Commentary on politics, technology and stock markets guided by Elliott Wave principles. Is Bob Prechter Hari Seldon, and has he invented Psycho-History? Or is Elliot Wave no more than Ptolemaic epicycles? On Cheer's, Cliff Claven said he had an infallible system for predicting the next President, and it could predict all prior elections. His prediction: "Yelnick McWahwah." And yet, Elliott often provides remarkable predictions. Stay tuned.

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Sunday, November 09, 2003
Yelnick has moved!
See our new site at

Monday, November 03, 2003
What 7% Growth Means for the Market
The STU dropped a mind-bending analysis today.  Guess the last three times we have had 7% GDP growth? 
At the peak in 2000 before the drop,
At the peak in 1987 before the crash, and
Intuitively we think we should be bullish when we see strong growth, but the causality is the other way around: the stock market doesn't rise after strong GDP growth, the stock market rise LEADS to strong GDP growth. 

Friday, October 31, 2003
Beware the Nones of November
As we track the Decline and Fall of the Greenspan Empire (aka The Greatest Asset Mania of All Time), the timing of the elusive Wave 2 top is the next big thing.  We all know the Ides of March is mid-month.  Less known is another day in the Roman calendar, the Nones, which in November is Nov5.  The STU today sharpened their forecast for the top to the Nones of November: a top around Nov4 - Nov6, with Nov 5 as most likely.  This date comes from several angles, but primarily they recalculated their mapping of the 1987 market pre-crash to the 2003 market, and found they had been off by four trading days, so on a trading day basis, they pulled back their original Nov11 prediction to Nov6; and on a calendar day basis, they similarly came to Nov4.  Beware! 
A bit of a gutsy call, given the 7% GDP growth announcement today, and continuing ebullient optimism.  Maybe the Ghosts of Crashes Past visited them this Halloween, and gave their prescient third eye a 'peak' ahead. 
Timing is the elusive part of Elliott Wave, but wave height and pattern is not.  Under the STU count, the Dow should not breach 10116, or their count is off; and if it breaches 9500, the drop is in. 

Tuesday, October 28, 2003
Prechter's New Count, Same Message
Yelnick has noted that Prechter has hinted at changing his count in recent newsletters.  Today he unveiled his new count.  The count may be different, but the message is the same, and the prediction is much closer to Yelnick's view: a top of around Dow10K at around Nov 11.
Prechter had counted the Dow since Jan00 as a nested series of waves 1 - 2, so that we were nearing the 3 of (3) of [3] wave.  This is what normally happens.  However, the recent wave 2 of (3) of [3] has proceeded longer and higher than should have been expected of a wave 2 of third degree down.  In particular, it had passed the normal 61.8% retracement and was heading for a 78% retracement, as had the prior wave (2) and wave [2].  While explainable by the unusual circumstances of the mania, it nevertheless is rare for wave 2's to retrace that far, let alone three times in a row. 
A simpler way to count the bear market would be to see the whole drop to Oct02 as wave [1] down.  Zoran had moved to that view a while ago.  Yelnick had suggested that view in informal communications.  Now Prechter has found the systematic justification for that view. 
The best reason for this change is the psychology of the current wave we are in, which is now relabeled as wave [2].  The investment climate has been uber-bullish, as expected in a wave 2.  Wave 2's are often more bullish than the peak of the bull since investors are convinced that they have caught the bottom, so feel they have deeper justification for their bullishness.  The level of bullishness now is higher than in the prior waves [2] and (2), which suggests that THIS is the highest degree wave [2], not the previous ones. 
Under this new count, we look for a 61.8% retracement of the full wave [1] down from the peak.  The former Yelnick target was 78% of the wave 1 of (3) of [3] down, or Dow9930.  The new ideal target is essentially the same, since whole drop of the new wave [1] is full of fibonacci relationships.  (78% is the square root of 61.8%, so since the prior wave 2's each retraced 78%, it should be no surprise that 61.8% of the whole drop calculates out as 78% of the most recent drop.)  Suffice to say the target is Dow10K +/- 200 points. 
Dow 10K is also a major psychological barrier.  When the Dow first broke 100, it took another 18 years (and the Roaring '20s) to go above it again.  When the Dow first broke 1000, it bounced off it a few times but didn't break through for another 16 years.  It should be no surprise if we slightly break through the 10K level and then turn south again.   
Timing for the top is anywhere from Oct15, the day Zoran has already called as the top, to Nov 14, with a most likely time around the first full weekend in Nov, or Fri Nov 7 through Tues Nov 11. 
Yelnick sees Nov11 as one of two likely times for the top.  Besides the above analysis of Prechter, Nov11 also fits the pattern the market saw in 1987.  If the 1987 model continues, it would point to a crash the first week of Jan04.  The other likely time for the top would be in late-Mar/early-Apr04, reflecting the impact of the Presidential four-year cycle on the timing of this wave [2].  To put it in simpler terms, Bush and Greenspan are doing everything possible to pump the economy and get re-elected.  Their manipulations will either have worked or not worked by the end of the first quarter, right smack dab in the middle of the primary season.  These manipulations have the effect of extending the timing of the wave, but not affecting its height or overall pattern. 

Friday, October 24, 2003
Financial Reckoning Day
The markets have gone south since Zoran's call of a top on Oct 15.  Is this it, or will there be the final pop up to the Yelnick 78% retracement of just under Dow10k?  So far the drop has been impulsive, which supports the case for an Oct15 top.  The market will now retrace in a little wave 2.  If it goes above Dow9773, it is likely it will continue to a higher top and test Dow10k.  Too early to make a definitive call. 
For a longer term perspective, we turn to the delightfully iconoclastic The Daily Reckoning, which laid bare the contrarian case this week:
We are almost past October - does this mean the seasonal uptick (stocks tend to rise from Nov to Mar) is upon us?  (Yelnick notes that the seasonal uptick has not been working since 2000.)  As they put it:
While "[t]he month of October can be a cruel one for investors. The other months that can be cruel are January, February, March, April, May, June, July, August, September, November and December. "
Why the jobless recovery?  Is it due to the magic of productivity?  (Yelnick believes it is due to the distinctly unmagical overcapacity in world production - little noted is that even in China, manufacturing jobs have declined recently.)  No, they attribute it to the wizardry of credit:
"While stimulating the U.S. consumer to buy things, neither the Fed nor the Bush Administration could make him want to buy things made in America.  Instead, he shopped for bargains and found them overseas."
Is tech leading us out?  They note with delight the Golder factor - George Gider was the guru of the bubble, with his breezy predictions of a telecosmic future, and after a long hiatus amidst the Telecom Nuclear Winter, he is now back in vogue!   They even re-read his book, to see if they could find evidence of his bold new future.  Instead, they found evidence abounds for the telecosm to again be a financial black hole:

"We see evidence that 'Financial Reckoning Day' is right on target. As the Mogambo Guru points out ... 'S&P stocks are selling at 33 times earnings. Nasdaq 100 stocks are selling, by one estimate, at 8 times SALES, and by another estimate for a P/E of 233. Houses are selling at over three times median income. Private household debt is financing 20% of GDP, and the debt is at record levels, both absolute and relative, in all of American history. Interest income has been slashed to negative real returns. Government deficit spending is exploding.' "

Is the end nigh?  I leave you with a quote from Dr. Deficit, or "How I Learned to Stop Worrying and Love the Crash" himself, John Maynard Keynes:

"The market can remain irrational longer than you can remain solvent."

Sunday, October 19, 2003
Zoran Calls the Top
Zoran has issued an update which is very worth reading. The DOW-An EWP view-19 October-2003.pdf Calls for a top last week on Oct15. This coming week will tell how prescient this is.

Zoran uses a different count than Prechter's (which is orthodox Elliott). Yelnick has promoted this count for several years also:
> Prechter has wave IV bottom in 1932, Zoran and Yelnick say 1949
> Prechter has wave 4 of V bottom in 1974, Zoran and Yelnick say 1982 (and it is a wave 2 not 4!)

(On an inflation-adjusted Dow, Prechter agrees with these counts.)

