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ELLIOTT WAVE ANALYSIS

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Key To Trading Success: Ignore Nature's Laws?
March 25, 2009

The following is excerpted from Robert Prechter’s Independent Investor eBook. The 75-page eBook is a compilation of some of the New York Times bestselling author’s writings that challenge conventional financial market assumptions. Visit Elliott Wave International to download the eBook, free.

By Robert Prechter, CMT

…The natural tendency of people to apply physics to finance explains why successful traders are so rare and why they are so immensely rewarded for their skills. There is no such thing as a “born trader” because people are born — or learn very early — to respect the laws of physics. This respect is so strong that they apply these laws even in inappropriate situations. Most people who follow the market closely act as if the market is a physical force aimed at their heads. Buying during rallies and selling during declines is akin to ducking when a rock is hurtling toward you.

Successful traders learn to do something that almost no one else can do. They sell near the emotional extreme of a rally and buy near the emotional extreme of a decline. The mental discipline that a successful trader shows in buying low and selling high is akin to that of a person who sees a rock thrown at his head and refuses to duck. He thinks, I’m betting that the rock will veer away at the last moment, of its own accord. In this endeavor, he must ignore the laws of physics to which his mind naturally defaults. In the physical world, this would be insane behavior; in finance, it makes him rich.

Unfortunately, sometimes the rock does not veer. It hits the trader in the head. All he has to rely upon is percentages. He knows from long study that most of the time, the rock coming at him will veer away, but he also must take the consequences when it doesn’t. The emotional fortitude required to stand in the way of a hurtling stone when you might get hurt is immense, and few people possess it. It is, of course, a great paradox that people who can’t perform this feat get hurt over and over in financial markets and endure a serious stoning, sometimes to death. Many great truths about life are paradoxical, and so is this one.
 


For more information, download Robert Prechter’s free Independent Investor eBook. The 75-page resource teaches investors to think independently by challenging conventional financial market assumptions.

 


Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

The Government Doesn’t Want You to Read This Article About the Financial Crisis
December 2, 2008

Editor’s Note: This article has been excerpted from a free issue of Robert Prechter’s monthly market letter, The Elliott Wave Theorist.

The full 10-page market letter, Be One of the Few The Government Hasn’t Fooled, can be downloaded free from Elliott Wave International.

By Robert Prechter, CMT

“Who Will Benefit From The Housing Act?”

This question is an actual headline from a national daily paper. The real answer is: mortgage lending corporations, developers, real estate agents, speculators and politicians. The government is also pledging tax money to providers of “financial counseling” and grants for speculators who want to “buy and renovate foreclosed housing”; in other words, it will hand tax money to charlatans and unfunded wheeler-dealers. But a far better headline would have been, “Whom Will the Housing Act Hurt?” The answer to that question is: (1) prudent people, i.e. savers, earners, renters and people who have waited to buy a house at a reasonable price; and (2) innocent people, i.e. taxpayers.

Government action (unless it is aimed at destruction) always causes the opposite of its stated effect. If taxpayers ultimately have to shoulder the burden for all the bad mortgage debt, those who are on the edge of being able to make their mortgage payments will be forced over the edge, causing more missed mortgage payments and more foreclosures.

There is never any need for a law granting privilege except when the goal is to reward the undeserving and to punish the innocent. If the goal were otherwise, there would be no need for a statutory law, because the natural laws of economics, when unencumbered, serve to reward the deserving and punish the imprudent and the guilty. Populists loudly challenge this idea, but they are wrong.

I thought the Fed was created to “help manage the economy.”

After a secret meeting on Jekyll Island (GA), Congress and a handful of bankers created the Federal Reserve System for two purposes. The first one was to allow the government to counterfeit money, thereby letting it steal value from savers through inflation. The second was to allow bankers to make profits through debt creation, also at the expense of savers. Any other claim is a smokescreen.

So shouldn’t we blame the Fed for the country’s financial problems?

That’s like blaming the collapse of your house on the biggest termite. The Fed is only one of the monsters that Congress has created. In the financial realm, others include Fannie Mae, Freddie Mac, Ginnie Mae, Sallie Mae, the FDIC, the FHA, the FHLBs and the income tax. But there are also a hundred other havoc-wreaking agencies of the federal government. Congress is to blame for ruining America. The Fed is only one of the mechanisms it created along the way. It’s a big one, and it’s fine to campaign against it, but to blame it for everything is to give its creator a free pass.

This is an important distinction, because many people seem to think that abolishing the Fed will cure America’s money woes. They seem to think that once the Fed is abolished, Congress will behave responsibly. One website even calls for abolishing the Fed in favor of giving money-printing power directly to the federal government! Abolishing the Fed is a worthy goal, but Congress will work tirelessly to create one disastrous institution after another, because that’s what campaign donors pay for.

Robert Prechter Explains the Price Effects of Inflation and Deflation
November 19, 2008

Editor’s Note: On Nov. 19, 2008, the U.S. Labor Department reported a 1 percent drop in the consumer price index for October 2008. The drop marked the largest decline in 61 years, and it was the first decline in that measure in nearly a quarter of a century. The 1 percent drop was twice as large as many mainstream analysts had forecast. Such a large decline in consumer prices is forcing U.S. policymakers to rethink the possibility of deflation in America. For more on deflation, we turn to Robert Prechter, the man who literally wrote a book on how to survive it. The following article, adapted from Prechter’s book Conquer the Crash – You Can Survive and Prosper in a Deflationary Depression, will help you understand exactly what to expect from deflation.

In addition to this article, visit Elliott Wave International to download the free 8-page report, Inflation vs. Deflation. It contains details on which threat you should prepare for and steps you can take to protect your money.

By Robert Prechter, CMT

Before explaining the price effects of inflation and deflation, we must define the terms inflation, deflation, money, credit and debt.

Webster's says, "Inflation is an increase in the volume of money and credit relative to available goods," and "Deflation is a contraction in the volume of money and credit relative to available goods."

Money is a socially accepted medium of exchange, value storage and final payment. A specified amount of that medium also serves as a unit of account.

