Monday, August 8, 2005
"Yah-Bah Dab-Bai Du!"
Printer-friendly version

Greetings once again, to Bears and Bulls alike.

We apologize for the lengthy silence since our last report in April. We've been waiting (and waiting and waiting) for the markets to make a break, any kind of break. Instead, the markets have gone a net-nowhere so far this year. The DJIA opened 2005 at 10,783. It closed Friday (08/05/05) at 10,558, down a negligible two percent for the year so far. The Nasdaq and the S&P 500 are up a few percentage points apiece.

For that matter, the markets haven't moved much over the past 18 months. The DJIA is almost exactly where it was on opening day 2004. This sideways movement has frustrated and confounded both bears and bulls. Not much money has been made on either side.

The DJIA has fallen over 150 points over the last two days (August 4-5). Has the tidal wave has finally turned? Is our long-anticipated next leg of the "Great Bear Market of 2000-200[?]" finally underway? Click here to continue.

"Yah-Bah Dab-Bai Du!"
As a very wise and honored Yogi once remarked, "It's deja vu all over again!" (Yogi Berra, that was.)

By now you've probably heard of the fantastic success of Baidu.com Inc. the tiny Chinese internet search engine company that went public on Friday (08/05/05). Maybe they should have called it "Buy-Do!" BIDU is the symbol and it rocketed 354% on opening day, from its offering price of $27.00 to $122.54.

Baidu.com was the best IPO first-day gain since Selectica Inc.'s 371% gain right at THE top in the Nasdaq in March 2000.

Caveat emptor! What they're not telling you on CNBC is that Selectica is not exactly the desired role model for a hot IPO. What they are not telling you on CNBC is that Selectica crashed immediately following its wild IPO bonanza. The stock plunged from $151.00 to $3.00 in less than one year!

Selectica Inc crashed immediately following its March 2000 IPO bonanza.

Baidu's market capitalization is now $5 billion, not too shabby for a company with a grand total of $21 million in revenue.

As Baidu.com has demonstrated, the 75% plunge in the Nasdaq from March 2000 to October 2002 did not fully exorcise the bullish demons of Techmania. It's back, stronger than ever, and it has melded with the new-found China Mania. What more could a bull ask for: a Chinese Google. 

Even Fred Flintstone would be able to recognize the parallels and similarities of this latest episode to the tech frenzy of early 2000. We all know what followed back then. Maybe it'll be different this time. "Yah-Bah Dab-Bai Du!"

Despite the overall lack of net progress in either direction over the past 18 months, there remains on Wall Street a remarkable level of optimism and complacency. Many technical indicators are at levels that often follow sharp or long-lived rallies, not long periods of sideways.

• The latest Investors Intelligence report shows bulls overwhelming the bears by a 57% to 22% margin, nearly a 2.5 to 1 ratio..
   

• Strategist Jay Shartsis, writing for our friends at the Daily Reckoning, exports that small time options buyers - 10 contracts or less per trade - are buying calls like crazy. Only twice in the last five years have levels been higher. Both times marked lasting tops.

• Mutual fund cash levels are once again near historic lows.

• As of last week, 80% of NYSE stocks were trading above their 10-week moving average, an extreme and bearish reading.
   

• The VIX continues to hover near decades-old lows, indicating excessive complacency and confidence.

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 given market's most likely next move. That's where the Elliott Wave Principle comes in.

We'll be the first to concede that in Elliott Wave terms, the market action over the past few months has been messy, to say the least. The waves have twisted and turned in expected fashion several times. But messy market action in and of itself is valuable information, a clear sign of a counter-trend move. The definitive labels for the wave 2 corrective bounce are certainly open to various interpretations, but here's our best count for the DJIA:

Wave 2 took its sweet time and traveled a lot farther than we had envisioned. Nevertheless, it looks as if the DJIA's 150 point drop over the last two trading days (August 4-5) has marked at least a short-term reversal. Indeed, it very well may be the beginning of our long-anticipated next leg of the "Great Bear Market of 2000-200[?]