Implications are:
> 2000 wasn't the 5 of 5 of V and the end of civilization as we know it, but the end of 3 of V
> We are in a wave 4 of V, and there is a new bull market wave 5 of V ahead, but wave 4 isn't over yet

Where Yelnick and Zoran differ is, Zoran thinks the end of what Yelnick has been calling wave 2 is actually the end of the bull market from 1982, and the end of wave 3 of V from 1949 .. Yelnick would have those all end in 2000, with the action down into last Oct02 (or Mar03) being the wave 1 down, and the recent uptick being the wave 2 back. But these count differences matter little, as we both agree that the next stage is down and down hard, and agree that the Dow will retrace the start of the mania (Dow3600 in 1994) to end this wave 4 before wave 5 of V starts.

Wednesday, October 15, 2003
Prechter Triangulates
Prechter's EWT today used the C word (crash).  He sees the market nearing the end of a rare expanding wedge or diagonal triangle, which is always an ending formation.  As a consequence, he sees the odds of a rapid decline or massacre in November as the market catches up (or should we say down) to reality.  Crashes are rare events, so view this prediction as unlikely; but the extreme P/E ratios and other indicators of an overbought situation call for a severe catch-up event.  Perhaps the Yelnick view of a touch of the 78% retracement (Dow9930) followed by the severe altitude adjustment around Nov11 is coming.  The adjustment might happen in two phases - a preliminary jitter down in November, and an historic drop in Mar/April.  More on this as it unfolds. 

Tuesday, October 14, 2003
Silicon Valley Tea Leaves: VC Funding Hits Pre-Bubble Level
Corante reports this story from Investor’s Business Daily

Mark Jensen, national director of VC services at Deloitte & Touche, weighs in on the current state of the U.S. venture capital industry. While the industry is "still recovering from whiplash," VC funding has apparently returned back to its pre-boom levels: in 1996, the VC industry invested $10 billion; in 2003, the VC industry will invest close to $15 billion. Jensen discusses "hot" areas for VC investment, the role of the VC industry in "feeding" the dot-com bubble, and positive trends emerging for technology investors. Some parting thoughts: "A downturn can be good for innovation… A lot of the real success stories in the tech industry came about during times that were worse than they are now."

Friday, October 10, 2003
Fighting Terrorism by Empowering Woman
Aristophanes in Lysistrata wrote a wonderful satire with a gem of truth: to prevent war, the women withhold sex.  George Gilder, before he wrote the Bible of the Reagan Revolution, Wealth and Poverty, wrote a screed against feminism called Social Suicide, which, although much vilified and satirized, also contains a germ of truth:  through marriage, young and restless men are made to provide for the future.  But what about the woman?
At a Commonwealth Club session at Stanford, an off-handed suggestion was made by one of a group of panelists while discussing the role of the UN in the war on terrorism, that may contain an amazing insight into winning the hearts and minds of the people captured in the broken nations that spawn terrorism:  empower the woman to break the back of support for terrorism.  Despite what Gilder argued, it appears worldwide that the empowerment of woman - education, employment, enfranchisement and entreprenurialism - is a major force for lifting broken nations out of a cycle of poverty and hate.  The Grameen Bank in India, and others like it, have found that giving microcredit to the poor, especially to woman, has a remarkable impact. 

Thursday, October 09, 2003
Can Govt Stats be Trusted?
This disturbing report from Merrill Lynch, sent in by a loyal Yelnick reader:  that recent GDP figures assume a much larger increase in tech spending than other sources support.  This on top of the head-fake employment numbers a week ago, where the Labor Dept reported an increase, but the fine print showed they had removed a much larger number from previous reports, so they were able to claim an increase when their own numbers showed a decrease! 

Tuesday, October 07, 2003
Silicon Valley Tea Leaves: Seller's Market?
Fortune reported more tech optimism today.  In addition, in a remarkably quick turnaround, the VCs now seem starved for deal flow.  ("What ye shall sow, so ye shall reap").  In the last few weeks a stack of 'social networking' companies - Friendster, LinkedIn, Tribe - got funded at higher than recent A round valuations.  More significantly, they were chased by VCs wishing to get in on the action.  Haven't seen that since late 1999. 

to B or not 2 be
Wave action suggests higher highs ahead.  We appear back to the march towards the 78% tretracement level of Dow9930, and therefore back towards a turn date of around 11/11.  Also, Prechter has hinted in his last two Theorists that he might rejigger the count from wave 2 of (3) of [3] down, to wave B after a wave A down into last October.  Wave B's behave like wave 2's except can go much higher before the wave C starts. 

Sunday, October 05, 2003
Scandal Candidate: Cheney and UA93
Yelnick said: "Prechter has gone out on his limb, and predicted that Bush too will be brought down by some scandal, yet to emerge, for actions already taken." My scandal candidate: The fact (reported by Dan Balz and Bob Woodward in the WaPo) that Cheney ordered and then confirmed the order to shoot down UA93 on 9/11, and the suspicion-bordering-on-fact that the Air Force carried out this order, followed by a cover-up. Reason for the cover-up: a) GW wasn't in the decision loop (he wasn't even on the phone!), and his 9/12 public image couldn't have taken the hit. b) "The Vice President killing Americans" (even if it was the right thing to do... it was...) complicated the spin of "bad guys killing Americans," and this is an administration driven by spin.

Also note that while "conspiracies" (before the fact) are exceedingly rare, "cover-ups" (after the fact) are depressingly common... I believe in the latter, hardly ever in the former. The electorate has said it doesn't care about crony capitalism, but it does care about 9/11. Scandals which bring down presidents need to go to the source of their strength.

The Kennedy Republican Tax Cut
Art Laffer, the scion of supply side, proffered a perfect tax proposal for Gov. Schwarzenegger to fix California's fiscal problem: a radical simplification down to two taxes: 6% on business net sales, and 6% on personal income less the normal middle class deductions (mortgage, charity, and - significantly - rent).  This would match current California tax revenues and would replace ALL other taxes, including sales, property, capital gains, etc.  Laffer's insight is that a complex tax scheme raises too much money during boom times, which governments overspend; and raises too little in bad times, which causes crises like the one behind the Recall.  This simple tax would smooth revenue to the state, as well as make California look like the promised land to business once again. 

Kennedy Republican and the Internet Democracy
A NYT editorial today picked up on Yelnick's theme that the California Recall is presaging the next shift in US politics - towards more direct political action, an Internet Democracy.  What is behind this is a revolt against politicians.  This is why the perfect Presidential candidate for the times is not Howard Dean, nor Hillary, but Wesley Clarke - not just an outsider, but a non-politician.  He was recently described to me by a loyal Yelnick reader as a 'multi-dimensional' thinker who would answer a question such as, how do we fight terrorism? by noting that terrorism is part criminal behavior, part cultural clash, part financial .. and only part military.  So using the military to try to solve all four aspects is doomed to fail.   
The country has Wesley, we have Ahhnold.  Arnold Schwarzenegger is currently more a tabla rosa than a political figure.  We don't yet know how dimensional is his thinking.  It is easy to underestimate his potential impact on politics, much as Reagan was underestimated.  But his role will be different.  Reagan honed his political philosophy over many years on the fried-chicken circuit, whereas Ahhnold seems to have honed his approach in the fried-chicklet circus on Hollywood sets. 
This leaves Ahhnold susceptible to the political confluences he is emerging into.  A blank slate indeed!  Unlike Reagan, who helped shape the emergence of a new conservative movement in the US, Ahhnold seems destined to be the popularizer of an already extant political movement.  And what is that movement?
Kennedy Republicanism.  A grand realignment of the political landscape.  The realization of the 'Third Way' politics of Tony Blair and of the original Big Groper himself, Bill Clinton. 
Taking a multidimensional approach, Third Way has three prime tenets:
1) militarily adventurous, vs George McGovern/Howard Dean pacifism
2) fiscally conservative, vs. LBJ/Hillary Great Society socialist experiments
3) socially liberal, vs. Reagan/Dubya religious right conservatism
Kennedy was a Third Way politician;
1) He was the 'bear any burden' President, a fan of James Bond books, probably would have enjoyed Ahhnold's  own Bond movie, True Lies.
2) He pushed through a 30% tax cut and sparked the '60s economic boom; and faced down the steel industry, somewhat like Reagan facing down the air traffic controllers early in his first term, and very unlike Bush II initiating steel tariffs in one of his many betrayals of American leadership in world trade
3) He supported civil rights and laid the groundwork for the seminal Civil Rights Act of 1964
The Vietnam War split the Democratic party (as well as the nation) and sent the party off in a pacifist direction where it still occasionally languishes.  In a real sense the party walked away from Kennedy's policies, and many Kennedy Democrats defected in 1980 to become Reagan Republicans.  The Reagan Revolution was incomplete, since he had to maintain the socially conservative base that Nixon had used to realign politics in 1968.  Clinton pointed towards the third way, but although intervention-oriented in small conflicts, he shied away from confronting terrorism in 1998 when Saddam kicked out the inspectors. 
Ahhnold's opportunity to become the Kennedy Republican is based on more than his marriage to a Kennedy, his womanizing and his appearance in a Bond-like movie.  To the extent he is formulating a political philosophy, it is reflecting the Third Way direction.   Given that the Republican high ground are the first two Third Way issues, Ahhnold can shirk the religious right and add the socially liberal constituency to complete the realignment started by Reagan. 