According to its two financial definitions, credit may be summarized as a right to access money. Credit can be held by the owner of the money, in the form of a warehouse receipt for a money deposit, which today is a checking account at a bank. Credit can also be transferred by the owner or by the owner's custodial institution to a borrower in exchange for a fee or fees – called interest – as specified in a repayment contract called a bond, note, bill or just plain IOU, which is debt. In today's economy, most credit is lent, so people often use the terms "credit" and "debt" interchangeably, as money lent by one entity is simultaneously money borrowed by another.

When the volume of money and credit rises relative to the volume of goods available, the relative value of each unit of money falls, making prices for goods generally rise. When the volume of money and credit falls relative to the volume of goods available, the relative value of each unit of money rises, making prices of goods generally fall. Though many people find it difficult to do, the proper way to conceive of these changes is that the value of units of money are rising and falling, not the values of goods.

The most common misunderstanding about inflation and deflation – echoed even by some renowned economists – is the idea that inflation is rising prices and deflation is falling prices. General price changes, though, are simply effects of inflation and deflation.

The price effects of inflation can occur in goods, which most people recognize as relating to inflation, or in investment assets, which people do not generally recognize as relating to inflation. The inflation of the 1970s induced dramatic price rises in gold, silver and commodities. The inflation of the 1980s and 1990s induced dramatic price rises in stock certificates and real estate. This difference in effect is due to differences in the social psychology that accompanies inflation and disinflation, respectively.

The price effects of deflation are simpler. They tend to occur across the board, in goods and investment assets simultaneously.

…………….

For more information on deflation and inflation, including money-saving steps for protecting your wealth, download Elliott Wave International’s free 8-page report, Inflation vs. Deflation.

Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

 

 

Has Cash Been King for the Past 10 Years?

If you're like most investors, you've been nearly brainwashed with conventional market "wisdom" that stocks are the best way to grow your portfolio.

You would be crazy not to have your money in the markets, right?

But when markets drop, as we've seen in this credit crisis, it's amazing how quickly the story changes.

Steve Hochberg and Pete Kendall, editors of Elliott Wave International's Financial Forecast, challenged the notion of stocks' superiority years before this latest downturn.

Learn how cash has been king – and will remain so – far longer than the latest news headlines may have you believe in this free excerpt from Elliott Wave International's Credit Crisis Survival Kit.

Elliott Wave International has also made the full Credit Crisis Survival Kit available free for a limited time. In addition to this excerpt, it contains 14 other articles, reports, and videos that reveal how to survive and prosper during the credit crisis. Visit EWI to download the kit, free.

Cash's Invisible Reign Made Visible
[excerpted from Elliott Wave Financial Forecast, August 2008]

With respect to cash and its status as the preeminent financial asset, however, we are starting to wonder if investors will ever come around to our point of view, which, as we explained in the March special section, is that there are times when "the phrase 'focus on the long term' means "get out and wait.'" As we also pointed out, the last eight years are clearly one of these times, as cash has outperformed all three major stock averages over this period. A July 3 USA Today article shows how this outlook is actually becoming more farsighted as the bear market intensifies:

3-month Treasuries Beat
S&P 500 for past 10 Years

The article says, "Investors who bought stocks for the long run are finding out just how long the long run can be." But the farther back in time cash's dominance stretches and the rockier the stock market gets, the farther investors seem to move from ever taking anything off the table. After stating that "there can be times, long times, when stocks won't beat T-bills," a professor and popular buy-and-hold advocate is cited as "optimistic that the next 10 years will be better than the past decade." In March EWFF stated, "Cash will continue to outperform until stocks are no longer fashionable." There is no sign that such a condition is even close to happening.

It's somewhat amazing that cash is not capturing anyone's fancy because a tremendous society-wide thirst for cash is spreading fast. "In a deflation," the Elliott Wave Financial Forecast has stated, "Rule No. 1 is to unload everything that isn't nailed down. Rule No. 2 is to sell whatever everything remaining is nailed to." The banking system is surely deflating, because, echoing Elliott Wave Financial Forecast's wording again, "Desperate American Banks Are Selling Everything That Isn't Nailed Down." SunTrust is selling its stock in Coca-Cola, an asset the bank held for 90 years. Merrill Lynch sold its founding stake in Bloomberg as well as various other subsidiaries.

Meanwhile, "Americans are selling prized possessions online and at flea markets at alarming rates." Pawnshops and auction sites are booming. At Craigslist.org, the number of for-sale listings soared 70% in eight months. This fits with our review of Craigslist's prospects when it was getting started in 2005: "This is just the set-up phase. Once the global garage sale really gets rolling, truly astounding volumes of dirt-cheap goods will be available on-line and elsewhere." The global garage sale is on. The chart of the U.S. savings rate shows that the bull market in cash has come to life.

A 30-year downtrend in savings rates ended at minus 2.3% in August 2005. In May 2008, the savings rate skyrocketed to 5%. This jolt may be somewhat overstated due to the arrival of the government's stimulus checks, but the burst should be the start of a critical new mindset among consumers. When the government showered the economy with $600 checks, many did something they never would have thought of through most of the bull market: They put the money in the bank, which is exactly what the administration did not want. In fact, federal, state and local governments are desperate for the tax revenue that a little ripple-effect spending would have generated.

According to the National Conference of State Legislatures, states must close a $40 billion shortfall in the current fiscal year. "The problem today is that tax revenue is vanishing," says a story about the sudden appearance of the worst fiscal crisis in New York since 1975. Even cities like East Hampton, New York, where someone paid $103 million for an oceanfront house last year, are out of money. "Nobody understands how it happened," says one resident. The pages of this newsletter show otherwise. If we are right, a deflationary decline is depleting and destroying cash flows in novel new ways that no one alive has experienced before.

The Primary Precondition of Deflation

By Robert Prechter, CMT
Elliott Wave International
 

The following was adapted from Bob Prechter’s 2002 New York Times and Amazon best seller, Conquer the Crash – You Can Survive and Prosper in a Deflationary Depression.

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way:

In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:

(a) All were set off by a deflation of excess credit. This was the one factor in common.
(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.
(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases years, in advance.
(d) None was ever quite like the last, so that the public was always fooled thereby.
(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.
(f) Credit is credit, whether non-self-liquidating or self-liquidating.
(g) Deflation of non-self-liquidating credit usually produces the greater slumps.

Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan – for business start-up or expansion, for example – generates the financial return that makes repayment possible. The full transaction adds value to the economy.

Non-self-liquidating credit is a loan that is not tied to production and tends to stay in the system. When financial institutions lend for consumer purchases such as cars, boats or homes, or for speculations such as the purchase of stock certificates, no production effort is tied to the loan. Interest payments on such loans stress some other source of income. Contrary to nearly ubiquitous belief, such lending is almost always counter-productive; it adds costs to the economy, not value. If someone needs a cheap car to get to work, then a loan to buy it adds value to the economy; if someone wants a new SUV to consume, then a loan to buy it does not add value to the economy. Advocates claim that such loans "stimulate production," but they ignore the cost of the required debt service, which burdens production. They also ignore the subtle deterioration in the quality of spending choices due to the shift of buying power from people who have demonstrated a superior ability to invest or produce (creditors) to those who have demonstrated primarily a superior ability to consume (debtors).

Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation because almost no one expects deflation before it starts.

For more on deflation, including the following topics, see Elliott Wave International’s free guide to deflation, inflation, money, credit and debt. There, you can also download two free chapters from Conquer the Crash.

Learn more about these six important topics:

1. What is Deflation and When Does it Occur?
2. Price Effects of Inflation and Deflation
3. The Primary Precondition of Deflation
4. What Triggers the Change to Deflation?
5. Why Deflationary Crashes and Depressions Go Together
6. Financial Values Can Disappear in Deflation

Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

 

3 Questions The Government Doesn’t Want You To Ask About the Financial Crisis
(And 3 Shocking Answers!)

September 22, 2008

Bob Prechter, President of Elliott Wave International (EWI), is no stranger to challenging the status quo. His New York Times bestseller, Conquer the Crash, was published in 2002 before anyone was even talking about the current financial crisis.

In his recent 10-page market letter, Prechter shifts his focus to the government’s role in the latest financial turmoil.

Elliott Wave International is offering the full 10-page report free if you’d like to read all 28 answers. Visit EWI to download the full report, free.

Here are 3 questions excerpted from the free report:

1. Didn’t Congress create the Federal Housing Authority, Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Banks for the purpose of helping the public buy homes?

You’re kidding, right? What happened is that clever businessmen schemed with members of Congress to create privileged lending institutions so they could get rich off the public’s labor. In return, members of Congress got big campaign contributions from the privileged corporations and, as a bonus, even more votes. The public’s welfare had nothing to do with it.

Who celebrated when Congress passed the latest housing bill? Answer: “The California Mortgage Bankers Association applauded Congress for permanently increasing the size of loans Fannie Mae and Freddie Mac can buy….” (USA, 7/28) The legislation exists to “protect the nation’s two largest mortgage companies….” (NYT, 7/24) Who took out full-page ads to encourage Congress to “enact housing stimulus legislation now”? Answer: the National Association of Home Builders. Who celebrated when the administration “unveiled a new set of best [sic] practices designed to encourage banks to issue a debt instrument known as a covered bond”? Answer: “[Treasury Secretary] Paulson was joined at the news conference by officials from the Federal Reserve [and] the Federal Deposit Insurance Corporation…. Officials from banking giants Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. issued a joint statement saying, ‘We look forward to being leading issuers’” (AP, 7/29) of covered bonds. And voters still believe that Congress is there to help the needy.

2. Who cares if a bank goes under? Won’t the FDIC protect depositors?

The FDIC is not funded well enough to bail out even a handful of the biggest banks in America. It has enough money to pay depositors of about three big banks. After that, it’s broke. But here is the real irony: The FDIC, as history will ultimately demonstrate, causes banks to fail. The FDIC creates destruction three ways. First, its very existence encourages banks to take lending risks that they would never otherwise contemplate, while it simultaneously removes depositors’ incentives to keep their bankers prudent. This double influence produces an unsound banking system. We have reached that point today. Second, the FDIC imposes costly rules on banks. In July, it “implemented a new rule…requiring the 159 [largest] banks to keep records that will give quick access to customer information.” As the American Bankers Association puts it, the new rule “will impose a lot of burden on a lot of banks for no reason.” (AJC, 7/19) Third, the FDIC gets its money in the form of “premiums” from—guess whom?—healthy banks! So as weak banks go under, the FDIC can wring more money from still-solvent banks. If it begins calling in money during a systemic credit implosion, marginal banks will go under, requiring more money for the FDIC, which will have to take more money from banks, breaking more marginal banks, etc. The FDIC could continue this behavior until all banks are bust, but it will more likely give up and renege. Remember, every government program ultimately brings about the opposite of the stated goal, and the FDIC is no exception.

3. Who are the “homeowners”?

Everywhere you turn, news articles are discussing how Congress, the President and the Fed are taking action to “help homeowners.” People’s understanding of this statement is 100 percent wrong. The homeowners in question are not the residents of the houses. The homeowners are banks. Unlike some states, Georgia made its law very specific on this point. Our local paper recently explained that, by recognizing the reality of ownership, “Georgia employs primarily a nonjudicial foreclosure” and therefore “has one of the fastest procedures in the country.” Specifically, “The property owner gives the mortgage holder a ‘security deed’ or a ‘deed to secure debt’. Technically, until the debt is paid, in full, the mortgage holder owns the property and allows the borrower to possess it.” (GT, 8/6) In states where the mortgage holder is deemed the property owner, the title is merely a legal technicality. The day he stops making mortgage payments, he no longer owns the property; the bank does. After foreclosure, many of those whom politicians and the media call homeowners will simply go from paying interest to a bank to paying rent to a landlord. For those with little or no equity, it’s not that big a deal. The real devastation is happening in banks’ portfolios, and banks, not home-dwellers, are the ones whom the government is trying to rescue, at others’ expense.

One might be tempted to charge therefore that Congress makes its laws for the purpose of helping banks. This idea, too, is incorrect. Helping banks is merely a side effect. The reason that Congress creates privileges for bankers is to benefit politicians. They make laws in response to campaign contributions from lending institutions, real-estate organizations and builders’ associations. They also garner votes from mortgage holders and, miraculously, from voters who think that their “representatives” are being “compassionate.”


