Grizzly's Growlings 070201

Monday Morning Market Musings 07/02/2001

You Can Lead a Horse to Water...

For the month of June, the Nasdaq managed to about breakeven while the DJIA sank about 500 points. For the quarter, the Nasdaq rebounded 17% and the DJIA rose 6%. For the first half of the year, the Nasdaq fell 12% and the DJIA lost only 2.7%. The Nasdaq is still down nearly 3,000 points from its all-time peak 15 months ago.

Conventional "wisdom," always to be taken with a large shaker of salt, has it that lower interest rates lead to higher stock, always starting no later than six months following the first rate cut. As we enter the third quarter, the clock is now ticking for the near-universally expected bounce in the markets (and the economy). It�s poop or get off the pot time for the Bulls. We think they're constipated.

The Elliott Wave patterns on the markets are at one of those critical junctures, where the action will go either way, and a long way, starting soon.

As shown on the chart below, we think the highest probability is that wave 5 to the downside is underway.

So how far down will the Nasdaq go? At this point, we can�t put a high-confidence number on it, but the 1,000 area seems like a likely suspect.

The alternate scenario that must be given consideration is for a short-term bullish move to complete the wave 4 counter-trend rebound that began in April.

Under this scenario, the 2,700 area is a solid target for completion of wave C of 4.

If you�ve been following our daily updates, for several weeks we�ve been looking for the 2,075 level to offer solid resistance to any bounce. This level held until last Wednesday. It is now key support for the bullish case. Any breakdown below this area should usher in the quick drop to the 1,900 area we�ve been looking for, with much more risk to the downside from there.

Make no mistake about it though, we firmly believe that Nasdaq 5,000 will remain unapproachable for many years to come as the Great Bear Market of 2000-200[?] runs its course.

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

The Economic Watch
The economy continued to slip and slid lower in June, surpassing the already bearish expectations of The Street anal-ysts.

For example, at the beginning of the second quarter, anal-ysts tracked by First Call/Thomson Financial had been looking for a 35% drop in combined earnings for the 82 stocks in the S&P Technology Index. As the second quarter ended, these anal-ysts are now looking for a 64 % drop.

We�ve been highlighting in our daily reports the earnings and revenue problems in the speculative high-tech sector, our SSDDDC (Same Story Different Day Different Company) �winners�: Nokia, Nortel, Juniper Networks, JDS Uniphase, Palm, Transmeta, Telllabs, Teradyne, Varian Associates, the list goes on and on.

And let�s not forget that many of the earnings and revenue disappoints are coming against already lowered expectations. As JDSU's president said a couple of weeks ago: "The business downturn has been rapid, steep and unprecedented..."

But the economic disappointments are not confined to the tech sector. Industrial giants like FedEx, Ingersol-Rand, Merck, Merrill Lynch and DuPont have all delivered earnings disappointments and large layoffs.

The performance of a company like FedEx is perhaps more bearish for the entire economy than for itself. Express deliveries in the first quarter of 2001 registered the largest drop since the company invented overnight express delivery, 1973. This kind of indicator tells more about the health of the economy than any government report.

Barron's estimates that in the second quarter overall corporate earnings fell 17% vs. the same period a year ago.

Sir Alan of Greenspan and The Fed delivered an unprecedented sixth interest rate cut in six months last week, though it was by �only� 25 basis points. Along with the rate cut, the Fed dispensed another round of its patented monetary mumbo-jumbo.

Our friend James B. Stack, editor of InvesTech Research summed it up nicely: "monetary policy has truly turned into a job of bubble management. And the Fed's number one objective is to prevent a Japan-style (deflationary) scenario." [More on Japan below.]

Despite the six interest rate cuts, the US dollar is still king. The strong dollar is a severe impediment to any thought of an export-led recovery. Europe is stagnating and Asia has been in the tank for a decade. [More on Japan below.]

For the last nine months, mainstream economists and anal-ysts have been predicting a �second half recovery.� Yet, the second half is here - with virtually no sign of a recovery. In fact, the news just seems to get worse. You can lead a horse to water, but you can�t make him drink.

Our favorite source for economic updates is The Daily Reckoning, a daily dose of witty and enlightening economic analysis. Click here for your free signup to The Daily Reckoning.

Lower interest rates are not the cure for what ails the US economy. The Japanese have been pushing on a string for a decade, to no avail. Even near-zero interest rates haven�t helped. [More on Japan below.]

Lower interest rates aren�t helping spark much new debt expansion. as much of the industrial sector is struggling to just keep afloat. According to the FDIC, the percentage of commercial loans falling more than 90 days past due rose in May to 1.8% - a seven- year high. There�s just no ability to take on more corporate debt.

Despite the Fed�s six rate cuts in six months, corporate bonds yields are actually higher than they were back in January. Furthermore, there�s little need for the industrial sector to build new factories and other facilities:

Industrial production slumped in May for the eighth month in a row.

