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Published Monday through Friday about 8 AM Central Time Except Holidays

 

Urgent Update

Russia's Move preempts Iran Strike

You may recall the story that I reported on August 29th (scroll down to "Georgia - One Hot Back Story) which claimed, among other things, that Israel was planning to base forces out of a Georgia airfield from which to strike Iran.

 

Well, we see that today, the story is getting MSM 'legs' as the well-connected Debka web site is reporting that "Russian units raid Georgian airfields for use in Israeli strike against Iran – report "  So, although my credibility may have seemed stretched a week ago, the story - at least part of it - is starting now to 'go public' and 'mainstream'  just a week after my post here.

 

Blurring Lines

Before the employment report came out (which we'll get to in a minute) the futures were pointing toward a downward open following the market action Thursday which shaved more than 340-points off the Dow Industrials.  That was followed, in almost predictable fashion, by the sinking of markets in Asia, and then Europe, as a follow-on.

 

One of my colleagues insisted (to the point of making a ceremonial 5¢ bet of the matter) insisted that the decline was simply a great entry point for some of his longs.  His thinking was that yes, the US in making some progress in Iraq, the problems of the subprime market fallout may be overblown, and, and besides, no one is going to torpedo the US economy because as goes the US, so goes the world.  In other words, the typical Ameri-centric view of things.

 

For my part, taking the other side of the argument (and wagering the princely nickel) I argued that the reason oil is coming down is that fewer people will be able to afford heat, the predictive linguistics hold not only one more major bank failure, but a financial 'lockdown' condition as the year goes on, and that many companies are 'blurring the lines' a bit when they talk about their sales.

 

Take for example the question posed yesterday in this column, relative to Wal-Mart's earnings.  The underlying 'happy talk' in the MainStreamMedia (MSM) was that WM same-store sales were up prompting headlines like "Discount stores score big in August."    Being up to my ears in work, I didn't have time to follow-up with Wal-Mart's investor relations department, but reader DM did (and our thanks for his diligence here) and it got him this admission out of WM's investor relations folks:

"Thank you for your call earlier today. I inquired about the same store sales as reported in our August sales release. According to the Director of Investor Relations, the US sales numbers are the actual numbers as reported each month, and are not adjusted for inflation. I hope this helps. Thanks again for your inquiry."

Helps?  You bet!. What this means, when you read further stories like "Wal-Mart sales Climb on Back-to-School Discounts" that you can take the 2.8%/3% same-store sales and back out inflation.

 

Of course, once we open the "What's Inflation Really Running?" can of worms, things get ugly in a hurry!  We could argue for a low of 2.4%, basis the Fed M-1 levels for the past 12-months contained in the most recent H.6 money stocks report.  Or, we could argue for 8.8% inflation, based on the more current 3-month M-1 inflation rate (same report).  Or, we could bounce over to the Bureau of Labor Statistics and hit the latest CPI numbers, which would argue for an inflation rate of 5.6% higher than it was a year ago.

 

In all but one of the figures (YoY M-1 from H.6) the Wal-Mart sales figures really reflected a decrease in sales, if you were to look at things from a units perspective, not just the gross dollars involved.  Or, because so many companies have been downsizing their packaging, you would have maybe seen just as many boxes of 'whatever', but under it all, the dollars per pound of goods was flat to down. 

 

My point is that lines are blurring.  Corporate America is reporting sales that are in many cases, and I don't single out Wal-Mart because it's the current way of doing things generally, reporting sales that are "up" but only so long as you put inflation out of your mind.

 

But then again, it's that way with the Dow Jones Industrials, too.

 

I don't want to remind my colleague that on an inflation-adjusted basis, if you put in the Spring 2000 Dow Jones of 11,723 into the Federal Reserve's online inflation calculator, you'll see that in order to have just maintained purchasing power, the Dow would have to be at 14,677.58.

 

And, worse, since the thrashing in the markets on Thursday, on a purchasing-power (inflation) adjusted basis, the buy and holding of the Dow (excluding dividends, but also excluding commissions, yada yada yada) is down 23.773% since 2000.  Of course, if you were a real financial genius, you would have been reading this site back in the fall of 1999 when I posted the paper "Death by Dot Coms: When Barriers to Entry Fail". 

 

Not to put too fine a point on it, but it you'd have sold the Dow and parked your money in an inflation-adjusted Treasury position, you'd be about 20% better off than now, but that's all capital gains under the bridge now, isn't it.

