’08…Not Great! Watch for test of Dow 10k area this summer (MAYBE THIS MONTH); 8k or worse in ‘09?

FACTS: we are currently experiencing...
The worst June for the Dow since the Great Depression; The first time the Dow has been down three quarters in a row since 1977/1978; A 1300 point decline since my "Dow 12k or Bust" article on June 2; An 1100 point decline since my "Hindenburg" article on June 20, and 5 additional Hindenburg Omen signals since then, creating a cluster of warning signs of the markets poor health; U of M's consumer confidence index hit a 28 year low as reported Friday, June 26th; The rally that took 4 months from the Jan'08 low was just wiped out in 1 month, and both the Dow and S&P are below their January lows as of June 26; Wall Street is in the midst of the biggest "crisis of confidence" since the 911 Attacks; The Dow and S&P sit -20% and -18% from their Oct'07 all time highs, while the Nasdaq sits -19% from its Oct'07 high, which is still 54% off it's all time high in January 2000.

So, how do you like the "buy and hold" strategy your broker has been experimenting with on your money? Brokers, financial planners, or whatever else you call them, are mostly salesmen...not that there is anything wrong with salesmen. But, if you are believing that they are saints that are looking out for your best interests above their own, wake up and at least sniff some coffee. Only a true money manager with demonstrated skill in surviving both up and down markets should be relied upon to take care of your funds.

A Lunar Effect (http://tradewithwaves.com/lunareffect.php ) is likely holding court over the markets from June 30 to July 2 +/- a couple days. As this link explains, New and Full moons (we’re at a new moon currently) have been shown to “inflect” the trend of the markets. So, if the trend is down into a Lunar Effect, it should reverse higher out of a Lunar Effect, and vice versa. This is another reason that I suggested taking short trades off yesterday morning with nice profits.

The Euro has moved back up to the 1.58 level, nearing its 1.60 high. There is a chance it'll make new highs prior to another multi month decline, next time toward 1.40. My suggestion to short near 1.58, then to cover on June 10, near 1.53 worked out well. Conserative traders should stand aside now, awaiting a short on a new high in the 1.61-1.66 area, or on a break of 1.54 for the slide toward 1.44-1.48 initially, with lower levels possible toward 1.38-1.40. Aggressive traders would short here again at 1.58, adding into the range just mentioned. If your business can benefit from currency exchange, begin making your dealings in dollars, at the expense of the Euro for the next year or so.

Books: Day Trading books came out near the market top in 2000, as the market was topping…Flipping Houses and Foreclosure Investing for DUMMIES have recently been published, almost certainly guaranteeing that the housing debacle is far from over. It’s rare that books and magazines that teach you the correct thing to do come out at the perfect time. In fact, history shows that they tend to mark reversal or acceleration points. Therefore, despite what realtors are telling you, this IS NOT the time to pick up and hold onto houses for investment. Ask to see how many ‘great deals’ they have bought in the last year that are cash flow positive, or they have sold for profits.

Check my last post for actionable buys and sells, if you can take the heat. Otherwise, stay out of the kitchen, seriously! THIS DECLINE HAS THE POTENTIAL TO CREATE SHOCK AND AWE, AND CONTINUE FOR MANY MONTHS. DON'T BE SURPRISED TO SEE SINGLE DAYS WITH 500-1000 POINT DOW MOVES.

For what it's worth,

Ken

EXTREME OVERSOLD CONDITION suggests short, maybe sharp, bounce any moment now!

***Note***this is an update with posted profits on our buy/sell lists.

Current market conditions are sloppy and down, but important levels are being tested, as well as under-market technicals are near extremes, where snap-back rallies have tended to occur. At this moment, the Dow is down 200 testing 11,200, the S&P is down 18 testing 1260, and the Nasdaq is down 29 testing 2255. These levels, in no way, mark the end of the decline that we have been forecasting for months, but likely will mark the end of the first wave lower, in an ongoing decline that should dramatically break levels most are afraid of. After a multi week rally, the Dow should break 10,000 and test 8,000. In fact, that could prove to be far too conservative. Evidence of a short term low IS NOT visible, but could be seen this week. This exit of shorts and fractional entries of longs is anticipating that turn. In a waterfall decline, which current market conditions suggest, buying anything is an extremely risky play. This is why we suggest fractional entries if at all. Conservative players would allow a bounce to re-enter short positions, since the market has "told" us that the trend for some time to come is DOWN. Either the time will be short and the points large, or the time will be long and the points can be less severe. These are the only two options, other than continued rally. Evidence doesn't support that outcome.

We'd be exiting any and all profitable short positions, including all those on our RED list in prior issues. Many have profits from 10-40% as of noon Eastern, July 1, 2008. We'd also be buying, for short term bounce only, many of those on our GREEN list, like msft, yhoo, sbux, grmn, ebay, ba. These sections below have been updated with exit pricing and percentage gain or loss as of the time posted above.

These buys would be with a small portion of any portfolio, as they all could continue to decline. So, our plan would be to buy only 1/4 of the shares we would eventually want to own of each of these plays, adding on further significant declines.

On the other hand, our long amgn position has done well, quickly, and we'd take profits on that entirely here at 48, +20%.

Percentage profit/loss is being calculated from from the "above" or "from" number to the exit price posted today, as of the time stamped above. Minimal slippage doesn't materially change the percentage gain/loss.
Popular stocks to lighten up on at current prices or higher are (note that almost every one on this list is significantly below the price I've been listing to lighten up, exit, or short at): CSCO above 25, covered at 23.10 +7.5%, EBAY above 30, covered at 27.05 +9.8%, AMZN above 80, covered at 70.70 +11.6%, COST above 70, covered at 69.50 for about break even, INTC above 24, covered at 21.21 +11.6%, YHOO above 27, covered at 19.65 +27.2%, SNDK above 30, covered at 17.25 +42%, RIMM above 145, covered at 114 +21%, AAPL above 180, covered at 165.25 +8.2%, BA above 82, covered at 65 +20.7%, GOOG above 560, covered at 519 +4%, DELL above 23, covered at 21.8 +5.2%.

Interesting stocks to add to gently (if you have to): GE from 30 could test 36 and add into 18, SBUX from 13-15 could test 23-25, GRMN from 40-42 as pointed out for weeks (touched 55 so far and if you didn't take those profits from 42, +30%, hold for the next run above 55) could test 60-75, AMGN from 40, sold at 48 +20%, ABK from 2-3 could test 20+ if not in bankruptsy a year from now, WM from 5-10 could test 18-23 also if not in bankruptsy, adding into 2.50, BAC from 27-32 could test 42 and add into 16 , C below 18 and add into 12 which could test 40 in coming 12-24 months, and MSFT from 26.5 could test 31 by year end, GM under 12, adding in the 6-8 range, for at least a test of 30 in coming 2 years, BA under 68 for bounce to 77-80, adding in the 45-55 range, YHOO under 20 for bounce to 25-30, adding in the 12-14 range, EBAY under 28 for bounce toward 38, adding in the 18-21 range, and SNDK under 18 for bounce toward 35, adding in the 10-12 range, GE under 27 for bounce toward 32, adding into the 17-20 range, NVDA under 13 for bounce toward 23-25, adding into the 7-9 range, VMW under 38 for bounce toward 55, adding into the 18-22 range, SBUX under 15 for bounce into 25, adding into the 8-10 range, MER under 31 for bounce toward 50, adding into the 18-20 range, and all home builders for bounce of 30-50% from their lows, but specifically, KBH under 16 for bounce toward 30, HOV under 5 for bounce toward 12 and TOL under 18 for bounce toward 25, finally GOOG under 480, adding into 380 lightly for ride into 600-650 this summer.


For what it's worth,
Ken

Your RIMM runneth over?