Consequently, we're maintaining our highest level of financial alert: FULL CRASH WARNING 

"All of the conditions and prerequisites are in place for a 'crash of historic proportion' to happen at any time. Be on the lookout for a magnitude 9.2 shaker on The Street."

Moreover, all of our longer-term bearish indicators remain in place. Please review our illustrated gallery in the January 1st report for details.

To be clear, our crash warning indicator is not a specific timing device, it is a measurement of risk in the system. To repeat our ongoing footnote:

The purpose of our 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.

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

We think it unlikely, but a burst above the March high of 10,925 would argue for much higher prices.

Stay tuned!

The Economy
The yield curve -- it sounds like something from the hottest NASCAR track. In the 800 mile per hour world of Wall Street, the yield curve is the spread between the two-year and ten-year treasury notes. Currently, the spread is just 24 basis points (24/100th of one percentage point). That's next to nothing. The curve is essentially flat.

http://bonds.yahoo.com/rates.html

Inversion seems imminent, as Sir Alan of Greenspan and His Merry Monetarists seem intent on raising short-term rates at least two more times in the coming months.

As our friends at Elliott Wave International and others have pointed out, every recession in the last 40 years has been preceded by an inverted yield curve.

So what's the big deal about inversion? It's economic upside-down cake. Banks usually "borrow short and lend long." That's how banks make their profit, but it's a losing proposition with an inverted yield curve. There's no incentive to create new debt. Liquidity in the system dries up. The wheels of commerce grind to a halt. And if the inversion persists, the dreaded deflationary cycle kicks in.

Long-time readers of this report know we've been anticipating exactly such a devastating deflationary depression. So how bad might it be? Doug Casey, publisher of the International Speculator newsletter, expects to see the "...Collapse of Western Civilization." No sense in mincing words, Doug.

Economic "Growth"
Despite the historical message of an inverted yield curve, mainstream economists are still wildly bullishness about the economy. One anal-yst recently proclaimed "the economy is rolling along like a freight train." Huh? They're all jazzed about reported growth of 3.4% on an annualized basis.

We don't buy it and we haven't bought it for years. If you've followed Grizzly's Growlings over the years, you know we've been a grinch on the state of the economy. We've harped on the fact that government economic statistics cannot be relied upon to be an absolute, accurate reflection of the state of the economy. This is not out of some dark and dangerous conspiracy, but out of the outdated, obsolete and ineffective methodologies used by the government to measure, calculate and analyze all the data.

We continue to proclaim that the emperor has no clothes. There is no economic growth.

To see how we come to this conclusion, unfortunately we need to dive head-first into the dismal world of government economic statistics.

The crux of the problem is that virtually all government economic statistics, including economic growth in particular, are adjusted for inflation. The politicians and bureaucrats mean well, really, they do. But their nobility has led them down the slippery slope of statistical manipulation. For at least the last ten years or so, they've fiddled with the figures for the purpose of under-reporting the rate of inflation.

Why would they want to do such a thing? For political gain, of course. They're politicians, aren't they? What they try to do is make things look better than they really are (and then take credit for it all). They want to be able to promise their constituents as many benefits as possible, for as little cost as possible.

OK, so what does this have to do with economic growth? Well, it's basic third grade math.

To calculate economic growth, government economists start with the overall growth in the economy, then they subtract out a rate of inflation. The result is the inflation-adjusted growth rate. Let's look at some numbers:

Now, lets "fudge" the inflation rate down to 2 percent.

Voila, the adjusted growth rate has magically increased to 5%!

So, for every 1% that reported inflation is reduced, adjusted growth increases by 1%. Fudge with the rate of inflation, and you directly affect the bottom line.

But don't take our word for any of this higher math, learn about it for yourself from two masters on the subject, Jim Puplava and John Williams. Jim Puplava is editor and publisher of Financial Sense Online, a "Five Paws" don't miss web site for everything economic and financial. John Williams is an economist and editor of Shadow Government Statistics,

Williams has done all the detailed research and gathered all the evidence. He skillfully charges that the Consumer Price Index has been willfully and deliberately understated for political and economic advantage. Click here to access Jim and John's fact-filled and revealing interview. (Scroll down to July 23.)

Savings and Spending
Zero. Zip. Zilch. Nada. The personal savings rate of Americans hit Absolute Zero in June. Yet personal spending surged 0.8%. Even most mainstream economists agree that this cannot be sustained. The cash tank is empty. The septic debt tank is already overflowing. The real estate re-fi cash machine has already been punched up for the max. There is no more juice to be squeezed from the financial stimulus stone.

Advertisement

Real Estate
It may not pop with the same thunderous thud as did the Nasdaq bubble in 2000, but real estate's time is fast coming to an end. How do we know? As our friends at the Daily Reckoning have reported, state pension funds are loading up on real estate like never before. Governments are usually the last to recognize trends, financial or otherwise. The greatest fool has joined the mania. There's no one left.

The warning signs continue to flash like a six-track railroad crossing. Here's a sampling of the latest data covering the first half of 2005, gathered from various media reports:

• 42% of first-time buyers put nothing down. Moreover, the median down payment on residential real estate purchases dropped to just 3%.
   

• 50% of all new mortgages are adjustable rate loans.
   

• 27% of all new mortgages are interest-only, compared to only 1.6% of mortgages just four years ago.
   

• Overall, nationwide, about two-thirds of all new mortgages are interest only or adjustable rate (or both!).
   

• An estimated 60-70% of "jumbo" loans (those more than $359,650) are Interest only.
   

• The median price of homes sold in June was $214,800, flat from the prior year.
   

• The price of lumber has fallen about 30% in recent months.
   

• Fannie May and Freddy Mac now hold over $3.5 trillion in mortgage-backed securities, more than all banks and savings and loans combined!!
   

• An estimated 56% of U.S. commercial bank assets are mortgages or mortgage-backed securities, a record high.
   

In a recent report on CNN, the infamous IMF found that real estate busts cause far more damage to the economy than do stock market busts. We think this time it will be one for the record books.

The Metals
As with stocks, the metals have gone a net nowhere this year, frustrating bears and bulls alike. As discussed in our January annual report, it looked as if the 8-year cycle in gold had topped and was ready to turn down  Our outlook was:

  . . . at this juncture, gold looks and feels as if it is ready to at least take a breather in the $430-$450 area, if not undergo a sizable pull back.

Indeed, gold has bounced around and consolidated this year, mostly in the $420-$440 range.

From the December 2004 peak just above $450 (just a few weeks after the long-delayed launch of the first gold ETF), spot gold traced out a textbook 1-2-3-4-5 wave decline to complete wave A  From the February 2005 low at $413, a lengthy A-B-C-D-E triangle wave B has brought gold back to the $440 area, the upper end of its recent range.

What mostly likely lies ahead is a five-wave decline to around the $360-375 area to complete wave C. The 8-year cycle would still have plenty of downward influence to go (see chart in January annual report), so the wave C low may only be the first leg of the correction. A trade-able bounce may ensue, followed by another drop, to the low $300s.

We think it unlikely, but a burst above the December 2004 high at $453 would argue for much higher prices.

Another reason we're still cautious (short-term) on gold is the persistence of bullish sentiment. For example, there have been recent full page ads in our local newspaper for a national coin dealer, pumping U.S. Gold Eagles. The sub-headline of the ad reads: "Gold sets blistering pace towards predicted $1,500 per ounce." Huh? Blistering pace? It's been more like a snail's pace. $1,500? Let's get through $500 first.

Our summary from the January annual report still holds:

Despite our current caution on metals prices, we know that holding the metals is about much more than making a profit on them. They're a security blanket, a sleep-well-at-night comforter, a nugget of piece of mind. If you're going to stick to your "buy and hold" approach, considering hedging with some puts. Long-term gold holders, if nothing else, just condition yourself to gold potentially dipping back to at least the mid $300s as the US dollar stages a rebound from its deep, four-year plunge.