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So there's my colleague, hatching out what I expect will be a nickel.  And there's me, on the phone to my friend Robin Landry, the best market predictors I know, and I asked him about his take on things after the close Thursday because I had posted a rare special technical note for Peoplenomics readers, (link for subscribers) showing how we had just taken out what looked to my like critical support:

"If this is the third, (under Elliott Wave counts), it is actually the third of the third - and in that action Thursday, we had a one down, two up, and a three down, which does not appear to be complete yet.  And, it's initial target is around 10,800.  And then we will have a little 4, and then a five, and once we do get that 10,800, if we the panic, because that was the recently low back in July, the targets will be somewhere in the neighborhood of (for the Dow) somewhere in the 10,695 area.. 

 

If we break that, then I expect we'll go straight down to the 9,700 area I mentioned in my comments a while back.

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The interesting thing about what is happening now is that when we had broken the 200 week moving average, going into the July 15th low, we rallied back up to the 200 week average, recently, and it now turned down again. 

 

Going on down from here, if this leg of the decline is from 13, 136 and you subtract 10,816, that equals 2,320 points.  Then if you take the recent high of 11,865 minus 2,320 points, that gives you the 9,545 - which I think is where we're headed right now.

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We're in an oversold area and of course, I have told you that crashes happen when the market is oversold.  So, does this have the chance to be the Big One?  Absolutely!  We are now in the timeframe for the major crashes to Occur - which are usually September into October.

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I have mentioned to you that the highs are usually seen in August.  And so it's following the 'normal' yearly pattern and I suspect that whether it goes beyond the 9,545 to 9,700 levels, in fact we could see 9,,223, one of those little fours will hold for a rally.  At what degree?  I can't tell you because it will be shaped by the decline ahead.

 

But, would it surprise me to see a thousand point down day?  No.

 

When you see the action that you saw the action on Tuesday - with a strong rally, that was a failed C wave of Wave 2.  (Subscribers: see the earlier technical note this week on the rally set-up-G)

 

When a wave fails it does so because the momentum in the opposite direction is so great, that it can't reach its normal target.  That's like a failed fifth wave on the upside.  So all of the things are coming together.

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What is particularly bearish is that the 50-week moving average is now going down toward the 200-week moving average.  When the 50-week crosses the 200-week moving average, things can really accelerate to the downside.  you'll see all kinds of government actions trying to stop it.

 

They might - for a while - temporarily, but it doesn't change the ultimate outcome.

 

The other thing that I think is very telling is that since January of 2008, the Dow Jones 50-day moving average crossed through the 200-day moving average and the high in May rallied back up to the 200-day moving average.  And then it accelerated down into the low of July the 15th.

 

This recent rally that's just ended Tuesday on the highs with the reversal, all it could barely do was test the high of the 7th of August or so, and then it accelerated down and broke back through.

 

Now you have the 50-day below the 200-day moving average and the 50-week is approaching the 200-week moving average. 

 

Many times when they are in this mode, you get your crash, you get a rally, and then you get a test.  The crash being the third, rally being the fourth wave, and the test being the 5th.

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This time if that happens we want to see bullish divergences.  If we do not see bullish divergences, then it means that we're more than likely on our way to the 7,400 area without  a subsequent 6-montyh to year rally in-between.

 

(Note, this would fit like a glove with the predictive linguistics which point toward a financial 'lockdown' in November and lots of bad woo woo through Feb-mar of '09 - G)

 

In other words, it appears the way things are going that we are lining up for a quicker downside resolution than what I had been anticipating because I thought we would have a decline down to 9,700 area, then a 3-6 month rally, and it could surprise us and set a brand new high. 

 

But, we will learn more in this timeframe between now and the end of the year with the wave structure and the breadth of the decline.  That'll give us a clue as to when the subsequent rally goes up, or whether we are in what Mr. Prechter describes as a Grand Super Cycle Decline that will last most of our lifetimes.

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The main thing to get from these comments of mine is that if you're in the market, you need to get out as soon as possible. It's better to be aggressive at getting out, and have to go back in, than to sit on the sidelines and watch everything collapse in front of you. 

 

You know the saying "He who takes his chips and walks away, lives to play another day"?   I was reminded in my readings Thursday that the best thing an investor can do is turn off CNBC.  They are a perfect mirror of what is actually happening.  They'll advice do this and this....a few days ago bullish, Thursday bearish - you can't play that kind of emotional roller-coaster and come out alive.