The previous 3 questions and answers from Bob Prechter were excerpted from his recent 10-page market letter, The Elliott Wave Theorist.

Elliott Wave International is offering the full 10-page report free if you’d like to read all 28 answers. Visit EWI to download the full report, free.

 

Gold, the Dow, T-Notes: Which Does Best During Recessions?

By Susan C. Walker, Elliott Wave International
April 11, 2008

Each year, the NCAA college basketball tournament winnows its starting field of 64 teams to the Final Four teams who play for a chance to become the national champion. Congratulations to the University of Kansas and the University of Tennessee, this year's men's and women's basketball champions.

The structure of the NCAA tournament got me to thinking. Wouldn't it be great if we could set up brackets for our own investments the same way – start with 64 equities, bonds, mutual funds, commodity futures, metals, etc. Then let them duke it out against one another to see which ones emerge as the "Investment Final Four"?


Click here to download a free 5-page report from Elliott Wave International with even more information on which investment does best during recessions. The report, excerpted from Bob Prechter's Elliott Wave Theorist, includes in-depth historical analysis and six eye-opening tables.


Since most of us have neither the time nor the money to act as our own version of the NCAA (which might stand for the "National Coordinator of Asset Allocation"), it's worth knowing that Bob Prechter of Elliott Wave International has already set his mind to the task. He has specifically explored which investments do best in times of recession and which do best during economic expansions. But instead of starting with a field of 64 investments, he researched the three most popular investments – gold, the Dow, and Treasury bonds. We can call them the Treasured Three, rather than the Final Four.

Gold and Recessions

Since economists and even Ben Bernanke, chairman of the Federal Reserve, now admit that it looks like the U.S. economy has entered a recession, many people may wonder whether they need to change the mix of their investments. In particular, as some prices keep going up – notably for food and gas – the threat of inflation makes people more interested in gold as an investment, since it's usually seen as a bulwark against monetary inflation.

It is this conventional wisdom that piqued Prechter's curiosity. He wanted to find out whether it would hold up to a reality test. As he writes in The Elliott Wave Theorist, "I have often read, 'Gold always goes up in recessions and depressions.' Is it true? Should you own gold because you think the economy is tanking? Whenever we hear some claim like this, we always do the same thing: We look at the data."

So he and another Elliott wave analyst ran the numbers, reviewing the behavior of these three key investments during recessions following World War II, from February 1945 through November 2001. This is what they learned:

Gold was not the best investment during recessions in terms of total return.

The winner of this tournament was actually Treasury Notes, which had a total return of 9.96%. In contrast, gold had a total return of 8.80%, and the Dow came in at 6.89%. But that's not all – once they figured in the transaction costs for each investment (at a 2008 level), gold fell from second to third place as a worthwhile investment during recessions. The total returns with transaction costs came out this way:

1. T-Notes 9.82%
2. Dow 6.85%
3. Gold 4.80%

This result turns conventional wisdom on its head. It's also worth being aware of as you invest in 2008. Here's how Prechter sums up the results:

The Best Investment During Recessions

The most important question, however, is not whether the Dow beat gold or vice versa but whether making either investment would have been better than taking no risk at all. Table 3 [see free report provided by Elliott Wave International] shows that ten-year Treasury notes beat both gold and the Dow during recessions since 1945, and they did so far more reliably. T-notes provided a capital gain in 10 of the 11 recessions, and of course they provided interest income during all of them. And the transaction costs are low….

So if you want to make money reliably and safely during recessions and depression, you should own bonds whose issuers will remain fully reliable debtors throughout the contraction. Of course, as Conquer the Crash [Editor's note: Bob Prechter's best-selling business book] makes abundantly clear, finding such bonds in this depression, which will be the deepest in 300 years, will not be easy. Conquer the Crash forecast that in this depression most bonds will go down and many will go to zero. This process has already begun. This time around, you have to follow the suggestions in that book to make your debt investment work. [The Elliott Wave Theorist, March 2008]

 

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

 

Suddenly, It's a Bleak Midwinter for Housing and Lending

By Susan C. Walker, Elliott Wave International
January 7, 2008

In the bleak midwinter,
Frosty wind made moan,
Earth stood hard as iron,
Water like a stone…
(From "A Christmas Carol" by Christina Rossetti)

Shawn Colvin sings a beautiful song based on this poem by Christina Rossetti, reminding us of the bleakness of midwinter. That is exactly where the housing market seems to be now – facing its very own bleak midwinter of falling prices, rising mortgage rates and growing inventories.

The latest report of the S&P/Case-Shiller home price index shows that the price of houses fell 6.7% in October, year over year. That is the largest year-to-year decline drop since April 1991. Think of it – if you had bought a home for $300,000 in October 2006, it is now worth about $280,000. And suppose you just got a new job and need to move? You are going to have trouble selling it at that price, too, thanks to so many foreclosed homes on the market. One realtor in Phoenix explained to a Wall Street Journal reporter that local residents are now competing with foreclosed homes selling for $50,000 to $100,000 less than other houses on the market. "The sellers now are having to reduce their prices by 20% to 30% to compete," she says. (Wall Street Journal, "Pace of Decline in Home Prices Sets a Record," 12/27/07)

At a meeting of the New York Society of Security Analysts on January 7, U.S. Treasury Secretary Hank Paulson said this about the U.S. economy: "We will likely have further indications of slower growth in the weeks and months ahead.''

Paulson and central bankers at the U.S. Federal Reserve recognize that they, too, face their own bleak financial midwinter. It's not just the mayhem brought on by the subprime mortgage debacle, the implosion of the housing market and the ensuing credit crunch; nor is it that the U.S. economy lurches toward a recession and hard times.

No, it is something bigger than that. Public opinion or social mood, as we call it here at Elliott Wave International, has shifted from positive to negative. When that happens, financial heroes find themselves falling from their pedestals onto frozen earth hard as iron.

