The Fed's unprecedented eleven rate cuts in 2001 (a cumulative 475 basis points) failed to spark anything more than a flicker of recovery. The Fed's last cut, 50 basis points on November 6th, was perhaps the last rate cut arrow in its quiver. It won't make a bit of difference anyway. More grease isn't the answer when pushing on the proverbial string is the problem.

As mentioned in our reports numerous times over the past five years, near-zero interest rates haven't helped Japan recover from its burst real estate bubble, 21 years ago. The U.S. economy is acting every bit as comatose, and the U.S. equity markets are following Japan's example, too.

Aside from appeasing the politicians' need to "do something" about the economy, near-zero interest rates have their negative consequences:

• Savers and investors are penalized with near-zero returns on bank accounts, treasury bills and money market funds. The real return (after taxes and inflation) is negative.

• Low investment returns tend to encourage investors to chase higher yields in much riskier securities, such as junk bonds. This is not a prudent thing to do in a deepening recession (or worse).

• A collapsing dollar. The historic low returns on U.S. securities just can't compete with European rates. Moreover, the dollar's 15% drop in value in 2002 brings many foreigners' losses to 40-50%. We're nearing the "cry uncle" point, Foreign money will just stay home. According to Fox News, Europeans have reduced their purchases of U.S. stocks from $84 billion in 2000 to just $11 billion in 2002. 2003 will likely show a net outflow.

The U.S. trade deficit also has continued to inflate in its own Hindenburg bubble. The deficit has inflated nearly four-fold over the last four years, reaching a colossal $450 billion in the latest twelve months.

Personal bankruptcies have soared. CNN reports there is a shortage of federal bankruptcy judges!

There's one remaining sector that the bulls cite as evidence of continuing strength in the economy: real estate. Housing has been propelled to extreme valuations by the lowest mortgage rates in 40 years, This bubble will burst shortly after the Fed's next interest rate move, which will likely not be a cut but a hike, necessitated to defend the plunging U.S. dollar.

Now given that even the anal-ysts parading across CNBC can see the real estate bubble about to burst, it pains us to agree with them. But the evidence is building day by day:

• In many areas of the country, apartment and office vacancies have soared.

• Mortgage delinquency rates have doubled.

• Inventories of unsold properties have soared.

• Prices of those home that do sell have leveled off.

• Foreclosures have soared.

• Permits for new construction have plunged.

• More and more real estate agents are starting to talk about it being a "buyer's market," for the first time in a decade.

The Economic Outlook for 2003
We continue to be unequivocally bearish on the U.S. economy as well as the U.S. markets. This is not just another routine bear market for stocks, and it's not just another routine recession for the economy. Unfortunately, the potential for a "3D" scenario, a "devastating deflationary depression," is very real,

The good new is that we can not only survive but actual prosper if (when) the 3D scenario unfolds. Robert Prechter, the world's foremost authority on Elliott Wave technical market analysis, has written his tenth and most important book yet. It's called Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression. It's a Wall Street Journal #1 Business Bestseller.

Here's my standing review of "Conquer the Crash":

"In straightforward language, free of typical Wall Street econo-babble, Bob Prechter builds a bullet-proof case that a deflationary depression of historic proportion is underway. It will devastate the wealth of those who do not read this book and heed its advice. Bob Prechter calmly and rationally lays out the many options a prudent investor should consider at this juncture. Conquer the Crash could save your financial future."

We strongly encourage everyone to read this book. Buy it or check it out at your local library if necessary. The modest price of this book is a true investment in your financial future. If you need to protect your portfolio or if you just need to sleep well at night, you owe it to yourself to read Conquer the Crash.

One of the most astute economists out there is Dr. Kurt Richebacher, former chief economist for Dressner Bank. We generally concur with his poignant perspective. He believes "this is by far the greatest and worst credit bubble that the world has ever seen." Dr. Richebacher elaborates on his outlook in this must-read interview on http://www.investmentrarities.com/12-24-02.html.

The most recent batch of economic indicators offers no evidence whatsoever that a genuine recovery is underway. On the contrary, economic performance continues to deteriorate.

For example, holiday season retail sales were the weakest since they starting tracking such data in 1970. On New Year's Eve, the Conference Board reported that its consumer confidence index "unexpectedly" sank to 80.3 from 84.9 in November, just above the nine-year low of 79.6 reached in October. The economic anal-ysts were looking for the index to rise to about 85.3.