The capacity-utilization rate plummeted to 77.4%, its lowest reading since August 1983.

The productivity of US workers had its largest drop in 8 years, falling at an annual rate of 1.2%.

Capital spending (new orders) fell 4.6% in April...with a 10.3% drop in spending on computers and electronics.

Consumers won�t be helped much by lower rates either:

Total US consumer debt reached a record $1.58 trillion in April.

Car dealers have been offering zero percent financing for months. (That�s about all that�s keeping the auto sector afloat.)

Americans are spending 14.3 % of take-home income on debt, the highest since 1986.

More U.S. household wealth evaporated in the first quarter of 2001 than in all of 2000 - which was the first year in half a century in which American net worth declined.

Credit card write-offs are running at an annual rate of about 6.7%, the highest since 1991.

The interest rates on many credit card interest rates have already reached their minimums. That is, the rate on variable rate cards can go no lower.

The average credit card debt per household hit $8,123 in 2000, nearly three times the average amount owed 10 years ago, according to CardWeb.com, Americans owe $568 billion to credit card companies, up from $172 billion in 1990.

The percentage of credit card loans considered delinquent - as well as the number of Americans behind on mortgage payments - at the end of last year hit their highest levels since 1992, according to the Federal Reserve and the Mortgage Bankers Association.

The average amount of debt per household has reached 14% of disposable income, the second-highest rate ever, according to the Federal Reserve.

The second-highest number of personal bankruptcies on record were filed during the first three months of this year, a 17.5% increase. 2001 should surpass the record 1.44 million bankruptcies filed in 1998.

Nearly three million people filed continued claims for jobless benefits the past three weeks, more than at any time since '92..." The Conference Board's help- wanted index slipped to an 8 1/2-year low.

As commentator James Grant notes, �Increases in unemployment usually PRECEDE recession buy 7 months. This means a recession should begin in the third quarter. Further, many recessions started from employment rates better than we currently have, so the fact that we only currently see 4.5% unemployment gives us no encouragement, at least from a historical perspective.�

What�s always a prime target for any corporate budget-slashing? Advertising! Merrill Lynch & Co has slashed their forecast for 2001 domestic advertising from an increase of 2.5% to a decrease of 0.7%, which would be the first drop in advertising since the recession year of 1991. (Advertising increased by 9.8% in 2000.)

Things are slumping across the country in the real estate sector as well:

Current household debt loads are huge, and despite the Fed�s six rate cuts, mortgage rates have increased since the beginning of the year.

US office rental rates fell for the first time since 1993 in the first quarter.

Mortgage delinquencies rose to 4.5% of outstanding loans in the first quarter of 2001, the highest since 1992.

The number of New York City homeowners defaulting on FHA-backed home mortgages has surged nearly 30% in the past year.

"Manhattan office leasing dropped dramatically in the first four months of this year," reports Crain's, "with the volume of space rented in midtown and downtown just half of what it was in early 2000. And nearly 6 million square feet more space was vacated than was rented..."

In tech-heavy Denver, the inventory of unsold homes rose by 36% in June from the prior year�s level. The office vacancy rate along the US 36 corridor soared to 28 percent, from just 1 percent last May.

Business travel is tanking, another one of those unfiltered indicators of economic health. Northwest Airlines' CEO said last week that he had never seen ticket sales fall off so suddenly. Delta Air Lines' President told Business Travel News "Business travel is dropping off precipitously... We are in the deepest slump I've seen in a decade or more... We don't see it getting deeper, but we also don't see it getting better.

Over in Japan
So how�re things over in Japan? (And we don�t mean their dreadful reception to the film Pearl Harbor.) Japan really hasn�t recovered from their burst bubble of 1980.

The Nikkei 225 currently trades just a few percentage points above levels not seen since 1986.

Unemployment in Japan rose to 4.9% in May.

Consumer prices fell 0.7% in May, the largest drop since they began calculating it, 1971.

Industrial production fell 1.2% in May, the third straight drop. It has fallen seven out of the last eleven months.

Consumer prices in Tokyo fell 0.6 percent in May from the previous year, marking the 21st consecutive month that prices dropped.

Consumer spending fell 4.4% this April, over the same period a year ago.

GDP sank by 0.2% in the first quarter of 2001.

And don�t think Japan is the only economy in trouble in Asia. For example, over in Taiwan, its global trade plunged 26% in May. Orders for U.S. technology goods like computers and semi-conductors have collapsed 40% since last year, the ISI group reports.

Stay tuned folks, it�s going to be a long and hot summer, around the world. Have a great 4th of July holiday!

"People for the most part stood their ground, but the ground itself gave way beneath them." � Economist Joseph Schumpeter, describing the beginning of the Great Depression.

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