In September, the University of Michigan Consumer Sentiment Index generated a Stock Market Crash warning with a precipitous drop under the neckline of a multi-year Head & Shoulders top pattern, similar to the drop back in 2000. In 2000, that led to a crash. We believe it will again now. The September plunge in sentiment was confirmed, and worsened by Friday's final October reading where sentiment fell another 2.7 points to 74.2. This is the lowest consumer confidence reading since before 1997.
A study of the above chart shows the present divergence between the Dow Industrials and the Michigan Index is highly irregular. These two measures have been moving in tandem for years. This supports the claim that equity markets may be artificially supported at this time, however, the high correlation of the relationship tells us that won't be the case for much longer. We expect the Dow Industrials to follow the lead of the MCSI soon, be that days, weeks, or a couple of months. Back in 2000, there was a two month lag, where the MCSI led the Dow Industrials. But we are getting precious close to that two months now, as we turn the calendar page to November next week.
Worse, the University of Michigan study was confirmed by the Conference Board, a research group headquartered in New York, that found Consumer Confidence falling to an 85 reading in October from a plunging 87.5 reading in September.
Worse, we learned of several events this week that could take an even greater toll on Consumer Confidence. We learned that Congress is trying to pass a bill creating a new regulatory body over Fannie Mae and Freddie Mac, the two largest acquirers of mortgage loans. Apparently the current Regulator, the Office of Federal Housing Enterprise Oversight (OFHEO) has not gotten the job done. Any takers the new regulatory arm will be placed under the jurisdiction of the Fed? This is an attempt to gain control of part of the derivatives mess. Think RTC and the Savings and Loan crisis for a horizon point. The more things change, the more things stay the same.
Ben Bernanke, former Princeton professor with little to no administrative experience, but from what I understand could throw a supply and demand chart on the smart-board with the best of 'em, was named to replace Alan Greenbackspan as Chairman of the Federal Reserve. Look for the government transportation component of Durable Goods Orders to increase as the Fed purchases helicopters to drop sacks of money from the sky. It would seem the Bond market believes this, dropping since the announcement. My favorite U.S. Senator, side winding, high heater, James Bunning of the beautiful bluegrass state of Kentucky immediately criticized the appointment of Big Ben, accurately pointing out that the new chief "Maintainer of a Stable Currency" has failed to demonstrate the necessary independence to be entrusted with the job, according to a story at www.cnnmoney.com on Tuesday. Good for you, Jim, for standing up once again as a right and wrong guy in the midst of a relativist world, showing the same guts you did when you brushed back an encroaching Willie Mays, Hank Aaron, and the great Mick back in the day.
Speaking of great key appointments, Harriet Miers gracefully bowed out as Bush's latest Supreme Court nominee. With Special Prosecutor Patrick Fitzgerald not feeling the need to return the White House men's room key any time soon, the thinking here may be that the focus has shifted from a third term to "What did he know, and when?" where she could prove far more useful. Sadly, this week we learned of the 2,000th passing of a brave U.S. soldier in the Weapons of Mass Disappearance war. We also learned that Cheney's Chief of Staff was indicted for Obstruction for Justice, and that Bush's chief political advisor remains under investigation. What's the big deal? Because a trial could shed an unfavorable light on the private deliberations, truths and falsehoods, of the administration's case to invade Iraq. Why mention the politics here? Because as we've seen, they affect confidence which has a powerful direct correlation to equity and bond markets.
The Master Planners' solution to all of this, of course, is to print more money. M-3 was reported up another $40.6 billion last week, as the PPT needs funds to support markets. How does printed (electronic) money get into the economy? By the Fed buying securities. Their preferred instrument of choice traditionally has been Treasuries, however under the auspices of acting as the Working Group, a.k.a. Plunge Protection Team, they can buy equities. The rub here is it was the original intent to stop market crashes, but that seems to have morphed into supporting prices for political expediency. Declines are not bad, inherently. They cleanse out supply, and create renewed invigorated demand to push prices ultimately higher. Natural free-markets volatility makes simple investing strategies such as Dollar Cost Averaging work nicely for the investor, whether sophisticated or amateur. The PPT has virtually wiped out that safe investment strategy by buying any potential deep dips in a Bear market, pirating that profit opportunity from investors.
The result is a flat market with little to no gains for anyone, except for the derivatives options writers, the big boys on Wall Street. To make money in a flat market, a centrally planned market, is nearly impossible, leaving an investor to a market timing investment strategy that he hopes he can get right, and hopes he can find a 2 percent move to play. It is wrong, and it is dangerous. At some point, psychology will presume the PPT can hold up all markets, that markets no longer ever fall, and thus more dollars will be put at risk in the face of turbulent times. The thinking being, the worse the prospects, the more likely markets are supported. But the day will come when this false sense of security will be punished as the PPT fails to stop so horrific an event that markets tank anyway, with the innocent PPT faithful not knowing what hit them.
Then there is the inflation risk, and the consequent damage to the Dollar and Bonds as too much money chasing goods is forced into the economy for the wrong reasons. The resulting bubbles will pop, and the innocent will be slaughtered. M-3 was up an annualized rate of 21 percent last week. Over the past three weeks, M-3 is up $74.3 billion, or 12.8 percent, is up $95.5 billion over the past month for a 12.4 percent pace, is up $158.8 billion over the past two months for a 10.4 percent rate of growth, and is up $272.4 billion over the past 12 weeks, for a 12.0 percent growth rate. These rates of growth are three times the rate of growth in GDP, and five times the reported "core" inflation rate. This is wrong. It goes against the Fed's original mandate "to ensure a stable currency." This policy will destroy America's economy if left unfettered. And now we have another inflationist at the helm of the Fed, nominated no less, by a supposed conservative Republican President. Hellloooo?
This is all good for Gold, of course. Gold broke out and up from its Symmetrical Triangle, as expected, finished its Micro degree wave 4 correction, and rallied October 21st into the start of wave 5 up of iii on its march toward $500 an ounce. Wave {1} up of 5 completed October 20th, and Friday saw the start of a small correction that could take Gold down to 465ish before rallying hard into wave {3} up of 5 up.
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"And after He had said these things, He was lifted up
while they were looking on, and a cloud received Him out of their sight.
And as they were gazing intently into the sky while He was departing.
Behold, two men in white clothing stood beside them;
and they also said, "Men of Galilee, why do you
stand looking into the sky?
This Jesus, who has been taken up from you into heaven,
will come in just the same way as you have watched Him go into heaven."
Acts 1:9-11
