Tuesday October 19, 2004
Greetings once again, to Bears and Bulls alike.

Election day is just two short weeks away. Did you know that more than half of all eligible U.S. citizens won't vote! In fact, the U.S. has one of the lowest voter participation rates of any democracy in the world!  Why in the world are Americans so apathetic?

We think this deplorable situation is a direct result of a perceived lack of choice at the ballot box. No other major democracy in the world has only two "major" political parties.

Not only are there only two "major" parties, but as George Wallace first said, "There ain't a dime's worth of difference between 'em." (This is one of the very few worthy political insights from  Wallace, in our opinion.)

Quite simply, most people don't vote because they think it doesn't matter! If either the Democrat or the Republican is elected, it doesn't matter. Taxes will go up, government spending will go up even faster, and the deficit will go way up. There will be more oppressive regulation of the economy, more intrusion into our private lives, and more socialistic redistribution of income from those who earned it to those who didn't.

If you're like most Americans and you get your news only from the mainstream media, you may be surprised to learn there are six to ten presidential candidates on the ballot in most states. None of these "others" receives even a token mention on the nightly news or on the front page of your local paper.

Sure, a few of these "other" candidates are frivolous, but most are quite serious, quite credible, and quite worthy of at least your consideration. So if you're in the "it doesn't matter" camp or "I don't like either Bush or Kerry" camp, or for that matter any other camp, we urge you to consider the candidacy of Libertarian Michael Badnarik.

If you're not familiar with the Libertarian Party, it's America's third largest party, far surpassing the Greens. The LP is the only party that unequivocally supports a true reduction in your tax burden, a true reduction in the size and scope of the government, a true interpretation of the U.S. constitution as it was written, a true non-interventionist foreign policy, and a true elimination of the government's micromanagement of the economy and of your private life. If you've "had enough," we urge you to consider the Libertarian ticket.

We are proud to support the presidential campaign of Libertarian Michael Badnarik.

We know, it's been over two months since our last report. We've been waiting and waiting, because frankly, there hasn't been much new news to discuss. But since we're entering the historic mid-to-late October crash window, an update is needed at this time. Rather than fill these spaces with a lot of filler (OK, more than usual, if you prefer), this report will be briefer than usual.

For those wishing to get right to the bottom line, our analysis continues to be that the U.S. stock markets are at extreme risk for a "crash of historic proportion" to occur at any time. Enquiring minds, please read on.

We've been waiting and waiting to issue a report, because the markets have gone a net nowhere over the past seven months, since late March. The DJIA has vacillated only 5% to the upside and 2% to the downside from the March 24th close of 10,048. It closed this Friday (Oct. 8) at 10,055. Both Bull and Bear have been frustrated by this lack of movement in either direction.

Market history tells us one thing certain: the longer the consolidation goes on and the tighter the range becomes, the sharper the subsequent breakout will be. We firmly maintain that it will be to the downside.

Market sentiment remains at near-historic extreme bullish levels. Market Vane's Bullish Consensus is hovering around 67%. The latest Investors Intelligence report shows Bulls leading Bears by 52% to 24%, more than a 2-1 ratio.

The VIX continues to hover near 8-year lows, closing Friday (Oct. 8) at 15.05. Extreme complacency and confidence that a deep decline cannot happen is now deeply engrained in the psyche of investors and traders. Market history tells us that ultimately, they will be proven dead wrong.

Last week the S&P 500 fell to the area of its 200-day moving average. Most institutional money managers view the 200-day as critical support. If (we think when) that level is breached, the selling should accelerate.

There is also a lot of talk among technicians about a Dow Theory Non-Confirmation. The Dow Transports have made a new recovery high while the Industrials have not. Such divergences often mark trend reversals.

If there's one thing all market analysts agree upon, it's that "markets don't move in straight lines." So if they don't move in straight lines, just how do they move? In zigs and zags, or more precisely, in waves. These waves can be quantified and qualified, and used to project the markets' most likely next move. That's where the Elliott Wave Principle comes in.

In Elliott Wave terms, it appears that the DJIA has traced out yet another small-degree set of 1-2s to the downside, the third set since the February top  A break below 9,900 should just about confirm that the next downleg, a devastating "3rd of a 3rd of a 3rd" wave decline, was underway.

Moreover, all of our longer-term indicators remain firmly on FULL CRASH WARNING status. All of the conditions and prerequisites are in place for a "crash of historic proportion" to happen at any time. We urge new readers of Grizzly's Growlings to review our 2004 forecast and our standing analysis of the longer-range market conditions and indicators. We also reiterate our ongoing footnote:

The purpose of our crash warning is not to frighten or intimidate. The purpose is to bring to the table this potentially very serious situation that you'll never hear discussed on CNBC. We want everyone to be aware of the extreme risk at this juncture so you may take whatever steps you may feel necessary.

An unlikely surge above 10,400, perhaps sparked by some sort of pseudo "surprise," such as the capture of Osama Bin Laden, would no doubt skyrocket the markets for a few days or even weeks. But the overall trend should be down hard following that reaction.

To the Moon, Baby
As hard as it may be for most to accept, astro-forecasters such as Arch Crawford have at times made some remarkably accurate and profitable market calls based on "the moon and the stars."  There is something to it. Exactly what that is, or how it works, that is another question. But sometimes you don't ask why, you just scratch your head (or your butt), shrug your shoulders, and reluctantly acknowledge what has happened.

