By Robert Prechter, Steve Hochberg and Pete Kendall
April 11, 2007
Luxury Boom To Swoon
The luxury boom hit some important milestones in March. These included the first $1,000 slice of pizza (at a New York City restaurant) and a $1 million laptop (from Luvaglio). At the same time, USA Today announced that luxury fever hit the masses: "Average Joes enjoy $4 cups of joe at Starbucks, guzzle bottled water, feast on Godiva chocolates, drag suitcases on wheels, sit on heated car seats and let GPS systems guide them."
But that’s the old trend. To see where things are headed, look to the new leadership sector, the subprime mortgage arena. Two years ago, loan officers were flooding through a Newport Beach, Calif., Porsche dealership. These days the only mortgage industry types that come in are stopping to put their Porsches up for sale. "In the last two weeks, we’ve had nobody," says the Porsche dealer. Across the breadth of the markets, it took a long time for the great peak to roll in. In areas like luxury, however, where the trend is so extended and pervasive, the swing from up to down will seem to happen overnight.
Another Fed-Sponsored "Recovery"
When the Federal Reserve "softened its language" about possible future rate hikes on March 21, the Dow zoomed to a 250-point gain that reminds us of a similar "tilt toward lower rates" in January 2001. At that time, the Dow jumped 300 points and EWFF stated, "With headlines and rallying cries like this one, the collective mind continues to issue signals that suggest it will win the war against manipulation. As Jim Grant says, ‘Money is of the mind.’ When the collective mind wants to make it disappear, there is nothing Alan Greenspan or anybody else can do about it." EWFF added that stock prices would reverse "as soon as the Fed-induced buying frenzy of January 3 [2001] subsides and the bear goes back to work." The S&P rallied through the rest of that month, and then fell 20% in less than 7 months. This time, the Fed’s posturing toward an ease in short-term rates led to a more muted reaction, and it should be followed by a far more serious decline. One hint of the greater downside potential is how quick the media is to point fingers:
* Fed Says It Could Have Acted Sooner on Subprime Rout --- Bloomberg, March 22, 2007
* Fed Accused of Subprime ‘Perfect Storm’ ---Financial Times, March 23, 2007
Another headline suggests that Fed Chairman Ben Bernanke "Had Better Be Right [to leave rates at current levels] – Or he could Face Impeachment." But as The Elliott Wave Theorist noted in February 2006, it makes no difference: "No matter what the Fed does, Ben Bernanke will be blamed for the debacle." All it took to spark the attack was a stock market decline of just over 6%. Commentators’ short fuse suggests that the Fed itself may be battling for its life by the end of the bear market.
Former Fed chairman Alan Greenspan, one of the premier magnets of bull market veneration, appears to have a role to play, too. One key feature in EWFF’s bearish forecast back in January 2001 was the prominence of Greenspan’s public image. At that time, "Maestro: Greenspan’s Fed and the American Boom" was a best seller and was called the story of "the real president of the United States." In February, right at the high, Greenspan was feted as the "2007 American Hero." But after the market fell and he offered negative assessments on the economy and the potential spread of the subprime lending debacle, Greenspan caught flak. "Who Thinks Greenspan Should Pipe Down?" says one representative headline. A March 1 USA Today editorial ran his picture under one of Mayberry deputy Barney Fife. On Capital Hill, where the usual post-bubble blame game is revving up, Greenspan is a favorite target. Senators and congressmen charge Greenspan with a "pattern of neglect" that fostered the unfolding crisis. Instead of riding off into the sunset, Greenspan stayed to bask in the glory of the final highs. It will undoubtedly prove costly to his legacy. The rising chorus of angry politicians is nothing compared with what’s to come.
Coming Soon To a Jail Cell Near You
Resident CNBC bull Jim Cramer captured the general feeling in the wake of the first leg down this way: "Our short national nightmare is over." The quote and a lot of others like it remind us of historian John Brooks’ comment on the crash in 1929-1932: "It was possible to believe one had experienced and survived it when in fact it had no more than just begun." The strength of the street’s happy-go-lucky attitude is evidenced by captains of disasters staging comebacks. Brian Hunter, the energy trader behind hedge fund Amaranth Advisors’ September collapse, is raising money and intends to open a "multibillion dollar commodity investment vehicle." Nick Leeson, the trader who single-handedly brought down the 233-year old Barings Bank back in 1995, is also back in the game. These last two items may be important as they connect the front and back ends of the Great Asset Mania, revealing its amazing durability and tolerance for even the most egregious failures. This magnanimity will undoubtedly change fast in the bear market’s next phase. At the lows, there will likely be formal restrictions on who trades and how they do it.
This article is an excerpt from The Elliott Wave Theorist and/or The Elliott Wave Financial Forecast monthly newsletters. Get the very latest analysis from Robert Prechter’s Elliott Wave International. www.elliottwave.com/a.asp?url=http://www.elliottwave.com&cn=ir
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ASX Price at posting:
0.0¢ Sentiment: None Disclosure: Not Held
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