Back in mid-May I forecasted the market was either at, or very near, the final top. (see: May 18, Stock Rally Unsustainable) Odds were given as to which month the peak would be reached:
*MAY 1999: --already past the peak, down hill from here 90%
*JUNE 1999: --Very likely month for final peak, if hasn't happened already in May. 70%
*JULY 1999: --Equally as likely as in June. 70%
*AUGUST 1999: --Market will be in decline by now, well past the peak. 30%
*SEPTEMBER 1999: --Major declines and temporary crashes already underway25%
*OCTOBER 1999: --Should be in full crash mode and long-term decline. Will not be at peak beyond this time.5%
For internet stocks this peak was correctly called. For the Dow, it hit a peak two days before on May 16 whence it traded sideways for exactly two months and another high was reached July 16, 1999 at 11,209. Mark this number down. It will be referred to by historians as the start of the global depression that ruined millions and wiped trillions in paper wealth clean off the slate.
The technology-laden Nasdaq is now off 11% from its high, the Dow is off 4.4%, and the S&P by 8%. The Russell 2000 (small cap) is still around 1998's highs.
I hereby officially declare the Great Millennial Bear Market as underway. Roughly 55 days after this peak comes the real crash (give or take a few weeks).
We are at the tail end of what I call the "triple bounce sequence" that began three years ago. In essence, this means a replay, roughly, of 1997 and 1998: rising from January through spring to which a new high occurs in summer, namely July. Fall 1997 was choppy and the Dow crashed 500 points as the Asian crisis began. It once again rallied through spring, achieving a high in July, 1998.
At this point I realized (and predicted--successfully, thank you very much) the market was going to decline throughout August and September. The Dow did indeed lose 15% in August, 1998 and 19% from peak to trough (Oct.) in the midst of a cracking global economy. This was only the second of this three-stage bounce and thence rebounded through spring 1999, with most of the blue-chip indexes hitting a peak in July, 1999. Precisely as this 'model' predicts. I admit, however, I did not expect the recovery to be so robust as it turned out to be!
This replay phenomenon indicates continued declines in August (Be alert for the eclipse and Nostradamus' "King of Terror"--as well as the GPS Aug 22 rollover) and September after which an historic crash takes place. Unlike 1997 and 1998 it will not recover to new highs. The crash should be around 30 or 40% sometime between the start of the fourth quarter (Sept 15) and the end of October, the traditional month for such events. There will be a brief suckers rally for a short period until y2k anxiety pervades the populace and investors. By December there should be intense, panicky sell-offs that paralyze the market and liquidity becomes impossible.
The internet stock craze/mania has already started its implosion with the Dow Jones Internet Index going from 320 in April to the current 180. Despite this devaluation, prices are still outrageous with p/e levels of 200-to-1 for e-bay.com, 140-to-1 for AOL and 373-to-1 for Yahoo!. This is the harbinger of what the rest of the market will experience in the months ahead.
I need not remind readers that we are in a ludicrously over-inflated bubble exceeding anything previously observed. Like all manias, this one will not end pleasantly. It will explode with retched violence, without mercy on its naive participants; S&P p/e level: 35-to-1 and is 44.5% over-priced. Short-selling interest on both the NYSE & Nasdaq is at or near the lowest levels seen this decade. Without this short interest to act as a cushion, each new low point will only be met with more selling as there are no short covering to counter-act falling prices. Thus, we can expect it to fall like a rock when it does begin dropping.
The Asian and global crisis of 1998 is not yet over; It's merely on temporary hold. While the situation has disappeared from the headlines as a booming US economy propped up further calamities from spreading and escalating, the process of world-wide collapse originating from Global Economic Instability is far from finished. Y2K will complete the journey into the abyss and ensures a virtual halting of global trade and capital flow in 2000.
The Fed will raise interest rates. This may be 'blow below the belt' that finally brings down Goliath. How high could interest rates go when y2k starts hitting the fan? Levels undreamed of as Gary North explains here:
There will come a day when a major bank will default to other banks. Those owed the money will also be forced to default. The great collapse will begin: cascading cross defaults.
It will finally dawn on depositors that if banks are defaulting to each other, they will default to their depositors. The bank runs will begin. They can be held in check by a refusal to allow currency withdrawals. So, people will start spending on credit cards, running them to the limit. They will cease saving. They will get rid of electronic money and hoard currency. There will be discounts for cash, i.e., currency. Cash discounts are another way of saying "high interest rates."
The panic rush for cash will push short-term interest rates to levels undreamed of today. Men will want whatever money will buy today. They will see that they will not get paid off in the future. They will sell claims on future money at steep discounts. That's another of of saying "high interest rates."
These high rates are not foreseen today. Men do not want to admit to themselves that y2k is real, that banks will default when their computers no longer function. So, all those speculators who are long in the bond market or who have written derivatives against low mortgage interest rates will find themselves bankrupt. They will default. Then those institutions that thought they had covered their interest rate risk will find that they are exposed.
Think "mortgages." Leverage? Consider this: $27 billion in equity to support $870 billion in obligations. That describes Fannie Mae and Freddy Mac, off-budget organizations that are thought to be insured by the U.S. government.
Leverage? Consider this:
Taking a quick look, and combining five of the major Wall Street firms, Goldman Sachs, Merrill Lynch, Morgan Stanley Dean Witter, Lehman Brothers, and Bear Stearns, we see that they have total assets of $1.3 trillion supported by equity of about $50 billion. And this, importantly, does not include massive off-balance sheet derivative exposure.
When reverse leverage hits, currency will be immune to the financial contraction. It will be the appreciating asset: discounts for cash. Currency is not leveraged, so currency holders will profit from the de-leveraging of the electronic financial markets.
If it's electronic, it's an IOU. Don't hold IOU's in the de-leveraging phase.
"Cash" is not a four-letter word. Get some.
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