Here's our take (not Arch's) on the October skies: Thursday, October 14th will host the second solar eclipse of the year. The first one, on April 19, was followed by a 500 point plunge in the DJIA over the next 30 days. We believe a repeat performance, or even worse, is highly likely this time.

Next, there will be a total lunar eclipse just two weeks after the solar eclipse, on Thursday, October 28. This eclipse may have a heightened effect because:

• It occurs against the full moon.

• It will be the fifth total lunar eclipse over the past 17 months. October 28 will be the end of this rare cycle that occurs only once every 300 years or so.

• There will then be a long dry spell, 27 months, until the next total lunar eclipse, in March 2007.

So, if indeed our long-awaited historic crash is to occur in October, we think a valid and plausible scenario is for a top and start of the decline with the solar eclipse this Thursday (Oct. 14), +/- 1 day, leading to at least a short-term panic low at the  total lunar eclipse on Thursday (Oct. 28), again +/- 1 day.

To be clear, this is not a specific forecast for The Crash. It is but one realistic and plausible scenario. We shall see...

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The Economy
The economy continues to under-perform and disappoint the so-called experts. The mainstream has been consistently missing the mark, mostly on the overly optimistic side. Here are but a few recent examples:

• Friday's (Oct 8) employment report showed only 96,000 new non-farm jobs were created, well below the consensus forecast of 145,000.

• The Institute of Supply Management's (ISM) index fell to 56.7, well below the consensus forecast of 58.2

• Factory orders slipped 0.1% in August, well below the consensus forecast of a 0.3% gain.

• Durable goods orders fell 0.5% in August. The consensus forecast was for a gain of 0.1%

• Industrial production rose just 0.1% in August. The consensus forecast was for a gain of 0.5%.

So, while Fed Head Sir Alan of Greenspan believes the economy is "regaining some traction," we maintain that the bulk of the evidence indicates the economy is nearly finished with its long, drawn-out supertanker-like turn. It is has almost come almost all the way about, and its next heading is due south. The downturn should accelerate noticeably following the November 2 elections.

Perhaps the most important recent economic report, which fell below most mainstream anal-ysts' radar screens, is that consumer credit fell by $2.4 billion in August, the first drop in ten months. Total revolving credit, including credit cards and other debt, also fell by an annualized rate of 5.4% in August, following a 9% increase in July.

As the mainstream media have been drumming into our heads for the last two years now, consumer spending accounts for about 75% of GDP. If this drop in consumer borrowing continues, as we expect, it will mark the beginning of the end. The entire credit bubble will start to unwind. The bubble will deflate, or worse, burst. The stock markets will follow, and then the economy.

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Oil
Our guess, and it is only that, is crude will continue to surge to the $58-60 area to finish the entire spike up from $17.50 in March 2003. The ensuing correction will be swift and violent. Fortunes will be made and lost over the next few months, on both the long and short side of the trade. Stay out of the way!

Metals
Renewed weakness of the U.S. dollar has helped gold hold above $400 and silver above $6.50. There's no change in our outlook for gold and silver.

• For the short-term, we remain "cautious and nervous." Another shake-out and downleg appear to be needed before the next major rally.
   

• For the long term, we remain extremely positive on the metals and mining stocks, particularly the solid and proven "juniors." Those looking at the longer term may just want to fasten your seat belts and hang on for the ride.

Extras
Even More Far Out, Man
Further to our "You are here" derivatives calculation in July's report, a new report from the Bank for International Settlements (BIS) estimates the value of all world-wide derivatives at $250 trillion, up from the previous best estimate of $150 trillion we used in our first analysis. The new estimate extends our "dollar line" to a total of 24 billion miles, That's over 26 times the distance from Earth to the sun, and more than 4 times the distance from the sun to the outermost planet, Pluto!

Designing Spaces
Bearmarketcentral.com has been "serving the bearish investor" for nearly six years now, and it's time for a facelift! We haven't set a date for the unveiling yet, but keep an eye out for these improvements and much more in the weeks ahead:

Thanks for listening, and stay tuned! Things are going to get verrrrry interesting!  -- Grizzly

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Greetings once again, to Bears and Bulls alike.

In July's report we extolled the virtues of the old adage "Be careful what you wish for, you may get it." On June 30, the Fed gave the markets exactly what they were wishing for, a 25 basis point increase in the federal funds rate. From there, it's been all downhill. The Nasdaq Composite has lost 12%, and the Dow Jones Industrial Average has lost 675 points (about 6%).

The selling is intensifying as the economic data starts to confirm what we have been discussing for months, that the "recovery" is at best an illusion, having been artificially propped up by the flood of cheap money flowing from the Fed, which has now officially ended. The DJIA mini-crashed 311 points (3%) over the last two days (August 6-7).

So what's to blame? As mainstreamers on The Street are fond of saying, "The markets hate uncertainty." (We say, "Are there ever extended periods of "certainty?")  Friday's jobs report (more below) certainly adds to their uncertainty.

The Fed meets again this Tuesday (August 10) and (at least before Friday's jobs report) virtually everyone on The Street is expecting another 25 basis point rate cut. If they don't deliver the goods this time, the Street will read it as confirmation that the economy really is weaker than they (not us) are expecting.

