Deflation was the Game, not Inflation.
Brief Market history Till 2000
The Federal Reserve has always been behind the curve when determining interest rates. Ever since Alan Greenspan’s “irrational exuberance” remark in (1996 or 1994?)
the economy has been suffering from deflation. Meanwhile, the Fed was stepping on the gas by raising interest rates, then alternating putting on the brakes. Chairman Greenspan’s could not comprehend the massive productivity shift that had been sweeping throughout the world’s economy with the advent of the internet. You cannot have inflation when commodity prices are declining. The Feds was concerned about Y2K computer bug, Indonesia currency crisis, and hedge fund crisis in 1998. While falling prices are great for the consumer, our nation cannot survive composed of consumers only. The industrial capacity for this nation reached a 36 year low during the last bear market. The massive job shifting from industrial economy to a service economy disrupted many baby boomers income throughout the mid 1990’s. However, the Fed began lowering rates in 2001, exacerbating this deflationary period and creating a housing bubble. The housing bubble was created after the stock market began to fall precipitously, even before the 911 event. As investors realize their mistakes of the “buy and hold” mentality, they became more concerned with “nesting their nest eggs into the real estate market.”
Most demographic trends begin in two primary states, California and Florida; these two states will determine the future outcome of the rest of the nation. California has greatest number of illegal immigrants, highest cost of living, and highest state income taxes. Florida sets the future trend because it is a reflection of the retiring baby boomers wants and needs. What happens in these two states will define the future of America. The decline in real estate prices will begin in California first, followed by the northeastern states and lastly in Florida.
The First Bear Market Cycle
The housing bubble was being inflated by changing the laws in real estate with the elimination of long term capital gains on home sales of primary residences. This long term capital gains elimination on primary residences is seldom referred to becoming the primary inflation factor in real estate prices. The savvy real estate buyer could receive tax free capital gains, up to million dollars, simply by living in a home as a primary residence for 2 out of the last 5 years. Using the new capital gains law, many home owners bought bigger homes, cashing in on 30% appreciation or more of those homes every 2-3 years. The capital gains were free; you didn’t have to buy another home to keep the gains tax free. You could take the tax free gains to start a business or invest in the market. I know of several people who started out buying homes for $200k then sold it after 2 year for $300K or more. The 100k tax free gain was used to buy another home in a fast appreciating neighborhood. Now they are selling their homes again with as much as $200k in tax free capital gains. However, time is running out on these large tax free capital gains due to the Fed raising interest rates. The housing bubble precipices are in the northeast and the west in the U.S.. Many home owners will see their paper profits disappear as the average home prices depreciates. There were 13 homes listed for sale valued at over 1 million dollars at the start of the bear market. Now the number of homes for sale valued at over 1 million dollars are in the thousands. The laws of supply and demand will sweep through the real estate market, just as it has done before in the 80‘s The falling real estate prices will hit those homes which have appreciated the most in the northeast and western parts of the country.. The shocks to the home owner may be slow to realize as the Fed raises interest rates higher. California has the highest average home prices at $500k per home, deflating the housing bubble will begin there first and sweep throughout the country.
The bond players are being suckers for the next wave of inflation which will be sweeping through the economy by mid 2006. Meanwhile the brokerage profits and bonuses are at an all time high due to churning of portfolios, the money managers are trying to beat the indices with short term program trading tactics. These short term program trading tactics can manipulate the stock market to appearing normal. Last week, we have had the highest level of program trading since Sept.16th this year, with 65% of the volume of trades on the NYSE. The market may or may not sell off in January. Meanwhile, the hedge fund managers will be able to quietly sell or buy stocks using leverage in the futures contracts. That is why, currently the Russell 2000 index is the best performing indices once again after 3 years of a bull market. The russ2k small cap stocks are easily manipulated by using the futures contracts, causing hedge fund managers to match the index. The fact that a majority of the stocks within the Russell 2000 companies are owned by large institutional investors has caused this benchmark to outperform the other large cap indexes. The hedge funds (8000 of them) can use the futures contracts to move the stocks higher in the Russell 2000 index through market arbitrage. The hedge funds are playing an arbitrage game with the index and the other stocks are moving up in sympathy with these stocks. It is a game to them, simply numbers with dollar signs through program trading. The long term market trend is a secular bear market. As history proves correctly in the past, secular bear markets have short term bull rallies to keep “hope alive” for the long term investor.
