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At least I think I am. As of late the stock market has
been giving some very ominous signs, like storm clouds just off on a Michigan horizon. I'll
have to admit that I've been looking for a top in this market for more than a
year, and yet that's all I've done… look. In fact, I've even gone long
on two occasions so as not to die of boredom in the interim. The latest was
back in early February when I took my clients long looking for a top of
11,345. I blamed it on too much liquidity. Well every party has to come to an
end, and this is no different. The Fed raised interest rates last week for
the 15th straight time and made it understood that it wouldn't be the last.
In a similar vain, the Bank of Japan announced an end to its easy money
policy. Central Bankers around the world are turning off the liquidity spigot.
1 In
short, the punch bowl has been taken away from the table; will the last one
out please turn off the lights.
I would like to point out a few of the warning signs
I see trampled in the dust of the "new Bull Market crowd" as they
drool in anticipation of the next run-up in the Dow. I'll have to admit there
are some very smart analysts in that crowd, some a lot smarter than me, but
that doesn't mean they can't be wrong. Greed can turn the brightest mind into
a useless tool. Let's take a quick look at a few things that are troubling
me:
- The Dow is
now selling at 21.5 times trailing earning while the yield is at +/- 2%.
That is reminiscent of a Bull Market high, not a Bear Market low. No Bull Market has ever begun at these levels.
- Lowry's buying
pressure has been decreasing for months while Lowry's selling pressure
has been increasing for months. That
smacks of distribution to me.
- In
mid-January there were 458 new highs whereas now there are less than 150
new highs.
- While the
DJIA is just 3% from its Bull Market (2000) high, the stocks that make
up the Dow 30 are, on the average, 20% off their 2000 highs.
- The US is
just awash in debt, all kinds of debt, and on every imaginable level.
There has never been anything like it in all the history of mankind.
- There is
price inflation, if you don't believe me, just take a quite look at the
CRB; it just made a new Bull Market high on Monday April 3rd.
- President
Bush is not going to be satisfied with just two wars in Iraq and Afghanistan,
he wants to attack Iran.
- The economy
in the US
is on the decline, and the decline seems to be gathering speed.
I could go on, but I think you get the picture.
These are the little nagging things that tug at the corners of your mind when
you try to drift off to sleep at 3 am. Then there are other things, seeming
less innocuous, but perhaps more important and I'd like to spend some time on
each and every one.
At the top of my roll call is the Dow Jones
Utilities Average. As you can see below in the Daily Chart of the Dow Jones
Utility Index, it is not a pretty picture. After making an all-time high in
January, the Index has turned down and has yet to look back. Normally, when a primary or big
 
secondary move comes to
an end, the utilities will turn down two or three months before the Dow. That
happened in late 1999 and could be happening again at this very moment.
Currently, not only has the Utility Index turned down, but it is trading
below both the 50-day and 200-day moving averages. What's more, the 50-day
moving average has turned down and looks like it is about to cross below the
200-day moving average. That is not a good signal.
Next we have the housing market. Just about
everybody and their brother knows that the housing boom has been the backbone
of the "economic recovery" that began in 2002. The rising prices
have allowed the average American to go to the financial trough time after
time in search of the liquidity necessary to keep him afloat. He refinanced
his house time and again, using variable interest rate loans (ARMS) in most
cases, because Allen Greenspan said it was all right. Hell, he even said it
was advisable. What more could you want? Meanwhile, Greenspan raised those
rates fourteen times and his predecessor, Bernanke,
just made it fifteen straight. To further complicate matters, the language in
the papal-like Fed statement implied that more hikes were in the works.
The credit cards, leased SUV's, and second and third
homes are coming home to roost and will soon weigh heavily on the pocket
books of Mr. and Mrs. America.
Please focus attention on the Daily Chart of the Philadelphia Housing Index
above. The Index topped just before the previously mentioned Utility Index,
made a series of lower highs, rallied to an intermediate level, and appears
to have rolled over. Pay close attention to the fact that the 50-day moving
average has now crossed below the 200-day moving average. This is really
quite a bearish scenario.
I personally believe the top is in for the housing
market and reduced liquidity along with rising rates are the funeral dirges
being heard in the background. Check out www.realtytrac.com and look at the U.S.
Foreclosure Market Report for January 2006. The foreclosure rate is up 45% as
compared to January 2005. Put that in your pipe and smoke it Mister
Greenspan! Also, the inventories of both new and existing homes are making
new highs as I type. Rising rates will only exacerbate this trend. Finally,
in some markets as many as 20% of all homes financed were with no money down.
Here's a little something I learned back in the interest rate purge of 1979,
when my generation thought we had invented creative financing. If a person
has nothing to lose, and times become difficult, how long do you think he
will hesitate before he decides to give the key back? I'll give you a clue, you can measure it in hours rather than months. Just
ask any Savings and Loan. Oops, I almost forgot, there aren't any left!
