Grizzly's Growlings 020501

Monday Morning Market Musings 02/05/2001

Recession or Depression?

As we�ve been detailing in our daily updates throughout January, the markets have been fixated on Sir Alan of Greenspan & Company. The question has been: will our hero once again ride in on his white horse and save the markets and the economy with interest rate cuts?

It may not matter. History provides at least two examples where rate cuts were too little too late to stop a bear market: 1929-1931 in the U.S. and 1990-1991 in Japan. (More on Japan below.)

Bill Fleckenstein, one of the sharpest minds on The Street, points out "the high of the post-crash bounce was on April 17, 1930, from which the market collapsed nearly 90 percent. The moral of that story is that folks shouldn't confuse the bounce that is under way with a return to prosperity - no matter how long it lasts..."

The Dow Jones Utility Average was last to peak in 1929. This time around, the DJUA peaked on Dec 27, 2000 at 418.25 and promptly plunged 21% in next three weeks. The DJUA has since recovered about half of that drop, a typical retracement level, and appears ready to roll over again to the downside.

"Rate cuts are not a panacea," comments Lance Lewis of the Prudent Bear Fund by way of the Daily Reckoning:

"Rate cuts will not make all the bad debts of bankrupt Internet and telecom companies good. Rate cuts will not bring back the millions of brokerage accounts that have declined 50 to 100 percent over the last year as the stock bubble collapsed. The only thing accomplished � was a short-term change in psychology that could be very short term indeed. The [interest rate cut] was clearly a panic move on the part of Uncle Al, and there are already nervous rumblings among market participants that it was just that."

We�ll just add that California's near-bankrupt utilities won�t be helped much by a 50 basis point interest rate cut either.

Economists generally agree that the stock market is a leading indicator of the economy, by nine to twelve months. The Dow Jones Industrial Average peaked a little over a year ago and the Nasdaq peaked last March. The economy turned south in earnest in the 4^th quarter of 2000, right on schedule.

As it usually happens as the economy turns into recession, the economic conditions deteriorate much more rapidly than expected by The Street. Evidence that the economy is in recession already is mounting daily. Here�s a sampling:

U.S. gross domestic product grew by only 1.4% during the 4th quarter, its slowest pace in five years.
The National Association of Purchasing Management's index of manufacturing activity fell to 41.2 percent in January, the index's sixth straight monthly decline and its lowest level since 1991.
The Conference Board's Index of Leading Indicators fell for the third month in a row. It dropped 0.6% in December, its sharpest decline in five years. Three consecutive drops in this index is usually an advance warning of recession.
The Conference Board�s quarterly Business Confidence Index fell in the 4^th quarter to the lowest level in more than 20 years. Even more ominous, this 16-point plunge was the biggest drop in the 25 years of data collection by the Conference Board. The previous largest quarterly drop was 13 points in the final quarter of 1981, which ushered in the longest recession since 1933.

The Conference Board�s Consumer Confidence Index has tumbled four months in a row and now stands at its weakest levels in four years.
The U.S. savings rate in December was a negative 0.8%. Taking the year as a whole, the savings rate was negative 0.l%, the lowest since Great Depression year 1933.
Goldman Sachs Economics estimates that U.S. household net worth fell $875 billion in the 4th quarter. The Goldman report noted that the last three quarters saw the "sharpest reduction in the ratio of net worth to disposable income on record (since 1952)."
Sales by U.S. automakers plunged 15% in December.
Formerly high-flying Dot Coms slashed jobs by the hundreds in the 4^th quarter. Now, major blue chippers are slashing by the thousands and tens of thousands. Business Week is reporting that General Electric plans to cut 75,000 jobs over the next two years, though GE is denying the report (at least for now).
Barton Biggs recently summed it up nicely by saying "It still boggles my imagination that everybody thinks we can come through the biggest bubble in the history of the world and certainly the longest boom that the U.S. has ever had, and get out of it with a very, very mild recession. Is that the way it works?" Well, if it does, it�ll be the first time.

As we�ve been saying for months, the 2000 sell-off was extensive but rather orderly, with really no signs of the panic or capitulation that typically mark solid bottoms. It was all too painless and bloodless, and optimism remains rampant:

Market sentiment (a contrary indicator) remains massively bullish. The latest report of investment newsletter writers by Investor's Intelligence shows 61% are now in the bullish camp. The last time there were this many bullish advisors was last April, just after the Nasdaq hit its all-time high and began the first leg of the Great Bear.
According to Investors Intelligence, investment strategists are now allocating a record 64.7% of their clients' assets to the stock market, which is by far the highest in the history of this indicator.

Over in Japan, they been "pushing on a string" with interest rate cuts for ten years, all to no avail. Speaking at the recent IMF meeting in Switzerland, Japanese Prime Minister Yoshiro Mori explained what happened during Japan�s "lost decade": The impact of their bubble bursting on financial institutions in 1990 was much worse than expected. We'll add that the U.S. appears to have dipped its toes into the same economic quicksand. See Tokyo braces for possible economic emergency for additional analysis of the what's happening in Japan.

The Nikkei 225 index is hovering just a few hundred points above levels it hasn�t seen since 1986. As we go to press early Monday morning, the Nikkei 225 is down another 318 points (2.3 %). A break of these lows portends another major down leg in the Nikkei�s 11 year Great Bear. One more day like Monday will get us there.

Back in the U.S., the Nasdaq rebounded some 28 percent in January. This counter-trend rally has allowed the Great Bear to digest the market�s losses in 2000 and work off the extreme oversold conditions.

As the Elliott Wave patterns show in the chart below, the Nasdaq should be entering the next leg of the Great Bear any day now if it hasn�t done so already. This decline should be wave 5 of wave 3 down.

For much more detailed information on Elliott Wave technical analysis, please see Putting Elliott Wave to Work in the Markets.

We continue with our ongoing outlook:

US STOCKS REMAIN ON FULL CRASH ALERT!

For speculators, any short-term strength in the markets hold excellent low-risk entry points to the short side.

For more aggressive investors, the few bear funds in an industry of 4,300 mutual funds were the place to be in 2000, and they should fare well again as the Great Bear continues throughout 2001. Please see our Great Bear Funds Page for more information.

For conservative investors, 6 percent in a money market fund will be hard to beat.

Please read our disclaimer.

"If I seem unduly clear to you, you must have misunderstood what I said."
- Federal Reserve Chairman Alan Greenspan

grizzly@bearmarketcentral.com

Please read the disclaimer.

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