Chinese Checkers
China has finally broken the ice and begun its long-anticipated currency revaluation process. The 2008 Olympics are just around the corner and the yuan needs to be fully convertible with other major currencies. They'll get there, with plenty of time to spare, and with plenty of profits along the way.

In our April report, we discussed the ever-growing possibility of a direct confrontation between mainland China and its renegade province, Taiwan.

The rhetoric intensified a few weeks ago when a top Chinese general actually threatened to use nuclear bombs not again Taiwan, but against the US! From a July 14 CNN Report: China sends nuke warning to U.S. over Taiwan

BEIJING, China (Reuters) -- A senior Chinese general has warned that China was ready to use nuclear weapons against the United States if Washington attacked his country over Taiwan, the Financial Times newspaper reported on Friday.

"We Chinese will prepare ourselves for the destruction of all of the cities east of Xian. Of course the Americans will have to be prepared that hundreds ... of cities will be destroyed by the Chinese," he added.

A very scary, but very real, scenario. Will the US stand by its treaties with Taiwan? Could the Chinese military be bluffing? We sure don't know, and it'll take titanium testicles to call their bluff. America and indeed all of the so-called civilized world, will be "all-in."

Advertisement

Far Out, Man
Predicting the stock market is difficult enough. Care to try your hand at predicting earthquakes? There are actually several rational, educated, sane people who read the seismic waves like stock charts, some with a good deal of success. Stan Deyo is one of the foremost quake-callers. He went out on the limb a few days ago, calling for, as Fred Sanford would bemoan, "The Big One."  From Deyo's August 2nd bulletin:

The August 2 RED ALERT is the first of its kind I've ever made in the 11 years of studying seismic event indicators. It is so huge that I almost can't believe my eyes. The importance and severity of this has impressed me more significantly than when I predicted and warned about the coming December 26, 2004 Indonesian events beginning December 22.

Needless to say, an earthquake of epic proportion would be an unmitigated catastrophe, rippling through hundreds of Main Streets across the country, and at least one Wall Street.

"Be Prepared."
-- Boy Scout motto

"Expect the unexpected."
-- Heraclitus  500 BC

Thanks for listening!  -- Grizzly

Recommend this page to a friend
Grizzly's Growlings Archives

Agree? Disagree? Express your opinion in our "Hair of the Bear" Forum.

New commentary is published by Grizzly as market conditions warrant. If you would
like to receive email notification when new commentary is posted, click here. 

bearmarketcentral.com home page

Monday, April 18, 2005
"Uncharted Waters"
Printer-friendly version

Greetings once again, to Bears and Bulls alike.

Stocks
An old axiom on Wall Street is "Bull markets climb a wall of worry." The less well-known corollary is "Bear markets slide down a slope of hope."  Well, talk about your market timing: In Friday's papers, one leading Wall Street anal-yst nailed it by stating "Earnings are really the only hope for this market."

Following this relatively brief rebound, which may last a few days or even a few weeks, another devastating decline should ensue to complete the wave 1 of C.  Consequently, we're maintaining our highest level of financial alert: FULL CRASH WARNING 

As our friends at the Daily Reckoning/Rude Awakening reported recently, the average holding period for an NYSE stock has plunged from eight years in 1960 to less than one year now. We haven't been able to find similar data for NASDAQ stocks, but one would expect the holding period for the more speculative stocks to be even shorter. For Pink Sheet stocks, it would have to be measured in days or weeks, not years.

"Long-term" has become persona non grata on Wall Street. Over the last 30 or so years, America has degenerated from a nation of investors to traders and now essentially to speculative gamblers.

Indeed, gambling in general and poker in particular are hotter than ever. World-class high-stakes poker is now broadcast on at least five cable TV networks. A poker junkie can watch the action nearly around the clock, just like the financial markets.

