yield was 3.08%. At the Bottom in Dec 1974, the DJIA Dividend Yield was over 6%. And just in case you are interested, the DJIA's Dividend Yield is currently only 3.42%. The DJIA Dividend Yield is a long ways from giving the current market a buy.
I started reading Barron's in 1977; it was clear the trauma of 1974 had yet passed. Five years later in the spring of 1982, the DJIA was over 820, for a gain of 41%, and still yielding over 6%! There wasn't a Stock Market Bull in sight. Business Week had its famous issue declaring the death of equities. The cover had a tombstone with "RIP Wall Street" on it. Only a few months later, in August of 1982, the biggest DJIA Bull Market since 1885 started.
Few people noticed. In the early 1980s, the nightly news frequently omitted the closing price of the DJIA. If the DJIA was mentioned in the news, it was usually on a big down day with Dan Rather giving the camera his "serves those idiots right" look. The best way to think of the DJIA from 1974 to 1990 is to think of the current bull market in gold and silver. The DJIA was going up with few people interested in a hot market. The Bear's 1974 basement scene, with a DJIA decline of only 45.08%, had destroyed the DJIA Bulls' faith in the stock market for the next 12 years.
Where was everybody? After the fabulous Gold Bull Market from 1971 to 1980, the investing public in 1982 was waiting for Gold and commodities to go back up. We see in the chart below how the DJIA and Gold are countercyclical to each other. So is it really surprising to see market sentiments in 2009, a mirror image of 1982?
In August of 1982, it took another 19 years of despair and forlorn hope to cure the hardcore Gold Bulls' hope of rising gold prices. This is what happens in Bear Markets; in the basement, hope is destroyed.
Our current DJIA Bear Market is amazing! After seeing the 2007-09 Bear become the second worst DJIA since 1885, with a drop of 53.78%, we see market commentators on CNBC and other financial media outlets talking about "green shoots." It's obvious that the DJIA Bulls have not made their mandatory visit to the basement yet. A BEV -50% drop didn't do it! That is why I'm now looking at a BEV -60% Bear. And guess what, if those "Green Shoots" are sighted again after a 60% decline in the DJIA, I'll be speaking of a DJIA BEV -70% Bear. So you see, I'm not looking for a certain DJIA point level or percentage decline as my signal for the end of the Bear Market. I want to see The Bull's HOPE DESTROYED. And like the Gold Bulls of the 1980s, Stock Bulls in the 2000's are a stubborn bunch!
Why do I believe this? Simple! I've taken my BEV Chart of DJIA from 1921 to the present to the library, and read old issues of Barron's from previous Bull Markets Terminal Zeros to their Bear Market Lows. I've done the same while examining the Gold Market.
Markets are human things. Bull and Bear Markets are psychological events in market history. The last Gold Bear Market, 1980 to 2001, was devastating to the Gold Bulls. Check out the table below!
From the bottom in gold on 15 February 2001 to 02 July 2009, there have been 2095 trading days. Taking 12 August 1982 as the first day of the DJIA Bull Market, 2095 days later would see the DJIA on 21 November 1990. It's interesting comparing the current Gold Bull Market with the past DJIA Bull Market's first 2095 trading days after their starting dates.
Would you know that gold has out performed the DJIA in the first 8 years of their respective bull markets by following the financial media? Heck no! Why is this? The financial media experts (and the public who take CNBC seriously) are still waiting for the stock market Bull to return. Clearly they haven't seen the Bear's final basement scene yet!
But I believe it's more than just that. Some reporters and market commentators may actually be team players with the "policy makers." Never doubt that any "policy maker", whose "policies" include running their monetary printing press 24 hours a day, fears rising gold and silver prices and would like to quell the animal spirits of the Precious Metal Bulls. A few friends in the media would be very helpful. But on the whole, most reporters today, in and out of the financial area, are just too lazy to do their own homework. Contemporary journalists are happy being the chosen conduit to the public, for expert or official views on this, that and other things.
Years ago, reporters sought out corruption in government for public exposure. This made access to government officials difficult, but government honest and the news business profitable. Today's reporters have chosen access to corrupt government officials, rather than seeking out these same officials' corruption.
Remember, CNN after the first Gulf War agreed not to report on torture or the abuses of the UN's oil for food program if Saddam Hussein allowed a new CNN new bureau in Baghdad. So what kind of Iraqi news came from CNN a decade ago? The same fluff pieces CNN, and other new agencies, are now reporting from Washington. The media's see no evil, hear no evil and speak no evil news policy, when it comes to government corruption and President Obama, is not only disgusting, but is driving the offending news companies into bankruptcy!