Consumer spending increased by only 1% in the second quarter of 2004, the lowest increase since the second quarter of 2001. It's important to recall what happened in the summer of 2001, as many on The Street with selective memory syndrome forget that the markets had been plunging for weeks when September 11, 2001 took its place in the history books.

In our July 4th report, we concluded:

For all practical purposes, it appears that the counter-trend rally is over. What lies directly ahead should be a devastating "third of a third" wave, most likely including the historic crash we've been anticipating.

Our analysis would be invalidated only if the market is able to rally back above the support line at 1370. If that happens, it would suggest the onset of wave 3 of 3 would be delayed by a few weeks, putting it smack in the middle of the historic September-October crash window.

Moreover, all of our longer-term indicators remain firmly on FULL CRASH WARNING status. All of the conditions and prerequisites are in place for a "crash of historic proportion" to happen at any time. We urge new readers of Grizzly's Growlings to review our 2004 forecast and our standing analysis of the longer-range market conditions and indicators. We also reiterate our ongoing footnote:

The purpose of our crash warning is not to frighten or intimidate. The purpose is to bring to the table this potentially very serious situation that you'll never hear discussed on CNBC. We want everyone to be aware of the extreme risk at this juncture so you may take whatever steps you may feel necessary.

Short-term, last week's sharp sell-off has put the markets in deeply oversold territory, so anything from a meager dead-cat bounce to a sharp but short-lived rally should not be a surprise.

Speaking of surprises, we wouldn't be altogether surprised by some sort of pseudo "September Surprise," such as the capture of Osama Bin Laden. The markets would no doubt skyrocket for a few days or even weeks, but the overall trend should be down hard through the rest of the year.

Though we're contrarian by nature and don't like too much company, we are seeing more and more "establishment" analysts echoing our standing crash warning.

Writing for our favorite daily dose of reality, The Daily Reckoning, Steve Sjuggerud reports that his 1-2-3 Model has just entered "Super Red Light" mode. Over the last 30 years, this has happened only three time previously:

• in late 1999, just before the all-time peak in the DJIA in January 2000,

• in mid-1994, following which the markets went sideways over the following twelve months,

• and, just before the Crash of 1987

Tim Wood of cyclesman.com is starting to talk of potential crashes.

Ditto "Astro-Bear" Arch Crawford of crawfordperspectives.com.

The latest market sentiment indicators remain in the extreme bullish camp, exactly what you'd expect to see at a market top. For instance, the latest Investors Intelligence report shows 49% bulls vs. 24% bears, down a bit from June's data, but still an extreme 2-1 bullish ratio.

Mutual fund cash levels sank to 4.1% in June, the second-lowest reading on record. The record low was set in March 2000, right at the all-time top in the Nasdaq and S&P 500.

The TV talking heads are still talking about which stocks to buy. When they start talking about which stocks to sell, then we'll start looking for an end to this leg of "The Great Bear Market of 2000-200[?]"

The supposed "IPO of the Millennium" is "at risk." Google is plexing in the deep doo-doo. First, Google PO'ed the powers that be on Wall Street by refusing to play the IPO game their way. Google's proposed "democratic" Dutch-auction would cut the fat-cats out of their normally lucrative piece of the action.

On Friday (08/06), it was announced that Google is under investigation for possible state securities laws violations. Minor and apparently unintentional, the violations will nonetheless throw a monkey-wrench into the works. And with the entire tech sector leading the way (to the downside) since July 1st, investors are likely to pare their desire to pay the expected and exorbitant price of $108 to $135 for a share of Google. Are you "Feeling Lucky?"

From the "It's deja vu all over again" department, you may have seen this full page ad running in your local newspaper recently.

We recall several other such bold claims of the extraordinary skills of children back in 1999 and early 2000, not to mention the other end of the spectrum, the (since-discredited) grandmothers of Beardstown Ladies fame.

Or, in your area maybe you've seen the full page ads for "Options Made Easy," or "Your Ticket to Wealth." Or maybe you've been tempted by the infomercials for Wize-trade, StarTrader and others that run day and night on cable and satellite TV.

It's all symptomatic of the extreme bullish sentiment that's usually seen near market tops. It's all just child's play, right?

Oil's Well?
The high price of oil, of course, is being blamed for the plunge in the stock markets. Hey, they've got to blame it on something, especially in this highly charged election year.

It's not a supply crisis. There are no 1970s-style lines at the pumps. OPEC has the pedal to the metal, they're pumping and piping just about all that they can, as fast as they can. Refineries around the world are cranking and cracking to the max. There is no slack.

Indeed, it wouldn't take much of a supply disruption to cause a panic in the oil pits of New York and Chicago. Even unsubstantiated rumors of a refinery fire can spark a sharp rally. A successful terrorist attack on a major pipeline, refinery or harbor terminal anywhere in the world would be devastating. So would re-nationalization of the Russian oil industry. Or a coup in Venezuela. Or tribal warfare in Nigeria. Or an assassination in Kazakhstan. You name it - they all add up to very possible triggers for a dramatic but probably temporary spike in oil.

Moreover, as Stephen Leeb points out in his latest book "The Oil Factor", sharply higher oil prices have always pushed stock prices and then the U.S. economy lower. This time, we think the reaction will be much lower.

Russia has just begun Act I of a potentially catastrophic banking and industrial crisis. The oil giant Yukos, equivalent to a Chevron-Texaco in the American economy, is on the verge - of exactly what, no one knows. Bankruptcy, nationalization, liquidation, or whatever, the exact nature of the demise is of little practical significance to us in the West. The end result won't be pretty, and the entire Russian banking and financial system may go down with it.

Already, a Great Depression-style panic and run on the banks rocked the Russian system for a few days in July. It took a 10% surcharge on withdrawals to stop the massive cash outflows. The next run will not be stopped so quickly or cheaply.

The truth is the world will never "run out of oil." What it will run out of is easily accessible, low cost, high quality oil.

There are two trillion (that's trillion with a "t") barrels of potential crude oil brewing and starting to seep out of the Athabasca tar sands in northern Canada. It's only a question of when will it become economically feasible to harvest the tar sands in earnest. Ft. McMurray will one day be as popular as Fred MacMurray was in his heyday.

Yet despite all the hot air and hullabaloo over $44.00 oil, adjusted for inflation it's really not as bad as it appears, or as bad as the mainstream media and politicians would like you to believe. Adjusted for inflation (caused by those very politicians), crude would have to run up all the way up to $65.00 to match the $30.00 peak of 23 years ago.

Makes you wonder, why don't you hear Joe Six-Pack bitchin' about the fact that the price of his six-pack has gone up from $1.50 to $4.50 over the last 23 years.

The Economy
The latest economic data continues to confound and confuse the so-called experts. Last month we asked the not-so-rhetorical question: "If they're so 'expert,' why do they miss the mark so often, and why do they keep earning the big bucks?"

Yesterday, the mainstream anal-ysts chalked up another mark against them earning their keep. They completely missed the mark with their computer projected, seasonally adjusted "guess" at the number of new jobs created in July. Their consensus estimate of 230,000 missed the mark by a mere factor of seven compared to the reported 32,000. This miss is on top of their huge swinging strikeout on the June numbers, where they overestimated the job growth by 125,000.

We'll ask another semi-rhetorical question, "Why does anyone pay any attention at all to these guys?"

As we've maintained for years, most of the government-reported numbers are bogus anyway. They're massaged and manipulated to produce a desired result. But the numbers do matter, to those who are fixated on them.

Indeed, "disappointments" such as we saw on Friday generate the emotions that produce that compulsion to click the Sell button. This is all a natural part of the process, and many more disappointments are to be expected as the next leg of the "Great Bear Market of 2000-200[?]" unfolds.

Last month we said: "The abrupt downdraft exhibited in some of the most recent data should expand and extend into all sectors in the coming months." The latest data is confirming the new downtrend:

• Automobile sales hit a six-year low in June. It's taking $5,000 bribes, er rebates, to get anyone into the new car showrooms.

• Personal spending dropped by 0.7% in June.

• Durable goods orders grew by only 0.7% in June, less than half of the mainstream estimate.

• As mentioned above, the 1% increase in consumer spending in the second quarter was the slowest increase in three years. It was less than a quarter of the first quarter's 4.1% growth rate.

We believe it's all downhill from here.

Housing and Debt
The latest data continue to highlight the unprecedented risk and outright danger in these markets:

• Business Week reports that new loans to high risk, low FICO score borrowers soared by 70% to $107 billion in the first quarter of this year. These "sub-prime" loans now constitute 18% of all mortgages, up from 7% a year earlier. The bubble has trickled down to the lowest strata. It's over, there's no one left; no more "Greater Fools."

• HSBC Securities reports that housing prices relative to income, rent, replacement cost, and home equity have set record highs.

• A record high 35% of all mortgages issued in the second quarter involve adjustable rates of one sort or another. That's very telling, considering how low the fixed rates are on a historical basis. A logical mind would suspect that more people would want to lock in a fixed rate when rates are low. But who ever said borrowers are logical.

• Mortgage re-financings have collapsed, falling about 80% from the peak level last year.

• New loan originations have stopped increasing and appear to have started a reversal.

• Overall mortgage debt has doubled in the last nine years, to just under $10 trillion.

• Home equity as a percent of home values stands at a record low 55%.

Freddie Mac finally announced its earnings for 2003. No wonder they were reluctant to report; the earnings were down 52%. The company also reported that it is experiencing difficulties with its antiquated accounting and computer systems. As our friends at The Daily Reckoning put it, "That's a comforting thought for an entity that manages trillions of [derivatives] risk."

Deflation Update
Business Week editor Chris Farrell's new book, Deflation: What Happens When Prices Fall, says it all.

The Metals
There's no change in our outlook for gold and silver.

• For the short-term, we remain "cautious and nervous." Another shake-out and downleg appear to be needed before the next rally attempt.
   

• For the long term, we remain extremely positive on the metals and mining stocks, particularly the solid and proven "juniors." Those looking at the longer term may just want to fasten your seat belts and hang on for the ride.

Be aware that our aforementioned "pseudo September Surprise," such as the capture of Osama Bin Laden, could knock $50-$75 off the price of gold and $1.00-$1.50 off silver, in just a couple of fell swoops.

