FSU Editorial: "Quick Look Report #45" by Stephen Rinehart 07/09/2007

QUICK LOOK REPORT #45
NYSE JULY 2007 UPDATE
by Dr. Stephen Rinehart
July 9, 2007

Background:

This is an update to the prediction of daily closing prices of the NYSe Composite Index from 1966 through June 2007 (Reference NYSe predictions Qwik Look Report # 40 for Feb 2007 - Rinehart). The longest cycle in this dataset is 18 years. The largest cycle in the dataset is the proverbial 7-year cycle which represents a shift from about 6.4 years to 6.9 years from Feb 2007. Report # 40 predicted the weakness of the NYSE that occurred in Feb 2007 with a bottom around March 05, 2007 based on a nominal 18-week cycle (see Chart #2 from Report # 40).

The slope of the NYSe from April 2005 thru July 07, 2007 was about 5.9 NYSe points per day but since April 2006 the slope has been 9 to 11 points per trading day. This slope correlates to an M3 in excess of 12%+ Y-O-Y and was used as the trendline for the current NYSe slope.

Chart 1 show the actual daily closings of the NYSe from Jan 2005 thru July 2007. The slope of the channel from 2005 is about 5.9 points per day. This is a solid move by a market the size of the NYSe Composite Index and is due to the increase of “M3” by Central Banks in major countries. In some cases, this increase in the money supply may now exceed 13% Y-O-Y. A slope of 6 trading points per day would yield a rising NYSe market of 260 (trading days) x 6 (NYSe points as slope) = 1560 points per year!? Since this is larger than the sum of all the cycles in the NYSe (for the time being), we have a Bull Market running in a well-defined upward channel thanks to the Central Banks. Although M3 is no longer published, if M3 is suddenly decelerated (at the right time) it could cause a major drop in the NYSe Index.

Chart 2 shows the four and seven year cycles in the NYSe Composite Index from 2001 predicted thru 2011. As I have stated previously, this technique shows the seven-year cycle is the largest cycle in the NYSe and not the four-year cycle. In the past decade the seven-year cycle has added to the four year cycle on its downside move and increased the rally on the upside giving the overall impression there is a “large four-year” Presidential Cycle present in the NYSe. Indeed, there is a solid four-year cycle but the phasing of the current market depends upon looking at both cycles as well as the overall levels of M3. Chart 2 clearly shows both of these large cycles are still rising and coincidently M3 is increasing at the same time – same decades old game by Central Banks. Since the major cycles are still rising this market may still have legs for 2007 despite all the emerging problems in the toxic waste of CDOs.

Chart 3 shows a possibility for a continuing increase in the NYSe Composite Index for the remainder of 2007. In particular, there is a predicted turning move upwards in mid to late August 2007. In fact, based on the current slope of the NYSe, it is slated to make a major try at 12000 in the next 9 months!? One possibility for the August 2007 date is that the initial disclosures of failed hedge funds/banks will be papered over or suppressed for the remainder of 2007 as well as placing Iran on the back burner after late August. On the other hand the housing situation will continue South riding the 86-month cycle downwards (possible major bottom in May 2009).

Chart 4 shows a prediction of the seven largest current cycles in the NYSe Composite Index from July 2007 thru July 2011. There is wild volatility coming in the NYSe Composite Index after a major bottom in May 2009. The date of Nov 11, 2011 (11.11.11) has come up before in the waveforms of major banking players (i.e., CitiGroup) as regards a major market top.

Chart 5 shows a prediction of the 40-week cycle (200-DMA) in the NYSe Composite Index from July 2007 thru July 2008. It currently shows a top on Jan 20, 2008 (The incoming President is going to have a mushrooming major financial crisis developing which will plague the new Administration thru 2012).

Remarks:

Continue to exercise caution with these markets as we are now entering a “generational event window from 2008-2012” in the markets with two major cycles forming a top (into 2008) and these major cycles (and others) will be accelerating downward together after late 2008. The crash of 1987 came within nine months of these cycles forming a top together. The CDO (well-executed fiasco) crisis will continue to deepen but the underwater hull damage may remain hidden until perhaps mid to late 2008. It will change the coming landscape in America with more than 3 million homeowners at serious risk.
There are thousands of Condos for sale in Miami – the market has serious inventory problems and Broward County has a current backlog of homes for sale beyond 18 months duration. The median price is $237,000 and the median salary is about $40,000. The math does not work to support the current elevated median price of houses – we are going to need more affluent Asian buyers for US real estate market to make this current business model work.
Spain has overbuilt in housing to the point it may be threatening its economic growth with millions of new houses/apts and heavy reliance on foreign buyers. A friend of mine traveling to Tuscany now says the signs that in English (use to be a top of a restaurant/business) have moved to the bottom of the list and signs in German are on the top. If you want to see how fast the USD is dropping – go on a European trip.
If one wishes to remain in equities in this market, it is strongly suggested to follow the behavior of the NYSe in its current channel. A break below mid-channel should be considered as a possible Sell Signal – one major candidate for such a signal is Jan 20, 2008. A breakdown to the bottom (or below the bottom of the current channel) of the NYSe channel is a Red Flag at this point (say 9587). There are so many wild cards in this deck, that one can come up at any time causing a bust in the market. I would think the Fed is going to supply continuing liquidity to this market for 2007 to keep it afloat and trending upwards after mid-August.
I would avoid any hedge fund that holds any form of highly leveraged mortgage debt instruments. This stuff is an unstable compound. If you are buying Treasuries, keep them to less than one year duration and thank you for your charitable contribution to Uncle Sam.
The Secular Bear is not expected to make an appearance until the wee hours of the morning of Nov 11, 2011. Make sure you look into your rearview mirror on that date to see what’s coming behind you – have somebody ”check your six”.
Ghawar (the old Saudi oilfield) is declining (perhaps greater than 5% a year) as are other old oil fields in Mideast/North Sea/Mexico. It has been a great ride with decades of cheap gas and big block Chevys/Fords which carry fond memories of an era we shall not see again. When will the waterflood (to get the remaining oil out of Ghawar) hit the majority of Ghawar’s Northern wells (11.11.11)? Rest assured – we are not prepared for a coming 3 million+ barrel a day cut in oil imports by 2012. We may have already used 50% of the world’s oil supply – the low hanging fruit is all gone.
The OilDrum website has very good point about countries that have declining oil production for export. Historically, the rate of export drops faster than the actual production decline as the nation decides to conserve more resources. We should see a very rapid drop in oil imports at some point (or much higher energy prices). Our base planning case is to raise gasoline prices until demand destruction occurs to meet a future falling supply – let people car pool again. This may occur North of $ 4 a gallon in the next year but we are heading for $5 a gallon gas (extra taxes will be needed by State and Local Governments by 2010).
The US taxpayers should have a direct vote on spending for their high priority budget items (check one or more special blocks on 1040 Form every year) starting with 5% direct allocation and increasing 1% a year for the next 25 years. This would be equivalent to a line item insertion into the Congressional Budget with No Committee Action or votes and no veto by White House. This way we could cap the growth in Government Agencies forever. For instance, we could check a block that says I want 5% of all my taxes to go to the Government directly buying Canadian Oil/Gas Tar Sands properties for the US taxpayers (Oil companies can be operators), or buying gold bullion for future generations thru major Swiss Banks and have it audited by GAO, or have a national competition to design a universal hybrid diesel vehicle (US Taxpayers own the design/tooling – not GM, Ford, Toyota, Damlier,BMW, etc) of an advanced vehicle to be built by any car company in the world who wants to bid, or developing an advanced solar panel for houses or buying bulk pharmaceuticals and training foreign doctors to take care of aging US population. We initially take away control of 5% of the total budget from Congress and in the end we take away 25% to 50% of the total budget and go back to directly voting US taxpayer priorities on spending. We could also vote to cut spending in any area. My first vote is to cut all funding to UN. New ideas can be dangerous.
Is Silver a better buy than Gold? Why would 80 be any kind of floor on the USD of today as it was 20 years ago? The USD (D stands for Dead Man Walking) decline is irreversible – find some other inflation hedge to buy (commodities or convert USD to Euros) other than real estate right now.
Our economic lives are dependent upon relatively cheap energy and reliable delivery systems. Our electrical grids are based upon stringing wires on wooden poles (same as 100 years ago) and the auto industry keeps producing relatively low mileage vehicles. We need to have a safe hybrid vehicle that gets 50 mpg in city driving with solid safety features (not a plastic box) for $25K – it should be one of our top priorities. The US auto industry have been going around this issue for the past 30+ years. Enter Toyota stage left with a Prius and the fun has only started.

CONTACT INFORMATION
Dr. Stephen Rinehart
Lynn Haven, FL USA
Email

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, the author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments.