BULLISH VERY NEAR TERM FUNDAMENTALS:  

    OIL-OIL-OIL is "most likely" nothing but smoke and mirrors!    Posted 8/20/2004   Oil update below

   Every piece of oil related news is saying the same thing: the "near term," and I stress near term,  supply and demand balance does not equate to this current $47-$50 per barrel price. Also, lets consider all the "potential" bad news that was hanging over oil just last week (8/20/04), and where we stand on these issues now, just one week later.  From what we have observed, just last week everyone, or at least "everyone" according to the talking heads on CNBC,  were "so worried" about: 1) an out break of violence in Venezuela over the elections, one way or the other,  2) Iraqi militants blowing up more of Iraq's oil infrastructure, 3) China's "over heated" economy continuing to "suck in" more and more oil production, and 4) Russia's effort to dismantle or nationalize Yukos, the largest oil company in that country, could disrupt oil supplies from there.

   Ok, assuming that these are the four "keys" to high oil prices, in "only" the very near term, then lets see where we are now in relation to how good it could get and how bad it could get. First of all, these "extremes" always have a way of working themselves out in the opposite direction of the extreme, and I assume this is do to fact that there are large number of "insider manipulators" in very country who will make that "reversal" happen as soon as this elite group of criminals, and their loyal foot soldiers, get a big snout full of stocks and bonds at the mega wealthy hog trough. While this may sound like some kind of "conspiracy theory," and it it is, that does not diminish the high probability that  it is true when you consider that "greed" is the second greatest sin humans possess.

   Lets look at these one at a time, and in a very condensed context. For the time being Venezuela is a positive and eliminated from the radar screen. Iraq is still up in the air but as of today, 8/20/04, it "appears" the the Iraqi government has the upper hand. While we do not know what the outcome here will be, we would clearly move this "potential risk" it to a positive bias if Muqtada al-Sadr was killed or something else occurs that clearly diminishes this threat even if not eliminating it.

Najaf standoff holds key to Iraq's fate, U.S. goals
Posted by: Editor on Friday, August 20, 2004 - 01:46 AM
 
In Iraq, pivotal moments have a way of sneaking up on Americans. Soon after U.S. forces occupied Baghdad in 2003, a decision to disband the Iraqi army seemed logical. In hindsight, forcing thousands of unpaid, unhappy and armed Iraqis into the streets only fueled an insurgency that persists today. Likewise, abuses at Abu Ghraib prison seemed minor until the release of photos unleashed anti-U.S. furor.

   As for Russia, we believe that their stock market has already made, or is very close to making, a giant Bull Market top, which began at the 1998 low, and we believe the pattern here is an Elliott Wave three top of super-cycle degree. Furthermore, we also expect this market to begin a multi year sideways to down bear market within the next six to ten months.  Needless to say, if this "expectation" is correct, then the price of oil will be falling very dramatically, and the only thing that can cause that is a  "world wide" economic slow down, which we believe will show itself in a big way by the summer of 2005, at the very latest. As for Yukos, we are not sure what's going to happen, but according to the International Energy Agency this mess has had no effect on Russia's oil exports, so this is just more smoke and mirrors and can actually be consider a positive because some people have already included it as a negative when in fact it was a non event. This next quote, from a Russian news service, fairly well sums it up.

 MOSCOW - YUKOS bankruptcy not to affect oil exports

August 12, 2004 Posted: 11:01 Moscow time (07:01 GMT) The recent crisis in the Russian banking sector could have affected economic growth, Russian Economy Minister German Gref said at a government meeting.  According to Gref, the banking crisis has not affected economic performance in the January to July period, butone should not rule out the possibility of the negative impacts of the crisis, which may become evident later.

   As for China, and applying the old saying that a picture is worth a thousand words, we think this next chart of China's stock market index "has already priced in" an economic decline of some magnitude.  By the way, two things on this chart that we consider very important are: 1) this last decline was five waves down, so far, and could easily be the beginning of a new bear market or just the first wave down of a larger zig-zag correction, and 2) while the current price-index value (1344 low on 8/16) did not "take out" the November 2003 low (at 1307), and we believe it will not be violated in the near term, it would be a huge signal that China is starting a new bear market if it is violated and confirmed.


SSE COMPOSITE (Shanghai:^SSEC) Quote data by Reuters

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China information updated and new added on 9/5/04:

   China's  >>Shanghai index<< went to an intra-day low of 1303 on 8/2/2004, thereby taking out (making a lower-low) than the 1307 low made on 11/13/2003. According to the rules of Elliott Wave Theory, this index is now very "unlikely" to be working any part of a new bull market. However, this single "break" of a very important low is not sufficient evidence by itself with which to base major trading decisions on, or even longer term projections on...YET.  

   For example, just for starters, the index did not make a new daily closing low (1319 on 11/13/04 vs another 1319 made on 8/20/04), and many traders will claim that this value is what the "lower-low" rule should be based on.  Also, there are traders who believe any major point must be "retested" from the opposite direction in order to be "confirmed."  Since I do agree with both of those "assumptions," then I do not consider this "first break" as a "clear sign" that China is in big trouble. Never the less, it is also very hard for me to believe that this a bullish sign, and I fully "suspect" we will get that confirmation before "too long." However, the smartmoney is called the smartmoney because they "react" to key signals like this in a way that is totally alien to most investors or traders. That is, in this case for example, most traders would run for cover but what the smartmoney does is just the opposite...they buy. The reason  is very clear and intelligent. For example, in this case, if the index rallies from here then "some," or many, traders will "assume" that the China index made a "double bottom," and is big time bullish. Of course, if the opposite is actually true, then the smartmoney uses this "get out rally" to "distribute" it shares to the bullish traders in preparation to go short.

    Therefore in conclusion, it's not that "lower-low" at this point that we consider bullish or bearish, it's how this index "acts" over the next few days or weeks that should give us the "real sign" as to just what China is up to.
However, should the index roll over again and go below 1307, then close below 1319, and fail a "retest" of 1307 from below it, then we have a full blown "get out of dodge signal. " While we do not trade in any China stock or market, we would surely count this as an extremely bearish sign for all the world stock markets and economics until proven otherwise.


