-One of the most interesting and appealing features of the BAM model (for me at least) is its apparent ability to predict sea-change events in markets. These turning points–whether related to shifts related to nature or human mass psychology–produce major tops or bottoms and are, at times, very surprising given an otherwise contrary consensus fundamental view. But, with its benefits, it also at times, gives me an uneasy feeling about what might lie ahead if its predictions do indeed come to fruition. At times its predictions seem harmless in relation to our everyday lives, as in the case of its very unlikely call during May of 2004 that OJ would end its fourteen year bear market. That call turned out to be correct and although it was, in retrospect, mainly due to the string of hurricanes that would batter Florida later that summer–along with the death of the Atkins low-carb diet craze–the fundamentals that drove the move were fairly harmless. At other times though—and I’m speaking specifically about the current predictions regarding the US stock and bond markets—the predictions are much more ominous with respect to the fundamental fall-out that might result from its call being correct.
-Here’s what we said about the market over the past several months-
April 2 Report- “All I can say is that I am certain of what the model is saying about the current set up and once it breaks—even if that occurs after another higher high—we will most likely witness something that none of us have witnessed before in real time. I hope I’m completely wrong about what I think we’re facing because it looks to be more than a normal bear market.”
April 30 Report- “The chart draws a nice clear picture of falling domino’s and although the outcome of this (housing) bubble seemed as predictable as anything I’ve ever watched, the shorts were “chased away” in each and every group unless they had a strong enough conviction to either stand their ground or add to their shorts as others gave up and “went away.” I have to believe that we’re seeing a similar move now in certain banks and/or brokers. Common sense says there’s got to be another “shoe to drop” related to the ridiculous loans that were written (maybe a few more pairs of shoes in fact) so it might be a good time to dig a little deeper in order to determine where the garbage was dumped.”
May 14 Report- “Something is out of whack and price will eventually provide the answer but my hunch, based on the model’s forecast, is that the NDX is correct in its pricing while the rest of the market averages—led by bubble-like advances in energy, financials and the possibility of further LBO’s–have it wrong up here. In other words, we believe the investment environment is about to change so drastically that the major averages will be viewed as wildly over valued as opposed to technology being viewed as wildly undervalued. We mentioned this idea months ago and we’re now starting to hear others echo our sentiments. The big-boys are piling into LBO’s, using private equity financing, at as hectic a pace as individuals were piling into the real estate market using subprime financing two years ago and we believe both will meet the same demise because it doesn’t matter how smart they are, if you give human beings a long enough rope, (enough leverage) they’ll hang themselves every time.”
June 11 Report- “We experienced a rare “capitulation sell signal” in the XBD hourly model last week and this is a very important development because I had always assumed we were going to make a bull market top followed by a correction followed by new highs a few years from now but I’m beginning to believe that we are witnessing a top of epic proportions.”
June 11 Report- “Again, the fact that the housing market has crashed with rates barely wiggling higher and the fact that they’re (investors, commentators etc.) even focusing on the possibility of a 5% or 6% or even 7% yield creating problems for the US stock market confirms our thesis that once again everyone is massively overleveraged. Let’s face it, this is a gambling generation and somebody somewhere is making a ridiculously large bet that will eventually take the market out by its knees because the only difference between an individual making a monumentally bad decision at exactly the worst time and a hedge fund making a monumentally bad decision at exactly the wrong time is purely in the size of the bet. Human nature doesn’t change and the only difference in a harmlessly bad decision and a tragically bad decision is the level of leverage backing the bad decision.”
June 11 Report- “Human behavioral cycles are so cruel it’s amazing. Just think about where we’ve come from in the current cycle and where it will likely lead us. Low interest rates and exotic mortgage instruments allowed an increase in risk appetite at precisely the wrong time. The housing bubble–fueled by no-money down, interest only ARMS’s and endorsed by Alan Greenspan at the exact moment 30YR fixed rates were at an all-time low—is now facing new, more strict, lending rules, higher rates and plunging prices.”
June 18 Report- “I have to wonder about recent news concerning sub prime mortgage exposure. I wonder if there are a few funds feeling the same way that I felt on that ice years ago. They probably know the ice is getting thin and they probably know the illiquid nature of their holdings, if the ice ever breaks, will carry them straight to the bottom.”
June 18 Report-
-Equity fund cash levels just posted a record low of 3.7% which broke the previous record of 3.9% set in May 1972 prior to the worst bear market since the Great Depression.
-The SEC recently voted to abolish longstanding rules that restricted short selling in declining markets.
-1st quarter 2007 broke the previous nationwide foreclosure record of the 4th quarter of 2006 and we’re not even in an economic recession.
-A record 157 billion was invested in commercial real estate during the January-April 2007 period.
-Housing demand at the high end is masking the dramatic decline in home prices at the entry level. Declines of 20-40% have already taken place.
June 18 Report- “One of the reasons I believe we’ll see another push higher is that the move off the top I’m expecting should be a straight-line cascading decline without a big bounce like the one we saw late last week. If I’m correct, that means that the next decline will be even worse than the one we just saw off the highs. This would be very unusual (a multi hundred point decline straight off a new all time high) but it has happened before and this cluster of sell signals we’re triggering up here call for a tremendous straight-line decline so we have to believe that we’re about to see a rare anomaly.”
Full report coming soon
