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Futurewatch Report...next 6 months

  1. croupier

    5,447 Posts.

    October-November rally 2002 = October-November rally 1931?
    by futurewatch
    03 November 2002 10:21 UTC
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    October-November rally 2002 = October-November rally 1931?

    (See qualification below).

    Deteriorating economy then and now:

    "Data shows US economy weak but market rises"

    The above is a title of an article on ft.com, November 1, 2002.

    It opened with:

    "US investors on Friday shrugged off weak economic data on jobs and spending that suggested the economy was in danger of relapsing into recession..."

    From the washingtonpost.com:

    "In the past two weeks a flurry of indicators suggest the economy weakened sharply in September and October," economist Joseph T. Abate of Lehman Brothers in New York told his firm's clients. "With momentum flagging, the rapid erosion in confidence and the pickup in uncertainty are likely to severely restrain consumer and investment spending over the next three to six months."

    Abate wrote that the fall in vehicle purchases in September and October indicates "the consumer response to incentives appears to have gotten weaker with each re-introduction of interest free financing. Likewise, a sharp pullback in durable goods orders in September suggests that businesses are not yet ready to expand capacity" (John M. berry, Economic Recovery winding down, November 2, 2002).

    Sharemarket 1930-31

    The rally after the October 9 low has a bare resemblance to the third suckers’ rally of 1931. (See quote below for the bad economic backdrop to this rally).

    The Dow Jones from the October 5 low rose 35% to the November 9 high and then declined 36.8 percent to the low for the year on December 17, 1931.

    It was during this rally the New York Reserve Bank raised the discount rate from 1.5 to 2.5 on October 9 and raised it again to 2.5 on October 16.

    So I thought it was interesting that last Thursday "the Fed’s board of Governors agreed to raise the discount rate" (Fed Raises Rate for Banks, washingtonpost.com, November 1, 2002).

    Tim Ahmann from reuters.com noted that:

    "The new rules go into effect on Jan 9, 2002, are intended to reduce swings in the federal funds rate in times of market stress... (Fed OKs Major Changes to Bank Lending, October 31, 2002).

    The Dow this year has experienced three suckers’ rallies (as I count them) just as in 1931.

    The Dow Jones from the September 3, 1929 high was down 69.4 percent to the November 9, 1931 rally high.

    The Nasdaq from September 1, 2000 to November 1, 2002 is down 67.8%; or from the March 10, 2000 high it is down 73%.

    The Dow in 1930 had two major suckers’ rallies. The second peaked on September 10 and declined 35.7 percent to the low for the year on December 16, 1930.

    So in 1930 and 1931 the Dow decline over 35 in the latter part of those years.

    Jim Jimerson on the Nightly Business Report (see interview below) was looking for the Dow to go to 5,500. If this was to occur the Dow would be down 39.2% from the August 22, 2002 rally high.

    Economy 1931

    "The climax from the foreign difficulties came on September 21, when, after runs on sterling precipitated by France and the Netherlands, Britain abandoned the gold standard... From the weak of September 16, the unloading of the bills onto the Federal Reserve assumed panic proportions. Foreign central banks drew down their deposits... The onset of the external drain was preceded and accompanied by an intensification of the internal drain on the banking system... the Federal Reserve System reacted vigorously and promptly to the external drain, as it had not to the previous internal drain. On October 9, the Reserve Bank of New York raised its discount rate to 2.5 per cent and on October 16, to 3.5 per cent - the sharpest rise within so brief a period in the whole history of the System, before or since. The move was followed by a cessation of the external drain in the next two weeks... But the move also intensified internal financial difficulties and was accompanied by a spectacular increase in bank failures and in runs on banks. In October alone, 522 commercial banks with $471 million of deposits closed their doors, and in the next three months 875 additional banks with $564 million of deposits... (Friedman & Schwartz, A Monetary History of the United States 1867-1960, Princeton University Press, 1963, pp.315-17).

    The quote above is presented to show how the Dow can go up 35% despite economic difficulties - rational markets?

    Qualification

    As mentioned before Future Watch as it looks at the economy sees a double pattern in today’s events with 1920-30s. The new economy as it is reflected in the progress of the Nasdaq is a mild forerunner to the old economy as reflected in the Dow Jones. So April 14, 2000 for the Nasdaq and September 11, 2001 for the Dow is parallelled with October 29, 1929.

    So that when Japan gets into trouble and starts to draw its money out of the US it is likely the Fed will have to raise interest rates which would then parallel the rasing of the discount rates in 1931, after Britian went off the gold standard.

    So if the historical parallel holds, based on the double pattern, this may happen next year. Whether it does or not is another matter. But if the world economy continues to go down; and the Dow continues to have lower highs and lower lows eventually Japan will be a major player contributing the "great" stage of the recession or depression.

