DAILY REPORT (11/20/08)
Even when your crystal ball is tuned into the right channel, it can sometimes be difficult to take advantage of opportunities in the market that you've seen coming down the road for months. Extraneous things like health or family can get in the way or the opportunities can come along with unintended consequences that come out of left field. Let's say you anticipated the downturn, shorted properly, and yet your account is inaccessible because your broker was Lehman Brothers. You were dead right and yet you'll be lucky to get five cents on the dollar. This happened to some of my clients. The message is that you can take all of the proper precautions and yet it can all turn out wrong. These types of situations usually occur when the system becomes so distorted, or corrupted, that you become subjected to all sorts of unintended consequences. I feel we are at that point right now.
Yesterday I listened to Paulson's responses before an increasingly unfriendly Congressional committee and it turned my stomach. In the first place the folks on that committee are almost as responsible as Paulson and in the second place he never gave a straight answer. What's even more frustrating is that no one seemed to care that he evaded answering all the questions! Then we have George Jr. who can't put two complete sentences together to save his life. I look at all of this and I just can't figure out what happened to the United States I grew up in. In 1960 you didn't need a contract because your word was your bond. Now a contract isn't worth the paper it's written on and the lawyer is the only one who comes out ahead. In 1960 you didn't need to lock your house and your neighbor would watch over it just in case. Now we have alarm systems and we don't even know our neighbor's name. In 1960 a good CEO would know a lot of his employees by their first name. Now a good CEO is someone who gets a US $64 million bonus (Goldman Sachs CEO last year) for driving his company into the ground. Something went wrong someplace.
Do you know what the American dream was? I do because I saw how my grandfather turned it into reality. The American dream was where you had the opportunity to really hard, scrap a few dollars together, and then start your own business where you had to work even harder. Often the whole family chipped in in order to make things go. Progress was painstakingly slow, but if you worked hard, applied yourself intelligently, and were persistent, it all paid off in the end. Somewhere along the line that American Dream was replaced with the American Dream 2.0, i.e. an updated version. In the updated version you tried to work as little as possible, with as little thought as possible, and you insisted on being paid more than you were worth. What's more you wanted access to credit and once you received it you convinced yourself it was really an asset. Finally, you elected leaders who promised to deliver on the American Dream 2.0. Anyone you spoke out against this new dream was labeled a lunatic or fringe element and was deemed to be mentally incompetent, or worse yet, dangerous.
We have been told that this time is truly different and that we don't have to suffer for our excesses, but that is a lie. Every so many generations the world goes nuts and then we have a cleansing process that's quite painful but manages to set everything right. From a global perspective, the last one was in 1930. Before that it was the 1907 credit crisis and the Federal Reserve was born out of that in order to prevent any repetitions. I believe that history will show that they did a horrible job and I have to wonder if that wasn't by design. I am not a scholar of the Federal Reserve but many of the original shareholders were foreigners and I question the wisdom of letting foreigners manage your currency. In any event I believe we began in October 2007 what will prove to be a terrifying and debilitating purification of the US financial system, economy, political structure, and even moral values. What will come of it is anybody's guess. We saw Hitler, Stalin, and Mussolini rise out of the last Depression. Imagine what would have happened if any of them would have possessed the bomb?
Now on to stocks! My grandfather had a saying: "water always seeks its own level". Today was a perfect example. In spite of the trillions of dollars spent to support this market, the countless blatant attempts to manipulate prices into the close, the Dow could not be denied. Over the last year I have set out in advance a series of downside price targets: 12,400, 11,600, 10,725, 9,941, 9,005, and then 8,146. All were touched and on each and every occasion the so-called experts came out and proclaimed a bottom was in and a good time was about to be had by all. In the case of 8,146 it was seen as a double bottom and that was seen as doubly bullish; so much so that the big guns like Barton Biggs came out and said the bottom was in. They were wrong and today they were doubly wrong. After yesterday's disgustingly manipulated close the cash Dow fell 427 points to close at 7,997, well below the critical 8,146 support.
Now we face the question of where to from here? I believe that at the very least the December Dow futures contract will fall further and test the 2002 closing low of 7,287. This should come as no surprise since I told way back when we broke below the 50% support at 10,725 that it would happen. Now we are about to test another even more important 50% retracement down at 7,470 and it has staggering implications. This level is so important because it represents a 50% retracement from the October 2007 closing high of 14,164 all the way back down to the 1982 bear market low of 776. A close below 7,470 would bring into play a possibility of a test of that 1982 low. Can you imagine what the world would look like if that were in fact to happen? For those of you who are
wondering, the Transports confirmed yet another significant low in the Dow as did all the other major indexes. I have lost count but I believe it is the fourth major reconfirmation of the initial bear market signal given way back in November 2007.
In conclusion, I have no idea if the support at 7,287 will hold or not but I suspect it will fail. I frankly do not see how the Dow can exhaust the urge to sell in just 700 more points. If I am correct then I would expect to see a hard fall down to 5,890 in a short period of time; maybe in just three to five sessions. Once we do see a bottom, I would expect to see a sixty to ninety day rally that would take stocks as high as 9,063. That of course would promote talk of a new bull market, suck in new cash, and then set the suckers up for a move down to an even lower low. In short, I am convinced this bear market still has a long way to go in terms of points and time. Oh, and look for a lot of volatility!
ebo@dtanalysis.com
Dow Theory Analysis SAC
November 20, 2008
Email this Article to a Friend 
Printer Friendly Version