(click on image to enlarge)
On Jun 25, 2008, at 1:33 PM, I wrote the following comment, but on June 26th it was accidentally deleted, so here it is again:

CHART AU COURANT: Research In Motion, RIMM, missed their earnings by a penny today (Wednesday), and the stock is down 14 points in the overnight session. Many people will try to tell you that the earnings miss was the cause of the decline, but I beg to differ. As I have shown in recent entries, fundamentals don't dictate price. In fact, psychology dictates price. When we (the 3 billion or so people that bet on the markets) feel good, any news is seen as positive and the price moves higher. Conversely, when we feel bad, any news is seen as negative and the price moves lower. Our collective feelings about anything are visible in the price action as seen on the charts of what we are looking at, as well as the technical analysis of various studies available. I've shown previously how things called standard deviation bands, stochastics, elliott waves, fibonacci ratios, and other tools can be used to guage those feelings. Above is the weekly bar chart of RIMM, using some of these tools, with the clear message that a change indirection is imminent. I took the picture of this chart a couple hours prior to the earnings announcement, when the stock was trading at 140, prior to closing at 142. As I write this comment, it's trading around 130, up from 127 a few minutes ago. You can see that the stochastics analysis is in extreme overbought territory at the bottom of the chart, as well as the recent extensions above the upper yellow standard deviation band in mid June and back in mid May. When this happened back in late '07, the stock fell from the 135 area to the 80 area in the following two months. Here again, the "market" is telling us that RIMM is very dangerous here, and at risk of falling easily under 100, perhaps to test that 80 low of early '08. I'd allowed a quick spike up toward 155-160 when I drew the blue lines at the far right of the chart, which could still happen. However, the big drop after hours may have eliminated that option. We'll see by the end of this week. Bottom Line: Prudent investors should have been lightening up into the 140-145 area in the last few days to weeks, and should be standing aside or shorting for the next 'big' move, which should test 110-100 at minimum, with 80-100 well within the realm of possibility. Any near term bounce into the 130-135 area would be the gift exit, if you missed the first one higher. If my labeling is off by one degree of trend in either direction, either 160-180 is still possible, or the 45-60 area. The weight of evidence is clearly on the side of lower pricing, rather than higher in the coming months.
__________________________________

MARKETS: Several interesting developments are surfacing this week. The recent highlight of the Hindenburg Omen was very timely, as prices have fallen 800 points since the signal was confirmed on 6/16. And, the 12,000 level on the Dow has failed to hold prices, significantly increasing the odds of the Hindenburg Omen fully manifesting in a blood bath by this Fall, not needing to wait that long however. Review the last posting to get the specifics on what a confirmed HO has historically meant for the market. All markets are very oversold short term (daily charts), not having been this this oversold since March. They can still get more oversold, since they still haven't beaten their January extremes. After a few weeks of weak rally from these levels, those extremes should be taken out, as the decline enters its sweet spot in August/September, perhaps setting up the low for the year (but not for the entire decline). In a big bear market, like we are evidently in, the counter trend rallies are short, but sharp, and can kill those that try to jump in too early. Caveat Emptor!

Crude is in the manic spike I mentioned could happen, prior to burning out in a blaze of glory. It touched 140 today. This is classic 'late stage' behavior, and should NOT be followed on the buy side. Leave crude to the hedgies that are about to get slapped, like they were by staying at the derivative loan party too long.

The FOMC voted to keep interest rates stable at their meeting this week, as the market expected, but commented that they were renewing their watch for inflation, and were prepared to act as soon as they see it. When they finally verbalize that "de"flation is the real issue, not inflation, we'll know that the worst is over. Unfortunately, that will be Thousands of Dow points lower (notice the capital "T"). For now, they are unlikely to lower anytime soon, and will probably put off the tightening until after the election, but won't wait if absolutely needed. The "market" will guide rates where it wants them, and after a little summer bump higher, will bring them down as the deflation rolls in. Don't get too excited though, as this will not be widely followed by your bank, since they don't want to make loans at all right now. In fact, as the government bond yields decline later in the year, the rates on our loans will rise, further hampering economic conditions.

Speaking of inflation, have you looked at the Emerging Markets at all? Their economies are experiencing serious inflation, which typically means their markets are peaking. Extreme caution is warranted.

The big three car makers just announced that they have 6 months of inventory on their lots, and can't figure out how to move any, especially the big ones. The used car market is collapsing as well, so make sure you begin your offer at 30-40% below their posted price, and be happy if you can get 20-30% below it. You have the power, as they may even have to take losses on cars in order to move them.

Housing, you ask? Fo-gedda-boud-it...no hurry, no worry. Prices are still falling and have at least another year, probably more, before reaching any lasting lows, at least on a national basis. Unless you are itching to by a flat in Manhattan for 2-4 million dollars for 1,500 square feet, waiting will be rewarded. Donald Trump just stated that Manhattan real estate has reached historic levels at $3,000 per square foot. He's not developing in Dubai, where he sees prices moving into the $5000+ per square foot range. Wow, I thought my Green Lake area was outrageous at $350 per square foot.

