24 July 2009
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Boiler Plate in Blue Grey
New Weekly Commentary in Black
Here is the BEV chart for the Bear Race.
The spread between 1929-32 & 2007-09 is getting wider. So far the widest spread was on the 11th week in the above chart. The 1929-32 Bear only took 11 weeks before it became a -40% Bear. As we can see above, eleven weeks into the 2007-09 Bear the DJIA was down only 5%. In December 2007, who could see the #2 DJIA Bear Market only 15 months away?
My Report is currently at Week 93, but this series on the DJIA's 1929-32 & 2007-09 Bears Market started at Week 53. It took 52 weeks for the 2007-09 DJIA Bear to see the BEV -40% line, so I had no reason to write a report for Weeks 1-52. The last time a DJIA BEV -40% Bear Market occurred was 35 years ago, in late 1974. These big bear markets don't happen too often. In fact they have only occurred 9 times since 1885.
This DJIA Bear started slowly, but, as you can see above, by Wk77 it stood at the #2 spot. That's a lot of damage in a short time. Given the monetary lunacy in the housing and financial market from 2002 to 2007, and how little bad debt (mortgages & derivatives) was actually written off (instead the Fed absorbed them into its balance sheet), only -53% on the DJIA, and only 77 weeks for the Bear seems insufficient to me.
The Bear never finished a proper clean up of the Bull's bacchanal of 2002-07. Financial Bears are usually very fastidious in their cleaning duties, so I find it unusual that the Bulls are enjoying themselves as they dance around the garbage from their last party. But I get upset every time the US Treasury floats another 200 billion in T-Bonds, so consider the source of the above observation.
Here what's making the Bulls jump with joy: the stock market is going up!
Bears can think up a thousand reasons for not buying this market. Bears are logical and tend to look before they leap. Bulls are driven by emotions, and are willing to take a big chance now and then. Successful investors, over the course of decades, will play the part of both Bull and Bear.
And I understand the current Bulls excitement. Look at what the Bulls have going for them:
THE DJIA IS BOUNCING OFF THE BOTTOM
OF ITS #2 BEAR MARKET!
If you look at my article on the DJIA -40% Bear Markets, the most profitable thing any investor could have done since 1885, was to sell the farm and buy stocks after the DJIA crossed below its BEV -40% line. The link to this article is at the end of every weekly report, and as always I have lots of charts in it to prove my case.
The problem I have with our market is seen on the first chart. Most people who came into the 1929-32 Bear, after it fell to its BEV -40% Line, were destroyed. The 1929-32 Bear kept investors hanging on, hoping the bottom was finally in. By July of 1932, as the DJIA fell to its -89% bottom, there was only universal despair.
That was when the DJIA finally took off in a move that pushed the DJIA up over 100% in the next 12 months. But after the 1929-32 Bear, investors became cynical and disinterested in making easy money on Wall Street. So from July 1932 to July 1933, the DJIA saw it largest increase in its history with few people profiting from the advance.
What made the 1929-32 Bear so different from the other DJIA -40% Bear Markets? I think it was the Fed's easy money policies of the 1920s. People believe bootlegged liquor and jazz made the 1920s a roaring good time. But I'm convinced it was the cheap money from the Fed that financed the party, and the depressing 1930s was the hangover from the 1920's good times. That is why I'm a big bad Bear.
After the 1990s' roaring bull market, the markets entered a credit hangover starting in 2000. So the "policy makers" flooded the markets with cheap money via sub-prime mortgages and real estate deals. With full Congressional & US Treasury approval, Dr. Greenspan never gave the drunks a chance to sober up.
The real estate liquor dried up last October, so the drunks started to get sick again, like they did in 2002, but worse. Again, the "policy makers" came to the rescue, but this time with 180-proof TARP. So I'm not surprised to see stock investors feeling good again. But I'm noting that unlike the 2002-07 binge, real estate investors are not getting well. That tells me something has changed. There is a limit to what the "policy makers" can do to fix prices in the markets.
For myself, I'm sticking with precious metal investments. I intend to enjoy the stock market as a spectator sport. But if you like to trade, and don't fall in love with the market, go put on your toga and enjoy the Bull's bacchanal. I hear Dr. Bernanke promised to bring some really good stuff to the party. He's up for reappointment in 2010, so everyone is having a drink on the house.
Below is my 8-Count & DJIA BEV Chart
The 2% days are coming in at a rate of 2 for each 8 trading day. That is not good, but then I have to admit, it hasn't been bad either.
Look at the green boxes in the chart below. During the Bearish moves, the DJIA ignored its rising Step Sum, but faithfully followed its Step Sum as it fell.
Currently, this pattern has reversed itself. The DJIA is more responsive to its Step Sum on the upside than on the down side. In other words, we're seeing more bang for the buck on the up days than on the down days. In Wk 93 of our 2007-09 Bear Market, the Bull has found its legs, and is running uphill like a champ.