Thanks for listening, and stay tuned! Things are going to get verrrrry interesting!  -- Grizzly

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Stocks
We find James Cramer to be one of the most annoying people on the face of the planet. We weren't planning to mention him in this report, but we couldn't resist after reading his newspaper column yesterday (July 3). Cramer gloats and boasts over the fact that his five favorite tech stocks are like a "valuation rocket that has broken away, no longer constrained by Earth's gravity."

 Here's how Jim justifies his bullishness:

"If something trades at 78 times earnings, can't it trade at 99 times earnings? Or 108 times earnings? Is one any less nutty than the other, once you have left the orb of rationality? These stocks have blasted through the atmosphere. Next stop: Mars."

OK, Jimmy boy, time to get out of the space ship, take your meds and get back to within the orb of rationality. You're on camera in 15 seconds.

You'd think a guy as smart as Cramer alleges to be would have heard of the Greater Fool Theory, but apparently not. He and his cohorts in the bullish mainstream have apparently developed a severe case of financial amnesia. Did they not learned anything from the events of 1998-2000?

Their tortured logic and insane rationalization typifies Phase 2 of the bullish mania. In many respects it actually goes beyond the mania seen at the market tops in early 2000!

From the wave 2 high of 10,750 on February 19th, the DJIA has traced out the initial waves 1 and 2 of the next decline. There may be one more very small degree zig and zag higher to complete wave C of 2, but for all practical purposes, it appears that the counter-trend rally is over. What lies directly ahead should be a devastating "third of a third" wave, most likely including the historic crash we've been anticipating.

Our analysis would be invalidated only if the rally is able to climb back above the February high of 10,750. If that happens, it would suggest the onset of wave 3 would be delayed by a couple of months, putting it into the historic September-October crash window.

CAUTION: As we have demonstrated in the past, it's pretty damned difficult to pick a market top in real-time, and we may indeed be wrong yet again. Invest carefully, at your own risk. Please read the disclaimer.

Moreover, all of our longer-term indicators remain firmly on FULL CRASH WARNING status. All of the conditions and prerequisites are in place for a "crash of historic proportion" to happen at any time. We urge new readers of Grizzly's Growlings to review our 2004 forecast and our standing analysis of the longer-range market conditions and indicators. We also reiterate our ongoing footnote:

The purpose of our crash warning is not to frighten or intimidate. The purpose is to bring to the table this potentially very serious situation that you'll never hear discussed on CNBC. We want everyone to be aware of the extreme risk at this juncture so you may take whatever steps you may feel necessary.

Bill Fleckenstein is one of the sharpest guys on Wall Street, and author of the Contrarian Chronicles, Speaking on the Fox New Channel yesterday (July 3), Bill echoed the sentiments of our standing crash warning, stating:

"The ingredients are in place for a low-probability event to occur, a crash."

When pressed by Neil Cavuto to quantify the risk, Bill said he thought the chance of a 1987-style crash was "maybe 1 in 5."

Bill, we think you're just a bit too optimistic.

Debts and Rates
As we've discussed over the past five years, we believe the Fed's attempts to micromanage the markets are essentially irrelevant if not downright harmful. The markets usually don't wait for politicians and bureaucrats to act, they go right ahead and do what needs to be done, on their own. The markets lead the way and Fed follows.

When they've "had enough," the markets will force rates higher. Indeed, the markets have been pushing rates higher for over a year now, with the yield on the 10-year note surging from 3.11% to 4.90% a few days before the Fed's latest pronouncements.

Sir Alan's overriding mission in life is to prevent the Fed from being caught with its pants down, i.e. too far out of line with real market rates. The Fed really didn't want to move, but it had no choice. We think Sir Alan isn't a total fool (only a partial one), and he knew damned well that his belt was unbuckled, the fly was unzipped, and the boxers were exposed. The Fed had to move.

Ten or twenty years from now, financial historians will no doubt attribute the pin-prick of the debt bubble to higher interest rates. But higher interest rates are a symptom, not the root cause. Financial irresponsibility, as practiced and encouraged by the Fed and the federal government, is the ultimate culprit.

Our favorite daily dose of reality, The Daily Reckoning, calculates that the amount of money issued from 2000 through 2003 exceeded the entire amount of currency printed from day one with George Washington up to 1980! Talk about debasing the currency....

One bankruptcy attorney sums up the problem on the consumer level by saying "When they come to see me, it may be the first time they sit down and figure out what their monthly budget is." 

Total household mortgage debt has mushroomed to $9.6 trillion. That's nearly twice the level of just eight years ago. Compounding the problem is that people have been following Sir Alan's advice and taking out adjustable rate mortgages, at an unprecedented pace.. The Mortgage Bankers Association estimates that 30% of all new mortgages are ARMs. And each uptick in variable rates will add multiple upticks to the foreclosure and bankruptcy rates.

The trade group Inside Mortgage Finance estimates that in 2003, $195 billion in mortgages were issued to "sub-prime" borrowers. That's more than a ten-fold increase from ten years ago. "Unconventional" mortgages, such as no-money-down loans, have exploded from $1 billion in 1994 to $80 billion last year.