According to CNBC's David Faber in his recent story on the "super rich" in our population, the wealthiest 1% of Americans are now worth more than the next 90% of the counrty combined. Think about that for a few minutes; it's just an awesome fact. Most of these people live in Manhattan, no doubt.

Popular stocks to lighten up on at current prices or higher are (note that almost every one on this list is significantly below the price I've been listing to lighten up, exit, or short at): CSCO above 25 (but buy near 18-20), EBAY above 30 (but buy near 20), AMZN above 80 (but buy near 50), COST above 70 (but buy near 53), INTC above 24 (but buy under 19), YHOO above 27 (touched 20.75 and profits from 27 could be taken +19%, but wait to buy under 19), SNDK above 30 (touched 20 and profitsfrom 30 could be taken +33% , but wait to buy under 18), RIMM above 145 (touched 116 so far very quickly, so if you nailed it up there, consider taking at least half your short off under 118, +18%, and re-shorting into 135 for eventual test of and buy point of 80), AAPL above 180 (touched 166 so far, but buy near 100), BA above 82 (touched 66 so far and profits from 82 could be taken here +18%), GOOG above 560 (touched 515 so far and profits from 560 could be taken +8%. Any new test of 600 could be used to exit if you didn't already, or to re-short, and under 400 should eventually be seen, and buy near 280-320 if ever so lucky), DELL above 23 (but buy under 15) to name a few.

Interesting stocks to add to gently (if you have to): GE from 30 could test 36 and add into 18, SBUX from 13-15 could test 23-25, GRMN from 40-42 as pointed out for weeks (touched 55 so far and if you didn't take those profits from 42, +30%, hold for the next run above 55) could test 60-75, AMGN from 40 (touched 47 and profits from 40 could be taken +18%, while any re-test of 38-42 could be bought again) could test 52-58, ABK from 2-3 could test 20+ if not in bankruptsy a year from now, WM from 5-10 could test 18-23 also if not in bankruptsy, BAC from 27-32 could test 42 and add into 16 , C below 20 and add into 12 which could test 40 in coming 12-24 months, and MSFT from 24-27 could test 31 by year end, GM under 12, adding in the 6-8 range, for at least a test of 30 in coming 2 years, BA under 68 for bounce to 77-80, adding in the 45-55 range. More to follow in coming months as prices decline.

For what it's worth,
Ken

Rare HINDENBERG OMEN floats over Wall Street

(click on image to enlarge)
On Jun 20, 2008, at 7:58 AM, I wrote the following comment, but on June 26th it was accidentally deleted, so here it is again:

CHART AU COURANT: Above is the weekly bar chart of another national obsession, Amazon (AMZN). Notice that after the parabolic rise into the all time high of 113, the crash to the 5 area that always follows. What an opportunity that was to buy if you knew what to look for. Notice the current situation...the stochastics have reached the extreme overbought level of 80+, while the price is drastically lower than the last time stochastics were at these levels. This suggests late cycle buyers are running out of money, and "smart money" is selling into the rally. A common target for the next 'big' move in these situations is reached by taking the distance from the recent high at 100 to the recent low at 60 (100-60=40), and projecting down from the most recent, but lower, high at 85 down to 45. Even if AMZN stretches to 90 in the next few weeks, we can see that the risk is down to 50-60. Bottom Line: prudent investors would step aside here, take profits, and wait on the sidelines until at least 60 is seen again.
_______________________________

MARKETS: There is a little publicized, but ominous indicator called the Hindenburg Omen, that has been present in 100% of the stock market crashes since 1985. It doesn't guarantee a crash, but no crash has happened without a HO. In fact, once confirmed, which happened Monday the 16th, there is a 25% probability that there will be a full blown crash, and a 41% probability of only a panic selloff, within the next 120 days. This time range takes us into mid October, which history tells us isn't a good time to be invested in the market. In fact, there is an old Wall Street saying that one should "sell in May and go away (until November)". For a definition, check http://en.wikipedia.org/wiki/Hindenburg_Omen. Compared to the normal probability of a crash of less than 1%, with a HO on the clock, caution is a good idea, to say the least. The last HO showed up in October '07, when the Dow was above 14,000. It fell for the next 3 months, bottoming at 11,600 (a mini crash for such a short period of time), over 17% from the appearance of the HO. I'm just saying...

