Monthly Archives: May 2008

2008…A Bad Year to Quit Sniffing Glue

 In the 1980 movie “Airplane,” actor Lloyd Bridges responded to a crisis in the air traffic control tower by making a series of ever more outlandish comments regarding giving up those things he considered potentially helpful when dealing with stressful periods.  “Looks like I picked the wrong week to quit smoking,” was soon followed by “looks like I picked the wrong week to quit drinking” which gave way to “looks like I picked the wrong week to quit amphetamines,” and finally—just prior to passing out and collapsing on the floor—“looks like I picked the wrong week to quit sniffing glue.”

They Just Keep Calling the Bottom

Back in February, the cover of Barron’s read, “Have the banks Finally HIT BOTTOM?” and Michael Santoli wrote extensively about contrary indicators like the Barron’s confidence index, Investor’s Intelligence sentiment numbers, Merrill Lynch’s monthly fund-manager survey, Birinyi Associates blogger sentiment poll, and Robin Carpenter’s hedge-fund equity exposure, all registering bearish readings indicative of important market bottoms.  Then, on page 26, a stock strategist named James Finucane, said that the “panic lows” set on January 22 and 23—when the INDU sank as low as 11,508—marked “an extraordinary low” that will hold.  In fact, he went on to compare that low to other historic “panic” lows seen in 1970, 1984, 1987, 1994, and 1998.  Page M1 also asked the question “Could the successful defense of the former lows last week turn the tape positive..?”  Even the Market Watch section highlighted David Kotok of Cumberland Advisors as saying “Early evidence suggests that the US market bottomed on January 22.  Subsequent trading in U.S. markets has tested that level three times but didn’t sell down to that level.”  Unfortunately, after all of these analysts had called “the bottom,” the market promptly plunged through the January lows and broke to fresh lows during March in most of the major averages.   And now, over one month after that March plunge, the talking heads in Barron’s are once again telling us that an important low is in place sighting strength in the TRANS (breaking to new multi-week highs) as a sure sign they’re correct in this bullish view.  Unfortunately for the bulls, if the market continues to track the BAM model (as it has all year long) the TRAN WILL CRASH.  That’s right.  The TRANS is now showing the MOST dangerous configuration of the entire year and I think we’re mere days away from a free-fall that should catch the majority wrongly positioned and scrambling to right themselves by SELLING shares into a declining tape. 

2007-2008 Debacle Has Been No Surprise to BAM Model 

Since the summer of 2005, when the BAM model correctly identified a MAJOR top in the real estate bubble, I’ve been telling subscribers that what I see in the model over the coming years “DOES NOT LOOK LIKE A NORMAL BEAR MARKET.”  In fact, the model has been making ever more outlandish predictions about markets of all kinds and, unfortunately for investor on the wrong side of the markets, it’s been spot-on so far. 

As we move forward during the unwinding of what will most likely be viewed as an “unprecedented bungling” of the entire world’s financial system—and thanks in large part to the leverage associated with high-octane derivatives products—I think we’re all going to be forced to expand our perception of what might be possible with regard to market movement and “value.”  

Perception 

“Value” has always been and will continue to be, highly dependent upon perception.  For instance, what is the “value” of the US dollar?”  What is the value of a home?  What is the value of a building?  What is the value of food?  What is the value of water? 

In the Solomon Islands, dolphin teeth have steadily increased in value against the USD but you’d be hard pressed to use them to buy a Gucci handbag in New York City.  Ironically though, the USD has probably never had a higher level of “perceived value” than it now has as it is backed by absolutely nothing but goodwill and self-confidence that the USA will, at some point in the future, change that fact.  We all know the USD is potentially worthless (in that it is no longer backed by Gold and Silver) so unless we attach to it a value based on the perception that the US is a super-power willing–or more importantly able–to pay what we owe all of those who have been so kind as to lend us the cash flow necessary to continue operating, there would conceivably be a mass exodus from our dollar.  Now I’m not trying to be alarmist or extreme, I’m just trying to make the point that we, as emotion-driven human beings, tend to view the world based on ideas and “perceived” truths that are based on years of conditioning.  But unfortunately, when those truths are at a historic inflection point, we tend to be slow to take in the new reality or to even entertain the idea that a new reality (truth) might be coming soon. In reality, all it takes is a collective shift in emotion whereby fear becomes a more powerful driver than greed, and once that switch is “flipped” the perception of “value” can no longer be calculated by pointy-headed number crunchers, because the entire game has changed from an offensive battle (one of accumulating “stuff” that is rapidly inflating) into a defensive battle (one of protecting your existing “stuff” while refusing to acknowledge value in other people’s stuff unless the perceived value becomes so compelling that it is impossible to refute.)  

The bottom line, and what I’m trying to get you all to consider, is that investors’ perceptions of “value” are driven by long-term waves of optimism and pessimism and as we move through a period of prolonged optimism and into a period of prolonged pessimism (as the model says we are), it behooves us to think strategically about what those changes in perceived value will mean to our families, friends, businesses, governments, financial markets, etc. 

The BAM Model’s CRASH Call–Chicken Little or Dead-Right? 

I can’t tell any of you (with 100% certainty) that we would have crashed if the FED had not stepped in during the August 2007 decline, the January 22 decline, or the March 10th and 17th declines, but the fact that they stepped in and lowered rates more aggressively than at any other point in history and also extended help directly to the brokers for the first time since the stock market crash of 1929, at the exact points in time where the BAM model had flagged “crash windows,” should give us a few hints as to their perception of the severity of our current problems.   Analysts have also written extensively over the past several weeks regarding the “what if” had Bernanke and company not stepped in the halt the slaughter.   Particularly interesting to me—since the BAM model had predicted over a year ago that we’re entering a period very reminiscent of the 1929-1932 period—is just how many people are now making comparisons to that terrible period in US stock market history.  

BAM Model Major Calls for 2008 

-TRANS CRASH COMING
-CRUDE CRASH COMING

Chart 1

Chart 2

 Full report coming soon

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