Internet-based poker, playing against sight-unseen opponents, is all the rage. Legal casinos are practically everywhere (except Utah). Las Vegas hotels are sold out months in advance. State-run lotteries are generating more and more revenue, despite offering significantly worse odds and payouts than casino keno.

It's all part of humanity, part of our innate self-defense mechanism. We're programmed to be competitive to insure our survival, and poker is just the ticket.

George Washington cautioned that "Gambling is the child of avarice, the brother of iniquity, and the father of mischief." Awh, c'mon George, it's fun! I just filled an inside straight. My cousin Louie's ex-girlfriend's sister-in-law's neighbor missed the Powerball jackpot by only one number. My bio-tech stock rose from $0.47 to $0.63 today. And besides, I can always get another cash advance off my credit card (more below).

The Economy
We're big believers in not reinventing the wheel. So when we see our thoughts and concerns expressed eloquently by someone much more knowledgeable about these affairs than are we, we're inclined to just sit back and enjoy the fruits of his labor.

We hope, we wish, we pray that the old Wall Street axiom: "As GM goes, so goes the nation" no longer holds true. If it still holds, America will soon be deep in the do-do, because GM is already in up to its hips, and it's still rising:

• GM's $300 billion mountain of debt was downgraded to junk status a few weeks ago.
   

• Next week GM is expected to post its largest quarterly loss in 13 years.
   

• GM earns practically nothing on each new vehicle it manufactures. The bulk of GM's "earnings flow" comes from the financing of those vehicle sales.
   

• GM's pension fund is under-funded by at least $17 billion, and it may be forced to seek assistance from the federal Pension Benefit Guaranty Corporation (PBGC).
   

• Some even argue that GM is more of a health-care management company than a car manufacturer. The health-care costs for its pensioners and retirees burdens the sticker price of each car with thousands of extra dollars.
   

• GM is all ramped up with production and inventory of big SUVs and trucks, right when it starts to cost triple digits for a fill-up. Good planning and timing, GM.
   

• GM is taking its crash-test dummies too literally. Its shares have hit the barrier and have been cut in half over the last twelve months, to lows not seen in at least 20 years.

To sum it up, GM is a basket-case, and for what it's worth, #2 Ford is right there with them, too.

So who cares about GM anyway? They're an industrial dinosaur from the dark ages, right? Maybe so, but GM is the world's largest private company debtor (beyond taxpayer-hitched Fannie Mae and Freddie Mac, who are in a league of their own). With its junk rating, GM's $300 billion of debt is "at risk" of default. It won't be pretty.

So, if GM is no longer a bellwether for America, who would be its successor? Let's look at a few candidates.

How about high-tech IBM? It's well-respected, it's humongous and it's omnipresent (just like GM). Bzzzzzzzzzzzzzz! Thanks for playing. IBM stunned the markets on Thursday with a quarterly earnings report that fell well short of estimates. For the week, IBM tanked 12.5%.

How about Wal-Mart, the world's largest store (and the world's largest importer of good from China)? It's well-respected, it's humongous and it's omnipresent (just like GM and IBM). Bzzzzzzzzzzzzzz!  Thanks for playing. WMT has been in a steady downtrend over the last 15 months, and it closed Friday at a fresh two-year low.

How about eBay? It's the world's largest electronic store (and the world's largest Internet enterprise). Bzzzzzzzzzzzzzz Thanks for playing. eBay stock is down a stunning 52% since the beginning of this year.

Debt and Deficits
Decades ago, debt was served up in small doses, like one of those shapely little 7-ounce bottles of Coca-Cola. A home mortgage (with a full 20% down payment) was fine. Maybe you took out a small "paycheck" loan for a diamond for your fiancée. But that was about it.

As hard as it is for those under 28 years of age to believe, people actually used to save first, and then pay cash for things, including big-ticket purchases such as a new car, a refrigerator and other durable goods. Student loans were virtually non-existent. If you didn't have the funds to pay for tuition, you got a part-time job and worked your way through college - what a concept! The thought of buying a new suit or dress, the weekly groceries or a vacation trip "on credit" was unthinkable.

