Seven Years, Two Warnings

[EJ]

We hope our market warnings July 25 "Before the Stroke of Midnight" and in our Newsletter Monday were not too subtle, and everyone was ready in their own way for this correction.

Before the Stroke of Midnight
July 25, 2007 (iTulip)

Investors await their fate, again

In our view, Thurow's warning is more relevant today than 20 years ago, and Hormats brings it up to date and into focus.

What does it mean? Given the extremes of imbalance that have developed since 1987, we'll state the risks simply: the market event we are due, when it occurs, will make the October 1987 crash seem benign by comparison.

In our Newsletter, Monday July 30, 2007 we referred readers to that warning first, noting additionally: "The last time we made a similar call was back in March 2000."

For long time readers of iTulip, that was back here...

Janszen Crying Wolf? Not So Fast.
March 21, 2000 (BankRate.com)

I have no quarrel with anyone who is in this market or who encourages playing the market. But I do take issue with those who fail to mention the risks. This leads many to put retirement money into the market, or take out a second mortgage on the house to buy stocks, or borrow money against stocks to buy property. My message is for them.

We hope two crash calls in seven years is not too many.

We received several emails today along the following lines:

If only everybody read your website...

I re-positioned my investments a couple of weeks ago in light of the market turmoil (rise in volatility, liquidity drying up) and your top call helps reaffirm my thoughts on this. Your website has been an unbelievably invaluable resource helping to guide me through this very challenging marketplace!

Keep up the good work!!

Wayne

Our man Jim Cramer completely freaks out at Ben Bernanke on national TV.

Our opinion isn't that the Fed is an inherently bad institution any more than is the European Central Bank, the Bank of Japan, the People's Bank of China, or any other central bank.

The principle here is that the concept of free and efficient markets needs apply as evenly to businesses that fail because of, for example, offshoring as to business that make losing financial bets. Even the Japanese, famous for using public funds to support corrupt banks that made uneconomic loans to favored bank clients, allowed their second largest financial firm to go under in the early 1990s after their credit bubble popped. The head of the Japanese Ministry of Finance put it well when asked why the firm was allowed to fail: "Easy come, easy go."

Of course, the Fed will need to step in at some point. We don't want this...

... followed by this...

See also:
Goldman's "Ready." Are you?
The Con Before the Storm
Turkeys fall back to earth: It started with real estate
Sell Everything
Bulls Rush Back In Where Angels Fear to Tread

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[metalman]

Re: Seven Years, Two Warnings

never pays to bet against the tulip!

[Uncle Jack]

Re: Seven Years, Two Warnings

If you haven't already planned on doing so, how about an update on the allocation models?

thanks,
jack

[jk]

Re: Seven Years, Two Warnings

it's not a crash yet. it's not yet even a 10% correction for the general market. wait.

[FRED]

Re: Seven Years, Two Warnings

it's not a crash yet. it's not yet even a 10% correction for the general market. wait.

Ah, everyone's an expert.

[EJ]

Re: Seven Years, Two Warnings

If you haven't already planned on doing so, how about an update on the allocation models?

thanks,
jack

I mean, see what turns up later today!

[jimmygu3]

Re: Seven Years, Two Warnings

EJ,

Is this "Ka"? Where do you think the safest place to be during this crash is... cash? Will the Fed be able to lower rates and still maintain steady sales of Treasuries to foreign investors? Thanks for all your great insight.

Jimmy

[zoog]

Re: Seven Years, Two Warnings

Ah, everyone's an expert.

Especially all of us.;)

EJ and Fred seem pretty confident this is "it", and you're probably right, given your track record. But I'm going with jk.

[Jim Nickerson]

Re: Seven Years, Two Warnings

Especially all of us.;)

EJ and Fred seem pretty confident this is "it", and you're probably right, given your track record. But I'm going with jk.

See

Ah, nothing like payday. Life is good! Cheers to you that know simple arithmetic, just don't get too greedy. Regards. -Sapiens

Sapiens suggest he undoubtedly knows what's happening, perhaps he will share his profound knowledge.

[c1ue]

Re: Seven Years, Two Warnings

My vote goes to JK.

Although there is pain, the pain is nowhere near enough yet.

I firmly believe we must experience enough pain to imprint a new generational series of people on the follies of credit expansion.

The last inoculated set have pretty much all kicked the bucket, only we few curmudgeons congregated on iTulip have been willing to explore the possibility of GDII (Great Depression II).

However even our exploration has been primarily intellectual.