Rush, to Judgement
Bear markets bring down the stock market icons of the prior Bull.  Martha Stewart, Frank Quattrone.  The grizzler bears begin to mawl the icons of the prior era outside of the financial arena.  This one seem to be about to knock Rush Limbaugh off his perch.  Prechter has gone out on his limb, and predicted that Bush too will be brought down by some scandal, yet to emerge, for actions already taken.  Bush's Watergate. 
Current candidate: the incredibly irresponsible behavior of Vice President Dick Cheney, still receiving stock options and deferred compensation from Haliburton, and the apparent favoratism shown Haliburton in Iraq reconstruction. 
Crony capitalism of this magnitude - and it may be just the tip of a deeper iceberg - deserves to be outed then dismantled.  Bush may have gone to war to fix a problem left by his dad, but the cronies around him may truly have gone to war for oil, to feather the nests of their prime consituents, oil and oil service companies like Haliburton. 

Cautionary Note
The markets went through the 62% retracement level, and shot above the 78% level, but didn't break the Sep19 highs before reversing at the close on Friday.  Technically a wave 2 has to break the start of wave 1 to change the count, but *usually* when it passes 78% it keeps going.  Zoran's weekend update points out that the market shot up on Friday on good employment news, then turned around when late in the day a little-noticed addenda to that news poured cold water on it.  Also little noticed in the financial news was that interest rates turned up, normally a bearish sign.  Prechter also sent out his EWT this weekend, a bit early - but he normally does this when he feels the need to keep the faithful in line.  (His primary point: cycles suggest relentless downside pressure into the end of 2004.)
Monday is Yom Kippur, and our Chinese Curse Day.  The STU pointed out the stock market adage to 'buy on Rosh Hashanah and sell on Yom Kippur."  Trading should be light on Monday, so we won't get a real read on this until Tues. 

Wednesday, October 01, 2003
Chinese Curse Day
What happened in the last two days is that the little wave [i] down extended in its subwave 5 to a lower low, and today we have begun what should be an ABC pattern back up in little wave [ii].  The Nasdaq is lagging, so watch it to spurt up.  The 61.8% retracement is SP1020 or Dow9500, and the 78% retracement is SP1030, Dow9570.  If it goes above the Sep19 highs, something else is going on.  When it goes below Dow9000, it confirms a wave 3 has started with a vengeance. 
While in terms of price this rally is almost there, in terms of time it would normally last into tomorrow to next Monday.
Mon Oct6 is a Chinese Curse ('may you live in interesting times') Day - Yom Kippur and the 30th anniversary of the 1973 attack on Israel.  Rumors abound of some event that day - maybe an Iranian nuke is tested, maybe North Korea tests as well.  The day after is the California Recall, and the most recent polls show that the recall is gaining momentum into its final weekend.  Both Davis and the markets may take a tumble that day.  If the nuke rumors are true, Yelnick wonders if Humpty Dumpty (Bush) will ever be put back together again. 

Monday, September 29, 2003
Confirmation of Wave Count
Today went as expected.  The initial down move completed a five-wave pattern since the Sep19 high, marking the end of wave [i].  The intraday reversal began a corrective wave [ii].  More serious downside to begin once this little wave [ii] sputters to an end, possibly as early as Wed, probably by the end of the week. 

Sunday, September 28, 2003
Weekly Charts
ChartSpeak is running a free trial this week.  To login to the site itself, use
username:  stock
password:  market
To summarize: The movement since last October has been the longest sustained rally in the S&P since 1998, but appears to be ending.  Key indicator is that the small caps are pulling the market down, whereas they usually they pull the market up at the beginning of a bull market.  Key level is whether Dow breaks 9000.  (The STU has a similar key level of Dow8997.)  Market seems poised for a small bounce this week, then we shall see if it breaks through 9000. 

Calif Recall Presages - Direct Democracy
The SF Chronicle ran several excellent articles today on the recall and what it means.  Polls show that the race is coming down to Davis vs. Ahhnold, with the margin in favor of recall beginning to widen. (The Gallup poll showed it began at 70%, faded to 53%, and now seems to be at 63% and widening; overnight party polls showed it peaking at 58%, fading to close to even, and now holding at 53%.) The other candidates are fading, in particular the other democrat in the race, Cruz Bustamonte.   Ahhnold did well enough at his one debate to push his main opponent, State Sen. Bill McClintock, into the background. 
The Chron did its best in the series of article to prop up its candidate, Davis, by showing Calif was not in as bad a shape as people think.  Of course, they skipped over that little problem of a $38B overall deficit and a $8B operating shortfall of funding normal operations.  
The recall is energizing voters.  Registrations are up. and turnout may rival a presidential election.   
Two editorials attempt to find the meaing behind the recall.  Clearly this the pre-shock of a political earthquake of the magnitude of Prop 13.  As David Lesher puts it:
Even the sponsors of the recall petition say they've tapped into something that goes far beyond Davis. He's blamed in part for the latest budget problems and the energy crisis. But polls also show record-low ratings for California legislators, leaders in other states and the outlook for the future.
An even more prescient comment was made by one of the political handlers:

"This one is more like the end of the 19th century, the Depression or periods of great tumult where change starts to germinate for different reasons and it ultimately bubbles over into a big change," said Paul Maslin, the Democratic pollster for Gov. Gray Davis and presidential front-runner Howard Dean. "This isn't just another garden variety brushfire."

Lesher notes that the recall provision has been in the Calif Constitution for 100 years, but only now is it being used.  Lesher concludes that a sea change is occurring due to the Internet:
At the same time, the Internet has become an awesome power for grassroots communication and organization. Arguably, the surging Dean campaign and the recall would not be possible without it. Dean, a one-time long shot, shocked the political world by outpacing the front-runners and raising $7.6 million during the second quarter of this year, most of it in small contributions on the Internet. And in California, Russo said talk radio and the Internet provided the essential framework for the recall.
Norman Solomon in the other editorial decries the use of referunda and other direct democracy means, as he views the voting public as largely incapable of handling the complexity of modern politics.  Nevertheless, he too agrees that the era of the Internet and other tools of direct representation are upon us. 
Yelnick has noted that in US history, seminal elections occur every 72 years (1788, 1860, 1932) and voter realignment elections occur in the 36 year midpoints (1824, 1896, 1968).  We are due for a major shift in the character of the electorate.  The question has been, which way would it go?  The prior three shifts all increased the power of the central government.  Would a Hillary win and use the economic crisis of 2004 to drive the great socialist dream that we had thought we had put a wooden stake in in 1989 with the fall of the Berlin Wall? 
Behind the Calif Recall is a vast discontent with leaders in government and business.  In an earlier era, a Dick Grasso would never have taken the $160M compensation, or even the $57M severance, as it would have reflected very poorly on his character and the purpose of his institution.  A Dick Cheney would have devoted himself to public service and forgone the unvested Haliburton options and deferred comp he is apparently still receiving.  Even Dick Nixon felt remorse and shame for Watergate. 
Public figures have higher responsibilities than feathering their nest.  Excessive greed was overlooked during the mania, as everyone thought they could get their piece.   Social mood has since changed.  Hence the recall. 
The last time this occurred was at the midpoint election in 1968, when the public turned on Pres. Johnson for lying about Vietnam.  Johnson withdrew.  (Think of what the public is about to do to Bush, who appears to have similarly lied re weapons of mass destruction.)  The Pentagon Papers and Watergate followed, and Nixon resigned in disgrace.  Zoran has commented that bear markets are caused by lack of trust in institutions.  We entered a devasting bear market in the '70s.  Trust in public instituions was seriously wounded until Reagan restored them. 
The simple lesson of the recall: the voters no longer trust any of their leaders, and are about to use direct democracy to bypass them.  Whether this results in a libertarian dream or a demogogue nightmare remains to be seen. 
As Neo says in the Matrix, where we go from here is up to you. 