How far can the DJIA go up? No one knows. But I will be looking at my Step Sum very closely next time it turns down. * If * the DJIA fights to keep its recent gains, I expect the stock market to go much higher from here. In an extreme case, the next two years could be a mirror image of the above chart from day 0 to 360 and go to new all-time highs.
Is that likely? No. But here is a quote from Warren Buffet sometime in 2003 commenting on the market during a similar situation.
"Give me a few trillion dollars and I will show you a good time too!"
-Warren Buffet (comments upon the Federal Reserve's "Economic Recovery" efforts of 2003)
In 2003, the Fed had the means to drive the DJIA above 14,000 by 2007, as well as create even a larger bubble in the American real estate market. Credit can be a drug. When abused, it creates a feeling of euphoria, but the withdrawals symptoms are horrible.
The "policy makers" are now armed with more TARP than the Milky Way has stars, and seeing how the market is not gagging on the TARP Dr. Bernanke is administering to it, I can't rule out new all-time highs for the DJIA in the next year or two. But we should note that the real estate market is still deflating against the wishes of the "policy makers." Real estate is a problem that won't go away. One day it will impact the stock market.
I've mentioned in previous Bear Market Reports how this summer's US Treasury's Auctions will be very interesting. Between now and the end of July, the US Treasury is going to sell $235 billion in new debt. That is a quarter of a trillion in new issues in only a few days!
If we lived in a world where supply and demand determined market prices, such an event would cause the US Bond market to upchuck sometime between now and the first week of August. But today's market prices are "policy statements" issued from the Fed and the US Treasury. Currently, prices of financial assets and commodities are determined by the needs of "policy." "Policy requirements" are dictating lower CPI Inflation and higher financial asset valuations. This will result in a crisis, but I don't see the crisis coming in July or August of 2009. So we should expect to see this summer's US T-Debt auctions go smoothly.
If the bond markets can handle $235 billion of new T-Debt in a few days, we should not be surprised if the DJIA was at 11,000 by November. I'm not saying this will happen. I'm not recommending that you position your investments as if it were, but if you did I would understand why and not talk you out of it. In this Theatre of the Absurd, anything is possible, and the DJIA rising between 10,000 & 11,000 by November seems probable. But that is not a guarantee it will happen, as events outside the control of "policy" will arise from nowhere.
Last October, toxic assets were on everyone's mind. Nine months later, no one seems to care. But these same toxic assets are still there. The massive OTC derivative market will not go away until its illiquid contracts are cleared in the markets. This will cause massive bankruptcy for someone, maybe your pension fund. It's a prudent thing to have 5% to 10% of your investments in gold and silver coins. Gold and silver can go down in price, but they will never fall because some unknown counterparty defaulted upon their commitment to you.
The link takes you to a very interesting story from 2008 on OTC derivatives. It's hard for me to get truly bullish on financial assets until these derivatives have become just another historical footnote of the dumb things smart people do with other people's money.
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.
US Electrical Power Consumption Down -3.62%
The Federal Government publishes economic growth data. But my inclination is to doubt government numbers. Fortunately, data is available from the private sector on Electrical Power Consumption. Given the choice between official government GDP data, or Electrical Power (EP) to measure economic growth or contraction, my preference is to use Electric Power.
EP has several advantages. It goes back to 1929, while GDP published by the Federal Government's Bureau of Economic Analysis (BEA) goes back only to 1948. So EP covers the Great Depression and WW2, while the BEA's GDP does not. EP is a simple statistic of electrical power used. GDP is more complex, and whose mythology of computation has likely changed many times since 1948.
Also, GDP data is unavoidably political. Presidential and congressional campaigns often are won and lost on economic growth issues. Politically-incorrect statistics, from government statisticians, will invite unpleasant phone calls from the White House and Capital Hill. Electrical Power Consumption is based on utility bill payments. Election year or not, it's unlikely that electrical utilities will over-estimate power consumption, when doing so invites unnecessary tax expense to the utility.
What isn't connected to an electrical utility: crystal radio sets from Radio Shack, solar powered calculators, and not much else. Battery powered devices use electricity when their batteries are manufactured and when people recharge them. If you consider how you make a living, what you do in your free time, you'll understand that your life is connected to an electrical utility 24 hours a day.
Economically speaking, EP is an excellent measurement of the economy as two things happen when a manufacturing concern can't pay its debts and ceases its operations:
Demand for Electrical Power goes down.
Electrical power demand is nearing its June 1983 lows. There has to be a reason for this. I suspect it's from unsold and foreclosed condos having their lights turned off and assembly lines shutting down.
And Unemployment goes up
Note how quickly unemployment increased since March 2007's 4.4%, with no counter trend to break the 5.1% increase. The 2007-09 increase in unemployment is unique in this 61 year data series.
With the "progressives" in power in Washington, I expect these two trends to continue.
24 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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