Wednesday, October 14, 2009

Market Update - Weds, October 14, 2009

Here is my last EW forecast:

And here is my new EW forecast (update shown in green):


  1. Interesting how Gold and the Stocks have been

    locked in step even as they top.

    Gigantic deflation as all assets collapse?

  2. I see not much has changed. Saw some weakness in Gold this morning that looked promising.

  3. That 3 is going to wipe the grin off a few bull's faces. A more southerly region of the bull physiognomy will need attention during 5.

  4. How has the S&P faired? I know you look at the DOW, but I never look at the DOW as a market metrics because of the very reason you stated, they always rotate out the companies that fall apart, so in theory it should never really fall

  5. For the past 78 years, gold has always followed stocks tick-for-tick in the nominal sense.

    That's because both are priced in dollars and inflation was not only the dominant force, but the ONLY real force in play.

    Gold never changes its value, only its price. For the past 3000 years, one ounce has always traded for a fine business suit, leather shoes and belt. Given October 2009 sale prices, one ounce buys 3 or 4 suits, but that's a micro imbalance that is in the process of correcting.

    Looking at stocks relative to gold: since the 1932 bottom starting this inflationary cycle, the Dow went from 40 to 14,000, a 350x increase.

    Why have stocks outperformed gold? Simple. The indexes rotate away stock loses. If you look at the original Dow 30 from 1932, only GE is left. GE is trading for $20. So the same Dow is down 50% over the past 78 years.

    If you adjust for the dollar's loss of buying power as defined by one ounce of gold never changing in macro value, that $20 GE share is worth ($1050/$20 per ounce) about 38 cents in trading power.

    So yes, inflation has been the only major force in play for the past 78 years. Stocks basically went to $0. Gold has maintained.

    Some assets did increase substantially in trading power. The highest performing asset I've been able to price accurately is, interestingly, Colt pistols.

  6. FDR - Sorry, but I'm not familiar with the rules around EW (but would like to) ... what are the boundaries around that current 2 / c location where you have us? How much higher (or longer in duration) can the market go in this picture before it violates the cycle you're predicting?

  7. Eric,
    There is no hard boundary, please see:


    Aside from my linked guidelines, the best model is the ABC between Waves 1 and 2 (shown in the upper left inset).

  8. FDR,

    Is it possible that we can not use the prior fractals since the "rules of the game" have changed since wave 1 started, i.e. banks are not being forced to recognize losses?

  9. "Is it possible that we can not use the prior fractals since the "rules of the game" have changed since wave 1 started, i.e. banks are not being forced to recognize losses?"

    Those increasingly significant changes are why the fractals grow.

  10. I dunno what you are wearing but I could easily pay USD 1065 for a suit. Actually, I am pretty sure I have.

    No cheap fabrics here.


    On top of the sale price, you can still get a second $1050 suit for $99.

  12. FDR- not sure looking at Josbank as a barometer for deflation means anything. Everything around me is rising in price very rapidly. The equity market rising at 1% per day, houses in Chicago rising at .5% per month right now. No sales on my street and fine dining in our neighborhood is having their best year ever and prices on the menu are rising. I don't get where you live or what deflation you are seeing. Anyone caught short on the deflation premise is losing money at both ends. The dollar is down everyday and the losses of currency from shorting keep piling up. So if you had 100k short and today you only 95K in your account and that 95k only buys what 85k did 6 months ago, you are getting hammered. I know you may be up from a year or 2 ago, but giving money back is the same as losing

  13. "Anyone caught short on the deflation premise is losing money at both ends."


    There is no "debating" it, measurably, our deflation is well ahead of of the 1929-1931 curve.

  14. FDR- I want to believe. I jut don't see how a rising equity market is deflationary.If you want cash in hand and you short DOW 9000, then don't you have less cash in hand as the DOW plows through 10000 and 11000. How is the rising equity market deflationary?


  16. "How is the rising equity market deflationary?"

    Cause it's down 40%?

  17. From the gold-eagle article:

    "The common belief is to say the Great Depression proves the awesome power of deflation"

    Dow and real estate down 90%. Ok, I'll buy that.

    "that the government can have a great deal of difficulty in fighting it, and may not be able to fight it at all. This is an extraordinary misunderstanding, and constitutes the second of our logical and historical fallacies."

    How did they fight it successfully, when it fell 90%?

  18. Can't the fed distribute currency to main street by going around the banks and straight into the equities market. If they keep buying up the stock market and make everyone whole and everyone can sell their holdings and get their cash back and then they are reflated. They can then crash the market and take their loss which is guaranteed by the tax payer down the line.

  19. "Can't the fed distribute currency to main street"

    Nope, they can only lend to banks which were once leveraged 40:1 and are in now in the process of going bust or pulling back.

    All while the FDIC squirms to raise cash to cover a 15T insurance fund shortfall.

  20. why can they only lend to banks?

  21. They do business with Primary Dealers. I'm not one, but they wish I was.

  22. Isn't JPM a primary dealer? Can't they buy SPY directly through them and hold it in various BS accounts like Maiden Lane, etc.

  23. From MW:

    Investor Alert - A superlative day for stocks

    The Fed wins I guess. They own us. Either chase superinflated stocks or watch your buying power erode daily. Quite a trick.

  24. FDR, I wish I had your conviction on things.

    You must really enjoy trading.

  25. FDR- make it stop please. My shorts are killing me

  26. FDR wrote: "Nope, they can only lend to banks which were once leveraged 40:1 and are in now in the process of going bust or pulling back."

    So your argument is that the Fed *cannot* buy equities? Period?

    What, exactly, says they can't, and even if something "says" they can't, why would they heed it if they didn't want to?