It's the data, stupid!
Fascinating insight from Tim O'Reilly in InfoWorld.  He says open source licensing isn't working as planned, as the GNU license contemplates sharing of proprietary extensions for software that is redistributed.  Instead what is happening is use of open source in web services such as Amazon, Google, etc.  No need to share as no redistribution.  Hence able to build proprietary extensions. 
More importantly, he suggests that the whole thrust of using Linux to defeat Windows is fighting the last war.  Gates' insight was that software would become more important than hardware.  Value would shift from computers to software.  He was right.  Now software is being commoditized.  Value is shifting from software to data services like eBay, Amazon, Google.   Someday Bill will wake up and see that his real threat came from that other tech company down the street in Seattle, Amazon. 

Friday, September 26, 2003
Sector convergence
Wave pattern is quite clearly a five-wave impulse down, which signals change of trend.  Next week should see continued down and a reversal which might last for several days.  Wave pattern also indicates that this trend change will last for a while.  Most likely pattern is down into the Xmas selling season. 
What is beginning to emerge is a convergence of sectors across the stock market.  The first sector to suffer was technolgy, followed shortly afterwards by telecom.  The early bear market was largely centered on those sectors, which is why the Nasdaq (heavily tech) and the S&P (weighted towards tech and telecom) fell more than the Dow.  A year after the peak, many analysts were trumpeting the value of not the nifty-fifty new highfliers but the thrifty-fifty old reliables.  Two years after the peak, the Dow had climbed back to within 10%.  Since last March, it appeared that tech was recovering - up 40% on the Nasdaq - and telecom was seeing light at the end of its dark fiber tunnels. 
Something significant has begun in the past few weeks.  Bush's popularity is below even, and he suddenly looks vulnerable.  (Yelnick predicted two years ago that Bush would become the next Herbert Hoover.)  The technical indicators are almost universally signalling excessive bullishness.  And now the other shoe is dropping - the other stock market sectors are catching up (or should we say down) to the tech and telecom sectors. 
Prechter's monthly newsletter points out in the Big One - the three of the three down - all sectors will be caught up in the backwash.  The bearish pressure will be overwhelming, and there will be no place to hide.  This sector ocnvergence is a leading indicator that the end is nigh. 
Yelnick has urged caution about when the Big One will occur.  Longer term models have been pointing to 2004 for years.  Perhaps we see it this quarter, but more likely we are in a minor wave 1 of the Big One, which will be followed by a bit of a recovery into early 2004, before we all get swamped by the tsunami sometime in the upcoming primary season.  As a coincident indicator, Prechter's newsletter identifies a 44 week cycle in the dollar vs. the Euro, and it points to the next low at the end of Mar04.  Thus, there may be a financial crisis around Mar04 which could both drive the Dow down and drive the President out. 

Thursday, September 25, 2003
impulsive decline
The sudden downdraft looks impulsive and broke the lower trendline since March.  This is very significant.  Possible the end of wave 2 *finally* happened.  More on this over the weekend.
The dollar is sinking and gold is rising.  The gold bugs are out in force.  Likely to be disappointed - the STU count marks gold as about to peak. 
Bush is plummeting and Hillary is rising.  The good general Wesley Clarke may be a stalking horse for her.  Next event to watch is the California recall of course.  It will show the mood of the electorate.  

Wednesday, September 24, 2003
Margin Mania
Alan Newman of Crosscurrents is an astute contriarian market analyst whose chart of the month is often an eye-opener. His most recent newsletter has a stunner in it: margin debt of investors at NASD firms (who make up the Nasdaq market makers) has shot beyond manic levels reached at the peak! A statistical glitch? Unlikely - the NASD has issued a warning about this. More likely "an abyss of intolerable risk" as Dr. Newman puts it. Seems like the stampeding herd jumped on the bandwagon just as the rapid market rise stalled in june and went into the summer trading range. Maybe they jumped in just as the ReFi game ended? You gotta give them credit!

Monday, September 22, 2003
Pullback or Trend Change?
Watching when the herd lift their collective heads up and sniff for lions in the grass (bears in the woods!) can be pretty funny.  Dollar has been dropping over 20% for two years, and a statement at the G7 meeting that the US wants more 'flexible' exchange rates wakes everyone up.  Oh!  Should we panic and run?
How significant was the stock and bond drop today?  The indexes have yet to end their final wave 5 wave action, and in particular retrace 78%.  Sometimes wave 5's truncate (end early), so we should watch the next few days.  The STU reports that the drop took us to the lower channel line for the past six months (back to March).  If we breach it -  Dow9381 and SP1008 - then the reversal is significant and signals continued weakness into the Nov11 date mentioned in a prior post.   If we bounce, as we should tomorrow, and go above the start of weakness - Dow 9686 and SP 1040 - then we continue up, as a corrective wave (wave 2 or wave B in a zigzag correction) cannot breach the beginning of the first wave. 

Fibonacci Ratios and Market Makers
Yelnick has been contemplating how fib ratos might develop in market indexes. Quick remarkable how often market movements shift at fibonacci ratios of each other. Prechter attibutes it to the fear & greed action of the limbic system in investors - since natural systems tend to show fib ratios in physical elements, he postulates it is also wired into behavior from the baser brain functions. It then gets realized in herd behavior. Zoran challenges this in the prior post, since small events or groups seem able to move markets ahead of the herd, and sometimes the herd is not able to turn the market.

Prechter attempts to answer this by suggesting that the herding instinct may cause a few to react before the herd, but react to the same underlying forces which later sway the rest, or fail to sway the rest. Could this explain the fib ratios?

Fib ratios occur not just in the classic fibonacci sequence (1 1 2 3 5 8 13 21 etc.) but in any summation series. Start with any two numbers and add them successively - the ratio between successive numbers trends to fib ratios (phi) very fast. This should also work with a sequence of mixed positive and negative numbers, although I have not seen anyone do this, since it is not intuitive. But it may reflect how markets move in fib ratios.

View the market as made up of groups of investors, all with different views at different times, some ahead and some behind. The behavior of these groups can be modeled as a sequence that sums or subtracts as time moves forward. A small group says X, and moves the market its way. A next group begins to agree with X, and piles on. Another group disagrees, and moves it the other way. These groups can be considered fib series whether they shift from positive to negative as long as they always 'sum' (make investment decisions in responce to) the previous views. In this way the fib ratios emerge, whether there are positive or negative views. (I played a bit with a spreadsheet and it appears one can build a series of plus/minus fib series and sum them, and the result has fib ratios).

Possibly elliott behavior could be modeled using such mechanisms to attempt to derive the group opinions underlying the market. An advantage of this approach is not to see one 'market' or herd but to begin to understand the multiple market opinion groups or forces.

One could then see how a small group could create a wave 1, while the wave 2 swamps it as the groups which see the market the other way pile on to 'buy on dips' or 'sell on pops.' In the background yet other groups flip over to X's view and wave 3 emerges. All this needs is the time delay of opinion based on the actions of the other groups to result in fib ratios.

