Urban Survival’s Inside Report # 13 January 13, 2001
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Back on Crash Alert:
Saved by NASDAQ?
Elaine and I went for a Sunday drive with the column for this week undone. I spent a good part of the day wondering what would happen in the coming week or two that would cause us to see the definitive breakout from the precipitous position of the market.
If you look at the news background, and the weekly charts, you'll see what I mean. Let me run through it for you because it's really bugging me.
Let's begin with the Dow. As you can see in the chart below, a couple of weeks ago we moved over the 200-day moving average and it was looking like the bottom might really be in...and the rally might be for real. Unfortunately, the strength did not last:
The next thing I did was take a look at the SPC (S&P 500 cash basis) and again, it was a similar picture, we had cross the 200 day moving average:
Now I'm a simple minded fellow on a lot of stuff, but I have to tell you, this one has me stumped. Look at the 50 day and k200 day moving averages of the NASDAQ 100 (IXIC) and you'll see something that's unexpected: The tech sector looked like it would open the week relatively healthy:
What you can see if you look at the "high circles" is that not only is the 50-day average higher than the 200 day but that the IXIC has managed to remain above both of its moving averages.
I think you can see what's bugging me: If the market were getting ready for a synchronized swan song, I would have expected to see some evidence that the techs were in the same kind of "chart trouble" as the other indices. But no! Instead we see this confounding and confusing situation (at least to me) where the techs are not behaving as they should.
So lets look around at the news and see if there's anything that could possibly account for it:
First, and foremost, the techs have been beaten severely.
They have had their little
butts kicked for two years and six ways to Sunday. Maybe this is just an indication that they are now ending Elliott Wave 4 or D. The way
Elliott works, is to suppose that stocks move in patterns of either three or five, a one up, two down but not below the start of the up, and three takes
the stock or index on to new highs. The other way Elliott is counted is one up from some important bottom, two down a bit, but not below the
starting point, then three up to new highs, four comes down to a low that is above the low put in by two, and again, not below the starting point, and
then wave five completes the move. The diagram says it more gracefully:- Then we have the Monday early action. #Even with the continued weakness in the down and the SPC, the IXIC was hovering in the area of down one percent, but it will need to close under the 2000 level (that's 2000 on the index, not the year 2000) in order to put us at the 50-day moving average. We would need to see a close this week of the IXIC under about 1940 in order to break down the 50 and 200-day averages. That's why I am watching the market like a hawk this morning.
- So what could pull down the SPC and the Dow so far that they will simply swamp the NAS100? Well, lots of things are coming to mind. The Enron situation certainly has potential because of the weekend revelations that Arthur Anderson ordered key Enron audit documents disclosed. The disclosure that Ken Lay and company were donating heavily to both sides of the political aisle has a lot of potential to wreak havoc in terms of markets because this is something that is developing into the largest financial debacle in the nation's history. It also is making clear what George Bush, Dick Cheney and Al Greenspan were talking about in December, we I called your attention to the very unusual meeting between all three in Washington when there was an active terrorist alert: They were obviously talking about how to deal with the financial impacts of the Enron blow up that they had some visibility on at the time and knew it would be coming. I would love to read the past two months of phone logs at Arthur Anderson to see which government officials - if any - called AA (that's Arthur Anderson, although a call to Alcoholics Anonymous would be an outcome too!) to tip them off about what was coming down the pike.
- Then there's the web bot output that I posted for you two weeks ago. In it there was a lot of referencing to a great financial mess developing and some indications that the GATA.org suit would win an important victory in the written decision pending in the case. Unfortunately, the web bots give us output that is based on emotional weighting of words, and do not specifically "name names", so there are a couple of other scenarios in the financial picture that could lead to the same kind of output at indicated by the web bots. One such scenario is the developing campaign of www.givemeliberty.org that is calling national attention to hearings in Washington D.C. on February 27th that deal with the constitutionality of the federal income tax on individuals. They are planning to spend a lot of money between now and then trying to convince people like you and me not to send in our 2000 tax filings. I will explain the logic of their arguments in a minute. First, let's deal with the bullet points on what is moving this market.
- The international situation in South Asia is also continuing to trouble me. Although it looks like India and Pakistan have chilled out for a while, there are still harsh words being bandied about on both sides. This weekend for example, the Pakistani's said they were not afraid of India, and India reminded the world that even if they were to suffer a "first strike" from the Pakistanis, they would be able to successfully respond with massive retaliation. I wasn't feeling especially good on Saturday so I laid around the boat and watched 13-days in October, which, if you haven't seen it, is about the Cuban Missile Crisis and how close the world actually came to nuclear war 40-years ago. (Whew, 1960 was that far back???). As I watched the film, I wondered how the same kind of angst would play out when there were not several days between key decisions, and instead there were mere minutes. That's the problem in South Asia, there's no time to think things through. The Kennedy Administration had the relative luxury of having a few days over which the "quarantine" of Cuba was set up and played out. In the case of South Asia today, the timescale is such that even a long phone conversation is out of the picture.
- Last, but certainly not least, is the mess in Argentina. This has been getting occasional headlines, but the gist of it is that the IMF is sending insulting proposals to the country - insulting in terms of not being workable given the high anxiety of the civilian population, and the country's stock market on Monday was closed for a sixth straight day.
There's no telling with certain precision how this is all working out in the markets, except to note that the Dow is down, the S&P is down, and the IXIC NAS100 is also down, but still holding just over the important 50 and 200 day moving average levels.
Here's my concern: If the IXIC breaks down, and we get a close this week under 1940 or 1930, and if at the same time, the weakness in the Dow and the S&P continues, then I think we enter a crash zone.