   OIL Updated 10/1/04:  WRONG!!  Oops, since oil went back up, hit $50, and it still wants to hold this high I'm the one who was left holding the cloud of smoke, or at least "so far."  Either a lot of someone's are stepping on themselves to buy for the "long term," even here at $50...which seems rather reckless, or maybe that so-called "Kerry " trade hasn't run it's course just yet.  

    That Hedge Fund trade is purported to be a position of short stocks and hedged with oil futures, on the basis that if Kerry wins the stock market will tank, and the Hedge Funds make their money on the stock shorts, or if Bush wins the market rallies and the Hedge Funds make money on oil for long enough to cover their stock shorts. While I'm not sure this "carry trade" (or Kerry, carry trade--ho, ho) even exist, I have heard it from more than one of our sources, eventhough, they may all be full of it.  

  One "real " danger here is just that, "the danger" of uncertainly. With production at the maximum, all it would take is one big attack on a pipeline or refinery just about anywhere on the planet to cause a full blown panic and $60-$70 oil.   By the way, notice that I didn't say "a terrorist attack," since anyone could make a huge bundle by pulling off that scam, and, to be sure, there is zero doubt that "someone" made a bundle off the 911 attacks.

   While everyone "assumes," that it was Osama and company who pulled off that short trade, I seriously doubt it since they seem to have a combined group I.Q. of about 50.  By the way, notice how nobody has ever mentioned those massive 911 shorts  in the last year or so? Hum?

   I guess I could write to the SEC again, for the 101th time, but I'm sure they would tell me it's just "exceptionally strange and highly unusual but probably a totally random coincidence,"  like the other 100+  times that I notified them about some of these "exceptionally strange trades" in the likes of Enron, Britepoint, William's, and Cenergy.

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More China (moved up from MarketView post on 8/29/04)

   The Shanghai index made a low on November 14, 2003, at 1307 on an intra-day extreme basis, and according to Elliott Wave Theory that low cannot be violated, or "taken out," by this current decline IF this decline is part of new bull market.  As of Friday, 8/27/04, the index "touched" a low 1314, so while it's still hanging by a thread, anything above 1307 leaves open the bullish view.  Also, since this last decline was five waves down, so far, this would leave open only one realistic senerio for that bullish point of view IF 1307 holds, and that senerio would be some version of the idea that this low is the actual bottom to the Bear Market that began in 2001. While anything is possible, if you consider just where the technology upgrade cycles is and the fact that China is having to limit industrial production do to a shortage of electricity, then I think you can quickly assume that the future is much more likely to be bearish then bullish.


  One more point here before I move on. If you look at a chart of Japan's Nikkei 225 index from it's 1989 high to it's most recent 2003 low, below, you can see how "similar" these charts "look," eventhough the ratio between index values is "about" 10:1, or nearly the same as the U.S.'s SPX index to the Nikkei. Oh, and since the correlation between the U.S. and China stock markets have been very high in the past, I would find it very hard to believe that the U.S. will go up as China goes down.



CHINA UPDATE "again," on 9/12/04:

   The >>Shanghai index<<  broke below 1307 on Wednesday, 9/8/04, and closed below 1300, at 1282, the next day, Thursday, 9/9/2004. Needless to say, this is a huge bear sign for this market, and more likely then not, all world markets. However, as we pointed out during the last two Market view postings, this "bear break" of 1300 is not the final nail in the coffin, it' only the first.  That is to say, from a pattern point of view, technical or Elliott Wave, the index now must "test" and fail to either penetrate 1300 from below, which would be VERY BAD indeed, or fail to hold a retest from above, which keeps the hopes of the perma-bulls alive. Usually, these hopes are ill founded, and those bulls pay the price, but on rare occasions this break is actually a major bottom and the pattern turns. While I think the likelihood of that is extremely remote in this case, you can never be even reasonably sure one way or the other until "after " those test.

   Furthermore, since China is also very closely linked to the Hong Kong and Taiwan markets, we would want to see these markets show "sign" of a rolling over before we start crying  big bad wolf, or more correctly, start crying  'big bad Bear."  Currently, Taiwan did complete a bearish five waves down from a rally high in March, and is now doing "something" up that "looks corrective," and is probably shooting for a double top to that last high before it shows it's true colors, one way or the other. As for the Hong Kong market, it's been moving up since March, even as the Shanghai index has come down, which seems rather strange, and this up wave looks to be more likely corrective then impulsive (bullish), but the pattern could still go either way and looks like it can easily make a double top, with that last high,  in the next few weeks.

UPDATE "again," on 9/19/04:

  The  >>Shanghai index<<   REVERSED at  a low of 1253 last Monday, 9/13/04, and  "exploded" back up through 1300 and even 1400 by the close on Friday, at 1414. Wow, I guess that 13% blast up in four trading days means someone thinks this is the bear market bottom and not a new breakdown.  While that is remotely possible, I think it's nothing more then short covering round one and those who think the bear is over will be paying the tokens (in Yuan or whatever) before to long.  Of course, even IF I'm dead on about this index, this first counter trend rally could go alot higher before the "real" Chinese economy shows itself.

The "key" is now just what I mentioned in last weeks addition, which is a "retest" of that 1300 line from above. If the index holds that test or takes out 1500 on the upside, then I'll rethink my expectations.

UPDATE "again," on 9/26/04:

   The  >>Shanghai index<<  is still above 1300 and below 1500, so we do not have any no new "sign" as to which way this will go. Also, the Hong Kong market is having trouble reaching a double top with it's last high, which is where we expected to see the big dogs pull the rip cord IF our bearish scenario is correct, as we believe it is. Also, the Taiwan market did a clean five waves down and then five waves back up from it's March, 2004, high, and it looks like it could still have enough "stuff" to reach a double top also before the bears pull the bull trap; although, this index also looks weaker then the Hang Seng (Hong Kong) index.

No change on 10/3/04 or 10/10/04. The index is at about 1400.