    The Fed might not *want* to buy equities for whatever reason, but saying they "can't" is like saying that the government "can't" restrict your 2nd Amendment rights (hint: the government does, no matter what people say it can or cannot do).

  27. A strange thing just occured. I was listening to news on the local public radio station. Of course, they started with dow over 10k and went into other news items for about 2 minutes, then right before going back to programming they mentioned "once again, the dow closed above 10k"

    Apparently, this manufactured number is in need of your support.

    The news brief was only about two minutes long, did I forget the dow was above 10k after they spent the first 30 seconds talking about?

    Stuff like this cracks me up.

  28. The goal of this rally was two-fold. Get rid of shorts and get people back in. They have gotten rid of the shorts, but people are not buying in.

    So now what? Only a fool would buy at these levels. I think most people are smarter then they think, but they are desperate to stop this deflation spiral. Or, at least big money knows this and that is why short term rates are extremely low.

    How far are they willing to push it? Who knows, but they are desperate. The fed doesn't care if the succeed or fail. There profits are guaranteed.

  29. The Fed bought Maiden Lane assets, didn't they? That wasn't a loan, it's an outright purchase of god-knows-what junk.

  30. "So your argument is that the Fed *cannot* buy equities? Period?"

    No they can print and lend, but not directly to you, and inherently this attempts to counter 40:1 peak leverage with a 1:1 antidote. And even that 1:1 "buy" is really a sale, because they are lending that cash at interest (and at gunpoint) not giving it away, and only with a taxpayer guaranty of a full return.

    Everything the Fed does is deflationary because it forces money out citizen pockets and stuffs it in the pockets of the richest mostly non-US citizens in the world. That's their only business.

    What banks and the govt does with the cash they BUY (always a loss) can be inflationary, but only if the economy is so kind.

  31. I really don't think fed cares about the market.

    However, some fools in the gov think they can prop it up via the big banks with borrowed money from the fed.

    I wonder who will get the last laugh.

  32. If the Fed prints $1T to buy my laptop, who has the cash been lent at interest to?

    I understand that you're saying in the end it's to the taxpayer, but only when the Fed decides it's time to "mark to market" and get its bailout from the taxpayer. The Fed never has to mark to market though. It may want to, but it doesn't have to, and the timing is of its choosing (there can be no such thing as a "run on the Fed" today, can there?)

  33. "one ounce has always traded for a fine business suit,"

    Like one from Nordstrom, not the dollar store and thrift shops you commonly refer to.

    If you compare the price of gold to the price of a FINE suit you will find that gold is trading inline with your postulation.

  34. "The Fed bought Maiden Lane assets, didn't they? That wasn't a loan, it's an outright purchase of god-knows-what junk."

    It's all a loan because they only play with other peoples money. They print cash at interest as a starting basis for all operations. It doesn't matter how you shuffle it.

    Yes, they take in real taxpayer guaranteed money, they are after all a for-profit, wildly speculative ring of banks.

    When it comes to wild speculation, they really aren't much different than any FDIC bank placing insane 40:1 bets on subprime real estate using depositors money.

    But that's the nature of counterfeiting for profit, the only real difference between a dealer and the kingpin is one of scale and influence within the law of the jungle.

    Think of the Federal Reserve, and the ring of unconstitutional crime that surrounds them, as compulsive gamblers usually running horrendous losses backed by public labor.

    If the public can't keep up, they'll force them into working for nothing by financing both sides of a war. At least, that has been their MO to date.

  35. FDR, I love this website, and believe it's more informative than any I've been to. I agree in the philosophy of how deflation should be happening right now, and how we should be shorting commodities, especially gold and the major markets, but I wonder if Uncle Ben will in fact beat deflation by utterly destroying the dollar. Absolutely wiping it out. He poses the only threat to what should be happening right now. Just read his "not on my watch" article again from 2006. He seems hell bent on beating deflation. If that means destroying the dollar so be it. Collateral Damage. I don't know what to believe now - to much manipulation. If I'm holding cash when the dollar collapses I'm toast. I'm also afraid of herd instinct of ditching dollars as they keep sliding. What gives. I'm about to throw my hands up in the air and give up.....

  36. Just when I thought we had seen the last of the chananigans up at Capitol Hill... along comes a Happy Bill for Pets which is being introduced by some cuckoo in congress (read below). More of the same desire to have my tax money subsidize somebody else's friggin lifestyle. FDR, When will these baboons get it that enough is enough for God"s sake?

    Congressman Thaddeus McCotter of Michigan has introduced a bill that would change the U.S. Tax Code by allowing a new itemized deduction: pet care.

    The HAPPY Bill, House Resolution 3501, is the Humanity and Pets Partnered Through the Years Act. If would allow "qualified pet care expenses" for a "qualified pet" up to $3500 a year.


  37. FDR, I've come to the conclusion that you are Ben Bernanke's alter ego. This is where Ben blogs what he can't say as Fed Reserve Charirman. Please tell me I'm wrong.

    PS. You know there's a gold bubble when Harrods are selling bullion over the counter.


  38. Hello fdr,

    I just noticed this morning Google no longer has a link to download the historical pricing on the dow. Wonder why that is? Maybe just temporary or a mistake.

    Anyway, I wanted to compare the down vol from last year's 10k (oct 3, 2008) to the dow low of 6547 on (mar 9, 2009) against the up vol from mar 10, 2009 to yesterday.

    Do you know what vol comparison is?

    By the way, Google still offers the download feature on individual stocks, just not the dow. People can look for themselves, click on historical pricing, the download to spreadsheet should be on the right hand side under the historical chart.


  39. Another question on volume. Why doesn't the DJIA volume on google match yahoo?

    Any idea?

    Thanks, again


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