Exhibit A - The headline of a recent article on Bloomberg: "Paulson Gets Diminishing Return with Bush, Like Powell, O'Neill" and the lead: "Henry Paulson escaped the Nixon White House with his reputation enhanced. He won't be so lucky this time around."

Exhibit B - The lead from a recent column by David Ignatius in the Washington Post:

"When airport rescue crews are worried that a damaged plane may have a crash landing, they sometimes spread the runway with foam to reduce the probability of fire on impact. That's what the Federal Reserve and other central banks are doing in pumping liquidity into severely damaged financial markets. Make no mistake: The central bankers' announcement Wednesday of a new coordinated effort to pump cash into the global financial system is a sign of their nervousness…."

Nervousness is in the air now. Investors are anxious about the markets; everyone is worried about the housing market. Our Elliott Wave Financial Forecast December issue explains how housing starts (and stops) are intimately tied to recessions: "One key indicator of success in pre-dating economic downturns is housing starts, which are approaching the 1-million-a-month level that has preceded all recessions of the last 40 years."

And the Fed is nervous, too. So much so that it announced a credit giveaway with four other major central banks (the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank) in mid-December to try to bolster the financial system and the banks that keep it humming. The Fed reports that banks have been stepping up to its auction window each week to purchase $20 billion. Unfortunately for the banks, most of this "liquidity" isn't that liquid. It has to be paid back within 30 days, with interest of about 4.65%.


Editor's note: Elliott Wave International has agreed to make available to our readers a 2-1/2-page excerpt from Bob Prechter's Elliott Wave Theorist in which he describes exactly how the Fed's latest effort to shore up banks' balance sheets has become "High Noon for the Fed's Credibility." Click here to read the Theorist excerpt.


Just how bleak is the future for central bankers if this recently implemented plan doesn't work? Bob Prechter explains in his just-published Theorist:

"Nevertheless, this is probably the single most important central-bank pronouncement yet. But it is not significant for the reasons people think. By far most people take such pronouncements at face value, presume that what the authorities promise will happen and reason from there. But the tremendous significance of this seismic engagement of the monetary jawbone is that if this announcement fails to restore confidence, central bankers' credibility will evaporate."

"At least that's the way historians will play it. But of course, the true causality, as elucidated by socionomics, is that an evaporation of confidence will make the central bankers' plans fail. The outcome is predicated on psychology."

The "socionomics" Prechter refers to is a new social science he has introduced that studies how humans behave in groups within contexts of uncertainty – where fluctuations in social mood motivate social actions. It explains that rather than an event happening that affects social mood (for example, falling home prices make people feel bad), what really happens is that social mood changes first from positive to negative and then lousy things happen (for example, unhappy people make home prices fall). If you can adopt this point of view, then you can see that, in poetic terms, we are fast approaching a bleak midwinter for the economy and the financial markets.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

Subprime Delivers One-Two Punch
Just Like Hurricane Katrina Did

By Susan C. Walker, Elliott Wave International
November 29, 2007

The world is awash in bad news about the subprime mortgage meltdown, just the same way that New Orleans was awash in floodwaters from Hurricane Katrina two summers ago. A few examples:

  • The median price for new home drops 13% since last year, the most in 37 years, according to a Census Bureau report on November 29. This due in large part to buyers not being able to get financing now that lenders have tightened their lending standards in response to the subprime debacle.
  • Major Wall Street banks write off billions of dollars in subprime-backed securities.
  • Dire forecasts estimate that the credit crunch caused by the mortgage problems will cause between $250 billion to $500 billion of losses at banks and brokerages before it's done.

If you want to see how this kind of news looks on a price chart, consider the chart that we published in the latest Elliott Wave Financial Forecast. It shows how confidence in the mortgage market has simply fallen off a cliff. "The ABX Mortgage Indexes are akin to the eerie music that starts to play right before the goriest scenes in a horror movie," write our analysts Steve Hochberg and Pete Kendall. Even prime-rated mortgages (the top line on the chart) seem to have been tainted by the cliff-diving exploits of the subprime and Alt-A mortgage indexes.


Editor's note: Elliott Wave International invites you to read more about this Mortgage Mutiny chart in a special three-page excerpt from the November 2007 Elliott Wave Financial Forecast, called "Transition to a Fear of Risk."


The continuing repercussions of the subprime meltdown since two Bear Stearns' hedge funds imploded in August remind me how closely this situation imitates the delayed punch of Hurricane Katrina in the summer of 2005. In fact, I wrote a column for Fox News on that very topic a few months ago, some of which is worth repeating.

* * * * *
[Excerpted from "Subprime Storm Mimics Katrina," originally published July 30, 2007]

Wall Street may have reason to worry about a financial hurricane poised to do the same kind of damage Hurricane Katrina did — in terms of money and assets lost — in New Orleans in 2005. Given the latest storm warnings about subprime mortgages and the Dow’s dive last week, it looks like "Subprime Katrina" might become the financial storm of the decade.

Wall Street investment bankers who remember the devastation in New Orleans might want to start battening down the hatches. In fact, some of them seem to understand their pending doom as they try to cajole the rest of the world into thinking that the subprime (otherwise known as low-quality) mortgage contagion is contained. 'Sure, sure, Bear Stearns got hit when its subprime hedge funds lost their value, but everyone else is O.K.,' they say. 'Let's all heave one collective sigh of relief that we dodged that bullet.'

Does that attitude sound familiar? It's exactly how the people of New Orleans felt for the 8-10 hours after Hurricane Katrina whipped up the Gulf Coast and dumped its rain. It was over; they had dodged the bullet. Their beautiful city that is built below sea level and surrounded by sea walls and levees was safe. That's where Wall Street is right now – hoping the levees will hold as investment bankers try to sandbag the rest of us with lots of placating talk. Well, it turns out that New Orleans was about as safe as the subprime bonds that are now below their own "C" level.

Although Wall Street bankers have been doing one heckuva job, I think it's too soon to breathe easy, just as it was too soon for those in the Big Easy to breathe easy. Here's why: Wall Street was warned about the coming hurricane-force fall-out from subprime mortgages, and it ignored the warnings, buying up all the securities backed by subprime mortgages that it could. Now, Wall Street is having trouble selling more debt. It sounds like it may be too late for many Wall Street denizens to get out of town – and their positions – before the floodwaters start rising.