Many of you have emailed or called about the break of 12k yesterday in the Dow, the first time trading under 12k since March 17. Although this is true, it only traded under 12k for 3.5 minutes, and didn't close under 12k. As described in my "12,000 or Bust" comment recently, the number itself is less critical than the "look" of the market as it "tests" the 12k zone. That said, a close under 11,800 suggests that 12k failed to hold, and a close under 11,600 will be the clarion call of imminent panic, plunging prices, and the Dow testing 10,750 within the next few weeks. It will take a close above 12,800 to suggest that the 12k area was successfully tested, and a close above 13,200 to signal the "all clear" for higher prices into 2009.

Friday is quad witching, the quarterly expiration of futures and options that is replete with emotion and programmed trading games. It would not surprise me if a short term low is being established around 11,800-12,000 this week. This would set up a bounce for a few weeks, at most, that is supposed to get us thinking 12k held. July would then become the ideal point to exit, prior to the magnetic, historic pull down into the Sept/Oct zone, which would allow the Hindenburg Omen to manifest. Again, 11,600 is the finger in the dike.

Growing rumors of the Fed preparing to raise rates is interesting after I only began talking about it here a week of two ago, when nobody was talking about it, but the market was beginning to signal that further, near term rate declines were unlikely. Evan though I said that the Fed rarely hikes rates prior to a Presidential Election, the market can raise them on its own. How? Big money players can drive intermediate and long term rates higher by selling bonds (bond price and bond yield move in opposite direction). Typically, the Fed actually "follows" the market, rather than leads the market. In other words, the market tells the Fed where rates should be by buying or selling treasury bonds, which MOVES rates by force in the opposite direction. The Fed then follows by raising or lowering short term rates to keep in step with the longer term rates, which are controlled by the market. Another raiser of rates are corporations and even us little guys. As lending gets tighter, due to poor lending practices at banks and lots of bad loaning, we offer to pay banks more and more interest to get the loan. So WE push rates up as well. Prepare for higher rates over the next few years.

Crude did spike to $140 on 6/16, as allowed in recent comments, but has reversed and closed at the low of the past two weeks today. This close under $132 suggests the "smart money" has left the building, and only the little guys are left to bet on $150 and $200 proclamations. Don't be surprised to see crude testing $100 in the surprisingly near future. In addition, a bunch of oil control freaks are meeting in Jedda, Saudia Arabia this weekend to talk about not doing anything. Whether they increase production or not is barely worth considering, as the price is driven by sentiment (fear and greed), not fundamentals (production, weather, demand).

Popular stocks to lighten up on at current prices or higher are: CSCO above 25 (but buy near 18), EBAY above 30 (but buy near 20), AMZN above 80 (but buy near 50), COST above 70 (but buy near 53), INTC above 24 (but buy near 18), YHOO above 27 (touched 21.75 so far, but buy under 18), SNDK above 30 (touched 22.60 so far, but buy near 15), RIMM above 151 (but buy under 80), AAPL above 180 (touched 166 so far, but buy near 100), BA above 82 (touched 73 so far, but buy under 50...any close under 70 will activate a head/shoulder top, with 40 as the target), GOOG above 560 (cover here under 550 as a bounce to 618 will be a better exit or reshort level, but buy under 300 if ever so lucky), DELL above 23 (but buy under 15) to name a few.

Interesting stocks to add to gently (if you have to): GE from 30 could test 36, SBUX from 13-15 could test 23-25, GRMN from 40-42 as pointed out for weeks (touched 55 so far) could test 60-75, AMGN from 40 (touched 45 so far) could test 52-58, ABK from 2-3 could test 20+ if not in bankruptsy a year from now, WM from 5-10 could test 18-23 also if not in bankruptsy, BAC from 27-32 could test 42, C below 20 could test 40 in coming 12 months, and MSFT from 24-27 could test 31 by year end, GM under 12, adding in the 6-8 range, for at least a test of 30 in coming 2 years, . More to follow in coming months as prices decline.