POSTED 10/17/04:

    The  >>Shanghai index<<  went back down to 1312 and bounced up a little to close at 1330.  This may constitute the "retest" but I'm sure about that one way or the other.  The Hong Kong market is still having trouble reaching a double top with it's last high, which is where we expected to see the big dogs pull the rip cord IF our bearish scenario is correct, as we believe it is.  The Taiwan market did a clean five waves down and then an "ugly" five waves back up from it's March, 2004, high.  This "ugly" five could turn out to be a bearish seven waves up, but with that last little wave being a clean five up, we will assume this is bullish until proven otherwise.
However, this last rally up, from a July low to high two weeks ago, looks like it wants to correct lower, but that assumption is little more than an educated guess at this point.

   All in all, it looks like the whole Asia mess is neutral until we get to see more of the puzzle. By the way,  Japan went back below 11k again but also looks like it completed a triangle back in September and is in the process of breaking up. Needless to say, that would be bullish for all world markets if that breakout continues and "has legs."  On the flip side of that, if the Nikkei takes out the May 2004 low, at about 10,500, then that triangle turns into some ugly to the downside. The index closed at 10,983 on Friday.

A.J.Q.

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PRIOR BEARISH NEAR TERM FUNDAMENTALS...continued from before the China post.

  So, it appears that we have turned the corner, at least on the actual oil fundamentals, and this market is running up on either momentum, a strong cyclical influnece, or pure manipulation. Now, since the single largest "event" that will effect the market over the near and intermediate term is this fall's presidential election,  whether that is acknowledged or not, then "someone" might just be trying to "manipulate" the oil futures for a political purpose. If  that were to be the case, and we have no actual proof of that one way or the other, then who and why becomes the $64 questions.

   Well, if we look back at the 2000 presidential election we can see that energy, oil, and gasoline all started up in the summer of 2000 and hit a high right at election time.  As I recall, oil hit $35 per barrel in early November, 2000, and then "tanked" back down to $25 by Christmas.  Also, later on and after the fact, we found out that Enron and two other Texas energy traders "conspired" to fix prices and "manipulate" electrical power transmission in an effort to produce a "energy crisis" in California. This crises was also somewhat strange in that it carried all the way into November, 2000, even when California's peak demand for energy came in August.

   Now, high oil prices into the 2000 election "could" be a viewed as a negative for the incumbent or his V.P., like Al Gore, and falling oil prices into this election "would surely" be viewed as a positive for the current incumbent president, Bush, and his V.P. (Cheney or McCain?).  In light of these "possibilities," it's my "wild estimate" that oil and gasoline prices will start falling very dramtically before the Republican National Convention, and gasoline has already turned down, with $30 or $35 oil being seen near election day, or sooner IF it's the Republican Right-Wing behind this manipulation. On the flip side of that "Lefty" senerio, if oil prices stay high, or especially if they continue on up above $50 per barrel, then you have to wonder if Opec or some other lesser Arabic oil countries are trying to "get Bush."?  

   Needless to say, if oil drops then we can "assume" a mega rally in stocks, and since we believe we have just made a major low or are very close to that low, then this would "fit" well with our expectations for a final "blow out" rally up into election day.

  One last "thought" that just passed through my evil  mind about this subject.  If some Hedge Funds were "accumulating" a slow but steady long term "short" position on stocks, then they would also be looking to find a "cheap hedge" in case this short position didn't work out. Since a short of stocks is a bet the economy will turn down, then buying long oil futures would be a hedge since it would be expected to rise if the economy actually turns up rather then down.  In the fall of 2000 oil went up big time, stocks were actually in the early stages of a huge bear leg down, the economy was "weak but ok," the FED had raised rates but was now "confused" by the economic signs, and  "someone" was building a huge short position in U.S. stocks. Need less to say, that all sounds familiar, so we need to think about paying up for some hedges ourselves once we get back into this market, which should be very soon if we have our "expectations" right.

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BULLISH INTERMEDIATE TERM FUNDAMENTALS:  Posted 7/25/04

  While just about anything is possible, I still think it's very unlikley that this last rally, off the 2002 and 2003 lows, has run it's course. That "assumption" is far more based in the technical and pattern aspects of the market then the fundamentals. Never the less, I can also see "enough" economic spin material to support a further advance in price. While the roaring nineties days of wine, roses, and $100 billion dollar dot coms is unlikley to ever be reproduced, in my life time anyway, the prospect of multiple tops in the DOW at 11, 905 is by no means off my radar screen. Since my long term "expectations" for the DOW is similar to, or even larger than, the roller coaster ride during the 1968 to 1974 bear market, anyone who takes the time to look at a DOW chart of that period, like this one,  <Dow Longwave 1966-1974> , can see what I'm expecting.

    One of the key stocks that has developed an ugly chart pattern but is actually bullish based on the Gann angles, and the fundamentals, is IBM, and all long time subscribers know that I have been harping on Big Blue for "awhile."  I believe this stock is an excellent barometer for the whole market, and I'm still "expecting" IBM to "kiss" $100, $106, or even $110, at the extreme, before the the big bear awakens from his temporary hibernation. The way I feel about this is fairy simple, if I have IBM wrong then I "very likely" have the big picture wrong, and I can assure you that I'm confident that is not the case. Look at this "rating" from VectorVest , one of the many services that we subscribe to, and you can see one reason why I find it hard to believe that IBM will lay down anytime soon. By the way, the Gann key angle (1:1 or 45 degrees in correct scale) coming up from the major low in 2002 is now at "about" $77-$80, and the stock is currently near $83.

From VectorVest

"Price: IBM closed on 7/9/2004 at $83.89 per share 
 
Value: Value is a measure of a stock's current worth.  IBM has a current Value of $125.30 per share. Therefore,  it is undervalued compared to its Price of $83.89     per share.  Value is computed from forecasted earnings per share, forecasted earnings growth, profitability, interest, and inflation rates. Value increases when earnings, earnings growth rate and profitably increase, and when interest and inflation rates decrease. VectorVest advocates the purchase of undervalued stocks. At some point in time, a stock's Price and Value always will converge. 
  
RV (Relative Value): RV is an indicator of long-term price appreciation potential. IBM has an RV of 1.30, which is very good on a scale of 0.00 to 2.00. This indicator is far superior to a simple comparison of Price and Value because it is computed from an analysis of projected price appreciation three years out, AAA Corporate Bond Rates, and risk. RV solves the riddle of whether it is preferable to buy High growth, High P/E stocks, or Low growth, Low P/E stocks. VectorVest favors the purchase of stocks with RV ratings above 1.00."
  
