Grizzly's Growlings
September 14, 2003
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Greetings once again, bears and bulls alike.

Little has changed since our June 28th report, when we raised our outlook for the markets to FULL CRASH WARNING. This is our highest level of preparedness, the financial equivalent of the Homeland Security Department's terrorism threat level of RED. We believed then, and we still believe now, that all the conditions and prerequisites are in place for a crash of historic proportion to happen at any time.

Yes, contrary to our expectations the markets have not (we think yet) cracked, but neither has the alleged New Bull Market continued. Things definitely aren't as rosy as the cheerleaders on CNBC would like you to believe. The DJIA has essentially gone a net nowhere this summer. The DJIA reached an interim peak of 9,406 on June 17. It closed this Friday (Sept. 12) at 9,471. The S&P 500 is up a whopping 3 points over this same timeframe. Not exactly a rip-roaring rally!

Admittedly, we did not anticipate the additional small-degree zigs and zags higher over the last ten weeks. At this juncture, it appears that this rally extension has run its course, and the markets have turned down. Here's the short-term picture in the Dow Jones Industrial Average.

In Elliott Wave terms, the large counter-trend bounce wave 2 from March ended last Friday (Sept. 5), and wave 3 to the downside has just begun. Wave 3 is what we have been waiting for, a devastating down-leg that will take the markets to new lows, well below 6,000 on the DJIA and 1,000 on the Nasdaq. As it usually seems to pan out, we'll be looking for a short-term low in mid October. Only a burst back above the recent high of 9,599 will postpone our short-term bearish analysis, but it would have no bearing on the larger bearish picture.

In addition to the Elliott Wave picture, all of the reasons we cited in our two previous reports for our extreme bearishness remain valid. (Please take a few moments and review those reports: June 28   August 2.)

Here are a few more recent tidbits of financial fodder for our "Great Bear Market of 2000-200[?]":

• The already manic bullish sentiment on The Street has exuberated even further. The American Association of Individual Investors' latest reading is a stunning 74.1% to 8.6% stampede for the bulls. This is the largest Bull-Bear spread since, uh oh, August, 1987.
   

• "Insider" selling is swamping buying by an staggering rate of 44-1. This is the highest ratio on record.
   

• VIX, the well-established measure of trader complacency and confidence, sank to yet another new low reading of 18.29 on September 8th. The VIX last tested such shallow waters back in late August 2000. The DJIA then proceeded to plunge 1,650 points over the next six months. Our lifeguard Mr. VIX continues to scream: "Get out of the water, NOW!"
   

• A growing chorus of U.S. senators is trying to score political points with their newly unemployed constituents by threatening stiff import tariffs and other measures against that job-stealing juggernaut, China. Messrs Smoot and Hawley are rolling over in their graves.
  

• With the bursting of the credit and interest rate bubble, mortgage re-financings are down 78% since May. The flood of cash-out re-fi deals has slowed to a trickle.

The Economy
To repeat our overall perspective, we believe the current economic situation is much worse than the official U.S. government statistics would lead you to believe. We caution that virtually all government-reported economic data must be taken with a grain of salt. This is not out of some dark and dangerous conspiracy, but out of the outdated, obsolete and ineffective methodologies used to measure, analyze and "adjust" all the data.

GDP rose by a reported 3.1% in the second quarter, but that figure is bloated by a 46% increase in government defense spending due to the war in Iraq, and by the last gasp batch of mortgage re-fi cash-outs. Third quarter data will be skewed by the $400 tax rebate checks sent to 20 million households, just in time for the big "back to school" shopping season. What will it be in the fourth quarter?

Wall Street went goo-goo over Wal-Mart a few days ago when it reported stronger than expected sales. What they didn't tell you is that a large portion of the increase was not "new demand," but merely the acquisition of hundreds of thousands of former KMart customers who now have nowhere else to shop.

We think trends such as those below are more indicative of the true state of consumer spending, the engine of growth for the U.S. economy: weak!:

• "Buy One, Get One Free" sales have always been a dime a dozen, but more and more "Buy One, Get Two Free" sales are being offered at the major national grocery chains. Our local Albertson's is currently running a "Buy One, Get Three Free" sale!
   

• Two local automobile dealerships are offering quasi-"BOGO" sales on brand new 2003 model cars!
   

• The next time you visit your local CompUSA, OfficeMax Office Depot, etc., take note of the hundreds of dollars of merchandise you can acquire for free, at no cost net of mail-in rebates. If you have the time, the patience, and enough postage stamps and envelopes, you can build a new computer piece by piece for next to nothing.
   

• The "Dollar Store" industry has survived its initial growing pains and has matured into a viable concept. If you don't have a dollar store in a shopping center near you, you will soon! The question "Should I buy an American-made widget for $5.95 or a nearly identical Chinese version for $1.00?" has been answered.
   

• If you don't shop online at eBay, and we mean shop for everyday items, you're probably spending too much. From brand new Donna Karan cashmere sweaters to used Yugos, almost every consumer and business product in existence can be acquired at a bargain price.

According to the econo-crats who get paid handsomely to decide such matters, the recession officially "ended" in November 2001. Don't tell that to the 1.5 million workers who've lost their jobs since then! The economy lost another 93,000 jobs in August. The "expert" economists surveyed by Reuters were looking for a small increase in jobs. This all follows July's revised drop of 49,000.

We know, we hear it every day: "employment is a lagging indicator." True, but that does not rationalize or justify the continuing dismal data. Economic history shows there really isn't much of a lag to speak of anyway; it's usually a matter of only a few months, not a few years. The country can't handle much more "recovery" like this.