Remember, too, the finger-pointing and blaming that started as soon as the rest of the nation realized that the U.S. government was not doing enough to help New Orleans? The editors of The Elliott Wave Financial Forecast recognize a similar change in attitudes toward Wall Street:

"The unwinding process will be sped along by a flood of revelations about illicit hedge fund and investment banking activities. Just as Enron, Tyco and a host of other primary beneficiaries of the late 1990s bull market run became the focus of scandals, hedge funds and the banks that enabled them are starting to become a focal point for scrutiny." (The Elliott Wave Financial Forecast, July 2007)

Then will come the final installment. Just as the U.S. government was slow to come to grips with the disaster in New Orleans so that people were left to fend for themselves, so too will investment bankers and investors have to fend for themselves. They may find themselves clutching their worthless paper and wishing someone would bail them out from the rooftops of their now-worthless homes.
* * * * *

Now, here we are at the end of November, and the situation for investors and investment banks has played out almost exactly as I outlined. Hardly anyone is coming out smelling like a rose. If anything it's the opposite, as the stench from quarterly financial filings rises as banks reveal how many billions in dollars they must write off for their mortgage investments gone bad. Sadly, the conclusion to my Subprime Katrina column still holds true: "Heckuva Job Brownie – now known as Helicopter Ben Bernanke and his Federal Reserve team – won't have any more luck picking up the pieces on Wall Street than FEMA did in New Orleans."

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

How To Recognize a Financial Mania When You're Smack Dab in the Middle of One

By Susan C. Walker, Elliott Wave International
November 12, 2007

When you're caught in the middle of a bad storm, you don't really care whether it's a tropical depression or a full-strength hurricane. You just know you're hanging on for dear life. The same idea applies to financial markets. When a market is trending up strongly, it's hard to tell whether it's just a bull market or a more dangerous financial mania.

The recent tremendous ride up for global and U.S. financial markets, including the Dow, looks and feels more like a mania than a mere bull, says Elliott Wave International analyst Peter Kendall. This distinction is important to recognize in the rising stage, because manias always result in a crash that takes them back beneath their starting point.

Kendall recently published his research into current financial manias throughout the world in SFO (Stocks, Futures and Options) magazine. The article, titled "Financial Manias and the Trade of a Lifetime," suggests an even more stunning finish for the current manias: "The speed and global scope of the unfolding credit crisis suggest that most of the fast-rising markets of the last decade will crash in unison," he writes.


Editor's note: Elliott Wave International invites you to read the full five-page article with charts from the October 2007 SFO magazine by Elliott Wave International's Pete Kendall called "Financial Manias and the Trade of a Lifetime."


As co-editor of The Elliott Wave Financial Forecast, Kendall searches for trends that help traders to move in and out of markets. By comparing other historic manias with the impressive rise of the DJIA since the late 1970s, he focuses on the skyscraper pattern that they all have in common. The four historical manias are the Dutch Tulip mania of the 1630s, the South Sea bubble of 1720, the U.S. stock crash of 1921-1932 and the dot.com bust of the 1990s and early 2000s. Once you can see the similarities, you will be better prepared to face the music when the crash comes. As Kendall writes, "once the belief that the markets will always rise becomes widespread, it actually signals the start of a price swing that tends to be a career-breaker for any trader who tries to oppose it."

He also discusses current manias, such as the Nikkei, which has yet to return to its start after a manic rise to its all-time high in December 1989, and the Dow, which reversed from its rise in 2000 but made a U-turn in 2002. The starting point for the Dow's mania as shown in the chart included in the article is at the 1000 level.

Kendall, who is also writing a book about financial manias, titled The Mania Chronicles, describes five telltale signs that help an investor to tell the difference between a regular bull market and a mania. It's a mania if:

1. There is no upside resistance, and rising prices seem to be perpetual.
2. Everyone in the market looks like an expert.
3. There is a flight from quality investments to riskier investments.
4. As financial bubbles pop in one area, they bubble up in others.
5. The crash after the peak takes back all the gains the mania made.

No. 5 can be viewed only with hindsight. But the first four signs provide essential clues to what's shaping up in the markets.

"By studying past mania experiences, traders can gain valuable insight into the collective emotions that drive their markets," writes Kendall. "It's possible to make significant money in the advancing stages of a mania with no knowledge of its existence. But there is nothing like recognizing a mania for what it is in real time to help a trader keep those gains and deal with the relentless crash after it peaks."

In the last part of the SFO article, he asks the key question, Are we at the peak yet? Find out his answer by reading the whole article for yourself.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

Wanted: Prime Suspect of Housing Market Murder

By Susan C. Walker, Elliott Wave International
October 8, 2007

Helen Mirren accepted her Emmy award for best actress in the mini-series, "Prime Suspect" with elegance and grace. Just the opposite of the tough detective superintendent character she plays who tracks down murder suspects in England. Who would Jane Tennison pick out as the prime suspect for the murder of the U.S. housing market and the resulting gruesome credit crunch?

Suspect No. 1 – Phil Spector
No – sorry, wrong case, wrong suspect. Spector has been on trial for the murder of a guest at his home (the judge declared a mistrial this week), but Spector has nothing to do with the subprime mortgage fallout and ensuing credit crunch. O.J. Simpson, who stands accused of trying to "recover" his sports memorabilia, is not the prime suspect either. If the crime doesn't fit, you must acquit.

Suspect No. 2 – Alan Greenspan
Says that he didn't catch on for a few years that subprime mortgages could create a problem for the economy. As chairman of the Federal Reserve, he let easy credit ride, which facilitated the housing bubble and the subsequent implosion. Could liken his behavior to supplying the gun to a rampaging murderer. Guilty of aiding and abetting, but he's not necessarily the prime suspect.

Suspect No. 3 – Angelo Mozilo
Angelo Mozilo, CEO of Countrywide Financial (largest mortgage company in the United States), says he kept his staff writing subprime mortgages day and night, because if they didn't, then home purchasers would just find someone else to give them a low-quality mortgage. Company went from writing 4.6% of its overall mortgages as subprimes and low-documentation loans in 2004 to 8.7% in 2006. Guilty of greed and a poor business plan but not murder.