“Boomers” are the unknown factor in this secular bear market; they are turning 60 and running out of time. The boomers have the majority of their net worth tied up into their 401(k) plans and their real estate holdings. The last cyclical bear market began in 2000 and ended in 36 months, in March of 2003. The boomers witnessed the first of 6 bear market cycles that evaporated 9 trillion dollars of wealth in the stock market. People had borrowed money from their pension plans to invest in the stock market and they were burned in the last bear market. Those who didn’t borrow money to play the stock market did borrow money from their homes, like a personal ATM machine. They were betting their homes would appreciate faster than the stock market had during the cyclical bear market over the last 3 years. Since the market drifted lower from -40 to -85% in the NASDAQ, people begin buying homes, instead of putting money into the market. This left the door open for massive program trading and hedge fund managers to easily manipulate the indexes through futures and stock arbitrage. The market can only be fair and balanced with large numbers of retail investors, not big hedge funds and institutional investors. The Fed created the stock market bubble only to make it crash by raising interest rates 5 years ago. Then the Fed lowered rates, despite signs of deflation in an effort to save the market. The Fed was behind the curve and failed to save the stock market. But I don’t think they were ever trying to save the stock market, they were protecting the bond market. The Fed created tremendous wealth for the bond market with the help of falling interest rates and the “carry trade” in the Forex market. The Fed, after lowering the interest rates to 40 year lows began to raise rates to slow down an inflating economy. Now, the Fed is continuing raising interest rates and fanning the flames of inflation. The Federal Reserves is desperate to keep up the illusion of a strong economy. By the time the Fed stops raising rates, the economy will begin to deflate the housing bubble. The Fed is creating a stealth inflation bubble, just like they did in the last secular bear market in 1966 to 1984. The secular bear markets begin with deflation and devaluation of stock prices in the first half of the 18 year market cycle. The second half of the secular bear market causes a stealth inflation bubble as commodity, energy, and as bond rates go higher.
Remembering 40 years ago, what was happening in the stock market? The year 1966 marked the market’s highs, and the market was locked into a long 18 year bear market. Looking at my charts on the web site you can see the secular markets. The first 5 years was a deflationary period until the 70’s, and then we had high inflationary periods of time. If you remember those times, we are going to repeat those cycles once again. Now, you would think the Federal Reserve would be able to see market cycles right? However, since the creation of the Federal Reserve in 1913, they have never stopped one recession nor prevented any inflation bubble. If during this next bear market cycle, the stock market and the real estate market both decline, what do you think will happen?
Now, don’t hate the messenger, there are a ways to make money in declining markets and ways to protect your portfolio, but it involves you to learn a few new trading secrets first. While the days of the “buy and hold” strategy are long gone, since 2000, you will have to learn technical analysis.
2006 Outlook
The major problems I see for 2006 is the informational synergy between the advertisers and the major news channels. The Market Media Matrix is the synergy between advertisers, news media, and the financial consequences of the information. The speed at which we receive true and false information is defined by the tragedy in West Virginia in 2006. Who can you trust to give you information which is not biased based on their advertising revenue? The tragedy in West Virginia was caused by the news media’s attempt to boost advertising revenue competing with the “24 hour” news cycle. The Market Media Matrix is infecting our society by bringing tragedy and triumph of the smallest details of people’s lives. Everyone wants their 15 minutes of fame. Thanks to the Market Media Matrix, everyone will have their fame or shame for 15 minutes.
Looking at the stock charts over the weekend, I see that most stocks have not appreciated as much as the Market Media Matrix would have you believe. The television commercials advocate becoming an “active investor” searching for the next teenage fad in blue jeans and running shoes. Theses adds, re-enforce the concept that the individual can discover something that is a “secret” or not known to the majority of shareholder. The majority of these moves in stock prices are based off technical indicators, such as the 50 day moving average or 200 day moving average. You can see these technical indicators on many charts. The purpose is to buy low and sell higher. The Market Media Matrix convinces you there is some ““undiscovered” information concerning companies which are not known by those who have more money at risk than you. The trend is your friend, but who defines the trend? Can one person define a trend? If everyone is selling a stock, despite some hidden good news secret, a loss of 25% is still a loss. I have watched people buy on the dips, even if those dips are lower lows. These people have tried averaging down in declining markets, sometimes into bankruptcy. To compound the problem of loosing money, a loss of 25% will need a gain of 33% to break even. Even worse, is riding a stock down by 50%, then you will need a 100% gain just to break even.
I cannot understand the concept of “buy and hold”, unless it a human need to justify your ego in proving that some day you will be right. The only justifications for the “buy and hold” investors are a hopefully higher prices and bragging rights. The Pavlov conditioning ads are proving themselves profitable to the Wall Street brokerage houses bottom line through churning and commissions through program trading. Don’t fall into the trap of thinking like a collector of stamps, coins, or baseball cards. The Market Media Matrix efforts to bolster stock prices higher continue the cycle of Pavlov’s conditioning to “find” a stock to own. Hey, you don’t get paid to own a stock, chose to buy carefully!
There are two dominant forces in today’s market matrix, both are fear.
The traditional tug of war between greed and fear is not clear in today’s market. Where there should be fear of losing money, there is none, and greed is replaced by fear of missing the next rally. There is no concept of greed, stock prices should go up everyday and never go down, according the Market Media Matrix. Just look at Google’s stock price, reminds me of the tech bubble in the NASDAQ, every high price encourages more people to buy at even higher prices. No company, not even Google, deserves more than a P/E ratio of 10. The market continues to climb higher and higher to the moon. When stock prices fall, there are many excuses and befuddled looks on the Market Media Matrix teleprompter’s faces. The need to continue this charade is dependent upon new money being invested in the same stock stories recycled year after year. The charade of earning reports and conference calls are to convince you to commit more money into the market.