   Recently, since 1/24/2004, the stock failed to hold at a key "Fibonacci" support line of, $89-$91, when coming down from that Januray high, and then it failed a retest of that line from below. While this is anything but bullish, I still don't believe it will stay down, and more specifically, I think the mega bulls are setting up a 'bear trap" in this stock.

   If my expectations for the U.S. stock market is to become reality, then the fundamentals must follow a basic pattern that includes the following: 1) we must not have any "single" disaster period that Greenspan's easy money cannot deal with , and it's hard to believe that "things" could be get worse than they were in 2001, and 2) the "real inflation" will not show it's ugly head until after the bear market ends, just like it did in the 1977-1982 period, after the last bear market ended in 1974, but the "bulk" of deflation" must have already run it's course too. In other words, these next many years will not be another Golddy Locks senerio, but it will not be a repeat of the Great Depression either. In my view point, this type environment is what will be needed to produce the "mostly sideways" pattern that I'm expecting. In this type of environment, there will never be a clear resolution to the bull-bear battle, and only a few traders, and even fewer analyst, will ever realize where it actually started and ended except in retrospect, sometime far into the future.

   Based on this "expectation," I believe the the fundaments will take a back seat to the shorter term cycles when predicting highs and lows during this long sideways to down Bear Market. Assuming this to be true, then I don't consider any of the fundamentals to be strong enough, or weak enough, to matter much except over the very near term. Over the current very near term, fundamental "thing-ees" are so cloudy that I don't even want to guess what will be, or could be, any more important then something else. While this may seem like a cop-out, that is that way I feel about it for the time being. Therefore, as you might expect, I'm planning to rely more the technicals then usual, and since I have relied on technicals more than fundamentals since 1997, you can believe that I'm going to "just about" disregard them thar "Funnies" entirely. That is, "just about" disregard them entirely, since my mother didn't raise no fool!

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BEARISH NEAR TERM FUNDAMENTALS:

  The " easy comparisons" periods for company earnings has "very likey" run it's course. The SPX earnings "estimates" I'm seeing from First Call , Yahoo, Multex and others are calling for 2004 earnings of "about" 20% over the actual "low" to "good" earnings reported in 2003. However, those same services are also calling for "earnings growth" only only 10% for 2005 from these levels.  Of course, those estimates are "most likely" based on the "typical" expectations for the economy, and stock market, which can be summarized as "fair" to "good," with a broad consensus of economic opinion centered on the 3%-4% area of growth in GDP.  Since the stock market is a large part of that GDP, and "a lot" of company "earnings" (as cash flow) are made "playing " the stock market, it goes without saying that those "expectations" assume the Perpetual Motion Machine will keep on keeping on, if you know what I mean. Needles to say, this means that there is very little "bad" priced into this market, so it better not stumble or the big bear will be back sooner rather then  later. On the other hand, I firmly believe the CEO's and CFO's are building up cash for an all out "thrust" to support their candidate of choice in the elections, and, needless to say, that candidate is Bush Jr.

SEASONALITY: "SELL IN MAY AND GO A WAY" !!!!  Until after October ???

INTEREST RATES: "DON'T FIGHT THE FED" !!!! and the FED is raising rates !!!!

INTEREST RATES: "Three steps and a stumble."  ( 3 rates increases)

Market Performance after Fed Rate Increases

(median performance of the S&P 500 for a given number of trading days after successive Fed rate increases since 1946)

Rate increase  7 days         22 days       126 days     252 days

First                -0.57%       0.76%        3.91%      9.87%
Second            0.05           0.96           3.93          6.45
Third                0.23          -0.36          3.46         -2.72
Fourth              0.33          1.95          -1.37         -2.79
Fifth                -1.44         -1.12         -5.38        -2.86
Sixth                0.13          -1.92         -5.20         -6.98

Source: Leuthold Group

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BULLISH LONG TERM  FUNDAMENTALS:

   While I have no definitive information to support this assumption, I "suspect" that nearly every pattern trader on Planet Earth is calling this current decline a "1994 style minor correction" that is preparing the way for another "new" bull market up to new highs. In other words, in Elliott Wave terms, it's a wave two down of fi ve waves going up. While I don't necessarily dispute the new highs at some point, it has always been my view, since late 2002, that these new highs will be part of bear rally top, and not part of any new bull market, to be sure, or even a final wave up of the old bull market, that started in 1974; eventhough, that is less clear than a new bull market.

   Eventhough I see plenty of circumstantial evidence that the last big technology cycle ended on 12/31/1999, at Y2k, there also "seems to be enough "left-overs" to squeak out a new high too.  This again goes back to the conflicting thesis between Harry Dent and Michael Alexander which we alluded to in the subscribers introduction, and detailed in a review of  their two books, Stock Cycles--Why Stocks Won't Beat Money Markets Over the Next Twenty Years, and  The Roaring 2000s . That conflict essentially boils down to whether or not the stock market will "predict," or anticipate, the actual top in the Technology Cycle, which Mr. Alexander's evidence and estimates point to as either 2004 or 2007. Mr. Dent, on the other hand, supports a stock market top ending right on (or near) the top in the technology cycle, which he places in 2008. Personally, I'm fully  convinced that the "actual" technology peak was in 2000, but it's hard to say when the "inflection point" of it's distribution curve will occur "when based on current, or adjusted, dollars." That is to say, by inflating prices of that technology, it's dollar value peak could have been extended to 2004 or maybe even 2007-2008, as Mr. Alexander and Mr. Dent contend.

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BEARISH LONG TERM FUNDAMENTALS:

   For nearly two years now, I have been saying that October 2006 will "most likely" produce a new price low in many stocks  and the Nasdaq Composite index, but not, necessarily the SPX or Dow. These "projection" are based "mostly" on technical "pattern  and cyclical " analysis. Never the less, we can see plenty of fundamentals that "could" easily support that thesis. At the top of my short list would be a very clear sign that this market has had plenty of trouble just holding it's own even with the massive life support that the FED has placed it on. While another round of forty year low interest rates cannot be entirely ruled out when there is an epidemic of short term thinkers in control of the Federal Reserve, I fail to see how either Bush or Kerry will be able to pull another tax cut rabbit out of the hat while running $500 billion a year deficits.
 