Zoran Teaches
Zoran Gayer is developing a modern version of Elliott wave theory, blending the orthodox Prechter view with the rival Neely view, and adding a better understand of chaos theory. He is attempting to solve the most bedeviling problem with ewaves, how to determine when a correction is ending. We have seen over the past year how Prechter's STU continually calls a premature end to this wave 2. For traders this is paramount, as placing positions at the end of a 2 to catch the 3 is where the money is made, at any fractal level of wave action. Here is part of Zoran's developing point of view:

EWP on the S&P 500 index 21
September 2003

I have read comments that this market is " climbing a wall of worry ". This is taken as indicative that this up move is a new BULL move. However, this statement is a contradiction the fact. How can you have a market "climbing a wall of worry" with optimism at the highest level since 1987 peak? This is not a "wall of worry" but more in line with exuberance of major tops and bubble mania.

The market comments are full of cliches that often are used out of context or times do not make any sense. Part of that is because our knowledge base has grown and that our view of the world has changed. Many of the market cliches we have inherited from the past and have been repeated so many times that they take form of market truths. Elliott formulated his concept over 50 years. Some things of Elliott's conceptualization may need revision. This not to detract from the man for his observational acumen was rare amongst men.

Let us consider three of his basic structural tenets.

Markets follow order

This is a basic tenet of Elliott Wave Theory as expressed by Elliott himself. Quoting from the introduction in Nature's Law Elliott says, "No truth meets more general acceptance and that the universe is rule by law. Without law it is self-evident there would be chaos, and where chaos is nothing is" and "But the market has its law, just as it is true of other things throughout the universe. Where there is no law, there would be no centre about which prices could be the resolve and, therefore, no market."

The statement is partly true and partly not. There is no question as Elliott puts it that there is law (or order). That there is law does not mean that the market always obeys the laws. Conceptually according to Elliott, the market is completely ordered and thus predictable. IT OBVIOUSLY IS NOT. It is much more correct to say,

"Markets are self ordering mechanism that constantly adjusts to an uncertain world".

The second statement in fact states markets are unpredictable. Thus, the concept markets are never the same, but they do rhyme is true. Modern research into the way natural systems behave is that small changes can produce vastly different results. In fact, though the rules are the same the outcomes can be vastly different. Substantially all natural systems move from chaos to order and back to chaos. The financial markets follow more the CHAOS THEORY than that they follow ELLIOTT'S COMPLETE ORDER CONCEPT. (There is a form of order in CHAOS/ FRACTUAL concepts, which seems contrarian to its name).

Crowd behavior moves markets

The crowds may move the markets but they are not the instigators of the trend they merely reactors to what has happened. The twelve men in the monthly meeting of the central bankers (FOMC) have more effect than rest of the crowd combined. History shows that individual men not crowds made the greatest changes. Most trends of human behavior grow from small beginnings. Crowds do very little than follow established trends.

In fact, a common indicator is that the crowd gets it wrong thus giving rise contrarian indicators. At market tops, the crowd is BULLISH and at market bottoms, they are BEARISH. Those that sell the tops and buy the bottoms are the market movers. The crowd does not create the mood its mood is a reaction to the market conditions. Greenspan and the central bankers have created the BUBBLE TOP not the crowd; they simply reacted to the created circumstances. Government policy, destruction law, actions from a small group politicians that started the IRAQI war affected the market to a far greater extend than any crowd ever could. How Elliotticians can conclude that the crowd moves markets is rather perplexing for it is so obviously wrong. Short- term crowds obviously do not move markets as it was amply demonstrated on the 6 June reversal. I suspect something like Peretos law applies to the markets where 20% of the participants have 80% of the effect.

Simplest market move

According to Elliott, the simplest market movement is five moves up and three moves up repeating in perpetuity. The direction is in the 5-wave thrust. It is a result from a LONG TERM to SHORT TERM approach. Ilya Prigogine suggested that all natural systems would move from one plateau to the next. The moves between the plateaus is fast and is directional - the order component. The plateau component is non-directional, thus CHAOTIC. To Ilya Prigogine natural systems rotate between order and chaos.

Each PLATAEU or NON- DIRECTIONAL movement resolves itself in a point, which Prigogine called a BIFURCATION . Thus, the simplest move in a natural system is from one BIFURCATION to the next making up the FRACTAL of chaos. Small changes at the BIFURCATION can cause an explosive move upwards or downwards and often this point is a fine balance. Because each bifurcation is a balance, the outcomes are unpredictable, for it can tip easily either way.

This is the very reason why Elliott is obvious after the event and nearly all Elliotticians get it wrong before the event .

One has only to read the newsletters of some Elliotticians to see that they have difficulties in accessing outcomes but then so has everyone else. Thus, long-term moves are made of many small term moves. This is opposite to Elliott and rather obvious. It also states that predicting the markets is a much more complex affair for at each bifurcation the market can head either of two ways. That does not mean that Elliott analysis is pointless. Since we know markets are SELF ORDER SEEKING mechanisms, it just means that we have to be flexible in our approach in reacting correctly to each BIFURCATIONS OUTCOMES. We also know from study of chaos that the same patterns appear in multiple timer frames. Thus by combining a multiple time frames in the analysis often, we can see the likely outcomes of BIFURCATIONS of a lesser degree. Each BIFURCATION will supply a possible trade in that fast move of order seeking attributes. THIS ALSO SUGGESTS THAT ELLIOTT ANALYSIS CANNOT BE DONE EFFECTIVELY WITHOUT USING MULTIPLE TIME FRAMES.

Sunday, September 21, 2003
1987 Redux
The STU has backed off its call of Sep8 as the end of wave 2.  They still suggest a near term top, in the range of SP1045, or if that is breached SP1060 +/- 8 (on the Dow the equivalents are Dow9707 or Dow9745 +/- 12).  Give them time, they will come to the Yelnick view of a 78% retrace, and a test of Dow10K. 
Their timing seems optimistic as well.  Walter Bressert has tracked the most constent stock market cycle - the four-year cycle which is driven by US presidential election economic finagling - and predicts a cycle top in 1H04, with a most likely time of Mar04.  This is consistent with the Yelnick view, and would make for a very interesting election, since the top would be followed by fairly clear downtick that might lead to the ultimate Bear Market low in Oct04. 
The STU provides an alternate scenario, building on their analogy of today's bullishness to 1987's, before the crash.  They overlay the current wave 2 on the 1987 market, and find a fairly close match.  Now, waves are fractals, and patterns can be found like this without predictive value, especially as to timing.  That said, if we follow the timing of 1987, the most likely end of wave 2 would be literally at the 11th hour: Nov11, the 11th day of the 11th month.  If again timing holds, the 'crash' would ring in the new year and we'll all hit the bubbly, hard. 

Tuesday, September 16, 2003
Recall Wave 2!
The wave action today of a momentary move up and slip slidin' away in both Dow and S&P (and after a longer pop up, in the Nasdaq) increases the odds that Sep8 was the end of Wave 2 since last Oct.  We are now entering wave iii territory and should see a more impulsive down move.  Note that in '29 and '87 the crashes happened the first trading day following a fibonacci 55 calendar days after the market topped.  Odd coincidence.  This might suggest an interesting market around Nov3.  Yelnick points this out not to make any prediction but to point out a possible serendipity. The California recall was momentarily postponed by the Ninth Circuit in what the conservative talk show hosts are seeing as judicial payback for the court-decided 2000 election.  While the Supreme Court may overrule the decision, it is also possible the recall will be moved to the more normal election time of the first Tuesday in November - Nov4!  Gray Davis's momentary victory may be Phyrric. 

Saturday, September 13, 2003
The Oracle Speaks
The WSJ ran two upbeat stories Friday, one on economists predicting the strongest growth in Q4 since 1999, and the other on anticipation that Oracle's after-hours earnings announcement would show solidifying business software sales.  The two are connected, as the economist are expecting business spending to begin to pick up, sustaining the economy as consumer spending begins to abate.  What did the Oracle reveal?  While Oracle hit its earnings target, it fell short of its license sales target.  So while there is an underground belief in the IT community that CIOs are beefing up IT budgets for 2004, in 2003 there still is no evidence of increased enterprise software sales, and in general no evidence of increased business spending on IT. 

