Dr.Mchughs grim but Realistic views here,Outstanding analysis of what is going on in the economy.
The Dow Industrials rose 119.01 points Friday, closing at 13,357.74. You would think that with the huge rally days we've seen the past week, that one of the three Bearish scenarios would be disqualified. Well, they all remain solidly in play as of Friday night, August 31st, 2007. We have seen a series of lower highs since mid-July, which is Bearish. In fact, we ended down for the week in the Dow Industrials, S&P 500, Trannies and the Russell 2000, believe it or not.
NYSE volume was 98 percent of its 10 day average. Upside volume led at 91 percent, with advancing issues leading at 85 percent, with S&P 500 upside points at 97 percent, another 90 percent up day. It is clear a ton of liquidity is being injected into the market, and the PPT is working hard to turn equity markets around. The key will be to see how the first couple of weeks of September pan out. If the rally that started mid-week continues, we could be out of the woods, with a very brief Intermediate wave 2 correction complete, scenario # 4.
That said, all four scenarios remain possibilities as of Friday, August 31st: First is that the bounce is part of wave 2 up, with a severe decline, Micro degree wave 3 down of iii down coming next, with deva! station continuing for weeks. In spite of the rally Friday, we are still seeing lower highs, thus this count remains in play. To be honest, we favor scenarios # 2 or # 3, not this scenario # 1.
A second scenario is that we completed Minor degree wave "a" down, and a multi-week rally, wave b-up is underway, with b-up having three subwaves, with the first wave "a" up complete, with this week's sharp decline Monday an! d Tuesday wave "b" down, with c-up starting Wednesday and lasting over the Labor Day holiday. Then a plunge, maybe crash, wave c-down into October. .
A third scenario is that we have completed Minuette wave "a" down within Minor "a" down, and the current rally is Minuette b-up, with c-down to follow to a wave "a" bottom. Inside b-up, we completed a-up, with b-down occurring Monday and Tuesday. Now c-up started Wednesday, which should wrap up after Labor Day, to be followed by a mini-crash into October, wave c-down. That third scenario suggests this Intermediate degree wave 2 decline is going to be long and deep. That third scenario suggests wave c-down of a-down would be the typical September/October swan dive, that wave b-up would last through the year-end holidays, and that a final wave c-down would occur in the first quarter of 2008.
The fourth scenario is that Intermediate 2 is short, shallow, but over, and that the current rally is the start of Intermediate degree wave 3 up. Proponents of this argue that we have seen a "V" bottom, which is sometimes Bullish. However, if you examine the decline from 2000 through 2002, you'll note a series of "V" bottoms that simply led to another crushing decline each time, once overbought conditions hit, so we don't put a ton of faith in that pattern as necessarily bullish.
NYSE New 52 week Highs rose to 41, with New Lows dropping to 16. Markets are operating on the clock of a confirmed Hindenburg Omen signal, meaning there is a far greater than normal risk (25 percent versus the random probability of less than 1 percent) of a crash between now and mid-October. We are not likely to see any more Hindenburg Omens for the next several weeks as the 10 week moving average is now declining, which stops the signal observations. A strong rebound could change that, but it would have to be strong in either time or distance, and so far it has not been either. Interestingly, the declining 10 week moving average stopped Friday's rally cold.
Standard & Poor's reported that U.S. Home prices fell 3.2 percent in the second quarter, the steepest rate of decline in 20 years. Mortgage Application volume fell 4 percent during the week ending August 24th, according to the Mortgage bankers Association. Housing Starts fell 6.1 percent in July, the lowest level in a decade. Building permits were the lowest since 1996. Homebuilders Confidence fell to a 16 year low at the start of the Gulf War in 1991, according to The National Association of Home Builders/Wells Fargo Housing Market Index. Home Prices dropped for the fourth straight quarter, according to the National Association of Realtors. Foreclosures in July 2007 came in at 179,599, which include default notices, auction sale notices, and bank reposses! sions. This was a 9 percent increase over June's figure, and 93 percent over a year earlier, July 2006.
We've been suggesting in these newsletters for months that this real estate debacle is going to require drastic government intervention directly with the homeowner, as opposed to past bailouts of corporations, banks, and Wall Street. President Bush unveiled a plan this week that would allow mortgage holders with good credit to refinance at preferable interest rates through the Federal Housing Authority. This is a first step, but we believe before this mess is over, there will have to actually be monetary handouts to homeowners to reduce the enormous debt load that hyperinflation over the past eight years has inflicted upon the average household. That hyperinflation benefited markets, particularly Wall Street, at the expense of massive inflation in tuition, real estate taxes, home prices, autos, medical care, and about anything e! lse you can think of to hurt consumers. Now the chickens have come home to roost.
The Fed began its bailout program in earnest last week when it lowered the discount rate by half a percentage point. Banks borrow money directly from the Fed at this rate, and since the rate drop, have borrowed heavily. Where is this borrowed money coming from? The Fed simply prints it. This hyperinflation will spread throughout the economy, eventually driving the cost of everything much higher. And the spiral will continue. The Master Planners advocate "trickle down" economics, where they take care of banks and Wall Street firms, and hope households gain from direct infusions of money into financial institutions. They won't. The Master Planners prefer lending to banks rather than direct handouts to consumers because it is a hidden exercise. M-3 is! hidden, money supply is increased, and nobody has to know. Direct handouts to consumers are open for all to see. If handled through the tax system, fiscal budget deficits grow. Or, should money be overtly printed and handed out to consumers, it would be a de facto Dollar devaluation. That is what we believe will eventually have to occur.
The Fed broke regulatory rules this past week, to bailout Citigroup and Bank of America affiliate brokerage firms. They permitted these giant financial institutions to lend more than is permissible to their brokerage affiliates. More Wall Street preferential treatment vs. American Households. Again, trickle down economic policy. What this tells us is that the Fed is in crisis management at this time, that the economy is in far worse shape than they are letting on. The Fed believes if they cut interest rates, it will be a sign of weakness, of panic, and that could undermine confidence. So they quietly bailout financial institutions through the back door, then show up on the front curb with smiles and tell us everything is okay. Credit Card del! inquencies are rising, as are defaults, according to Moody's rating agency. Jobless Claims rose to 334,000 in the latest reporting week. Consumer Confidence fell sharply in August, according to the Conference Board, the sharpest drop in two years.