   I can think of two more "items" that can be placed on the bearish side of the equation: 1) productivity and 2) long term interest rates. What is one of the most "unproductive" aspects of an economy? And the answer is: the military and "Homeland security." The cold war ended in 1988 and the bull market roared as the military was down sized.  Now, just the opposite is true but the cattle herder has convinced the cattle that this doesn't matter. It will ! As for long term interest rates: The U.S. had a twenty plus year decline in those rates and the bull market in stocks had a nearly 100% correlation to the "inverse" of that decline. Now, with rates just up from a forty-seven year low, I will take a wild guess that we have seen "the bottom," and rising, or even steady,  interest rates will not be bullish for stocks. That is, of course, just a wild guess.

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A FEW LONG TERM FUNDAMENTAL POINTS TO KEEP IN MIND.

Where are we in the long term technology cycle?

   A new generation of technology is only a true new generation when it completely revolutionizes and either totally or at least substantially replaces an old generation of technology. The automobile replaced the horse in local travel but was only an upgrade to the railroads in long term travel. The air plane was revolutionary in military terms but was actually only an upgrade to the automobile and railroad in long haul travel. While there can be plenty of money made in both true revolutionary technologies as well as upgrades, it goes without saying that the largest impact on a country's economy will come after the revolution but before the technology is mature and becomes what is now being called "cyclical."  At that inflection point, the "inventor," and/or his country of origin and development, can easily lose the "primary benefit" of the invention to other countries, since at some point it will very likely become a battle of low cost production and distribution rather then innovation and support.

   The single greatest 100 year revolution in world history surely must be considered the period from the late ninetieth century (1800's) to the late, very late, twenty century, and I will not even make that argument since it is so self-evident. Therefore, while it's very likely that we will continue to have a large number of "upgrades" to existing technology over the next 100 years, I seriously doubt that we will have many more "revolutions."  If that assumption is true, then it would also be logical to assume that in Elliott Wave Theory terms we have either completed wave three up, which is the most dynamic and bullish wave of a five wave up impulse pattern that comprises a bull market. However, after using this theory daily for over eight years now, and counting many-many-many thousands of patterns at everything from micro degree (a few minutes) to grand super-cycle degree (55-144 years), I can say with at least "good conviction"  that bull markets usually end on a whimper and not a bag; eventhough, they can end on either depending on whether the following  "basic" Bear Market pattern was a "fast-slow" (impulse followed by a triangle) or a "slow-fast" (flat or triangle followed by an impulse-5 waves down).

   I will not interject my own opinion here about where "I believe" we are in relation to the long term technology cycle or the long term Elliott Wave pattern, I'm merely being up this information to remind subscribers to take a few hours sometime and think this very important question through for yourself.  I have already done that, and I believe I have made my "bias" quite clear.  At this point in time, I would have to "see" some "good" evidence that a whole new technology is just around the corner which is going either replace or materially upgrade the existing technology in order  for me to switch that "bias," or at least diminish my faith in the conclusion that I arrived at using logic and rational reasoning, which, of course, is still no guarantee that I'm right or wrong.

Are historically low interest rates trying to tell us something? 

   Maybe long term interest rates are falling, or refuse to rise, like Greenspan wants, because the demand for money is falling, and maybe this low demand for money is due to a huge portion of consumers and small business now having a monthly debt service that is already as high as they can stand?

   Wow, now there is a novel idea! In other words, if you want to build a new manufacturing plant then there is so much loose money chasing so few good investments that rates are now low and not high? Or, if you want to Refi your home to 250% of it's appraised value then there is so much loose money chasing so few investments that there are a dozen Ditechs falling all over themselves to give you 4%-5% money in a few days. Now, maybe the "problem" is not "just" the excessive supply of money that the U.S. has used in the past to back seven trillion dollars worth of IOU's with, as everyone thinks it is , and maybe, just maybe, the "real demand for money" has become so low that it's the major reason that rates are falling and not rising.   Of course, one of the largest group of short term borrowers are stock traders using margin, and if they don't want to borrow then that also supports weakness in rates

   Ok, like everyone else who understands chart patterns, I look at that twenty year triangle in U.S. bond rates and I tell myself the same thing most bond traders are saying: Hey dude! Walk-up, interest rates are going to go ballistic anytime now! Well, first of all, based only on pattern analysis, not all triangles "reverse their trend in a big way," and many more that do reverse big time do not necessarily do so right away. In general, a triangle that "rides" the pattern all the way out to a "thin" apex will not turn on a dime and blast off in the opposite direction without building a base.  

   Now, while I'm still more likely to believe that rates will move dramtically higher at some point, I'm far from being convinced that this is going to happen anytime soon. While I can see a 6% yield on the 30 year bond during this next rally, if we do get one, I'm fairly confident that this peak will be the highs in rates until well after the 2006 lows, or even until well after Easy Al retires, in 2008. After that, the next FED president may be intelligent enough to realize that for U.S. businesses to create "real growth," and not just "paper growth," they need ideas that produce new products and not just easy money.  That person may also have the capacity to see that a lot of easy money can actually replace the "need" to create; or even worse, all that easy money being dished out here in the U.S. may actually be used to build up the foreign competitions infrastructure and ability to create,  in China or Singapore for example, in a misguided policy that will eventually run ourselves of business.  In other words, it's the 1970's all over again, history repeats, and a fool never learns from others mistakes.

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1) Privatization and deregulation (i.e. "union busting") and "out sourcing," throughout the 80's and 90's increased productivity...by lowering wages and benefits.  How much is left to privatize (bust) now?  Some, but very little as compared to the the 80's and 90's!

2) The military is very close to being a total unproductive drag on production, in relation to GDP.
The 1990's was a period of major down sizing of the U.S. military, and the 2000's are off to an exceptionally bad start in the opposite direction.  Then we have all this "Homeland security," and since it is most likely just another layer of overhead, I'm wondering  just how bullish this is for productivity?

3) NAFTA and other "major" trade agreements delt U.S. businesses a huge one time profit windfall in the 1990's, and this also showed up as an increase in so-called productivity. Is there another trade agreement in the works that will now beat out the cheap labor in Mexico and China without sending engineering , design, and programming jobs to China, India and Pakistan?