    Interview

    Market Monitor-Douglas Jimerson, President of National Investment Advisors

    nbr.com, November 1, 2002:

    PAUL KANGAS: My guest Market Monitor this week is Douglas Jimerson, president of National Investment Advisers, a money management firm based on Potomac, Maryland. And welcome back, Doug. It's nice to have you back in hour studios again.

    DOUGLAS JIMERSON, PRESIDENT, NATIONAL INVESTMENT ADVISORS: Thank you so much, Paul.

    KANGAS: During your many market appearances over 10 years, actually, for the first time this past May you began turning bearish on stocks. And actually it was two years prior then that you began --

    JIMERSON: Yes.

    KANGAS: But this past May 3rd you were just super bearish. The Dow was at 10000. You said 7,500, maybe lower. Needless to say, we got some e-mails questioning your mental acuity. But it turned out you were right. But now we've had a nice rally. We've seen the bottom, haven't we?

    JIMERSON: I don't think so. You know, it's really unfortunate, but the trend is still negative. And if you follow the trend, as we do with my firm, the trend is your friend.

    KANGAS: Well, the trend has been up for four weeks, and pretty impressively.

    JIMERSON: We look at a very long-term trend. I like a 200 day moving average. So if you look at the price action over the last year, what we've seen is a series of lower highs and lower lows, the high in March, the lower high in May, the lower high in August. And now I think we're finishing off another lower high.

    KANGAS: So we're going to go down and test the old low and then rebound, is that it?

    JIMERSON: Unfortunately, I think we're going to make new lows.

    KANGAS: How low?

    JIMERSON: Well, this is an environment where we need some sort of a washout. We have not had a satisfactory washout in this market.

    KANGAS: You want that capitulation day on eight billion shares and down a thousand points?

    JIMERSON: No one will ever want to hold another stock. No one's going to want to give a stock recommendation when it's over. But even if it can't end in the next several months or a year, I think we could have some sort of watershed event that would take the Dow down another 3,000 points --

    KANGAS: We're talking 5,500?

    JIMERSON: We're talking 5,500.

    KANGAS: Wow.

    JIMERSON: And the Nasdaq at 800, and possibly we could have a low, an important low that would provide an opportunity for next year to have a big rally...

    JIMERSON: Now, I would say, as I said before, cash is king. Cash is king today. Hold your powder for the opportunity that may be coming within the next three to six months.

    KANGAS: And you think it's going to be a day of capitulation, huge sell-off?

    JIMERSON: I think so. And I think that what we are looking for is an opportunity that's four to six months in length because that's the only kind of rally that you can sustain.

    KANGAS: So I assume you have no "buy" recommendations for us at this time?

    JIMERSON: Not at this time. In fact, bonds look bearish, precious metals look bearish and the dollar looks bearish. Paul, that's part of the problem with our market is the dollar is weak.

    KANGAS: So this recent four week rally, as impressive as it was, really means nothing to you?

    JIMERSON: I believe it's a trap.

    KANGAS: Oh, boy. Well, still bearish, really bearish, 5,500. It's hard to believe.

    JIMERSON: But that will provide an opportunity, and I think that investors should be prepared.

    KANGAS: OK.

    JIMERSON: Keep their cash dry for now.

    KANGAS: All right. Doug, we'll be watching closely. And we hope you're not right, but you've been so right so often recently, we'll have to pay attention. Thanks very much.

    JIMERSON: Thank you, Paul.

    KANGAS: My guest, Doug Jimerson.

    -------

    * Paul Kangas, [with] Market Monitor-Douglas Jimerson, President of National Investment Adviser, nbr.com, October 26, 2001:

    KANGAS: On your last visit with us this past April 20, the Dow was at 10,580 and you allowed that it might go above 11,000. Well, it got as high as 11,300. That was a tremendous call. But then you said it could get down to the 8,000 level and intraday it had gotten around, what, 8,040? Those were phenomenal calls and I congratulate you on the accuracy of them...

    JIMERSON: ...with this rally taking shape we have a very strong potential. I think the Dow can go back above 10,000, 10,200 in that area and beyond is resistance. The NASDAQ, I think, will have a bigger move, to go to 2,400 on the NASDAQ... For traders I think this is going to be lasting into Christmas so it's an exciting opportunity... Now beyond it, I think we have problems six months out.

    KANGAS: ...You say new lows on the Dow below 8,000?... What makes you so bearish after this rally?

    JIMERSON: The problem is when we get into next year we’re going to see new lows for the Dow and new lows for the Nasdaq. The trend is your friend and the trend is down. This is still a bear... the problem is the big picture... we're in a post bubble environment and the economy, and next year is likely to be another down year. This has been a very bearish year this year, the Nasdaq down 28 percent. We are going to see more declines next year.

    KANGAS: Well, your timing has been superb. As a matter of fact, I believe that you have a nice rating by "Timers Digest," do you not?

    JIMERSON: Yes, thank you. Long-term timer, I'm up near one or two on the list.

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