The reason for going on crash alert is that everyone who stands to make money on a "quick recovery" in stocks has enjoyed a good strong rally from early December. But now we're into "confessional week". It's here that we are likely to see additional warnings, more comments about "no guidance going forward", and any number of other "confessions" (job cuts, plant closings, consolidations of business units, and so forth) that could trigger a quick return to the post 9/11 lows and perhaps even taking those out.
The premise of this whole web site is that history is being played out in a similar, but different fashion that it was in 1929-1937. It's taking longer, and the facts are being obscured by having our focus split three ways by the Dow, the S&P (or Wilshire 5000) and then tech sector. It's hard to put the big picture in place. But look at what the Dow picture has been saying for the past few years:
With the close under the 200-day moving average last week, I think the Dow is setting up to resume it's decline with Elliott move E (or 5 if that's how you count). As my friend Robin Landry points out, its at the precise moment that everyone wakes up to an "E" or "5" that crashes happen. We have the major pieces in place to justify the move, but the question now is whether the market will lead thinking, or follow thinking. If the market can show real strong leadership, then a crash might be avoided. But if the market reacts in a cowardly way, then a crash seems more likely. The Aggregate Index is pointing to a negative conclusion of the rally within the next week or two at the most:
For this reason, I would urge anyone in markets now to be extremely cautious. As always, I will remind you that I don't give financial advice, and I just provide you with an historical perspective, but let me share one more thing with you.
The peak in our markets, as reported by the Aggregate Index, came in March of 2000. That level was around 13092. The present level of the Aggregate is a hair over 8169. Now if you go to the Federal Reserve's web site and look up the change in M1 from March 2000 to December of 2001, you will find that M-1, the narrowest measure of the money supply, was up 5.72% in this period. It's worth noting because we were likely in a period of productivity reductions. In other words, an estimated 5.7% inflation is probably evidenced in the money numbers. If you're willing to buy that, you need to multiply our recent Aggregate number by 94.3% (.943) to come up with a "constant dollar" decline from the top: 7703.
What this means in real terms is that the "constant dollar" aggregate is down 40%. If there's an economic miracle, it's that such a huge decline has been sustained with as little damage as we've seen so far. The administration desperately needs to keep public attention off the markets, and on issues like foreign terrorism, in order to maintain its grip on government.
A Word About Taxes
You might want to visit www.givemeliberty.org and take a look at the book they have prepared for the public about the Federal Income Tax System that they are challenging. I spent several hours this weekend (on Saturday) reading through their documentation and it seems to center around the idea that there are really very few "citizens of the United States".
According to their view (at least as I read it) you are a "resident of the U.S." but not a "U.S. citizen". You're really a citizen of whatever state you live in, unless you live in the District of Columbia or other really "federal" jurisdiction.
The group maintains that because you are not a direct subject of the U.S., your participation in the federal income tax is purely voluntary. They then go about explaining in some detail how you can claim to be a citizen of a state, such as California, and decline (they say legally) to pay your taxes.
I'd sure like to know of anyone who has done this. The steps involve filing what amounts to a notice with the feds that you are not a "subject of the U.S." and that you are a citizen of a State. They then walk you through how you should file a W-8 with your employer, not the standard W-4, and then they tell you to file a 1040NR (1040 for Non-Residents).
The case is interesting from a semantics viewpoint. Yes, the IRS uses Gestapo tactics, and yes, they seem to have evaded normal due process rules, but I'm not brave enough to run the risk of stepping on IRS by claiming not to be a resident of the U.S. and instead claim I'm a resident of a state and get away with it.
All that said, I won't be sending in my taxes until close to the deadline this year, because I need to gain employment in order to pay some taxes that I will probably owe. Still, it's an attractive idea and if you know anyone who has successfully file "non-resident alien" who was born a U.S. resident, please let me know so I can pass it on to other readers. - Thanks!
From the Poop Deck:
Food: The price reductions are over. Looks to me like the low food prices were due to reductions in energy costs. I think the only response here is to eat less, which probably wouldn't hurt me any...Shelter: Elaine and I have been looking at housing prices around the country - as my job search horizons are ever larger trying to find something to make money doing. What we found was that in the south, in particularly down around New Orleans, you can get a heck of a lot of house for $100,000. We're thinking that once we see what happens with the economy - if we get to a place where the bottom is in, or close to it, we will venture there. The effects of inflation on housing prices seem very uneven. Big bargains in the south east of California. Transportation: The Porsche is making noises again, clutch by the sound of it. After putting in a new brain two weeks ago, the cost of driving something other than a "plain vanilla" car are become uncomfortably clear again. We're not sure how we will handle it, but supporting a car is not what life is about. Communications: I've noticed fewer ISP's disappearing over the past few weeks...maybe I'm nuts, but maybe there will be some long term "basing" now in the communications sector. How long that base will develop is a question I haven't addressed yet. Energy: Gas prices are stable in our neighborhood. And the price of oil seems stable, or at least somewhat until our next Middle East move. Environment: On our Sunday drive up toward Riverside from San Diego, I was totally amazed at how much land has been covered by development. When I was last in the area 20-years ago, it was all rolling hills with craggy rocks. Today, the hills are there, many covered with homes, and there are houses on top of almost all hills. Finance: Still hoarding gold at our secret "off boat" location. I know it may not make sense, but something keeps driving me to put a few ounces in whenever we can. Especially because we have evolving scandals like Enron that could seriously damage the economy and the only way out of the mess may be for the Fed to aggressively inflate.
Watch the closing number on the NASDAQ 100 this week. 1930 with no rise in the Dow and S&P and I reckon it's time to batten down the hatches...