The situation isn't much better in the world of corporate and government borrowing. You can take your pick and blame Bush, or Congress, the terrorists or whomever. The facts are that the federal government continues to rack up enough reckless spending to give drunken sailors a good  name. The budget deficit will exceed $500 billion in fiscal 2004. The entire federal budget was less than $500 billion only 25 years ago!

The other half of the twin deficits is the current account. Mainstream economists have been telling us for years that the (still ongoing) drop in the value of the US dollar was going to make it "more competitive." A shrinking buck was supposed to cure, or at least curtail, the trade deficit by helping to increase exports and decrease imports. It just isn't happening.

The trade deficit red ink hit yet another record in the first quarter of this year, $145 billion. The number should total in the neighborhood of $600 billion for the entire year. That's one neighborhood you don't want to live in, or anywhere near.

The crux of the problem is that all this debt creation has flooded and overwhelmed the system. The funds have been lent out again and again and again. Total credit market debt in the US has bubbled up from $4.7 trillion in 1980 to over $34 trillion now. (That's  trillion, with a "t" folks.) $34 trillion in debt is completely unprecedented in the history of the known universe. What Earth history does tell us is that such bubbles always burst. Always. It's not a question of if, but when.

We acknowledge that our past projections for the exact when have been premature, and maybe so now, too. But Sir Alan's public acknowledgement that the era of cheap money is over just may be the excuse the markets are looking for to begin the debt liquidation. Call it the flick of the first domino.

It may start slowly, but at some point, Fannie Mae, Freddie Mac, WAMU, J. P. Morgan, General Motors (which gets 87% of its earnings from "money-lendering"), or whomever; some gargantuan debt processor somewhere will be squeezed and stretched too far, and go "Ba Da Boom." It won't be pretty, and it will ripple through the worldwide financial fabric at fiber-optic speeds.

This Ba Da Boom will make the 1998 blowup of Long Term Capital Management look like a cub scout jamboree. At the time, the Fed successfully orchestrated an international bailout of the hedge fund to prevent the collapse of the entire global financial system. LTCM was "too big to fail." This time around, those who did the bailing out in1998 will be the ones issuing the SOS calls. This time around, the Fed will be able to offer only duct tape.

Dow Theorist and market historian Richard Russell estimates there is about $150 trillion (again, trillion with a "t") of outstanding derivative instruments, with about 85% of them based on interest rates and debt of one sort or another. James Grant of Grant's Interest Rate Observer estimates that $36.8 trillion of those derivatives are held by just one institution, J. P. Morgan. Talk about a ticking time-bomb!

Far Out, Man
The derivatives total of $150 trillion is so large that it requires a demonstration to understand just how large it really is. If you took 150 trillion $1.00 bills and laid them end-to-end starting at the corner of Broad and Wall Streets, the line would stretch:

all the way around the globe,
out past the moon,
past Mars,
past Jupiter,
past Saturn, Uranus and Neptune,
past the outermost planet in the solar system (Pluto),
and out to a point deep in the cosmos, well along the way to the next nearest star! 

The Economy
Despite all the hoopla and euphoria emanating from mainstream anal-ysts and pundits, we maintain that  the economy is not roaring along. We think quite the opposite, that the "economic recovery" is on its last legs, having been propped up only by the flood of cheap money from the Fed, which has now officially ended. 

The abrupt downdraft exhibited in some of the most recent data (below) should expand and extend into all sectors in the coming months.

• Factory orders fell 0.6% in May, following April's 1.1% drop.

• Durable goods orders fell 1.6% in May, again "surprising" the so-called "experts," who were looking for a 1.1% increase. May's fall follows a 2.6% decline in April.

• Auto sales plunged 12% in June for Ford and 8% for GM.

• Bankruptcies continue to surpass prior records across the country.

• Wal-Mart slashed its sales growth forecast in half.

• June payrolls increased by 112,000, less than half the growth of the consensus estimate. 112,000  was less than any of the 73 forecasts reviewed by Bloomberg News.

• Construction spending in May increased 0.3%, less than half of their projected increase.

Even the gub'ment itself is seeing the slowdown (we think the end) of the "recovery." The Commerce Department revised down their calculation of GDP growth for the first quarter from 4.4% to 3.9%. This revision surprised the so-called expert economists and anal-ysts. (If they're so "expert," why do they miss the mark so often and why do they keep earning the big bucks?)

Metals
The metals also have been relatively calm and range-bound over the past two months, following wilder swings earlier in the year. Gold is still having problems, unable to hold above $400. Silver has gone a net-nowhere following its round-trip from $5.50 to $8.25 and back.

We're still "cautious and a bit nervous" (over the short-term) for the metals. Silver in particular has been unable to mount anything more than a "dead-cat" bounce from the post-blowoff low of $5.50.  Another shake-out and downleg appear to be needed before the next rally attempt. Those looking at the longer term may just want to fasten your seat belts and hang on for the ride.

Thanks for listening, and again, Happy Birthday America!  -- Grizzly

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Grizzly's Growlings Archives

You've no doubt heard the old Wall Street adage: Sell in May, and walk away.  We think the markets will be issuing their own May Day call, in short order. We think May Day 2004 marks a prudent time to run, not walk, from the stock markets.