To steal from some Asian philosophies (and sci-fi), sometimes you need 'body learning' to truly grasp a concept.

Body learning in one of my old dojos consisted of getting whacked repeatedly without comment until you figured out that certain modes of operation were simply not practical and never would be.

[DemonD]

Re: Seven Years, Two Warnings

The last inoculated set have pretty much all kicked the bucket, only we few curmudgeons congregated on iTulip have been willing to explore the possibility of GDII (Great Depression II).

"we few curmudgeons?"

I guess the legions of bearish websites out there (for a sample check the "friends of itulip" on the main page) don't count. The millions of gold buyers don't count, the millions of ron paul lovers don't count, etc etc.

I'm not saying a GDII can't happen, but there are many factors against it despite the credit contraction. Here are some factors externally that contributed to GDII:

Horrendous economy in Germany after WWII (remember US GD was in the wake of a global GD where there was a lot of misery in germany)
Isolationism (which helped at first prevent GD but eventually lack of trade led to inflexibility of markets)
Dust bowl/weather effect

And here are some things now that are inverse to back then:
Much better and smarter growth in developing nations
Technology keeps everyone informed/connected
No Weimar hyperinflation of a top 5 country (and no Nazi party to contend with or make money with)
Much more efficiency in markets
Much easier to reflate currency/prevent deflation
Much easier to move to another city/state/country
Way better agritech to keep people fed


etc etc

Will there be pain? I'm sure there will be. You can look at the Nikkei from 1990 till now - still off about 50%. But by the same token, no one in Japan starved to death because their stock market tanked. No one starved in 1987 either.

Also I don't think that the itulip thesis supports a true "depression." It's disinflation followed by reinflation, and a changing of how the world currency markets operate. This means instability, not a president on a campaign trail saying "a chicken in every pot."

Warning is heeded however. I did sell a large position of stock back in february or march that has been collecting 5.05% apr interest at HSBC online. Will see about liquidating more positions as the weeks go on, although I did actually buy a stock as I mentioned in another post somewhere back (MO @ 65..11/share).

[Jim Nickerson]

Re: Seven Years, Two Warnings

Will there be pain? I'm sure there will be. You can look at the Nikkei from 1990 till now - still off about 50%. But by the same token, no one in Japan starved to death because their stock market tanked. No one starved in 1987 either.

Also I don't think that the itulip thesis supports a true "depression." It's disinflation followed by reinflation, and a changing of how the world currency markets operate. This means instability, not a president on a campaign trail saying "a chicken in every pot."

Warning is heeded however. I did sell a large position of stock back in february or march that has been collecting 5.05% apr interest at HSBC online. Will see about liquidating more positions as the weeks go on, although I did actually buy a stock as I mentioned in another post somewhere back (MO @ 65..11/share).

The iTulip Ka-Poom Theory is one man's opinion. What you wrote above could prove true if events prove EJ correct. There are others who have stated a true depression lies in our relatively near futures. Prechter would be one, and the other's name I have in mind escapes me at the moment (I'm not at home to turn around and get his book), and with little doubt there are others with visions of very bleak outcome for the US.

It is not worth anything, but personally, I think this country need a serious "wakeup call," and anything less than a depression ain't gonna do the job.

[DemonD]

Re: Seven Years, Two Warnings

It is not worth anything, but personally, I think this country need a serious "wakeup call," and anything less than a depression ain't gonna do the job.

You may have a point Jim, but my point is that if we look back on history, there have been very significant market corrections after the GD that did not cause a depression.

Let's use the Nikkei from 1990 and the DJIA from 1929. It took 25 years (1954) for the DJIA to get back to where it had been in 1929. The Nikkei, right now, is right about at 50% of where it was in 1990, and is still off of levels seen in 1991 and 1992.



Then look at the DJIA... Now the Nikkei did not drop as precipitously, but in terms of length of time to regain losses, we are looking at similar time frames



Also please note that the low points the DJIA was off 89% and the Nikkei off 75%.

There are many many many more investment opportunities now than there were in 1929. Were there royalty trusts and master limited partnerships? No. Access to foreign currency exposure is much easier now, as is access to precious metals investing. Also back even in 1929 a large percentage of the economy was still based on farming. Many less people are career farmers anymore.

I'm not even saying "it's different this time." Because it's not. It's similar to many other market crashes that have occurred. The point is that if 50% of all hedge funds implode and go away, will that hurt J6P? The general consensus tat I get from itulip is that the FIRE economy is non-productive, so a loss of a lot of financial non-goods non-government businesses won't cause a depression, if anything it might actually get us going in the right direction again as mathematicians who were hired for quant funds get back to doing things like engineering and physics and chemistry and basic math to expand our knowledge base.