Suspect No. 4 – S. & P. and Moody's
Oh, whoops, say these rating agencies, we thought that once you sliced up a BBB security thinly enough and packaged it with other more desirable collateralized debt obligations that we could call it AAA. Did we mislead anybody? Again, aiding and abetting but not a prime suspect.

Suspect No. 5 – Goldman Sachs and other investment banks
Says that their investors wanted higher returns and that collateralized debt obligations spiced up with subprime mortgages served the purpose. And besides, they say, the rating agencies gave them an excellent rating. Guilty of acting like a fence but not the prime murder suspect.

The True Prime Suspect
All of these are worth a look as suspects, but the true prime suspect has neither a first name nor a last. It's known as "social mood," and its m.o. is "herding behavior." That's our real murderer, the one that quashed the hopes and dreams of those who believed that house prices would always go up. Social mood changed, and with it changed the idea of what were smart financing moves to purchase a house. Suddenly, as house prices began to fall and subprime mortgagees began to default on their loans, the stick house built on low-quality mortgages seemed like a really bad idea.

Who knew? When social mood was positive, mortgage writers pushed people who couldn't really afford a mortgage into believing they could. Then they sold the mortgages to eager investment bankers who sliced them up into small packages of risk and re-packaged them with less risky securities. Then the ratings agencies gave their stamp of approval: AA? Why not AAA? And eager investors who wanted higher returns bought them up.

But now the game is up. When social mood turns from positive to negative, fear replaces greed, and people begin to see the riskiness for what it is. When social mood changes from positive to negative, markets turn from bullish to bearish. And no one can stop it – not even the Fed.

This is how Bob Prechter, president of Elliott Wave International, describes the phenomenon:

"Like credit inflation, credit deflation is in fact an intricate, interwoven process, whose initial impetus is a change in social mood from optimism toward pessimism. If you are still on the fence about this idea, ask yourself: What changed in the so-called “fundamentals” between June and August? The answer is: absolutely nothing. Interest rates did not budge; there were no indications of recession; there were no changes in bank lending policies; there were no chilling government edicts.

"The only thing that changed was people’s minds. One day sub-prime mortgages were a fine investment, and the next day they were toxic waste. There was no external cause of the change.… According to socionomic theory, the stock market is a sensitive indicator of such changes in mood. This is why The Elliott Wave Theorist has continually said that the financial structure will hold up as long as the stock market rises. A downturn occurred in mid-July, and its consequences in terms of negative social mood are becoming swiftly evident. Remember, C waves (see Elliott Wave Principle, Chapter 2) are when optimistic illusions finally disappear and fear takes over. Sounds like now." [Elliott Wave Theorist, September 2007]

How To Protect Yourself from the Prime Suspect Who is Still on the Loose

Social mood has turned ugly and is likely to continue its murderous rampage, leaving the policymakers helpless. As analysts Steve Hochberg and Pete Kendall write in The Elliott Wave Financial Forecast: "The Fed does not "inject" liquidity; it only offers it. If nobody wants it, the inflation game is over. The determinant of that matter is the market. When bull markets turn to bear, confidence turns to fear, and a fearful people do not lend or borrow at the same rates as confident ones. The ultimate drivers of inflation and deflation are human mental states that the Fed cannot manipulate."

What should you do to protect yourself in this time of falling home prices, a powerless Fed and a contracting economy? Bob Prechter wrote one of the best how-to books. It's his business best-seller, titled, Conquer the Crash, How To Survive and Prosper in a Deflationary Depression. You might want to start there.

Editor's Note: You can read a FREE 9-page chapter from Conquer the Crash –
You will learn the implications of the massive credit expansion, what triggers the change from boom times to recession, and more.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

Why the Fed is Such a Lousy Wizard of Oz

By Susan C. Walker, Elliott Wave International
September 7, 2007

Central bankers who "follow the yellow brick road" end up in Jackson Hole, Wyoming, every Labor Day weekend for their annual symposium sponsored by – who else? – the Kansas City Fed. (Who can forget Judy Garland saying to her little dog, "Toto, I've got a feeling we're not in Kansas anymore," in the 1939 movie, The Wizard of Oz?)

The Jackson Hole Resort serves as the Federal Reserve's equivalent of the Emerald City, as Fed governors and presidents meet with central bankers and economists from around the world to discuss economic issues. This year, the symposium focused on housing and monetary policy. Usually, the Fed chairman kicks off the symposium and, this year, the new chairman, Ben S. Bernanke, did the honors. He closed his speech with these words:

"The interaction of housing, housing finance, and economic activity has for years been of central importance for understanding the behavior of the economy, and it will continue to be central to our thinking as we try to anticipate economic and financial developments."

Then came the other speeches. And it seems that some of the guests in Emerald City were waiting for their chance to pull back the curtain and prove that the Wonderful Wizard of Oz isn't such a wizard after all. Bloomberg reported that "Federal Reserve officials, wrestling with a housing recession that jeopardizes U.S. growth, got an earful from critics at a weekend retreat, arguing they should use regulation and interest rates to prevent asset-price bubbles." Apparently, one academic paper presented at Jackson Hole graded the Fed an 'F' for the way it has handled the repercussions from the rise and fall of the housing market.

Truth be told, these folks are a little late to the table as critics of the Fed. We're glad they're joining us, but here's what they still haven't learned: It isn't because the Federal Reserve messes up by allowing credit, asset and stock bubbles to form that it's not a wizard. The Federal Reserve isn't a wizard for one particular reason that it doesn't want anybody to know – and that is that the Fed doesn't lead the financial markets, it follows them.

People everywhere want to believe in the Fed's wizardry. But all this talk about how the Fed will be able to help the U.S. economy and hold up the markets by cutting rates now is as much hooey as the Wizard of Oz promising Dorothy, the Scarecrow, the Tin Man and the Cowardly Lion that he could give them what they wanted: a return to Kansas, a brain, a heart, and courage. Because when the Fed does do something, it always comes after the markets have already made their moves.