Today, debt is served up as if Homer Simpson were lying under a running soda dispenser with his mouth open: "ahgghghghghg, aghghghghg, aghghgghgh." Today, consumers go into debt for anything and everything they can get their hands on. A wallet-full of affinity credit cards is a necessity. Second and third mortgages are de rigueur. A zero percent, 7-year SUV loan is the only way to drive. (Go ahead, pull out that alumni credit card for the $100 fill-up tab.)

Yep, back in the "good old days," a little bit of brown sugar-water was a good thing. Today, 7-11 will gladly accept your 23.9% APR credit card to buy that $1.39, 64-ounce Super-Sized Big Gulp.

We discussed the looming debt and deficit crises in detail in our January report, and things have only gotten worse since then.

Here are a few more recent data-bits on the size and scope of "the problem":

• In the last 30 years, household debt as a percentage of personal income has doubled from 60% to 120%.
   

• Total household debt is now $8.2 trillion, over $29,000 for every man, woman, and child in America.
   

• Total US credit market debt is approaching 350% of GDP, twice the level of October 1929.
   

• The personal savings rate of Americans is next to non-existent, a meager 1.0% of income in January. By comparison, the typical poor Chinese peasant saves an estimated 25% of his meager income. What's wrong with this picture?

The U.S. federal government continues to spend, spend, spend at a rate that gives drunken sailors a good name. Our distinguished elected officials continue on their insatiable spending spree, leaving no stone unturned in their quest to "serve the public."

The 2005 budget will put the U.S. about $550 billion further in the hole. There are $71 trillion (that's trillion with a "T") in un-funded liabilities, $750,000 per American household! Who will end up paying off this tab, most of it incurred by politicians in the name of getting re-elected? Let's do it to, errh, for the children.

The U.S. trade deficit will approach a gargantuan and yet again unprecedented $725 billion for 2005. Federal Reserve Governor Ben "We'll drop money from helicopters if necessary" Bernanke must be reading a lot of George Orwell lately. In Newspeak that would make Orwell envious, Bernanke recently flipped the U.S. trade deficit on its head. It's not a trade deficit, he declares, it's a "global saving glut." It's off to Room 101 for you, Ben.

Real Estate
The real estate bubble is stretched to the max. It may not pop with the same thundering thud as did the Nasdaq bubble in 2000, but real estate's time is fast coming to an end. The early warning signs are flashing like a six-track railroad crossing.

• The National Association of Realtors reports that about 25% of all homes purchased in 2004 were for investment purposes, not occupancy. If the value of a home starts to drop, people who actually live in it are generally not inclined to sell it, at least not right away. They've still got to live somewhere, right? The same cannot be said of people owning a second or third home for speculative purposes. When prices stop increasing, the momentum will be gone and the speculation will no longer make sense. You can't put in a stop-loss order to quickly get out of that condo you own across town. When real estate's lack of liquidity is shifted into reverse, prices will plunge.
   

• In January, the inventory of unsold homes rose 17%. This inventory represents 5.2 months of supply, up from 3.5 months a year earlier.
   

• March new residential housing construction plunged 17.6% from the February and down 8.2% from March 2004.
   

• $3 trillion in mortgages were refinanced in the last four years. Just about everyone paying a mortgage has refi-ed (many two or three times) and cashed out as they traded up (up and away). Americans cashed out an unprecedented $300 billion in home equity in 2004. There just isn't much equity left to extract to keep the spiral going.
   

• 40% of first-time home buyers put no money down.
   

• Mortgage applications dropped by 9.5% in the latest reporting period.
   

• An estimated 11.8% of FHA loans are in default.
   

• Foreclosure.com reported last week that 28,190 foreclosed homes were put on the market in March, up 50% from February.
   

• Fannie Mae's stock (FNM) has plunged 24% so far in 2005. Fannie and her Siamese brother Freddie guarantee nearly half of all mortgages issued in America.
   