Friday, September 12, 2003
Phoney Recovery?
Prechter exhorted the faithful this week to resist the temptation of wave 2 bullish optimism, as wave 2's are wont to cause. He compared the statistics of prior recoveries to today's. The recoveries of the period from 1949-1989 were quite strong; the recovery after the Bush I recession of 1991 was middling, and the current recovery is downright weak, no more than "a temporary respite within a major bear market." We continue to have a 'recovery' which is losing jobs at a rate not seen since the 1930s. We continue to have economists extrapolating from a slight pop in GDP growth in Q2 that was largely caused by a one-time event - the Iraqi War - an event which adds to GDP statistics when it truly should be subtracted, because war expenditures are literally the shredding of wealth into pellets of lead in the ground.

Rush Limbaugh commented today that the economic growth of the end of the Clinton Era was phoney, as history has shown much of it to have been based on fraud and deception. Rush has an axe to grind, and grind it he will. Zoran believes that bear markets are caused by the reaction to such excesses at the end of a bull market, as the market pulls back due to growing distrust. Government statistics since the beginning of this bear market have been revised quite frequently, usually downward, calling into question the honesty of the initial figures in the first place. It is of course only the initial figures which get widely reported and remembered.

In Silicon Valley, the signs of a recovery appear first in chips, later in hardware, and last in software and services. The chip business has been solidifying, particularly in consumer electronics. Yelnick has noted how the home refinancing (ReFi) business has provided continued consumer credit, and consumer spending has been keeping the economy afloat. It is no surprise then consumer chips have seen increasing demand, but not other chip sectors. ReFi's are way down from their peak in June, and it is now very unclear if the consumer spending binge will continue. Will the tech recovery be stillborn?

Yelnick's view is that the legitimacy of the recovery will be revealed in Q4, when all the various levers will have played out: Bush's tax rebates, Bush dividend tax cut, Greenspan's interest rate cuts, consumer mortgage ReFi's, and Greenspan pump-priming in equity markets. In particular, we will see if consumer spending continues to ramp, or diminishes with the drop in ReFi's. One can hope that business spending begins to recover and fill the gap. The statistics will begin emerging in the new year. The Big One may miss its expected window in October and come with a vengeance right smack dab in the primary season of the 2004 election.

Are We There yet?
STU called a possible top for wave 2 at Monday's highs. The wave action Tues and Wed was a clear five-wave impulse down, and the action Thu and Fri (today) has been sloppy and corrective. Accordingly, supports the case for a change in trend. But is this THE top? Not yet clear. Monday should be down at the open, or if not, down sharply Tues and Wed.

Tuesday, September 09, 2003
Recall Bush?
Well, it hasn't come to that. But his poll numbers are plummeting and his popularity is evaporating as fast as his Dad's. Today's WSJ had a commentary called "Bush's Talk About Spending Discipline Is So Much Hot Air" next to a news report that the deficit would crest $500B shortly. The out-of-control spending involved Medicare, AIDS in Africa, homeland security and of course nation building in Iraq, Afghanistan, Liberia, etc. This from a Republican! Maybe Compassionate Conservative means War-Mongering Liberal Without Restraint.

The stock market implication is trouble ahead as the social mood is turning from momentarily optimistic (wave 2!) to dour and soon downright sour, and rightly so given our leadership. The Calif recall is still showing most want the Gov to go. He just signed a bill he had twice vetoed - allowing illegal aliens to have driver's licenses - to pander to the Latino vote. His Lt Gov who is running took an enormous campaign contribution from Indian Casino owners, who in general not are Native Americans (guess who they may be), and had to give it to charity to escape the public outcry. This is craven, blatant political corruption. If the Gov escapes recall, woe to California - he will be as out of control as, well, the Prez himself!

Senate Threatens China with Tariffs, Shoots off Big Toe in Process
Today a senator introduced punitive tariffs to force the Chinese to revalue the Yuan. Is this good policy?

It certainly is risky - it is the type of attitude that happened in the 1930s with the Smoot-Hawley tariff that led to a beggar-thy-neighbor death spiral of world trade. Not a surprise for the Yelnick worldview, as the social mood now most resembles the early '30s, and we shouldn't be surprised if we recapitulate the mistakes made then.

It may not be in our interest. The advantage the US gets in seniorage (being the world currency) is so profound it actually makes sense to let the Chinese keep their Yuan cheap. We buy physical things for paper, and they either hold the paper - so the physical things cost virtually nothing - or they recycle it into the world economy by buying oil or whatever. The more they build up reserves, the more we get *free* stuff. (We can be concerned over outsourcing our core advantages, but the value we save in cheaper imports creates new skills elsewhere in the economy, the mystery of free trade.) The Chinese are in no position to pull out of US bonds - where will they put their reserves? Anything they move into will be bid up, and could come tumbling down in value. They need to have US reserves to trade in the world economy, and if they move their reserves and lose value, they are worse off.

It may set in motion forces which have worse consequences. The French understand the value of seniorage, and have been trying to get the oil trade switched to Euros. Iraq went along with that! And I think so did our hemispheric partner, the Columbians. Only our closest friends! But few others. The Chinese would need to create an alternative reserve currency, or move from Dollars to Euros as part of a broader movement away from the Dollar, to preserve value. Hard to do, but probably being discussed between the French, Germans, Russians and Chinese as a consequence of US unilateral action in Iraq. (Sometimes the consequences of an action like Iraq are hard to see and years away, but nevertheless could have enormous negative impact on the US, and once in motion would be hard to stop.)

It also may prove unnecessary to force them to revalue. The pressure of large reserves at low interest rates will cause them to have an increasingly difficult time holding the Yuan where it is, since the reserves need to be recycled for Chinese imports or reinvested inside China; holding them means the government is draining wealth from their economy. (Ponder the value of sitting on a pile of gold, and not reinvesting it.) I suppose a people can live at low wages and postpone their economic improvement for a considerable period of time, but eventually they see the big city and want a piece of the action. China has a history of unrest, and does not want to stir up the up-and-coming.

Right now the trade statistics show an increase in Chinese imports, which suggests the reserves are being recycled and the people inside are beginning to consume to enjoy their new-found wealth.

All that said, I think the world economy would be better off if the Yuan were to float relative to the Dollar as Chinese reserves creep up, whether through a floating currency as in much of the world, or through a world currency/gold standard which has automatic mechanisms to readjust based on relative reserves and growth rates.

An intriguing question is how did it come to this? In 1996 there were rampant rumors and investigations of Clinton taking illegal contributions from the Chinese Govt in return for certain favors. Most of the focus was on leakage of US sateliite and military secrets. Maybe they were looking under the wrong rock, or not enough rocks. Around that time the Chinese cheapened their currency from 5 to 8.3 to the $. Coincidence? The US did not respond. The consequence of that move was to undermine the Four Tigers and cause the Asian Flu that almost pulled the world financial system down in 1997. The "fix" was Greenspan pumping liquidity into financial markets, which action, combined with further pump priming around Y2K, fueled the manic blowoff of 1998-2000 and led to our current doldrums. I hope Clinton thought the money worth it!

The law of unintended consequences reigns supreme in the land.

False breakout
Larry Katz has updated his e-wave forecast here.  Larry is a very good tech analyst and looks at a variety of indicators to cross-correlate where we are in the wave pattern.  As the summer trading range developed, he projected one of two outcomes: (1) another up move of the magnitude of Mar-Jun (bullish), or (2) a false breakout and then serious drop, much like the summer of '98 (bearish).  Now that the summer pattern has resolved into a fourth wave triangle, he is firmer in his forecast: the bearish false breakout.  Triangles are ending patterns, 'penultimate' waves as he says (the one before the last), and presage a final wave five before the Big One down.  This is consistent with the Yelnick view, and (except for timing) the STU view. 

Monday, September 08, 2003
Optimism at the Peak
A loyal Yelnick reader and sometime (but always constructive) critic commented on how
optimistic the Silicon Valley Tea Leaves had become - was Yelnick becoming a
bull? Yelnick calls them as he sees them, so if optimism is afoot, it will
be reported. But before you delight in such a turnaround, I must add that
optimism is what a bear would expect in a wave 2. One can get a good read
on where we are in the wave count by the indicia of social mood that
surround the indices of markets. If this were a beginning of a new bull
market - a wave 1 up - it would be filled with doom and gloom. Bull markets
need to climb their wall of worry. The rampant optimism that surrounds this
move since March are much more consistent with a fack breakout wave 2.