For what it's worth,
Ken

YaHoooooooooooooo...ouch !

For those of you that have been on my email distribution list prior to the launch of Logical Decisions, you might remember my April 25th comments on Yahoo. Those that are new to my work, here is what I said, "Speaking of deals, if you haven't sold your yahoo stock, today is the day, as the Microsoft friendly offer expires Saturday. If nothing happens, the deal is dead, Yahoo's price likely falls to pre-deal levels under 18, and Ballmer gets to get hostile, and buy shares in the open market for possibly half his announced offer price. If this hallucination actually happens and Yahoo drops toward 10-14, it becomes an interesting play, since an open market race to buy control will likely develop.”

Well, the deal expired, and you can no longer sell your Yahoo stock at 28, like was available that day. Yes, there was a few hours of emotion between now and then with prices between 28 and 30, but few took advantage of “getting’ when the getting’ was good”. Today, Yahoo and Microsoft announced that they had ended their talks and NO DEAL would be coming. The stock fell immediately from 26 to 23, and closed near that low. My comments from April stand; expect Yahoo to decline under 18, eventually toward 10-14. Since you can never play these kinds of deals perfectly, 19 would be the place to begin a position, adding at 16, 13, and 10. With that plan and a perspective of 2 to 4 years, it’s hard to imagine a losing outcome.

For what it's worth,

Ken

HOME EQUITY AT HISTORIC LOW...RATES ABOUT TO RISE ! Are we having fun yet?

(click on image to enlarge)

CHART AU COURANT: Above is the monthly bar chart of one of our national obsessions, Microsoft (MSFT). You can see the fantastic parabolic (also known as geometric) rise since the early 1990's, having come public in 1986, to it's all time high in late 1999 at 53 (after adjusting for splits). I'll use this as an example of wealth creation and retention. The yellow lines above and below the green bars are standard deviation bands. They revolve around the gold line in the middle of the bands, which is a 200 day moving average of price. 200 days is approximately the number of trading days in a year, and is very important to institutions, who often like stocks above the 200 day moving average, sell stocks when they fall below. The question arises about how far above or below the 200 day moving average is too far, and therefore suggestive of a change in direction. Notice the how rare it is to see the green bars break above or below the yellow bands. In fact, using this chart, if you bought MSFT whenever it was below the lower yellow band, and sold it every time it was above the upper yellow band, you would be a very, VERY happy and wealthy boychik. You would stayed away during its fall from grace (regardless of the news, analysts comments, personal feelings about the products, or insider tips from friends at the company) from above 48 in 1999 until its 2002 dip below 21, sold again in 2003 above 25, bought in 2004 under 22, sold later in 2004 above 26, bought again in 2006 under 22, sold in 2007 above 35, and be waiting now for the next dip below, likely under 24 (for a short period) in the coming months. Think of all the additional charity Bill and Melinda would have had to fund global everything. Also, look at that study below the bar graph, called stochastics (red and green inter-twined lines). Here, if you bought when the red stochastic line touched the dark red horizontal lower extreme line, and sold when above the upper extreme line, you would be very happy. Now, combine the two techniques and only buy with you get a double buy indicator, and sell when you get a double sell indicator...viola.

Now look at the blue lines I have drawn at the right side of the chart. I call those my "lines of halucination". They project where prices should go, based on history and my decision support models. Even though MSFT has been dead money since 2001, having traded in a range of 17-37, the double buy/sell indicator outlined above could have allowed you to avoid much of the loss and captured much of the available gain within that range. It's not perfect, but hey, do you have something better that only requires you to make a couple decisions per year? Bottom Line: any dip under the lower yellow band around 24 in the coming weeks/months will likely reward you with a move up into the 31-33 range in short order. If that move up breaks above what will be a falling upper yellow band, take your money off the table and wait for the next dip below the lower yellow band. This will likely happen several years in the future, around 2013 +/- 2 years, around 15 +/- 2 dollars. No matter what, if the green line around 13 is ever approached, back up the truck, and leave it alone for the rest of your life, as the move that will follow will eventually break above 53.
_________________________________