Yet sentiment regarding the economy remains decidedly bullish. According to the Bond Market Association, economists think GDP will grow at a 3.4% rate in 2003. CNN reports that the Wall Street consensus is for 14% growth in the earnings of the S&P 500 companies.

These economists need to get real. They don't get real because if they did, they'd be out of a job. It's just not politically correct to be bearish on the economy. It's bad for business, the business of economic forecasting that is.

We're sure to hear the choir break into their mythical "second half recovery..., second half recovery…" mantra, starting about mid-February.

Indeed, Sir Alan and his Merry Men have gone on record stating the Fed is standing by, ready to put the printing presses into high gear to keep the U.S. economic machinery well-lubricated. Just how worried are they about a deflationary depression?

The Market Outlook for 2003
Global Crossing... Enron... Tyco... Worldcom... Adelphia... Xerox... Vivendi...United Airline…Conseco… Cooked books... Fudged financials...Insider trading... Outright fraud.... The list of bankruptcies and bamboozlings goes on and on and on.

So where and when will it end? We certainly don't know, but you can bet there will be many more "disasters du jour" unfolding in the coming weeks and months. We even expect that a major U.S. state and eventually the U.S. federal government will be found guilty of accounting fraud and of deceiving us taxpayers. It's just a question of when and how much.

If there's one thing all market analysts agree upon, it's that "markets don't move in a straight line " So if markets don't travel in straight lines, just how do they travel? 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.

Quite simply, the wave structure down from the 2000 high just doesn't appear to be complete. Further, it appears that another major down leg is underway. Here's our analysis and outlook for the DJIA the next 12-18 months:

The Great Bear held firm control throughout most of 2002. The buy-the-dippers came out in force in October as the talking heads and anal-ysts parading across CNBC resumed chanting their first mantra: "the bottom is in..., the bottom is in...." We think the Great Bear merely paused to loosen his belt a couple of notches and light up a fine cigar.

As discussed in these pages many times since the March 2000 bubble peak, countertrend rallies such as we saw in October-November are to be expected and even welcomed. These corrective bounces are needed to relieve the oversold conditions created by the primary down trend, thus clearing the way for the next down leg.

Unfortunately (for most market participants as well as for "greater good"), 2003 has the very real potential to produce "The Big One," that 1929-style grand super cycle crash. Indeed, the one thing still eluding this e Great Bear Market is that elusive historic one-day crash. Stay tuned; the potential for a crash will remain high throughout 2003. We'll try and zero in on it as the waves play out their cards in 2003.

As we enter the new year, the markets' greatest fear is that the imminent war in Iraq won't be the quick and dirty cakewalk the politicians are promising. With as much advanced notice as Iraq has received, Saddam Hussein will no doubt have at least a few tricks up his sleeve. There's no point in speculating about exactly what he may have conjured up in his delusional dreams.

In the December issue of Money Magazine, Prudent Bear Fund Manager David Tice lays out his case for "Dow 3000." Among Tice's main arguments:

• Investors poured $1.6 trillion into mutual funds, So far they've only pulled out less than $100 billion.

• Stocks usually trade in the 7-8 P/E range; they're still above 20.

• We're in for a double-dip recession that will severely squeeze corporate profits.

As this report hits the web site, this must-read article isn't yet online, so if you're not a Money magazine subscriber, check your local library.

On the valuation side of things, stocks remain widely and wildly overvalued. This despite the dramatic plunge in the markets since the top in early 2000. Mainstream anal-ysts pay most of their attention to the S&P 500, so we'll look at what they're looking at, too. The P/E ratio on the S&P 500 stands at 17 (2003 consensus forecast), 33 (trailing twelve-month GAAP), or 50 (trailing twelve-month "core" earnings).

Any way you measure it, stocks are still expensive in terms of earnings valuation. Typically, bear markets beat down stock prices into the 7-10 P/E range before a lasting bottom takes hold.

Bianco Research reports that total U.S. market capitalization stand at just about 100% of the U.S. GDP. This is down from 183% in March 2000, but still well above the 1929 peak of 81%.