And this wave 2 may be cresting. The STU reports that certain indices hit
their target ranges today, so today could be the day. Also, this weekend
marks a fib turn date, so a couple more days of topping action, plus the Dow
cresting higher, would make this call more likely. The VIX is at its lowest
since the wave 2 peak in Sep00. The "Bullish Consensus" group sees
bullishness at a peak for this whole bear market. And so on. the technical
indicators continue to look manic. Look for a sharp downtick at the peak,
marking the peak.

Sunday, September 07, 2003
Redneck Greenspan
Zoran forwarded to Yelnick a translation of the Jackson Hole speech by Greenspan.  For those of you who have listened to Greenspan speak, or God forbid read one of his speeches, you realize he speaks with multisyllabic obscurity for a reason - if the mysterious ways of the financial priesthood were to become widely known, it would move markets against their wishes. 
Consequently, when some wit translated Greenspan's latest into the vernacular, it came with a clarity he doubtlessly did not intend.  You can read the redneck version below. 
For those of you with even shorter attention spans, John Mauldin has drawn the core implications from the speech in his piece Greenspan's Uncertainty Principle
For those of you with attention deficit disorder, let me do the abridged version of John's piece:
Greenspan's opens with:  "Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape."  Thus, econometric modeling is insufficient to predict future market behavior.  (This from one of the prime econometricians prior to his ascension to the Fed chairmanship.)  To fill in the gaps, the Fed has begun looking at behavior models and history, or as greenspan puts it: "inference of how market participants might respond to a monetary policy initiative may need to reference past behavior during a period only roughly comparable to the current situation."  The Fed has applied this historical view in its focus on deflation: "These considerations have inclined Federal Reserve policymakers toward policies that limit the risk of deflation even though the baseline forecasts from most conventional models would not project such an event." 
For those of you with no attention span, bottom line is:  they are coming to the Elliott worldview that social mood and behavior are more important considerations than the fundamentals of money supply, fiscal policy, and interest rates. 
Redneck translation of Greenspan's speech 
We are in deep doo doo boys and girls!

We did our best, but our best wasn’t good enough. We know what the key economic relationships are, but don’t know completely how they all interface with one another…and as the global economy continues to expand exponentially, our understanding of the intricacies of these relationships fall exponentially behind. In other words, it is kind of like having a front row seat in a train wreck. We can clearly see we are in trouble, but simply don’t know what to do about it.

Our economic models aren’t worth a crap, when the geopolitical shit hits the fan. We can control monetary SUPPLY, but we don’t have ANY control over monetary DEMAND.

Consumers, by extracting equity out of their mortgages to be used for cruises, trips abroad, his and hers SUVs, charge accounts at Macys…are the only thing keepin’ this economic train on the tracks…and one by one these consumers are either losin’ their jobs or hearing about someone else losin’ theirs…and they are beginning to tighten their money belts. We may not be able to count on ‘em for much longer ‘cause mortgage interest rates are headin’ higher and that will sure as hell kill the last remaining economic bubble as these patriotic consumers see the value of their homes drop 30 to 40 percent just after they secured a mortgage for 120% of the value of the home and just before the ‘wealth effect’ rug gets jerked out from under them. Oh boy, they will be pullin’ their little economic wagons in a circle and I don’t mean maybe.

It is all a WAG (Wild Ass Guess) so we might as well LOOK confident even if we don’t have a clue about how the real world works. It is not what you do that counts, but how you look doin’ it. It is getting awful close to election time boys, and we better get our act together quick…either that or we better get the hell outta dodge. Since we don’t have any real control over this train wreck, let’s just quietly go for the ride, look as dignified as possible, and make sure the first aid kit is handy…cause it sure looks like it is gonna be a doozy of a wreck just up ahead.

We’ve been working toward economic globalization thingee for the last 50 years and finally it has arrived. The downside of economic globalization is that when one domino falls…the whole kit and caboodle goes along with it…kinda like the Black Out we had on the East Coast a few weeks ago.

We came close to losing it in 1979, the dollar was getting dumped and we raised interest rates to da moon and just barely salvaged it. If our Arab friends had been more liquid in their U.S. investment holdings and had been more successful in unloading them quicker, we probably wouldn’t be having this conversation right now. Since we are pissing off our Arab friends on a continuing basis of late and since they are also a lot more liquid in their investment holdings today than they were then…we may not be able to deal with it as effectively this time around. They learned their lesson with Carter, and the presidents who followed him, who reacted desperately and froze foreign assets held in the U.S. of those countries ‘suspected’ as being responsible for acts of terrorism. If they get wind of anything like that in the future…we would have to raise interest rates to 40 or 50 per cent or higher with no certainty of keepin’ this baby on the tracks. Whooh! 1979 was a very close one. And don’t forget the Chinese…how many of our dollars are they holding onto? …waiting for just the right moment to dump ‘em on us…whoowee…I hope I’m retired when that happens.

Hey folks, this economic juggling act is getting a little wearisome…I don’t know how much longer we can keep these economic balls in the air…so maybe we oughta quit tryin’ so hard. Maybe we oughta just lower the bar a bit before we drop ‘em all and look like a bunch of buffoons.

The bottom line is this…we simply don’t know what the hell we are doing and our economic models no longer represent reality, so we are simply going to wing it and react to situations as they arise…and carry lots of bandaids…and pray we won’t need the splints.

Our flawed economic rules got us in the mess we are in today and it is doubtful their continued use will successfully extricate us from the disaster ahead…so we are going to consult soothsayers and palm readers…and then make the best guess we can.

If you pseudo economic geniuses think you have a better plan, I’m all ears. And if we don’t come up with sumpin’ good and real soon…we all are gonna be history.

Is Oz Showing the Yellow Brick Road?
Zoran reports that the Australian index, the SPI, appears to have topped last week.  Occasionally the SPI presages to S&P.  More support for the STU view that the top may come early this week.  if so, it creates one of the great shorting opportunities of our lifetime.  Yelnick has commented that one way to play the ewave analysis is wait for the end of wave 2 before taking a position.  We may be there, and what *should* follow is the Big One. 

Friday, September 05, 2003
Bullish Sentiment Hits '87 Extremes
The STU also reports that bullishness among investment advisors continues to rise and is hitting levels not seen until just before the '87 crash. Also, insiders are selling $44 for every $1 they buy, a level last seen right before the 28% drop in the S&P into the Sep01 low. This is what to expect at the end of a wave 2.

Wave 2 End *May* Be Nigh
One down day, and the STU sees the end of wave 2 is just a few days away. Recall that we are in wave C of 2 since the Mar03 low. Wave C is breaking out into a five wave pattern, which is expected. The first 4 waves have already occurred, with the summer trading range since Jun17 representing a wave iv triangle. We are now in the final wave v. This wave v has subdivided into its own five-wave pattern, and a reasonable count could put us in subwave v of v. If so, it may top early next week.

STU says to watch S&P closely, If it breaks SP1000 to the downside, it marks the end of wave v and therefore the whole wave 2. if it breaks SP1040 to the upside, it should continue both higher and longer towards the 78% retracement level.

If Yelnick sounds a bit skeptical, recall that Prechter called the top all the way up from Dow3600 to Dow4200 to Dow5400 before giving up and letting the puppy run to its manic peak. The STU often gets aggressively bearish when given the chance, based on its longer term view of the state of the market. If the market were to top next week, it would not have retraced to the 78% level but to a lower, non-fib level. Yelnick recommends - watch closely next week for the reversal, but expect this market to run a bit longer and higher.