 

While I have it on, 90 percent of the time I keep it muted and I use it as a sentiment gauge - by who they have on and what charts they put up.  It's getting so I can read lips...and you must have a plan and stick to the plan.

So, with such sage words, you might be asking, what are Landry's clients doing - if anything at this stage in the market.  His answer:

"We are in short-term treasury ETF's and short the double Dow ETF with 5-10% of our funds."

If we take out that 9,300 kind of area, the next fourth degree down level is what?

"7400."

And then if we step back even further from the chart, what's the next fourth down of a larger degree?

"The next one of larger degree is at 3,059"

And is there one after that?

"777."

(Gulp!) The one after that?

"That'd be the 1933 low - you can look it up."

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All of which sets the tone for the real socioeconomic speculation of the morning, which goes something like this:

 

When the US entered the Great Depression of the 1930's, there was not a lot of linkage between the financial economy and the general economy of the Nation.  In other words, paper finance, commodities, the military, and the development of technology were not so intertwined as they are today.  The ,falling commodity prices, due to automation of farms, came first.

 

I would argue that there has been a grand blurring of lines, in order to keep the general economy alive, to such an extent that recovery from a potential crash will be much more difficult than ever before, and thus, the amount of suffering may possibly be greater.

 

My source in Geneva has put up an interesting page here which contains, among other things, two documents which you might want to take a read through this weekend.  One is a strategic view by  the UK Ministry of Defence "Development, Concepts and Doctrine Center".  The key thing in this report (that I pointed out to subscribers last weekend) is that in the event of a major downturn in the economy, the risks of terrorism and the like might possibly go up dramatically because unemployed people will do many things for money or food.  The other papers on the page may be of interest as well.  That Treasury paper, for instance.

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As the economic lines have blurred, we have seen a return to weekend banking many years back, the move of bankers into investment, again, a blurring of the lines that was a precursor to the Great Depression.  And now, we're seeing how finance has become a key tool in State Policy toward terrorist organizations. 

 

We're blurring lines this time around in other areas, too.  We didn't have a carry-trade in the 1930's experience and certainly the global inter-market linkages didn't exist.

 

So we come, over the next year or so to a fascinating point in history which will give us one of two possible outcomes.

 

The optimistic case is that because of inter-market linkages, the expansion of federal financial strategy toward foreign policy goals and anti-terrorism efforts, and all the like, will add systemic resilient to the point where the Global Economic System will be able to muddle-through a massive periodic correction of past excesses in the credit markets.

 

The pessimistic outcome is that the excesses in the financial instruments markets have now been spread around so much - touching almost every part of the USA systemically, that a Crash now will not only trash the banksters on Wall Street, but it will trash the Military, Agriculture, Industry, and Services.  Each has become so intertwined with the financial system that the systemic decline threatening could essentially take down the whole country, not just the financial core.

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We shouldn't have too long to wait.  A year at tops.  But if you wake up one morning and read headlines about how the U.S. Dollar, currently in a counter-trend rally against other global currencies, has suddenly reversed course and is in decline again -- to the point where ships full of goods for the American market are turned around on the high seas to take their goods back home - then that will finally answer the question of whether expansion of the pool of players with 'skin in the game' really does as systemic stability, or whether it simply crashes the whole country.

 

Meantime, Russia is committed to a strong ruble policy, spending $4 billion to support it.

 

Me?  Too close to call, I figure.  As a student of history, I can see that without 9/11, the WOT and the subsequent Wars and Housing Bubble, the Crash to wipe out malinvestment should have happened in 2001/2002 when the Internet Bubble burst.

 

The intervening policy decisions (and you can carry that anywhere you will) have kept the game going, but with necessary expansion of participants.  To the point where now, we read how fixed income gurus like Bill Gross are saying that the U.S. will have to buy assets to prevent a financial tsunami.

 

[Linguistic note: The Bloomberg story above is the first use I have seen in the MSM of our word "de-levering" which was introduced as a concept in the Tuesday August 12th report "Who are the "PowersThatBe" - which in turn was coined by my book writing insider source, who is shopping his book on the financial meltdown...]

 

Does all this blurring the lines change the outcome?  I've got a nickel bet that long-term it doesn't and it just postpones the inevitable outcome.  But, it sure gives financial writers something to write about.