All I'm saying is that the signals for the US stock market seem much more similar to the Nikkei in 1990 as opposed to the DJIA in 1929.

[Jim Nickerson]

Re: Seven Years, Two Warnings

What does it mean? Given the extremes of imbalance that have developed since 1987, we'll state the risks simply: the market event we are due, when it occurs, will make the October 1987 crash seem benign by comparison. The trigger, as Hormats implies but does not say, will likely be related to the Iraq War.

EJ went on to remark:

We hope two crash calls in seven years is not too many.

To which jk, replied:

it's not a crash yet. it's not yet even a 10% correction for the general market. wait.

So right now is anyone, or everyone frigthened that a "crash" has begun?

From data I collect here is where some of the equity indices are as of 8/3/07 with regard to recent closing highs, and apologies for the formatting jumble.

days since high
DJI -5.99% 11 days
Nasdaq -7.84% 11 days
SPX -7.90% 11 days
NDX -6/88% 11 days
MID -9.30% 15 days
RUT -11.80% 15 days
VGY -10.17% 15 days
DJT -11.18% 11 days
NYA -8.32% 15 days

In my estimate, these losses so far are not highly significant in terms of percentages lost or the time frame over which they have occurred.

However, if one looks at overbought/oversold oscillators, then the negative level some of them have achieved in just three weeks are at levels that have marked bottoms since the markets' runs up beginning 10/02 or 03/03.

For those interested in technical analysis, peruse Carl Swenlin's MARKET OVERSOLD AND DANGEROUS from 8/3/07
http://www.decisionpoint.com/ChartSp...tSpotMenu.html

in which he warns:

As usual I would caution against trying to pick a bottom. For one thing, our primary timing model switched to neutral on July 31, which I think is a good place to be while the market is still displaying weakness. Another thing to consider is that the bears could be right about new bear market just beginning. If this is the case, oversold readings are extremely dangerous and can actually signal the likelihood of even more severe declines. To reiterate, oversold in a bull market means a bottom is near, but in a bear market it means "look out below!"

8/4/07 Mike Burk in Technical Market Report http://www.safehaven.com/article-8110.htm gives a very detailed analysis, basically focused on new lows using exponential moving averages for the Nasdaq, SPX, and RUT. If one can bear to read his analyses, then one can see how the markets' corrections til now probably do not represent whatever may turn out to be a tradeable bottom.

For the short term he notes:

In 1959 Joseph Granville laid out the parameters for a trading system that was popularized by Dick Fabian in the 1980's and to this day is promoted by Doug Fabian.

The original parameters were: buy when the Dow Jones Industrial Average (DJIA) crossed from below to above its simple 200 day moving average (SMA) and sell when it crossed from above to below its 200 day SMA.

As of Friday's close the DJIA was still above its 200 day SMA, however the S&P 500 (SPX) closed below its 200 day SMA for the first time since August 2006. The SPX implementation of the system is more widely followed so there may be a lot of selling on Monday.

Other than being very oversold there are no indications of a bottom.

For anyone who thinks Presidential cycle lows "must" occur in the second year of the cycle (presently that was 2006), he notes 1987 as having been the last time that the low occurred in the 3rd year of the Presidential cycle, and points out how this year, 2007, isn't so much like 1987 in certain behavior.

Richard Russell http://ww2.dowtheoryletters.com/ noted 8/3/07

The Dow and the Transports BOTH closed at new lows for the move today. From a Dow Theory standpoint, that's an ugly picture and calls for defensive action on the part of investors

Russell also surmises from Wilshire 5000 that since 7/13/07 the loss in US stocks has been 1.197 trillion Bonars. He also notes that there have been three "panic selling" days. These have occurred since 7/24 and except for a measly additional -2.30% down volume on 7/20, there would have been four "panic selling" days according to my own data.

Where is the market going now? I have no idea. It certainly seems prudent to be defensive now.

What would personally make me bullish anytime soon?

A 90% "panic buying" day would and an Equity Options put/call ratio of near or greater than 1.0 using the data from http://www.cboe.com/data/mktstat.aspx Whether using such indicators would lead to my making any profits from the long side, who knows? Anyone taking this as investment advice, would do so at his/her own peril.

[Spartacus]

I was expecting to hear "Flight of the Valkyries"

during the Cramer video.

Helicopter blades by themselves are fine, but the I guess I'm spoiled.