4) Without a doubt, gradually falling interest rates declining from a artificially induced high in 1981 to now "has been" helpful to stocks.  With deflation and declining interest rates, workers did not demand high wage gains and this added to productivity. Will this be the case going forward?  With a twenty year declining  triangle broken,  or in the process of being broken, then why would rates stay low even in the face of $50 oil and 4% inflation? Are bond rates trying to "price in" something bad for stocks...like high interest rates?

5) Stock options added to productivity by reducing the "reported" cost of labor," while actually adding to the underestimation of the true cost of that  labor.  How many years will it be before someone points out this slight of hand and puts a stop to it?  Never you say? Maybe! But even that only only equals a net no change and the best possible scenario, while anything less will be bad news at Black Rock.  By the way, the new FASB accounting rules for options will go into effect in 2005 unless Congress can pass a law to circumvent the rule approved by the very same "independent" board they establish to do just that...be independent of congress!  This is, of course, just another clear example of the hypocritical liars we have in Washington.

6)  On the subject of personal productivity gains, I can easily see where my last seven (yes, seven!) computer "upgrades" have yielded "real productive" gains in my ability to produce more for less time.  Now that I have a 1.7 Gig Hertz Dell with 512k RAM, I "highly suspect" that any future upgrades will be negative for me, where the cost of the equipment will never be replaced by the productivity gained. While I'm most likely more ahead of the curve then most in this process, I also need my computer for a lot more then a glorified typewriter and getting email, as is the case for nearly half of all users according to a Rand Corporation study done last year.  Also, at some  point I suspect that the time spent "playing" on the internet will completely offset the productivity of any "future" gains...and I think that is most likely the case right now if the truth was known.

    7)   REAL PRODUCTIVITY gains were clearly abundant during the 80's and 90's as "paper pushing" moved from file cabinets and vanilla folders to computer data bases. The Internet and Cell Phones "has" clearly cut the time required to reach contacts, keep in touch with employees, and do research.  In my field, the whole engineering industry moved from drafting tables, tee squares, and hand calculators to massive CADD (computer aided drafting and design) programs during the period from 1980 to 2000. These powerful "tools" cut many of our project times in half and reduced the cost to our clients by nearly that same proportion. However, I see very little room to make significant strides in further productivity gains going forward. That is not to say that productivity will fall off a cliff, but I find it very hard to believe that REAL PRODUCTIVITY  has not already reached it's peak.  

   As Greenspan pointed out in his many speeches during the late 1990's and early 2000's, "it's the rate of change of productivity that will eventually become a problem for the U.S. economy." As for the "claims" that the BLS (Bureau of Labor Statistics) makes related to productivity, as measured by output per hour, I "think" they are totally bogus and highly "skewed" because a lot of "labor" cost has been moved to "other" parts of the corporate ledgers, and "total compensation" is not being  used in the calculations.  Of course, I'm no expert on productivity or accounting, and this is just by personal opinion on the subject.

  Never the less, when I did a little research I ran smack into a big puzzle right off the bat. For example, I found that the average gain in GDP (gross domestic product) from 1947 to Q2 of 2004 was "about" 3.44% and GDP from Q2 of 1982 to Q2 of 2004 was "about" 3.39%, with both using an annualized basis.  The data for "total compensation" was only available from Q1 in 1982 to Q2 in 2004, and it showed that total compensation advanced at a annual rate of "about" 4.07% over that same period. I then calculated the total increase in GDP and total compensation for that 22 year period from 1982 to 2004 and got a 141% increase in total compensation between 1982 and 2004, and a total increase in GDP of 108% for that same period.  That says "total compensation" was rising faster than GDP and, therefore, productivity based on total compensation was declining...hum?  

   Ok, I then decided to check productivity over just the last seven years, Q2 of 1997 to Q2 of 2004, so that I would picked up what has been touted as the "productivity miracle." That period had GDP advancing at a 3.17% annual rate or +24.4% overall, and total compensation advancing at an annual rate of 3.79%  or +29.7% overall. That is, of course, another decline in productivity IF based on "total compensation, " which I highly doubt even includes stock options.

   Therefore, if productivity is merely "total compensation" per "total output," then what makes economist, like Greenspan, think productivity has increased, since total compensation has clearly increased faster then output? I don't know the answer to that, but I "suspect" that the BLS's "compensation" does not include benefits, but I will do some more research on it and get back to you.

OK, I'm back!

   Well, that didn't take long, and the answer is, of course, BLS defines productivity as "output per hour." Therefore, total labor "cost" is not part of the equation, as "hours worked" and  "wage cost" is used for that calculation. While that clearly explains the difference between the productivity hype and my calculation, it once again opens up a whole new can of worms that, as usual, leads right back to the bean counters at the BLS...what a surprise. IF the U.S. work force has been, and still is, moving from a manufacturing base to a service base, then I would assume that more and more people are being moved from hourly based compensation to salary based compensation, and with salary based compensation I "suspect" that "hours worked" becomes a very nebulous number. On the other hand, if people are willing to work more hours for less, or at least the same, compensation, then I can clearly see that "productivity" based strictly on "reported" hours "paid for" per total output in GDP would rise. I guess we should then expect another "spike" in the productivity miracle since the U.S. Congress just eliminated ten million worker's right to receive overtime pay. 

   I say that "productivity" should be the very simple calculation of  "total labor cost" divided into Gross Domestic Product to yield a simple percentage that does not need to be "adjusted" to any  base, since they both use the same current net value of the currency. Of course, that would be "too easy" and  would not give the bean counters room to "skew" the results in a direction to prove or support some preconceived assumptions.

   By the way, I knew the BLS used hours rather than total compensation long before I started this rant, but this way I can tell "the rest of the story."

For the PriceTime Review
Andrew J. Quiggly
Editor

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By John Roberts, CRN
5:00 PM EDT Fri. Oct. 15, 2004
Near-Term Sales Outlook
(Based on a CRN survey of 197 VARs in September 2004)

After three straight months of declines, solution providers' near-term sales expectations rebounded in September. The overall spending expectations index came in at 98, up from 86 in August and near the benchmark of 100 in May 2000. However, the September index was well below the all-time high of 111 last May.

