THE BEAR'S CASE

THE BEAR'S CASE— Bearish Waves From "Elliott Wave" Forecast

By Stockadvisors.Com | 9 July 2008

In January, Steve Hochberg, a leading authority on "Elliott Wave" technical analysis, had forecast that 2008 would be the "year that everything changes". His forecast called for a credit crunch, a housing collapse and a bear market. In his Elliott Wave Financial Forecast the advisor warns, "The bear market is far from over." Here, he again looks at stocks, housing and the case for deflation.

"The typical seasonal market patterns usual result in 'summer doldrums." But with a third wave lower starting to unfold, the traditional summer lull may turn into a real downside barn burner. "The Dow has broken its 34-year trendline, which confirms our bearish forecast." This trendline connected the market bottoms from December 1974 and October 2002. This break virtually eliminated any remaining bullish potential for a rise back to new highs.

"In addition, the nominal Dow, denominated in UD dollars, is now beneath its January 2000 high, leaving the stock's senior index with a loss for the past 8 years." The nominal S&P 500 and NASDAQ are down 17.5% and 53%, respectively, from their 2000 peaks, and the 'real' Dow as measured in terms of its gold value, is off by over 70%. "There certainly will be counter-trend rallies, but when they occur, they should be viewed as opportunities to add to established bearish positions."

"The recent stripping of both MBIA and Ambac's AAA ratings by Moody's came on the heels of previous downgrades by Fitch and S&P. We cannot overstate the importance of this event. Ratings on much of the debt backed by these insurers must now be cut in turn. A downgraded bond does not necessarily meant default. "But a decrease in the aggregate value of dollar-denominated debt in a credit-based economic system is deflation."

"The word on the street is 'inflation.' But there are huge holes in this widely-held assertion." For one, real estate, the #1 inflationary hedge through all prior inflations, is not rising. In fact, the fall in housing prices is the fastest on record. "The latest housing how-to books, eg, Foreclosure Investing for Dummies, captures the breadth of the belief that a decimated asset is a buying opportunity."

"Its appearance surely means that the housing debacle is hardly closer to ending than it was in January 2007 when we cited its predecessor— Flipping Houses for Dummies— as a sure sign that the downturn in housing was about to get nasty. Another inconsistency with a new era of inflation is the still-unfolding credit crisis. Inflation generally supports increased rates of credit expansion, as it allows borrowers to pay back their obligations in cheaper dollars. Currently, however, the credit bust is intensifying every day. Banks are tightening lending standards as borrowers curtail demand for new loans."

"Meanwhile, past due notices are piling up. In every sector, delinquency levels are rising. And banks are [[still : normxxx]]woefully unprepared for a flood of bad debts." When deflation rages, cash will get far more scarce and deliquencies will surge. "In a bear market, it is much safer to watch the 'knife-catching' rather than take part. The sooner that investors recognize the advantages of this approach, the more capital they will conserve and the smarter they will look at the bottom."



Bear Market: Where Do We Go From Here?

By Michael Santoli, Barron's | July 7, 2008 | 20 July 2008

Last week on the Dow's reaching "official" bear-market status with a 20% decline from a recent high is a bit like fixating on the moment that storm winds go from 73 to 74 miles per hour to formally become a hurricane. Either way, the gale is ominous, and the damage will be serious, regardless of whether the government declares an "official" disaster area afterward or not. A more practical definition of a bear market is one in which the overshoots occur to the downside. Cheap-seeming stocks keep going down, rallies are flashy but fleeting, and investors withhold the benefit of the doubt— and their capital— rather than bestow trust on the market.

As it happens, overshooting the 20% decline level has plenty of precedent. Robin Carpenter of Carpenter Analytical Services, while noting that this threshold "is arbitrary and much too 'neat' to be analytically credible," details the four prior times the S&P 500 has fallen at least 20%, dating to 1973. For no fathomable reason, or maybe no reason at all, each prior time the index fell significantly beyond that point, from 9% to— gulp!— 35% more. Looking back a bit further, the 1962 pullback went only about 5% lower. Bearing that in mind and without claiming to know precisely what it's worth, the S&P 500 now at 1262 is essentially where it gave way to appreciable rallies two prior times, in January and March.

Current conditions rhyme with, but don't perfectly echo, those earlier moments. Investor sentiment, as depicted in the usual surveys, is pretty much as sour as during those prior lows. Corporate insiders' selling has returned to rock-bottom levels. Chief Executive magazine's CEO Confidence Index is now 15% below the level of October 2002— a time when CEOs were a hunted species, remember. And the percentage of stocks under key averages and the tally of new lows— measures of how "oversold" the market is— also are in the range of prior bottoms. Retail investors are, again, pulling cash from stock funds and hoarding it.

Importantly, too, the recent momentum leaders in the fertilizer, coal and steel sectors were shellacked in the early July selloff. Weakness in leadership groups is often a prerequisite for a bounce, engendering a "no place to hide" vibe that can accompany capitulation. (Of course, these stocks can pull back an awful lot before endangering their long uptrends, and enough investors have been kicking their dogs in frustration for not owning them for so long that buyers may well step in before a deep correction takes hold.)

Set against these encouraging clues are a few large challenges. First— no less ominous for being obvious— is oil at $145 a barrel. It's up 25% since May 1, when the earlier trading lows were looking rather formidable and the market seemed to have discounted much of the soft economic and credit situations. The sheer velocity of the move has fed another major headwind: A Federal Reserve unwilling or unable to throw the market a rescue line, as it did in January and March.

Then there's the general lack of the screeching panic present the last time stocks were here. Yes, investors are evidencing deep concern, but the selling hasn't had the climactic, purgative character of the previous inflection points. The only thing more glaring than the refusal of the options market's volatility index (VIX), now near 25, to rise to the hoped-for heights of the first quarter above 30, is the constant commentary about this fact. Citigroup strategists argue that the VIX did get high enough above its 60-day average last week to hint that it was "high enough" to allow for a rebound before too long, incidentally.

If the market rushes to new lows and finally presses investors' panic buttons, it won't be because stocks are terribly expensive, or have failed to price in some recessionary risk to profits. Reasonable guesstimates imply that the S&P is now priced for 2008 earnings a good 10% below the formal consensus forecast of $92.

Leuthold Group last week, in the context of a "neutral" market view, told clients: "Our valuation models are indicating that there is not a huge amount of downside risk." Since 1945, the firm said, "70% of all bear markets bottomed out with P/E ratios around the historical median of 17.3-times normalized earnings." The market P/E on Leuthold's "normalized" profits was 17.3 at June 30. Normalized and median precedents and 70% tendencies can be useful. But they don't help in preventing those overshoots.

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Normxxx    
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