If you don't believe it, you should look at one chart from the most recent Elliott Wave Financial Forecast. It compares the movements in the Fed Funds rate with the movements of the 3-month U.S. Treasury Bill Yield. What does it reveal? That the Fed has followed the T-Bill yield up and down every step of the way since 2000. And the interesting question becomes this: Since the T-bill yield has dropped nearly two points since February, how soon will the Fed cut its rate to follow the market's lead this time?

[Editor's note: You can see this chart and read the Special Section it appears in by accessing the free report, The Unwonderful Wizardry of the Fed.]

We've got our own brains, heart and courage here at Elliott Wave International, and we've used them to explain over and over again that putting faith in the Fed to turn around the markets and the economy is blind faith indeed.

"This blind faith in the Fed's power to hold up the economy and stocks epitomizes the following definition of magic offered by Teller of the illusionist and comedy team of Penn and Teller: a 'theatrical linking of a cause with an effect that has no basis in physical reality, but that – in our hearts – ought to be.'" [September 2007, The Elliott Wave Financial Forecast]

Because, you see, what makes the markets move has less to do with what the unwizardly Fed does and more with changes in the mass psychology of all the people investing in those markets. The Elliott Wave Principle describes how bullish and bearish trends in the financial markets reflect changes in social mood, from positive to negative and back again. To extend the metaphor: The Fed can't affect social mood anymore than the Wonderful Wizard of Oz could change the direction of the wind that brought his hot air balloon to the Land of Oz in the first place.

As our EWI analysts write, "With respect to the timing of the Federal Reserve Board rate cuts, we need to reiterate one key point. The market, not the Fed, sets rates." Being able to understand this information puts you one step closer to clicking your ruby red shoes together and whispering those magic words: "There's no place like home." Once you land back in Kansas, your eyes will open, and you will see that an unwarranted faith in the Fed was just a bad dream.

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

Subprime's New Song: The Worst Is Yet To Come

By Susan C. Walker, Elliott Wave International
August 28, 2007

Remember that catchy love song that Frank Sinatra made popular in the 1960s, "The Best Is Yet To Come"?

"The best is yet to come and, babe, won't that be fine?
You think you've seen the sun, but you ain't seen it shine."

At the risk of mixing musical metaphors and styles, it looks more like the sun has deserted us right now in the financial markets, and we're about to see "The Dark Side of the Moon," the title of Pink Floyd's 1973 smash album. With the subprime mortgage problems reaching farther and farther out to touch hedge funds, U.S. and European banks, mortgage companies and money-market funds, what we're going to experience sounds more like "The Worst is Yet To Come."

That's because the financial markets must contend not only with the credit crunch brought on by rising foreclosures now; they must also deal with the repercussions from more foreclosures over the next 18 months as more adjustable-rate mortgages (whether subprime or not) reset from low teaser rates to higher interest-rate levels.

How bad can it get? Investment adviser John Mauldin recently published a month-by-month account of the dollar amount of mortgages that will be reset through 2008, and the largest reset amounts pop up in the first six months of next year. In fact, as he points out, the $197 billion of mortgage resets so far this year is "less than we will see in two months (February and March) of next year. The first six months of next year will see more than the total for 2007, or $521 billion."

So, we haven't even begun to feel the pain yet. It's bad enough for the folks who will find that they can't keep up with the higher mortgage payments and will have to move out of their homes. But the financial markets won't be catching a break either. The antiseptic phrase used to describe the situation is "repricing risk." That means that investors have woken up to the fact that the AAA-rated mortgage-backed securities and derivatives they invested in look more like junk bonds now. This eye-opener causes them to want higher yields from what they now see as riskier vehicles.

That new investor caution plays out this way: investment banks, hedge funds and any other entity that bought securities backed by subprime loans now find it hard to sell the darn things. It's almost the same as homeowners trying to find buyers for their homes – nearly impossible in a market where home prices are falling. In the financial markets, it's nearly impossible because no one even wants to attach a price to a collateralized debt obligation today for fear that it will be priced much lower tomorrow.

The Fed can try to calm such fears all it wants by lowering the discount rate and giving banks more time to pay back loans (from overnight to 30 days), but the real problem can't be fixed with more access to credit. The fact is nobody wants any more of that. What they really want is cash to pay off their debts, be it a mortgage or an unwinding of a securities bet.

Wall Street's denizens are in the dark about how much their schemes depend on the ocean of liquidity created by the bull market, say Elliott Wave International's analysts, Steve Hochberg and Pete Kendall. They are particularly struck by the image of the Grim Reaper that Business Week magazine put on its cover recently with the headline, "Death Bonds:"

"The grim reaper is the perfect visage to welcome the arriving wave of liquidation; it will wreak havoc with their work. The field's dark fate is clear in one fund manager's description of what caused 'forced sales' at another fund: 'The models work when they look at history, but not when history is all new.' What's 'new' is that for the first time in the experience of many model makers, confidence is on the run. As they rob Peter to pay Paul, all assets will be impacted in negative ways that do not compute in their models." (The Elliott Wave Financial Forecast, August 2007)

And the bad news just keeps accumulating:

  • Housing prices dropped 3.2% percent in the second quarter compared with last year, the largest drop since Standard & Poor's started tracking home prices in 1987.
  • CIT Group closed its mortgage unit this week, while Lehman Brothers closed its own last week. Mortgage companies that specialize in low-quality mortgages are either going out of business (London-based HSBC) or struggling (California-based Countrywide).
  • The Wall Street Journal lists the number of fired employees at seven mortgage companies, including First Magnus (6,000), Capitol One's Greenpoint (1,900), Associated Home Lenders (1,600) and Lehman (1,200), which totals more than 12,000 suddenly unemployed mortgage writers.

To top it off, Bloomberg reports that the subprime mess may lead to lower bonuses for the first time in five years on Wall Street, according to Options Group, a company that's been tracking this kind of information for a decade.
Somewhere, the world's smallest violin is playing a sad song for the fund managers and investment bankers who won't be taking home that million-dollar-plus bonus this year. And Frank Sinatra is singing a sad refrain… "The worst is yet to come."

Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.

For more information on the housing market and the credit crisis, access the free report, “The Real State of Real Estate,” from Elliott Wave International.
 


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