Friday, May 28, 2010

The Long and Winding Road... To "Oh Happy Day"

I've been reading Tim Wood's articles on Financial Sense for a few years. Without a doubt, he can be described as the most devoted Dow Theory technician I know of. Here is a link for more description of Dow Theory as a follow up to the earlier post on it, titled Dow Theory Basics. It is also his current opinion of the stock market trend using his version of Dow Theory analysis. He sometimes includes a bothersome list of financial events that he discovered in a book. This list is a sort of road to hell and it is his belief that we will visit every little point described by the book author. I have no such belief and I am only curious about Dow Theory, but I do want to keep the list in front of me, just because it challenges me to keep my mind open to ideas. It's a way for me to manage the influence of cognitive dissonance. There is some credibility to the idea of events happening in a sequence that can be predicted, but I don't think it can be predicted out further than a few years and have any probability of occurring as predicted. IMHO, the list in Tim Wood's article is going to need ten years to play out. (He mentions a K-wave winter which is described as a long period of global deflation.) I have added my POV in bold type for each point. Anybody else? Make a copy of the list and send me your thoughts in a comment or an eMail. Don't miss the big ending!

It has been a while since I have shown you the checklist associated with K-wave winter. We can all tend to forget things so I have again included this checklist from David Knox Barker’s book The K- Wave.

Global Stock Markets Enter Extended Bear Markets
I have said since 2007 that this is where we are, and ever since the 2009 low I have explained that we have been in a bear market rally. The Phase II decline is out there and it will be global in nature.
I'll agree, we are in the middle of a secular bear market.

“Trends During Winter: Stocks Down, Bonds Up, Commodities Down”
I believe that the bust in commodities in 2008 was associated with this trend change and that since the 2009 lows, commodities have also been in bear market rallies.
Agree, so far. Once the world markets reach their sustainable price, commodities could be the outperforming sector. Precious metal, water and energy in particular.

“Interest Rates Spike In Early Winter Then Decline Throughout”
In June 2004 the Discount rate was at 2.00%. By June 2006 it was at 6.25%, and in August 2007 the Fed once again began to cut the Discount rate. This too fits.
The mother of all interest rate crises is sleeping now and I'm hoping it snoozes for a couple of years more. It has the potential to make the rates of the 1975-83 period seem tame. "So tell me punk, are you feeling lucky?"

“Economic Growth Slow or Negative During Much of Winter”
I doubt that many will argue this point at this time.

“Commercial and Residential Real Estate Prices Fall”
This obviously began back in 2006 and is still ongoing.
Agree. I expect another wave of weakness.

“Bankruptcies Accelerate and High Debt Eliminated by Bankruptcy”
This has obviously begun and was no doubt been related to the housing and credit bubbles. But I suspect it will worsen as the Phase II decline and the deflationary forces take hold once again.
Agree. Inflation is more efficient and will be the tool used to deal with our debt problem.

“Social Upheaval and Society Becomes Negative”
Just wait!
Little sign of real upheaval so far. The Tea Party organized and is being polite. Optimism is still abundant.

“Banking System Shaken and New One Introduced”
The banking system was shaken in 2008, but there should still be more to come.
Agree. There will be a new look within five years.

“Free Market System Blamed and Socialist Solutions Offered”
Just wait, we have only seen the beginning!
Cambodians are saying, deja vu! Our government is now seen as the solution for everything, and it has it's own military. Just saying...

“National Fascist Political Tendencies”
More to come.
Can I remain in my denial mode? 

“Debt Level Very Low After Defaults and Bankruptcy”
This has not happened.
Agree. There will be 'start again' period.

“Trade Conflict Worsen”
It’s coming.
Same timing as real social upheaval.

“View of the Future at a Low Ebb”
When the cheerleading on CNBS stops, we will be there.
 Same timing as real social upheaval.

“New Work Ethics Develop Since Jobs are Scarce”
If I can assure you of one thing, it is that this has not happened.

“Greed is Purged from the System”
I can absolutely assure you that this has not happened yet.
Talk about epic change! I can't imagine this.

“Real Estate Prices Find Bottom”
This has not happened.
By 2012 in residential, 2015 in commercial.

“There is a Clean Economic Slate to Build On”
Not happened yet.
Agree. It may not be a 'good' clean slate.

“Investors are Very Conservative and Risk Averse
Again, this has absolutely not occurred.
Agree. Optimism is still abundant.

“Interest Rates and Prices Bottom”
Not happened.
Agree, the ten year bond can see 3.00% again.

“A New Economy Begins to Emerge”
Has not happened.
Agree, "Oh Happy Day". I'm getting a vibe.

“Stock Markets Reach Bottom and Begin New Bull Markets”
Again, we aren’t there yet.
Agree, "Oh Happy Day". I have to sing and clap to this timeless song.