Meanwhile the Market Media Matrix (brokers, media, and advertises) continue to make money. There are never any warnings to sell on Wall Street, because their fear is cash. You may not “buy” anything and their personal pocketbooks depend upon commissions. Did anyone warn you about the last bear market? The Harmonic Stock Clock users knew the bear market was coming. The Harmonic Stock Clock’s cycles and signal lines flashed the warning signs of the next bear market.
The general public’s apathetic view of the stock market has been conditioned by those on Wall Street. People have been conditioned to “buy and hold” stocks, just shrug their shoulders and say, “oh well, the market will go back up.”Well, things change and people should be flexible enough to know when things change. Cognitive Pricing Reminiscence is your innate ability to see through the charade of split adjusted charting systems. In fact, according to my charts, The Dow index has posted its smallest change in 109 years. The long term investor will be hurt over the next few months of trading unless he has a plan for the next bear market. It has been 5 years since the market hit all time highs. The clock is running on the baby boomer generation to show a profit in their retirement accounts. Given the massive conditioning response for these investors over the last 20 years, any sell offs may be supported with massive infusion of capital which may be sitting on the sidelines. If you are using the Harmonic Stock Clock, you will not have to make a prediction for the future, you just have to follow the signal lines. The market will move higher or lower depending on too many variables to worry about. The market worries include, inflation, energy cost, earning projections, consumer consumption continuing, General Motors’ fate, commodity prices, currency crisis, real estate boom or bust, bond funds bailout, pension plan defaults, baby boomers greed or fear, a new Fed chairman, bird flu pandemic, and lastly, geopolitical events. The market needs a “wall of worry” to climb higher, not a mountain of worry. You financial fate over these turbulent months will be your hands to learn technical analysis.
It hard to believe those days were only 5 years ago…
When at this time of year, red eyed day traders were full of cheer
And their trading accounts had no fear.
They couldn‘t wait to hear the morning bell,
Only to hold for hours, then to sell.
They drove prices higher and higher,
Leaving the short sellers and the bears dryer.
Later that year, the bears and short sellers were the ones to fear,
As the markets sold off, year after year.
In 2003, when all hope was gone and there was nothing but fear,
Everyone climbed aboard the money train with cheer.
Like all bull markets, investors have no fear,
“Buy, buy, buy and hold“, is all they hear.
When Greenspan raises the alarm,
Investors believe they cannot be harmed.
Meanwhile, secular markets will continue churn,
As Harmonic Clock investors have learned.
There is no such thing as buy and hold,
By the time you earn a profit, you will be old.
Follow the Harmonic signal lines and save time,
So you can retire early with plenty of wine.
Pick up a copy of “The Harmonic Stock Clock” before it is too late,
Over the next 3 months, technical analysis will prove to be great!
Investing by fundamental analysis and using “buy and hold” strategy only works in secular bull markets. The choice is yours. If you have read this far, you are above average and deserve to have contingency plan in place when the bear market strikes again. See Sample Charts.
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To help you with start off the New Year profitable, I have discounted the Harmonic Stock Clock book by 30% and have included 10 free bonus books to help you make smart investment decisions. You will also have 1 month free access to my “chicken straddle options and stock picks” to maximize your profits. The free bonus books are
Discovering Who You Are
Psychology of Trading
Day trading Mindset
Emotional Free Trading
Psychology of Trading
Winning Psychology
Forex short Trend Trading
Market Profile Basics
Intro to Candlestick Charts
Candlestick Charting Basics
Basic Fibonacci Principles
The Harmonic Stock Clock
Plus over 160 of my personal trading charts with notes on
Buy and sell signals on the Dow and E mini
Notice, I have included books on the psychology of trading because the difference between trading and investing is only time. The trader’s time horizon is minutes to days, while the investor’s time frame my by months to years. The mental skills needed for day trading are the same skills needed for long term investing. There is always a battle in your mind about making the right decisions to buy, or sell, and that is where 90% of the traders and investors fail. Investments are a bigger gamble on than day trading. Did you read that right? I said investments are a bigger gamble than day trading! Short term traders will know within minutes if they are right about a trend. Unfortunately, long term investors will not realize if they are right for months, years, and decades! If you have a “buy and hold” mentality, you are truly gambling on the future because things are constantly changing. Just looking at the past performances of stocks 5 years ago and how they have performed in a bear market The missed opportunity of time for investors is the biggest gamble of all.
To receive the special package of trading
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God Bless
Doc
Technorati Tags: buy and hold, carry trade, cyclical markets, deflation, Foolish Fed, housing bubble collapse, market arbitrage, programmed trading
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