Before I tackle the really big issue of confirmation
versus non-confirmation, I want to take a quick look at the Daily Chart of
the Philadelphia Banking Index. The banks have been the primary beneficiaries
of Mr. Greenspan's rather tainted policy, allowing the financial institutions
to have access to very cheap money that they in turn loan out at higher
rates. That cheap money isn't so
cheap any more. The
tipping point for the banks was probably at 4.0% and now that we've surpassed
that point, and there is every indication that we will keep on going, we
should see it in the above chart. We have a high on March 23rd, and we've now
turned down. The first test we be the 50-day moving average. It is far too
early to tell, but it bears watching.
It's about now that you'll tell me that the Fed will
begin to drop rates if the economy slows down too much. Wrong! That can't,
and do you want to know why? It's all that debt floating around out there. We
are becoming a bad risk. In a recent PIMCO posting, Bill Gross comments that
FNMA debt is listed as a higher risk than Emerging Market debt. He then went
on to say that that was a distortion. I disagree. This difference is an
accurate reflection of the reality in the US. We are a country that
requires damn near US $3 billion of 'other peoples money' in order to get
through each and every day. As it stands, foreign Central Banks are only
willing to anti up +/- 20% of that figure. Mr. Greenspan's dirty little
secret is that almost all of the balance is coming from our own printing
press. That's why the Fed decided not to publish the money supply figures
anymore. If Central Banks don't want our debt, what makes you think anyone
else will? Rising interest rates are just a reflection of our reality, and
they are going higher than almost anyone expects.
Now let's get down to the nitty-gritty. I want to
talk about the comparisons between the DJIA and the Transportation Index.
Right about now my clients eyes are beginning to
glaze over. Tough! Get over it, as my kids were fond of telling me. Below I have posted the Daily Charts for both the
DJIA and the Dow Jones Transportation Average. As
recently as yesterday, Thursday April 6th, the Transportation Average hit yet
another all-time high closing at 4,680.00. Notice the emphasis on all-time.
Neither the DJIA nor the S & P have been able to do so. In fact the S
& P still has another 250 points to go and that's equivalent to 19%. The
DJIA is much closer, needing only a 2% gain.
I'm sure you noticed that I did not include a chart
of the S & P above, and there is a reason for that. Dow Theory considers
the relationship between the Transports and the DJIA; there wasn't an S &
P when Charles Dow roamed the earth. For the DJIA to confirm the new highs in
the Transportation Index, we would have to top
11,750 and that would imply a new Bull Market in stocks is under way. A Bull
Market that would begin at 23 times earning and sport a yield of less than
2%. That's never happened before, and I'm going to crawl way out on a limb
here and say it won't happen now. We have been in a Bear Market since 2000.
The secondary reaction up, taking an unprecedented period of three years to
run its course, is over, or very close to being over. It lived on liquidity
and it will now choke on it, or rather its evil twin debt. If the truth be
known, I really believe it came to an end with the top posted on March 21st.
That was a 45-day calendar vibration. That's important because U.S. stocks
and the indexes trade in 90-day blocks. What's more, the Transports
registered new intraday highs on three separate occasions this week and the
Dow failed to even make so much as a secondary confirmation. Yes, I truly
believe the top is in and things will become nastier sooner rather than
later. Keep in mind that the second leg down in this Bear Market will destroy
wealth in the U.S.
like nothing you could ever imagine. Why? Simply because no one is prepared
for it! Ask for no mercy folks because none will be given.
In conclusion, Mr. Greenspan conspired with all the
other major Central Banks to try and do something
that has never been done before, i.e., change the primary trend of a major
market from bearish to bullish. Trillions upon trillions of dollars, yen,
euros, etc.,… were printed in an effort to
bury the bear, and they failed. It was in the other countries interests to do
this so they went along with the scheme. After all, someone had to buy their
goods. Now it's in their interest to stop, and that is precisely what they
are doing. By raising rates, they are making their foreign currencies and
bonds more appealing than the U.S.
junk bonds. As a result, Bernanke will have to keep
on raising rates and printing money to buy his own junk paper. Countries like
China and India are
awash in dollars, and will use those very dollars to buy infrastructure and
commodities. The end goal is to create internal demand that can replace
fading demand from a U.S.
consumer strong out on way too much debt. The savings rate in China exceeds
30% and, given the fact that there are almost two billion Chinese, it
wouldn't take much spending to drive the economy. It is a race against time
and I have the feeling that the clock is going to win. That helps to explain
the relentless rise in commodities like copper, zinc oxide, and iron oxide as
well as the surprising resurgence in oil. They are also using those useless
dollars to buy gold and silver. China has long since recognized
gold for what it really is, i.e., a true store of wealth.
Enrico Orlandini
Website : Dow Theory Analysis
Dow Theory Analysis S.A.C.
Lima, Peru
Phone:
001-51-56-973-5599
Email: ebo@dowtheoryanalysis.com
For those of you interested in receiving
information on the Funds we manage, please feel free to e-mail us at ebo@dowtheoryanalysis.com and we will respond as soon as possible.
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