CRN believes the economy has weathered the summertime soft patch and is poised for solid--yet unspectacular--growth in the months ahead. The rise in VAR sales expectations reflects that view.

more.. .

A 100-year bear market?
Today's headlines confirm Prechter's dark predictions
 
By Paul B. Farrell, CBS.MarketWatch.com
Last Update: 9:17 PM ET Oct. 13, 2004  
 
ARROYO GRANDE, Calif. (CBS.MW) -- Ten years ago Robert Prechter, a brilliant market technician and editor of the Elliott Wave Theorist newsletter, sent me a review copy of his book "At the Crest of the Wave: A Forecast of the Great Bear Market."

I've waited long enough. It's time to review it, along with the new two-volume work on his "New Science of Socionomics." Why now? Because, unfortunately for America, reality is rapidly catching up with Prechter's dark scenario ... whether we like it or not.

Let me explain: Back as early as 1978 Prechter predicted the beginning of the "raging bull market of the 1980s." Nobody believed him then either. Yet later he was named "Guru of the Decade" by the Financial News Network. He was a credible voice.

Then in his 1995 "At the Crest of the Wave," Prechter predicted the end of this raging bull. However, the market failed to cooperate with the guru. The Dow pushed through 4,000 for the first time. The bull continued roaring. The Information Technology Revolution took off. The Dow nearly tripled in five years.

Meanwhile, here was one of America's most respected market forecasters predicting that the market was going down, not up. He predicted a historic crash, with the Dow collapsing 90 percent to 400, and the world falling into a 100-year bear market. Worse yet for Prechter, Wall Street optimists poured fuel on the fire with book titles like Dow 36,000, Dow 100,000 and The Roaring 2000s. With near religious fervor, Americans embraced the New Economy's promise of everlasting global prosperity.

Then came the sobering realities of the new millennium: A collapse of the technology engine, a devastating bear market, out-of-control government debt, massive domestic problems, a worldwide energy crisis and an accelerating deadly war on terrorism.

Blind to the coming storm

Given this rapid, dramatic shift -- from the glowing promises of the '90s to the dark realities of today -- we felt forced to re-examine Prechter's predictions of a devastating market crash and a 100-year bear market.

Prechter's message never wavered: Recently he told me: "One thing I've repeated consistently is that the great bear market will take the DJIA at least below 1,000 and likely to below 400. Precedents for this severe a decline are the English stock prices in 1720-1722 and American stock prices in 1929-1932."

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NOTE:

   WE do not agree with Robert Prechter's analysis for two major reasons: 1) we are fairly certain that this big bear market is an Elliott Wave four and not a wave two, like the 1929-1942 or 1929-1932 decline, and it would be "extremely unlikley" for a wave four to retrace anything close to 90% of the absolute value of the high, which would not be uncommon at all for a wave two.  2) The lower trend line for the DJIA's longwave trend channel would provide huge support for this index in the area of "about"  2500-3000 IF,  and only if,  the index was to "crash" straight down right NOW, and this lower channel is rising at "about" 500 points per year. Therefore,  it's extremely unlikley the index will ever go below 3000...ever.  Those longwave trendlines can be view at this next chart:  <DOW Longwave trend>

   While we will concede that the DOW index could "theoretically" reach 1000, by blowing out all major supports including both the long term "mean" and "lower support" trend lines, we consider that a very long shot indeed.  

   As we just stated, we are fairly confident that this Bear Market, which we believe started at the 2000 ATH's and is still in progress,  is an Elliott Wave super-cycle wave four, and these huge wave four corrections are "usually" long lasting, sideways and down triangles, but "usually" retrace much less of the last wave up than do a wave two, like that 1929-1942 decline, and "about the same as the 1966-68 to 1974 decline. 

   While know one has a crystal ball, we will place our expectations on the longwave trend lines and the Fibonacci number  lines, rather then Mr. Prechter, who's long term forecasting record is only 1 for 3 at best.  Based on those two technical points and two equally huge fundamental buy signals that would, "most likely," appear in the DOW 5000-6500 area (dividends near 7% and PE's near 10:1),  we believe the most likely "normal" low for this Big Bear is the FIbonacci number line at 6,765, or the Fibonacci number line at 4,181 if "things" turn out to be much worst then we expect. One way or the other, we expect this decline to be stopped by either the "mean" or "lower support" long wave trend lines...period, and end of story!

A.J.Q.
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Large Firms: IT Spending Up

VARs more optimistic; enterprise companies look to business-process solutions
 CRN Monthly Technology Spending Outlook, October 2004
 
 IBM Again Targets Sun, HP With New pSeries, iSeries Servers
 
 By Edward F. Moltzen and John Roberts, CRN
3:44 PM EDT Thu. Oct. 14, 2004
From the October 18, 2004 CRN

Solution provider optimism rebounded in September after dipping during the summer, with brisk sales of notebooks, PC servers and desktops anticipated in the coming months, according to results of the latest CRN Monthly Solution Provider Survey.

Separately, IT executives at large businesses told CRN they are prepared to spend money on new technology over the next 12 months.
 
CRN's survey of 125 IT executives at companies with 1,000 or more employees asked this question: Do you expect your company's IT budget to increase, decrease or stay the same over the next 12 months? Fifty-two percent of respondents said they expected their IT spending to increase. Of those, a whopping 62 percent said they expected that spending to grow by more than 20 percent.

Anecdotally, solution providers said they also feel a sense of optimism.

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EDA growth turns anemic in second quarter
By Richard Goering
EE Times
October 04, 2004 (9:32 AM EDT)               

By the way--EDA is Electronic Design Automation and you have to design the next "got to have thing-ee" before you can build it, and you have to buy the software to design with before you design it, so any new "thrust" in "got to have electronics" will most likely show up here soon after IB (insider buying).

SANTA CRUZ, Calif. — Judging from the latest EDA Consortium (EDAC) Market Statistics Survey report, the long-awaited EDA recovery is nowhere in sight. Second-quarter EDA license and maintenance revenue was up just 2 percent over the prior year quarter, with most of the growth was in the Pacific Rim.