Sentiment is Still Striking
It's amazing to say but after nearly three years of the Great Bear Market, most individual investors are "only" bruised and battered, not bloodied, or bearish. Things got a bit hairy in July and October, but by and large the 2002 sell-off was rather orderly. Historic bear markets have never ended with a whimper. At the October lows, the markets exuded virtually none of the panic, capitulation, or blood in the streets that almost always mark a lasting bottom. Unfortunately, we think there's more pain to be absorbed by the brave bulls before they throw in the towel.

For example, market sentiment remains massively bullish. Investor's Intelligence's latest survey of independent stock market newsletters reveals a 50.4% to 24.2% lead for the bulls. Such excessive bullish sentiment is most often seen near market tops, not bottoms. The bear market will bottom when pessimism peaks.

According to this CNN/Money Poll, individual investors are definitely still bullish.

If you had $10,000, where would you invest it for 2003?

	Stocks		44%
	Bonds		8%
	Gold		11%
	Money market		13%
	Blend of any above		24%

Mainstream anal-ysts on The Street are also still bullish (after all these years). See "Most Wall Street strategists see good things for the market in 2003." From this CNN story, here are the past and present forecasts for the S&P 500 from some of the biggest names (and biggest paychecks) on The Street.

	Strategist	Firm	2002 target	2003  target
	Rich Bernstein	Merrill Lynch	1200	860
	Abby Joseph Cohen	Goldman Sachs	1300-1425	1150
	Doug Cliggott/ Carlos Asilis	J.P. Morgan	950	800
	Steve Galbraith	Morgan Stanley	1225	1000-1025
	Ed Kerschner	UBS Warburg	1570	1025
	Tobias Levkovich	Salomon Smith Barney	1350	1075
	Tom McManus	Banc of America	1200	1000*
	Ed Yardeni	Prudential Securities	1300	1025

Joe Battipaglia and his band of Band of Perma-Bulls are also as bullish as ever, They're looking for gains of 8-20% in 2003. Listen to them on CNN.

From within the heart of the Great Bear Market of 2000 - 200[?], now is not the time to abandon the mainstay of our approach, contrarianism.

So, What's and Investor to Do?
What could derail our bearish outlook? That is, what can save the markets in 2003? The politicians can always change the rules of the game, namely eliminate the so-called double taxation of dividend income. Instantly, the worth of all dividend-paying stocks would soar. Money would flood into the markets. Investor confidence would be restored. As the saying goes, "dividends don't lie."

But alas (for the bulls), we think the odds of such a rescue plan are about as great as the Chicago Cubs meeting the Chicago White Sox in next year's World Series. We think the fiscal pressures arising from the war in Iraq will trump the push for the tax cut. (To argue the bull case for a brief moment, we think such concerns are typical of the short-sighted attitudes of most politicians (of both major parties), Clearly, the long-term structural benefits of such a tax cut outweigh any temporary short-term revenue short-falls.

The price of gold should continue to benefit from the weak dollar, the increasing crises around the globe, and some very interesting market dynamics. Gold's dramatic rise above $350 last week may be just the first leg higher of a major advance. There is a good deal of credence behind the conspiracy theorists' claim that a massive short squeeze may be underway. J.P. Morgan/Chase, Citibank and a host of other global mega-conglomerates are wound up in a massive gold derivatives gambit. If things get messy, gold could start surging in $5 and $10 increments, rather than $1 or $2.

So on the equity side of things, what's an investor to do? First and foremost, nowhere is it written that you must be invested in the equity markets all of the time, or at any time. Three percent in a money market account in 2002 looks pretty good compared to the Nasdaq's 31% drubbing, plus you get to sleep nights.

For aggressive investors, the 18 Great Bear Funds we have identified out of an industry of 12,500 funds performed exceedingly well in 2002, as detailed above. They should fare exceedingly well again in 2003.

For speculators, any short-term strength in the markets hold potentially excellent entry points to the short side. Also, the extremely high risk and high volatility "junior" gold stocks hold excellent potential to capitalize on another leg up in gold.

Invest carefully, at your own risk. Please read the disclaimer.

Thanks for visiting www.bearmarketcentral.com and to all we say: "Kung Hei Fat Choy" -- "Wishing You Success and Prosperity" for this Year of the Black Bear. -- Grizzly

P.S. Agree? Disagree? Express your opinion in the new Hair of the Bear Forum.

© 2003 www.bearmarketcentral.com. All rights reserved. Please read the disclaimer.

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