Thursday, September 04, 2003
Microsoft Blazes a Patent Trail (Of Tears)

Patents are rapidly rising in pre-eminence as we enter a period where large companies are much more nimble in buying or building new innovations than previously, avoiding the mistakes of IBM and DEC in the PC era of the early '80s.   Given that the innovator can be copied faster than they can establish a market position, IP becomes the critical competitive barrier.  InterTrust's success so far in their dispute suggests its victory or settlement with Microsoft is the next shoe to fall; at the moment the buzz is around Microsoft's recent loss to Eolas.  As Corante reports from an InfoWorld article

Microsoft's loss to Eolas is sending a message to rest of the tech industry. Tech and legal experts are saying the ruling could affect a wide range of products that interact with Web browsers or services that rely on customer interaction through Web pages. The World Wide Web Consortium (W3C) is examining the impact of the ruling, but it could take months. Douglas Kline, chairman of the patent and intellectual property group at Boston law firm Testa, Hurwitz & Thiebeault, says it may be difficult for others to prove prior art. "Microsoft would know better than anybody what they were working on when the patent was filed. To the extent they did exhibit (prior art), the jury disagreed. So if Microsoft couldn't prove that their own activity didn't render a patent invalid, it could be difficult for anyone else to prove it."

Wednesday, September 03, 2003
Silicon Valley Tea Leaves: Q2 VC Survey - Clear Improvement
Fenwick & West publishes a quarterly VC survey whose conclusion for Q2 provides support for a rebound in VC, including (most telling) an increase in valuations. Deals in the hotter spaces (social software for example) report VCs cold-calling to get in. We could see a remarkable switch in a short time from a buyers market to a sellers market. The Fenwick report's conclusion reads:

Conclusion – The terms of venture financings improved somewhat in the second quarter of 2003. The percentage of financings that were down rounds decreased (although we note that a majority of financings were still down), the percentage of Series A financings increased, and the other terms of financings were generally less tough than in Q1 ’03.

Consistent with this trend, we note that various industry publications have also reported an improvement in the venture financing environment, showing an average 7% increase in the number of financings from Q1 to Q2 ’03 and an average 10% increase in the amounts invested over the same period.

Lastly we note that Nasdaq increased approximately 20% in the second quarter of 2003. To the extent this trend continues we would expect venture terms to continue to improve.

The Fragile Wave 2
The STU has now more fully joined the Yelnick view that we remain in a Wave 2 which will retrace 78% of the Wave 1 down since mar02, just as the two prior wave 2's in the Dow both retraced that far. Normally wave 2s retrace 61.8%, but these aren't normal times, and the extreme retracement recapitulates the extreme heights of the mania.

A number of pundits expect a poor Sep/Oct but they may be disappointed. The impact of all the steps to revitalize the economy are still rolling through. Although mortgage rates peaked in June, house closings continue at a high pace as people rush to grab the rates before they rise farther. This appears to now be slackening, but still shows up in the statistics. Although the massive dividend tax cut is one of the poorest designed cuts imaginable to revitalize the economy, since it mostly shuffles where capital sits rather than incents new capital investment, to the extent it is putting increased spending power in people's hands, it is doing so now and into the end of the year. Although the increased war spending was largely spent in Q2, war spending remains at a disturbingly high level (imperial overreach anyone?) and will appear in GDP statistics in Q3 as well as Q2.

Best view I have heard on our current state is a 'fragile recovery' which could be upset at any moment, given an adventuresome Prez, a large debt overhang, and a continued dour social mood.

Watch the wave 2 meander up towards the 78% retracement level of Dow9930. We may see the Dow bouncing off the 10K level in Sep and even Oct before the confluence of events and news upsets the fragile recovery.

Silicon Valley Tea Leaves; Get Ready for the Rebound!
A flurry of articles and activities show the growing optimism in the Valley. The WSJ had two articles, summmarized in Corante (the online WSJ requires paid subscription) as follows:

Bets are on again - Wall Street Journal (sub req)
The Wall Street Journal reports that the VC firms of Sand Hill Road are starting to poke around hot technology sectors for new deals. Investments in early-stage companies were up 43% in 2Q 2003, and rumors abound of start-up companies receiving multiple term sheets. As one VC explains, "If you look up, you only see scarred pines, devastation and you miss the point. If you look down, there's a profusion of damned near everything growing out of the ground." Seasoned investors note that a number of factors are responsible for the mini-turnaround in the VC industry, such as the stabilization of the IPO market for VC-backed firms.

Now a seminar request comes across my desktop: "Get Ready for the Rebound! With the economy showing signs of life, smart companies are starting to make major strategic changes in order to best position themselves for the rebound. What should YOUR company be doing to get ahead in the next business cycle?"

From a ewave point of view, we are in a wave 2, and optimism reigns at the end of a wave 2. Anecodal evidence continues to point to VCs going back to business, valuations beginning to rise, etc. - all signs of a rebound in formation. What to believe? Best to watch the other signs of whether this is still a wave 2 with a downturn to follow, or the beginning of the next move up.

Wednesday, August 27, 2003
Can the Fed Stop Deflation?
Prechter's EWI site has posted their primary
deflation analysis. Worth studying.

Prechter defines deflation as follows: "Just as inflation is an expansion in
the supply of money and credit, deflation is a contraction in the supply of
money and credit. Deflation is not falling prices. Falling prices are a
consequence of deflation. It is dangerous to confuse the two ideas because
prices can fall without deflation." PC prices are an obvious example of

Is deflation impossible because the Federal Reserve Bank can just print
money? Prechter says no, since the Fed primarily 'prints' money by
fostering the expansion of credit. Banks create money by lending. The
volume of bank money dwarfs the volume that the Fed could sensibly create on
its own. Hence the Fed has to weave its magic by trying to manage credit

Currently credit markets for business ("Main Street") are not working well -
another way of saying that it is hard to get venture capital, or go public,
or get commercial loans at reasonable rates and terms. It is virtually
impossible in certain segments, such as dot-coms, or new telecom companies.
During the Great Depression, banks simply stopped lending, and the levers
the Fed used to change behavior did not work. This was called the
'liquidity trap' since the Fed made credit available to banks but the banks
did not make it available to borrowers. The psychology had to be broken
before banks lent. Speeches about fear, big government deficits, government
job programs, Fed pump priming, cheapening the currency, failed to do so
then, just as they have failed for Japan more recently. It took WWII to
break the psychology.

(A fascinating validation of Prechter's point of view can be seen in WWII
movies. Some of the most commended early movies about WWII are actually
about the Depression; watch From Here to Eternity or In Harm's Way. These
movies start with people being bored, and when the war comes, it is
welcomed, as a way to escape the psychology of the Depression. More recent
WWII movies, such as Saving Private Ryan or Pearl Harbor, completely miss
this context, as they were made during the social mood of the '90s.)

Three credit markets have been working in lieu of Main Street: Muni's,
Mortgages and Margin, although the window on two of them appears to be
closing. Given the sorry state of California, muni borrowing is approaching
its limit. Given the recent jump in mortgage rates, after a final rush to
borrow, the real estate boom is likely to end. That leaves the stock
market. As Yelnick has reported, it appears the Fed has used any
significant event (9/11, Iraq War, blackout) to pump credit into equity
markets and keep the stock markets afloat without creating a dysfunctional
reaction from naked credit pumping.

Greenspan's strategy is use credit in these ancillary markets to keep the
economy afloat long enough for Main Street to return to normal. This means
the Fed is primarily trying to manage social mood and psychology, not more
mechanistic targets such as money supply growth.

Prechter's point is that the Fed is running out of arrows in its quiver to
affect credit market psychology, and when there is no more it can do, the
negative social mood may overwhelm all that it has tried to do, and send us
into a deflationary spiral and subsequent depression. The marker for when
the 'herd' recognizes this point of no return is a severe stock drop, or
even crash. If it happens, it will be said after that the crash caused the
subsequent depression, or 'discounted' it, when in fact, the crash only
reflects a collective "Oh, $#!@" reaction as investors head for the exit,
not knowing what may follow.

Monday, August 25, 2003
K-Wave V: The Rise of Machines
Thinking about the K Wave question: will the coming always-on world being brought to us by widespread broadband and wireless connectivity be the new factor of production that takes us out of the K-Wave Winter and starts the cycle anew?

A broader new factor is digitization, of which the always-on world is a subset. It may finally take us out of the 'paperless' office into a new paradigm where documents are not created with the intention to print but created for a pure digital existence. More generally it will spawn a vast collection of web services, which are machine to machine communications.

We have only so much attention time to give to always on communication, but our machines can talk to each other orders of magnitude more. They will allow the scaling of an information economy beyond the bounds of the prior analog world.