• On April 6, Sir Alan of Greenspan practically pleaded with Congress to put limits on the escapades of Freddie and Fannie. Sir Alan was so bold as to say: "Without restrictions on their balance sheets, we put at risk our ability to preserve safe and sound financial markets in the US..." Sorry Sir Alan, the horse is already out of the barn.
   

• Even the tax lien market of late-night infomercial fame is bubbling over. At a recent tax lien sale in Mojave county Arizona, 59% of the liens were bid so high that the buyer is guaranteed a loss on his "investment" if the lien is redeemed by the property owner. 98% of Mohave county liens have been redeemed in past years. Go figure.
   

As it has for at least the last 25 years, California leads and dominates the national real estate market. The California Association of Realtors describes the current situation this way:

• The median price of a home in the state is $470,000.

• The median household income in the state is $53,240.

• It takes a household income of more than double that median income, $109,320 to be exact, to qualify to purchase that median-priced home.

Clearly, something has to give. You make the call - is it more likely that household incomes will double, or that property prices will be cut in half?

Gold
Our outlook for gold from our January 1st report remains on track:

"Bull markets don't run in straight lines and at this juncture, gold looks and feels as if it is ready to at least take a breather in the $430-$450 area, if not undergo a sizable pull back "

So far this year, gold has been treading water as a result of the stabilization of the U.S. dollar, which in turn was induced by the seven straight increases in short-term interest rates by Sir Alan and His Merry Monetarists. Spot bullion closed this week at $424.30, essentially unchanged so far this year.

International Affairs
We need to keep a close eye on China. No, not because of the trade deficit or commodity accumulation or the un-pegging of its currency from the U.S. dollar. Instead, our focus is on geo-politics.

Indeed, mainland China is moving closer and closer to a direct confrontation with its renegade province, Taiwan.  Last month, China's pseudo legislature authorized a military attack if Taiwan pursues formal independence. The vote was 2,896 to 0. (Despite China's capitalistic successes of late, it's still ruled and populated by party-line party members. 2,896 to ZERO!)

Things could soon explode like, ahem, a Chinese firecracker factory. Seriously, the China dispute could have very serious consequences for the entire globe. The U.S. military will likely be called in like the Cavalry to at least try to quell the hostilities. The U.S. is Taiwan's strongest and most interventionist ally, and President Bush will not resist the call.

China is also making noises against arch-rival Japan. Thousands of people have staged violent anti-Japanese rallies across China over the past few days.

Beware the famous curse, allegedly of Chinese origin: "May you live in interesting times."

OK, let's get right to the point. 2004 was, to say the least, a major disappointment for us bears. It wasn't a disaster, but nor was it a smashing success for the bulls.  For the year, the DJIA edged up 3.2%. The Nasdaq Comp fared better, gaining 8.6%, and the S&P 500 improved by 9.0%.

Yes, we most certainly misjudged the current rally's extent and duration. As James Grant of Grant's Interest Rate Observer puts it, "...financial excesses can carry on for far, far longer than seem possible."

Indeed, we've been accused of being stubborn, stupid, and worse. We've been accused of "crying wolf," of being alarmists, and of being "un-American."

We're not going to make excuses for our bearish perspective. Yes, 2004 did not go the way we had anticipated.

What we are going to do is continue to point out the extreme and historic risks that exist in the markets. These risks not only still exist, they've intensified.

Jim Grant recently summed it up by stating: "When an oft-repeated forecast doesn't pan out, a forecaster owes his readers either a new prediction or a defensible reaffirmation of the old one...." Grant was referring to his stubbornly bearish outlook of the US bond market. We're referring to our stubbornly bearish outlook for stocks, which remains in effect:

All of our long-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. Be on the lookout for a magnitude 9.2 shaker on The Street.

To be clear, our crash warning indicator is not a specific timing device, it is a measurement of risk in the system. To repeat our ongoing footnote:

The purpose of our 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.

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

For those who've heard all they wanted to hear at this point, thanks for visiting www.bearmarketcentral.com and best of luck in 2005. For enquiring minds who want to know more, we present our analysis of the markets for 2005.