As contrarians, investor sentiment is one of the key indicators in our analytical arsenal. Sentiment remains near historic bullish extremes, adding significant weight to the immediate and intermediate bearish case:

• Investors Intelligence data shows bulls continuing to leading bears by an overwhelming 50% to 22.4% margin.

• Ned Davis, one of the best market researchers in the business, reports 68.1% of investors are bullish.

• Investors poured $40 billion into equity mutual funds in January 2004, the third highest amount on record, followed by another $30 billion in February. The two highest months on record were January and February 2000, right at the all-time tops in the markets. The DJIA peaked in January 2000, followed shortly thereafter by the S&P and the Nasdaq in March.

Not much has changed in the bigger picture. We urge new readers of Grizzly's Growlings to review our 2004 forecast and our standing analysis of the longer-range market conditions.

Mainstream media and anal-ysts are going ga-ga over goo-goo, er, make that Goo-gle. Yup, it's high-tech IPO bubble-mania, all over again. Google sought to raise about $2.7 billion from its IPO. Instead, thanks to the innovative auction-style offering, wildly bullish anal-ysts are throwing around numbers like $25-35 billion! One analyst went so far as to attribute last Friday's sharp sell-off to "people making money available to buy Google!" Ohhkaaay, if you say so.

The fundamental question remains, has anyone in the mainstream learned anything from the events of 1998-2000? Googlemania, as well as the current 150 P/E on Yahoo, one of the tech bubble's original poster children, argues emphatically, no, they haven't.

Moreover, all of our longer-term stock market indicators remain firmly on FULL CRASH WARNING status. See our 2004 forecast for all the details. To summarize, all of the conditions and prerequisites are in place for a "crash of historic proportion" to happen at any time.

For the benefit of new viewers, we repeat our ongoing footnote:

The purpose of our FULL CRASH WARNING is not to frighten or intimidate. We feel obligated to bring to the table this potentially very serious situation that you'll never hear discussed on CNBC. We want everyone to be aware of the extreme risk at this juncture so you may take whatever steps you may feel necessary.

Stay tuned!

For example, total household debt, including mortgages, has surged to a record $9.2 trillion. Conventional wisdom has it that consumers are supposed to pay off their debts in recoveries, not increase it!

And, consumers are not managing those record debt levels very well:

• Estimates are that each month, half of all Americans pay only the bare minimum balance due on their credit card statements!

• The percentage of past-due credit card payments hit a record high of 4.44% in the 4th quarter of 2003 (latest data available).

• Despite the record low federal funds rate of 1%, the average rate charge on outstanding card balances is a near-record high of 16.2%!

• Credit card issuing banks racked up a record $7 billion in late payment fees from cardholders in 2003.

• In many states, a record high number of customers are behind on their public utility bills.

• The personal bankruptcy rate continues to expand and make new record highs almost every month. There is no sign of abatement, as household debt has continued soaring, now at a record $2.1 trillion. That works out to a record debt load of $18,700 per American family.

All this, despite the record low interest rates of the last two years.

We acknowledge that many of the data discussed above are supposed to be lagging indicators. True, but that does not rationalize or justify month after month of dismal data. Economic history shows there really isn't that much of a lag to speak of anyway; it's usually a matter of only a few months, not a few years.

The April 4th employment report was greeted with great applause. "Employment soared by 305,000," the headlines read. Actually, we think this "blowout" report is more of a flat tire. What the mainstream media isn't telling you is that:

• "big jobs growth" is not bullish for the stock market! The April 4th report showed the largest increase since April 2000, just after the Nasdaq all-time peak at 5,132. From there, the Nasdaq crashed 77%. We fully expect an encore performance this time.
   

• a record 21 million Americans have "dropped out" out of the official labor force. most not by choice. Thus, the official unemployment rate is significantly understated. Some economists estimate the actual unemployment rate is about 10%.
   

• an estimated 95% of the 305,000 "new jobs" were temporary or part-time positions!

The country can't handle much more "recovery" like this.

The financial markets are coming to grips with higher interest rates. Rate have been rising, and T-bonds have fallen now for six weeks in a row, the longest such streak in over three years. As we've commented previously:

The markets usually don't wait for the politicians and bureaucrats to act, they go right ahead and do what needs to be done on their own. When they've "had enough," the markets will force rates higher. It won't be a small, short-term move, but the start of a key, long-term event. That certainly won't be a positive for the economy, real estate, the stock market or the debt market.

Short-term, bonds are extremely oversold, so a nominal counter-trend bounce can be expected soon.

Fed-head Sir Alan of Greenspan has been making the rounds, and making unusually clear pronouncements. Maybe Sir Alan just wants to retire with a clean conscious, having duly issued all the requisite "See, I warned you sos."

Sir Alan is concerned, we think rightfully, about the ability of quasi-government agencies Fannie Mae and Freddie Mac to withstand any further growth in their debt levels. Sir Alan has also warned of the looming Social Security crunch. Yet for some reason he thinks the record level of consumer debt burden is not a problem!  Go figure. After all, this is the man who once said: "If I seem unduly clear to you, you must have misunderstood what I said."

Indeed, it has been a wild ride, but the precious metals became a lot less precious in April. Gold melted by $40 and closed the month at $386. Silver bubbled up to an 8-year high of $8.40 on April 2, and then collapsed, crashing 31% in the next 13 trading days to $5.78

We're still "cautious and a bit nervous" (again, over the short-term). The metals are very oversold, so a few choppy and moderate bounces should be expected soon. Those looking at the longer term may just want to fasten your seat belts and hang on for the ride.

Far Out, Man...
As if investors and traders don't already have enough to worry about, there are other more perilous risks on the radar screen, literally.

Before continuing, we need to emphasize that we are not Armageddonists, honest! But managing your money in a bear market is all about managing your risks, including those risks seemingly too far-fetched to even consider.

The reality is that over the past six months, three times we have narrowly averted disaster by the slimmest of margins, and by plain old good luck. Three very real and potentially very disastrous "near-misses" threatened our world, and of course our personal and financial well-being:

• On November 4, 2003, the sun spewed forth a solar flare rated X-45, the largest flare ever recorded, by a factor of 2! There is no other way to put it, but by nothing other than sheer random luck, the flare fired off in a direction away from Earth. The flare blasted out an estimated 5,000 times the sun's normal amount of x-rays.
   
  If the Earth had been in the flare's path, the consequences would have been unstoppable and probably disastrous. The global satellite network could very well have failed. A loss of GPS service would have caused at least temporary chaos, disabling the transportation industry. Telecommunications would have been knocked out around the world. The international power grids could have been fried, putting many into cold and darkness for weeks if not months. The consequences could have gone on and on, but we were lucky (this time).
   

• On January 13, 2004, an asteroid about the size of a shopping mall was detected by astronomers. They initially estimated that it had a 1 in 4 probability of striking the Earth. If it had hit, a rock that size traveling "faster than a speeding bullet" (8 miles a second) could have devastated a city and killed millions. The astronomy community hemmed and hawed about whether and how they should notify the world and issue a warning.
  
  As it turned out (fortunately, this time) they did not issue an alert, and the rock whizzed by Earth at a comfortably safe distance of 12 million miles. But the issue is what would have happened had the astronomers actually issued an alert? Just how much would the world (and the markets) have panicked? It would not have been pretty.
   

• Just two months later, on March 18, a house-sized rock nearly brushed our planet, missing by an astronomically-speaking microscopic 26,500 miles. That's only a few thousand miles above the satellites in geo-synchronous orbit. This was the closest ever recorded "near miss" of a rock that large.

Astronomers estimate there are over one million house-sized and larger asteroids in our solar system that at times cross Earth's orbital path. Astronomers also estimate there are roughly 2,000 asteroids large enough, if it were to collide with Earth, could entirely wipe out all life on the planet!

It's not a question of if, but when, and the important thing to note is that when it comes, it may very well come without any warning at all. In fact, most near-misses are detected after the fact, after the rock has already whizzed by. Even Bruce Willis may not be able to save the day.

Tonight (Sunday May 2), NBC is airing Part 1 of the fictional TV movie "10.5," about the biggest Earthquake ever recorded. Could it really happen? Well, in the real world, a respected UCLA geophysicist is predicting a quake of "at least 6.5 magnitude hitting Southern California by September 5, 2004."

Again, it's not a question of if, but when. Maybe in five hundred years, maybe next Tuesday. Only the gods know.

"Expect the unexpected."
-- Heraclitus  500 BC

Help Wanted
As we enter the next leg of the "Great Bear Market of 2000-200[?]", we''re putting our money where our mouth is. We're embarking on a new project to upgrade and enhance bearmarketcentral.com. We've been serving the bearish investor for over five years now, and we're ready for a face-lift and upgrade!

Look for these changes and much more, in the weeks ahead:

• A new "look and feel"

• Expanded and enhanced "Hair of the Bear" Discussion Forum.

• New contests and promotions offering valuable prizes.

• New features and content

We want bearmarketcentral.com to help you not only survive, but actually profit from, the Great Bear Market, and we need your help to do it. Please visit the suggestion box and send us your comments, suggestions and criticisms. Tell us what you'd like to see in the new bearmarketcentral.com. We appreciate your input.

Thanks, and stay tuned, things are going to get verrrry interesting.  -- Grizzly

It's not even detectable on this linear scale chart (see log scale), but the starship's anti-matter pods are bubbling over once again. PCLN has more than 5-folded, from $7 in last February to $39 in September 2003. At Friday's (02/13/04) $24 closing price, Priceline's trailing P/E is a mere 95, a piker compared to red-hot Red Hat's ratio of 398! See [RHAT] for a truly nostalgic moment.

It's high-tech bubble-mania once again, and high-tech traders are oozing with complacency. Most of the chatter on the tech stock message boards is about politics and religion, not technology and trading.

If there's one thing all market analysts agree upon, it's that "markets don't move in straight lines." So if they don't move in straight lines, just how do they move? In zigs and zags, or more precisely, in waves. These waves can be quantified and qualified, and used to project the markets' most likely next move. That's where the Elliott Wave Principle comes in.

The Nasdaq has struggled so far in 2004. It has fallen four weeks in a row, and the short-term wave pattern is indicating that the larger trend may have turned as well. (See last month's report for the bigger picture.) Here's our take on the Nasdaq 100:

CAUTION: As we demonstrated in 2003, it's pretty damned difficult to pick a market top in real-time, and we may indeed be wrong yet again. Invest carefully, at your own risk. Please read the disclaimer.