MARKETS: The behavior of short term interest rate markets is starting to suggest that the Fed is done lowering rates for now, and may be posturing for some raises (in their controlled short term arena) after November (rarely does the Fed raise rates just before a Presidential Election), but they could do it prior if the situation required. They'll use the fear of inflation to justify any raises they do, but the real reason will be fear of foreign capital fleeing the US because of the relatively low yield on Treasuries. Inflation won't be the problem for at least the next 5-8 years. The problem will be deflation, which won't be acknowledged until near the end of it. What is deflation? Imagine your stock portfolio declining in value at the same time as your house declines in value, along with your collectables. Basically, due to "underwhelming" demand for everything, there is more supply of everything than the markets can absorb. Since nobody wants anything, mostly because with record unemployment they can't afford to buy anything but what is needed, prices decline to unimaginable levels.

According to the Federal Reserve, homeowner's equity across the nation fell to 46.2% in the first quarter of '08, the fifth quarter in a row below 50% equity, and is at the lowest level since the end of World War II. This is quite an accomplishment, considering we're the wealthiest nation on earth, where the streets are supposedly paved with gold (at least that is the global rumor that brings millions of people from around the world to America). Based on the value of the dollar, the gold has morphed into silver, perhaps pewter. Per the latest Beige Book report, there was a "noticable increase in late payments on consumer loans". NO KIDDING? Wonder why that is? It further showed that in some areas of the country, buyers are attracted to lower home prices. Again, NO KIDDING. We're all attracted to that. It's just that not many people can qualify for loans anymore, since we can no longer pay our other loans.

The DOW is getting close to the 12k (line in the sand) number, given in my last entry, quickly, having dropped over 1,000 points in the last month. Here's how the coming test of 12k should look: prices fall to 11,800 to 12,100 and attempt to bounce. The media celebrates the "holding" of 12k. Then the true test of the massive 12k area comes at 11,600, which is the low of the year. If a broad bounce can appear from there and quickly get prices back above 13k, the test will have been successful, and higher prices could levitate though the end of the year or early 2009. On the other hand, if 11,600 fails, big money will pull the rip cord and 9,600 to 10,300 will be seen within weeks. Catalysts, you may be asking? How about the final crude spike into the 150-190 zone, which may only last a day or two, but will surely blacken the mood on Wall Street. As I've said before, commodities often end their manias with "blow off" spikes, and crude is clearly in mania phase.

Speaking of commodities (gold, silver, euro, crude), in a historically unusual manner, the last several years have seen normally uncorrelated markets become correlated. Meaning, for most of the past hundred years, these commodities and stocks do not move in the same direction at the same time. However, for the last few years, stocks have risen along with gold, silver, crude, housing prices, and the Euro. Now, to pay the price of that anomaly, they are all falling in unison, as least so far. Eventually, they will return to their non-correlated relationships, and move in ways unrelated to each other. Until then, we can expect them to continue declining, more or less together (that is, once crude ends it's solo finale). Concerning gold, from the $1,030 peak earlier this year, it's a bit over sold short term down here at $870, but if $850 breaks, a test of $800 could be seen quickly before finding buyers. $600-$675 still remains the better longer term buying point, with $450 a possibility if a liquidity crisis unfolds at certain hedgies. This level around $450 is likely the buy of a lifetime. From my call of a Euro top a couple weeks ago near 1.58, it has fallen to 1.53, and is also short term over sold. If you have profits in your short from up there, take at least half off here at 1.53. Add this piece back around 1.56 or if 1.52 breaks. Take profit on half again at 1.5050. Then, again add it back short if 1.48 breaks, taking half off again near 1.44, and so on.

Popular stocks to lighten up on at current prices or higher are: CSCO above 25 (but buy near 18), EBAY above 30 (but buy near 20), AMZN above 80 (but buy near 50), COST above 70 (but buy near 53), INTC above 24 (but buy near 18), YHOO above 27 (touched 22 so far, but buy under 18), SNDK above 30 (touched 24 so far, but buy near 15), RIMM above 151 (but buy under 80), AAPL above 180 (touched 166 so far, but buy near 100), BA above 82 (touched 73 so far, but buy under 50...any close under 70 will activate a head/shoulder top, with 40 as the target), GOOG above 560 (cover here under 550 as a bounce to 625 will be a better exit or reshort level, but buy under 350), DELL above 23 (but buy under 15) to name a few.

