Despite Greenspan's Assurances, Economic Recovery is not Near

March 5, 2002

"Economy gets good diagnosis." So read a recent headline after Fed Chairman Greenspan's attempt at calming the markets and reassuring Americans that the weak U.S. economy is due for a recovery this year, albeit a "weak" one. Never mind that a weak recovery is no recovery at all. What Greenspan failed to make public is that fact that several key leading indicator markets are on the verge of outright collapse and will combine to cripple a major part of the economy in coming months.

The "recuperative powers of the U.S. economy have been remarkable," observed Greenspan, given the severe blow delivered by last September's bombings. He said businesses will be boosting production in coming months providing the fuel to lift the country out of the downturn. What he didn't mention is that two key segments of the economy and one major indicator- transportation, real estate, and gold - have given premonitory warnings that they will decline in tandem in the weeks and months ahead that virtually guarantee that no economic recovery is possible this year.

Transportation

A quick survey of the charts of the leading transportation components (airline, rails, autos, and shipping) and their leading equities shows the truly abysmal state of this high critical economic sector.

The Dow Transportation index, the leading indicator for the whole sector, has consistently failed to penetrate decisively above the critical 2800-2900 resistance zone now for over two years. This reflect a veritable "Berlin Wall" of overhead supply that guarantees a price collapse even bigger than the one we just saw in the transports last year. Truly, the transports are in for a "time of trouble."

All those 0% finance auto loans show how truly desperate the auto industry is to move new cars off the lots. Sure, they are moving at a quicker pace since Sept. 11 but the prices of used autos are dropping like a rock. This is a leading indicator for the new car market. The chart of Ford Motor Co. shows just how bad things are (and will continue to be) in the auto industry right now. When has Ford ever looked this bad? Its chart pattern can best be described as the "about to go bankrupt" pattern. Ford's long-term debt is enormous. It would not be surprising if the company makes a major announcement this year to the effect that "major internal changes are taking place."

Without an efficient and vibrant transportation, industry ceases. The wheels of commerce grind to a halt. Everything stops working properly and the whole economy eventually deteriorates. This is the disaster we face as the U.S. transportation sector gives every sign of being near a massive breakdown. Why does Greenspan not address this in his speeches to the country?

Real Estate

Real estate -- and real estate equities by extension - have experienced an unusually bullish six month run-up off of last September's lows. The real estate sector has benefited much more than most major stock groups in the weeks and months following the autumn crash. In fact, real estate has experienced a mini-bubble with home building, home buying and home improvements and related activity positively booming in the past few months. Everyone, it seems, has gone crazy over real estate.

Here on Topsail Island in North Carolina not a day goes by that the incessant sounds of hammering, sawing and drilling can't be heard from dawn 'til dusk. In the past five months alone, more than 50 houses in a 3-mile stretch of road have come up - a pace never before eclipsed in decades. Most of these houses are being built by contractors who are basically speculating that they'll be able to sell most of them at the current top-dollar market prices for prime beach property. From our discussions with real estate professionals, this is typical of locales all around the country. What these home buyers fail to consider is that in the few short months between now and the time these homes are ready to go to the block will have seen a dramatic change in the tone and tenor of the market. We predict that prices for real estate - across the board - will start to plummet by no later than June of this year, possibly sooner. All those years of falling interest rates, enticing home mortgage re-financing offers, mortgage bingeing, and easy access to home finance loans are going to bite the consumer in the back as home "owners" across the country will suddenly find themselves strapped with a bill of goods of monstrous proportions millstone tied around their neck with no way to stay above water.

One stock industry that has strongly contributed to the broad market's bullishness of recent weeks is the real estate sector. Real estate have really benefited from the mini-bubble in real estate, and the REITs are one of the few stock sectors that have managed to re-test or make new highs from the September lows. The charts for the leading real estate equities show that, in some cases, today was a critical day and potential top for some REITs and next week will be critical for others. For instance, the Morgan Stanley REIT index closed up today at 424, penetrating above a 52-week high. However, the top of the channel for the Morgan Stanley index is around 426-428, which means the index is very near a top. A parabolic dome similar to the one in the Dow, only higher, is also about to turn prices down. This indicates that the real estate bubble is about to burst.

Several leading real estate equities are either at or very near the bursting point besides. After working over the charts of a number of actively traded REITs we found at least five common denominators in the one-year charts of most of them: 1.) They are all approaching parallel channel tops (some already have) and are showing signs of exhaustion; 2.) They are butting up against the upper right-hand sides of bearish parabolic 8-week and 12-week dome patterns; 3.) They are at the upper extremity of a magnetic trading range, suggesting a sell-off is very near (magnetic trading ranges are lateral chart ranges that are evenly divided into two or three sections with perfect price equilibrium between the ranges); 4.) A perfect Elliott Wave five-wave impulsive pattern has been completed in most of them, confirmed by the fact that the 1.618, 2.618, and 3.618 upside targets off the bases have all been achieved (or nearly so); 5.) The tape shows distribution, defined in this case as unusual volume with most days that close below the day's opening value on high volume, followed by price resistance.

One leading real estate equity, [name deleted in respect to paying subscribers], a stock we recommended a while back as a buy, looks to have topped during today's trading session. The equity has failed to penetrate a 52-week high and is at the top of its six-month channel with heavy downside volume evident over the past 6-8 trading sessions. The tape hints very strongly of distribution taking place at the highs.

Another leading REIT,[name deleted], which most major REIT mutual funds hold as a component, also reached the top of a six-month trading channel today and also at a critical magnetic resistance level between [deleted]. What happens this week will largely determine what will happen to this top-performing real estate equity, which has scarcely had a pullback from its impressive six-month rally off the September lows. We anticipate a reversal very soon.

Gold

There is no need to relate how strongly the gold market has performed in recent weeks. An explosive gold market is the ultimate barometer that all is not well within the system and that investors are rapidly losing faith with the financial system. It also represents a major repudiation of the debt-based banking economy that will soon witness its long-deferred collapse.

The bullish state of the precious metals markets speak loudly and clearly that major trouble is brewing on the economic and financial fronts, and despite Greenspan's best efforts at convincing the country otherwise, the financial cataclysm cannot be averted. Investors flocking into the safe haven of gold are starting to realize that truth.

Concerning the fragile state of the investment markets, one investment analyst writes very presciently, "The problem, of course, is we now have a bear market for the first time in 20 years and capital gains will be replaced with capital losses to be written off. All the creative accounting in the world won't help when the masses realize that "the Emperor has no clothes." I'm reminded of the genius of George Soros, who not only in one day in April 2000 said it's a bear market and liquidated everything and left stocks, but who identified the key investment principle. For years it was always assumed that the masses were ignorant and the 'smart money' professionals should fade the trend or short when the masses bought, or buy when the masses sold. Soros correctly realized that the masses are by definition the trend. For long periods of time they control the bull market, even if for the wrong ignorant reasons. The key was to identify that critical time period when the masses woke up to the realization that they could be wrong and at that precise time you hammered them by selling everything you could beg, borrow, or steal. The [recent] accounting panic is just such a time. Very few stocks have legitimate cash flow or earnings and sell at realistic valuations. Humpty Dumpty just had a fall. And not even Alan Greenspan himself can put the pieces back together Again!

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

Seventy-five percent of all gold in circulation has been extracted since 1910

Gold Eagle twitter                Like Gold Eagle on Facebook