The Bernard Madoff case is another example of the current state of journalism. The news media, in the main, have refused to ask hard questions why those SEC officers, who were informed of Madoff's questionable activities for almost a decade, are not being prosecuted for misconduct? The Navy court-marshals any junior petty officer for failure to clean a marine strainer if it causes a diesel engine to overheat and become inoperable. But note how the Justice Department neglects to investigating senior SEC officials for criminal disregard of duty to protect American taxpayer that resulted in losses of billions.
Don't be stupid; there is every reason to believe that Madoff's generous donations to the Democratic Political Machine paid for 10 years of malfeasance in the SEC. A through investigation of the Madoff case would cause shock waves in official Washington. For the Justice Department to chose this course greatly damages the integrity of government regulators and trust in the government itself.
The way I see it, before the DJIA bottoms, and Gold tops out, there are going to be many people who will one day find themselves in the Bear's basement. That goes double for government officials and the journalists who've given them a pass on their misconduct.
In fairness to Fox News and Dow Jones, I must say that "officials" in Washington are not happy with their news. Fox and Dow Jones are also profitable. Now if Fox and Dow Jones would start asking Obama for an independent audit of the gold in Fort Knox, and demand Barney Frank allow the bill authorizing an audit of the Federal Reserve to reach the floor of the House for a vote, I would be really happy with them.
Below is my 8-Count & DJIA BEV Chart
Twice in the past two weeks, the 8-Count was going to see a 1, but then another 2% day comes along. The Bear is letting us know he is not far away.
Remember, Bear Markets don't care if the volatility is expressed as up or down days. Let's take a look at the Great Depression Bear in the chart below. The days with the highest volatility from 1929 to 1932 were positive days! In fact, the greatest DJIA up days of the 20th Century occurred during the 1929-32 Bear Market.
Remember, volatility is the calling card of the Bear.
The DJIA is still ignoring its Step Sum.
Since the 2007-09 DJIA Bear became a -40% Bear Market last October, investors have seen a lot of exciting action. But 9 months later we can see we're back where we started last October.
I expect the next significant move will be to test the DJIA's March lows, and then maybe we'll see a DJIA BEV -60% Market by year's end. If we see gold briskly moving above $1000, and higher, I would take that as a sign the "policy makers" are losing control in their price fixing scheme.
Central Banking itself is in a Bear Market. The day is coming when the Bear's script will have those academics walk with trepidation down the basement's stairs along with everyone else.
The Step Sum is an indicator of market sentiment. When the underlying sentiment is bullish, the Step Sum will rise. When bearish, it falls.
Think of the "Step Sum" as the sum total of all the up and down price "steps" in a data series over time; an Advance - Decline Line for a data series derived from the data series itself. Logically, bull markets will have more net up days, while bear markets will have more net down days. Understanding the Step Sum is no harder than that.
Wk 89's NYSE MD Data was Incorrect
Barron's NYSE Margin Debt data for April and May of 2009 was from a corrupted data file. Since 1921, Barron's has published massive amounts of data weekly for investors, information available nowhere else, and all for a very reasonable price. Little glitches every few years are to be expected.
I thank my reader GM for bringing this to my attention. The Chart below displays the corrected NYSE MD data.
Below is the corrected NYSE MD BEV Chart. My Wk 89 comments concerning the April & May 2009 NYSE MD should be disregarded. The rest of my comments in Wk 89 concerning MD are accurate.
I'm actually glad I was wrong. A two month, 70% increase in MD would be frightening! But with the markets as they are, the Bear in me was willing to believe what I saw in Wk 89! I suspect most of my readers were willing to accept Wk 89 MD comments and data too.
As I now have charts with the correct data, I think I should make some comments on things as they actually are. Historically, seeing the NYSE MD below its BEV -50% line has been very bullish for the DJIA, except one time: November 1930.
Note below that in February of 1930, NYSE MD bounced off the BEV -50% line up past its BEV -40% line before ultimately crashing down below the BEV -90% line, taking the DJIA with it.
Extraordinary things happen in extraordinary markets. The jury is still out on how extraordinary the 2007-09 Bear Market will prove to be.
Asset Price Fixing by "Monetary Policy"
There are excellent articles currently in circulation addressing the potential of the "policy makers" using monetary inflation to raise financial asset prices. These authors' line of reasoning goes as follows: the "policy makers" can place a bottom on the stock market if they are willing to sufficiently corrupt the currency, and target inflationary flows into financial assets, while using derivatives to depress CPI Inflation in commodities.
Are there any historical examples of a government doing this? Given my limited information on foreign markets, Argentina from 1994 to 2009 seems to show exactly this. But to be fair to Argentina's government, I don't know if the rise in their stock market was due to official policies or simply the citizens of Argentina saw their stock market as a safe haven from inflation with no prompting from their government.
From the standpoint of financial assets as an inflation hedge, it's six of one and a half dozen of the other. For whatever reason, the Argentine Stock market was a good inflation hedge from 2001 to 2008 for wealth held in Argentine Pesos.