According to the report, total EDA revenue for the second quarter was $993 million, a four percent year-to-year increase. But that figure includes semiconductor intellectual property, which was boosted by the addition of new companies to the report, and services, which was up 11 percent over the same quarter last year.

"We have very small growth and no broad indicators of recovery," said Wally Rhines, EDAC chairman and Mentor Graphics CEO. Meeting earlier predictions of 5 to 7 percent EDA revenue growth in 2004 "will be a real climb from here," Rhines said.

Even with design services, not all the news is good. While up compared to last year, Rhines noted, services are actually down 8 percent sequentially from the first quarter.

There were, however, bright spots, Rhines said. EDA tool categories that showed strong growth included system-level design and verification, analysis tools for power and signal-integrity, resolution enhancement technology, RTL simulation and floorplanning.

These categories were offset by declines in IC placement and routing, IC full-custom layout and verification and logic synthesis. Functional verification and PCB design tools were both down about 1 percent year-to-year.

Geographically, North American revenues increased by 4 percent to $523 million, European revenues increased by 4 percent to $180 million and Japanese revenues decreased by 5 percent to $176 million.

The "rest of world" category continued its strong growth, up 19 percent to total $115 million. The region includes Pacific Rim countries such as China, Taiwan, South Korea, Malaysia and Singapore, where wafer fabs appear to be tooling up.

But why isn't EDA overall showing more growth? Rhines expressed puzzlement, noting that the move to 90 nm is happening faster than expected and that the semiconductor industry may enjoy 25 percent growth in 2004.

"It may be company specific," Rhines said. "And it certainly can be that we need more new tools and new capabilities to see some new growth."

end

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By Mark Hulbert, CBS.MarketWatch.com
Last Update: 12:01 AM ET Sept. 14, 2004  
 
ANNANDALE, Va. (CBS.MW) -- A number of the newsletter editors I monitor are worried that the VIX is too low.
 
The VIX, of course, is CBOE's Volatility Index (VIX: news, chart, profile), which represents the implied market volatility of a basket of widely traded options on the S&P 500 index (SPX: news, chart, profile). Low readings are assumed to be bearish, according to the contrarian logic that option traders have become too complacent.

And recent readings have been very low indeed. At Monday's close, for example, the VIX stood at 13.17, which is the lowest reading in over eight and one-half years.

There's just one problem with this argument, however: Low VIX readings have not reliably been followed by below-average market returns.

more...

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Presidential Elections - AP  
Polls Suggest a Double-Digit Bush Lead

By MARY DALRYMPLE and DEB RIECHMANN, Associated Press Writers

AKRON, Ohio - President Bush (news - web sites) and John Kerry (news - web sites) battled over the economy and jobs in a small corner of the campaign's most fiercely contested state Saturday as polls showed a post-convention surge for the Republican in the White House.

Late Saturday, Teresa Heinz Kerry, the wife of the Democratic presidential candidate, was taken to a hospital in Mason City, Iowa, after complaining of an upset stomach, a spokeswoman said. She was taken to Mercy Medical Center-North Iowa by ambulance from the airport.

"As a precaution, Mrs. Heinz Kerry had a series of routine tests performed and was released," said Sarah Geggenheimar, a spokeswoman for Heinz Kerry. "She is feeling better and is traveling to her home in Pittsburgh tonight as planned."

Heinz Kerry had just finished a private meeting with a group of local Democrats to talk about health care. She was traveling separately from her husband.

With little more than eight weeks remaining to Election Day, a Newsweek survey gave the president a lead of 52-41 over Kerry, with independent Ralph Nader (news - web sites) at 3 percent. A Time Magazine poll released a day earlier also made it an 11-point race.

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Asia growth may soften impact of semi downturn
By Spencer Chin
Silicon Strategies
09/07/2004, 10:00 AM ET    

MANHASSET, N.Y. — With the Asia-Pacific region triggering much of the recent growth in semiconductor demand, the industry slowdown underway may be less severe than in 2001 when all global regions experienced a boom-and-bust cycle, according to market research firm Advanced Forecasting (Saratoga, Calif.).

The firm said that during July, IC supplier revenue in Asia grew 43 percent year over year, outpacing the 22 to 25 percent growth worldwide. Advanced Forecasting noted that by comparison, all global regions were growing over 33 percent year-over-year in 2000, thus producing a steeper downfall when the recession hit a year later.

"The current slowdown felt across the industry may reduce the severity of an impendingrecession as the industry attempts to realign itself with underlying demand, as was the situation in 2002, where overheating during the first half-year caused a correction in the second half," stated Rosa Luis, director of marketing and sales for Advanced Forecasting.

Still, all signs indicate the global semi industry is stumbling, the firm said. Growth rates in IC units and revenue have diverged, with revenue increasing more rapidly than units, as was the case prior to the 2001 recession.

IC suppliers have also become more nervous recently because revenue growth appears to be leveling off. Many suppliers have revised their guidance for the current fiscal quarter as unit demand has fallen during the summer months.

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Dethroning the dollar
Deficits, maturing euro, China role undercut benchmark
By Rachel Koning, CBS.MarketWatch.com
Last Update: 8:23 PM ET Sept. 7, 2004  [ Page 1 | 2 ] 

CHICAGO (CBS.MW) - It would be a slow turn of events, but the U.S. dollar is moving closer to surrendering its status as the world's benchmark currency.

Just as it supplanted the British pound after World War II, the dollar stands to lose its lead position if the United States fails to shrink record trade and budget gaps with dispatch, some analysts argue.

Its natural successor would seem to be the five-year-old euro. Some argue China's expanding global position could vault its currency to lead status. Central banks and multinational corporations might simply hold a mix in their portfolios, forgoing a reserve currency like the dollar that helped build an economic powerhouse.

For now, the dollar is "the reserve currency ... on life-support," says Peter Schiff, chief executive of Euro Pacific Capital, in Newport Beach, Calif.

While the future of global currencies is murky, what is clear is the U.S. must offset its deficits with a $2 billion daily flow of foreign capital. That leaves its economy and currency's buying power up to the whim of foreign investor sentiment.

The world's richest nation has evolved from its biggest lender to its biggest borrower. Some analysts say its ability - and willingness -- to rebalance its ledgers is a necessary vote of confidence in its currency and economy.

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