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Strategies & Market Trends : MARKET INDEX TECHNICAL ANALYSIS - MITA -- Ignore unavailable to you. Want to Upgrade?

To: da_cheif™ who wrote (19205)	3/1/2007 2:59:46 PM
From: J.T.	Respond to of 19219

I live for chaos theory and volatility. Where is da man behind da Bear Curtain? Crash Redux: Prechter Chronicles FOOL ON THE HILL Is a Crash Coming? Elliott Wave theorist Robert Prechter has been calling for the Big One for a while. He believes the Federal Reserve has encouraged our economy to get drunk on credit, and when stock markets fall, as they have, the next step is a deflationary depression. Even if you disagree, his new book makes fascinating reading. By Tom Jacobs September 12, 2002 Bleeding indicators Prechter saw the following major warning signs at the end of Q1 2002: 1. Historical -- and hysterical -- low in Dow Jones Industrial Average dividend yield. Investors demand yields at market bottoms and will accept that management uses cash for "growth" at tops. The DJIA yield has averaged 6.5% at moderate bear market bottoms. It dropped to 3% at 1929's peak. In 2000, it hit 1.5% and recovered to 1.8% to 2.1%. 2. Bond yield/stock yield well outside historical averages. The AAA corporate bond yield divided by the S&P 500 index dividend yield has, for every year since 1987, been a statistical outlier, and for every year since 1991, beyond even Sept. 1929's level. It has always regressed to the mean from those outliers. 3. P/E ratios beyond levels of historical bottoms. According to Prechter, the S&P 500 price-to-earnings ratio is twice the average level of a market top and six to seven times the bottom. And that's with accounting that has distorted true earnings for years and continues to do so. Today, many companies still mask true earnings by not expensing stock options and stating fictional returns from pension funds. 4. Money manager psychology. Pension funds and insurance companies hold stocks at historically high percentages, even with the market drops since 2000. At the start of 2002, not one money manager in a Tower Perrin worldwide study predicted the averages would decline this year, and they expected double-digit returns. La la la. 5. Individual investor psychology. The level of cash and cash equivalents as a percentage of the market value of stocks and bonds is at a 20th-century low. New York Stock Exchange margin debt is 50 times lows touched in 1965, 1970, and 1975. Viewed on a log scale, it's vertigo-inducing. 6. Media psychology. The largest number of bears is typically heard at the bottom, and one school of thought is that this happened with alleged investor "capitulation" in July. Prechter wrote this in Q1 2002, as markets hit tops following Oct. 2001's lows. The consensus was uniformly rosy. He said it was a bear market rally. So far, he's been right. 7. Total credit market debt as a percent of U.S. annual GDP. To make his point about over-indebtedness, Prechter shows that this hit 300% in 2001, versus a low of around 100% in the early 1950s, and a high of about 260% at the 1929 top. 8. Explosion of non-self-liquidating debt. At the height of a boom, credit moves from self-liquidating to non-self-liquidating. A self-liquidating loan is tied to production. I lend you money to produce something that earns you a profit; you then pay interest and run your business. There is net wealth creation. Prechter posits an explosion of non-self-liquidating debt -- debt not tied to production. I lend you money, not for a used car to get you to work, but for a second car -- a brand new SUV -- that you want "because it's cool." Non-self-liquidating debt includes loans for any purchase of depreciating assets that don't increase your production. Money lent to buy stocks on margin is non-self-liquidating. See number five. What happens? When stock market and other asset prices fall, wealth evaporates (and Prechter disposes of that old saw, "Well, someone bought and someone sold, so the money just got moved somewhere.") What follows is a vicious cycle of loan defaults, tightened credit, panic selling of assets, lower asset prices, loan defaults.... You get the idea -- what Japan has lived in for over a decade. This keeps Alan Greenspan up at night. His greatest fear is that the only medicine he and the Fed have to fight a downturn will fail to cure the patient. All the Fed can do is increase -- inflate -- the money supply to allow for easy credit in bad times. Prechter explains how this works in detail, but every amateur student of economics knows the problem. The Fed can create all the conditions for easier credit it wants, but if lenders don't want to lend because they believe borrowers will default, or borrowers can't borrow more for consumption because they're tapped out or don't believe they can create more wealth, look out below! In one view, the Fed has been expanding credit since its creation in 1913, and sooner or later, the consequences of indiscriminate lending must be worked out of the system. Human psychology has not been repealed.