Below is an index of the Argentina Peso from 1986 to present. I only have data on the Argentine Stock Market from 1994. From August 1986 to May 1991, (5 years) Argentina saw an 8000 to 1 increase of inflation. These numbers are * not * Peso CinC, but how many Argentine Pesos one US dollar would purchase in the foreign exchange market. I don't have the foreign exchange data previous to 1986, but I've read that Argentina experienced horrible inflation during the 20th century.
Back to the Argentine stock market.
In my first chart, it was obvious inflation had a positive influence on financial asset prices. What isn't obvious is that this same inflation can leave investors with a deflationary hangover.
A Bear's Eye View (BEV) Chart of the Argentine Stock Market shows the full story of inflation and deflation. Remember, BEV Charts are a poor indicator anytime a financial series rises above a former all-time high. This is because each new all-time high is converted into a Zero value. But BEV Charts miss nothing when a financial series goes down.
While it's clear that the Argentine Stock Market rose with peso inflation from 2001 to 2007, the BEV Chart below makes clear that there was a post inflationary BEV -60% Bear Market from 2007 to 2008. Ouch! If monetary inflation is good for financial asset valuations, how did that happen? Simple, anytime inflation inflates a bubble, there is always a following period of deflation that "policy makers," and inflationary Bulls, have never been able to avoid.
We see the peso inflation of the early 21st Century resulted in a 9 fold increase in stock prices from 2001 to 2007. But after a BEV -75% market decline in 2001, do you think the average person in Argentina bought at the bottom of the 75% decline? I ask myself a question: did the average American buy at the bottom of our BEV -54% Bear last March? No way!
For the average Argentinean, I suspect the BEV -61% decline of 2008 cancelled out what ever inflationary hedge the rising stock market provided, and then some. Inflation is never profitable for the average person. Allen Greenspan warned us of that in 1966!
But the articles I referred to in the beginning were not about the Argentina, but the American Stock Market. Is the Argentine experience an appropriate analogue to Wall Street? I have my doubts, as well as questions I have no answers to.
Unlike the Argentine Peso, the US Dollar, and US-Dollar assets are widely owned worldwide. With trillions of dollars in US stocks and bonds owned by foreign interests, such as central banks and insurance companies, it seems the US "monetary policy makers" can only inflate financial assets to the extent that the world allows them. China has publicly shown their displeasure at the massive expansion of the Fed's balance sheet in the last year. What would happen if US "policy makers" attempts to inflate financial asset prices were met with equal or greater selling by foreign holders of US financial assets?
Is this likely?
If Congress and President Obama, under the supervision of academics in public employment, continue to function as the private sector's wrecking crew, why would anyone, foreign or domestic, want to hold US corporate financial assets? If you think of the dollar as a share of America, and you should, would you invest in a company's bonds, when management publicly shows contempt for profits while promising to dilute their common stock by 50% to 100% and increase their debt to insane levels in the years to come?
Look at what happened to Bear Sterns and Lehman Brothers when they sought ways to profit from the toxic waste streaming from Washington. Most people already forgot about these two huge NY financial houses, but large international holders of US financial assets remember why Bear Sterns and Lehman Brothers went bankrupt: they were sunk by American, AAA-rated, financial assets, created as a result of US Government "policy" on "affordable housing." But it was more than just that. Bear Sterns and Lehman Brothers believed they could get along by going along. They were wrong!
My point in these charts is to illustrate that with an inflationary increase, excellent profits are possible. But one should also expect a future deflationary reaction. It's called bull and bear markets. It might take years, but it will come. As I've said before, in a sane economy stock market valuation is driven by dividend yields. Truly profitable markets, based upon shared profits from corporate operations, lack the excitement of inflationary capital gains, and losses. But inflation is the thief of future asset values. Like a drug, it feels good at first, but it's a historic destroyer of civilizations.
Take a moment and read Greenspan's 1966 piece on inflation. History will show that the stock market is no long-term hedge against the inflationary predations of the "welfare statists" (as Greenspan called progressives in 1966) who now control our government.
3 July 2009
Dow Jones -40% Declines From 1885 to 2008 is the article that inspired this race of 1929 & 2007 Bear Markets. You may want to read that article to understand my "BEV Chart."
Dow Jones Industrials Average Market Volatility is the source for my volatility studies.
The Lundeen Bear Box and Step Sum is the source for my Lundeen Bear Box and Step Sum Chart
Note For the Record: Mark Lundeen does not want a devastating bear market in the next two years. However, in full view of Congressional Market Oversight Committees and under the supervision of Government Regulatory Agencies, things were done that I believe will make a historic bear market inevitable. If you have a problem with this bear market, contact Washington, not Mark Lundeen.
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