Interesting stocks to add to gently (if you have to): GE from 30 could test 36, SBUX from 13-15 could test 23-25, GRMN from 40-42 as pointed out for weeks (touched 55 so far) could test 60-75, AMGN from 40 (touched 45 so far) could test 52-58, ABK from 2-3 could test 20+ if not in bankruptsy a year from now, WM from 5-10 could test 18-23 also if not in bankruptsy, BAC from 27-32 could test 42, C below 20 could test 40 in coming 12 months, and MSFT from 24-27 could test 31 by year end. More to follow in coming months as prices decline.

For what it's worth,

Ken

12,000 Dow or BUST...US foreclosures now 1.1 million...Unemployment at 5.5% (22 year high)

(click on picture to enlarge)
If you check time stamp (9:42 am PST on May 21, 2008) at the bottom of my last blog, and the predicted price range for a peak in the crude market in the opening paragraph, "a quick spike towards $135-$138 or a little higher is possible", you can see a BULLSEYE within 24 hours. Later on the 21st, and again on the 22nd, crude jumped to $135 momentarily, before reversing sharply. Since then, we have seen selling on good news for that market; a sign that there are just no more speculators at these levels, and that the big money is taking profits, likely now betting to the downside. My targets of $100 for sure, and $80 likely this year still stand. This means that gas prices of $4+ per gallon are not likely to hold for long, and $2.75 to $3.25 per gallon should be seen by Thanksgiving at the latest, even if another rumor driven spike takes crude to recent or above. There are unsubstantiated rumors that the US and or Israel is preparing for an attack on Iran circulating across trading floors this week. These are the kinds of rumors that happen after the top occurs, that are designed to bounce crude to allow "big guys" caught in losing trades to get out. The little bounces that occur are usually quickly erased, and further losses follow. To add fuel to the fire of this mania, predictions of $200 oil are surfacing. Interesting that this always happens at or near peaks of dramatic proportion. Examples are the calls for 30k and 40k Dow when the index just crested 14,000, calls for $2000 gold when it crested $1000, Nasdaq 10k eight years ago when it just crested 5k (still not having seen 3k since), calls for google at 1000 when it just crested 700 (remember it fell to 400 in March), and the list goes on.

Oil falling will help gold drop back toward the 600-700 range, and 1.30 +/- .30 in the Euro in the next 12-18 months. Planning European vacations for the first half of 2009 will likely allow the best bang for the Buck for the last couple years.

There is now a line in the sand, that if crossed, will burst the dam of optimism and what little sense of security most of us have left, and it's Dow 12,000. On the long term chart of the Dow above, I've placed a light blue line from the Dow low in 1974, and drawn it through the 2002 low. If you could see the entire picture in log-scale, you would see that is has been the "inflection line" for the past 35 years, including the recent January and March lows of 2008. Currently, this line passes through 12,000 for the month of June. A break of that line, in this case, Dow 12,000, will be the first break of a 35 year support line. Usually when this happens, the institutions wait for prices to get back just under or to the line again, and then sell like there is no tomorrow. So, consider this THE risk level of your portfolio, since under 12,000 will be likely bring in waterfall-like selling. Where is the Dow likely to fall to if 12k breaks? Let's just say that a reasonable target is the panic low of late 2002 around 7,500 +/- 300 points. This would also come very close to the trendline drawn from the 1987 low up through the inflection low in 1990, which is in the 6000-7000 range through the end of 2010. This gives two target surrounding 6,800 +/- 500 points (the average between the two technical analysis methods just mentioned).

What about everyone saying that the economy and lending sector is on the mend? Well, today, the banking index, BKX, will close at a lower low than in January, March, and April, or in other words, a new low for the year, and at levels not seen since 2003. Apparently, the banking system problems ARE NOT over, says the market, who is ALWAYS right!

In fact, today, after I have been suggesting it was coming for 6 months, WAMU replaced Kerry Killinger as Chairman of the Board. He is remaining as the CEO for now, but not for long in my humble opinion. At a price under $9, WAMU could be the buy of the sector, especially if Kerry's CEO days come to an end quickly. Having fallen from $48 in 2007 (a loss of $39 per share), what is the risk of buying at $9? Well, about 80% less than it was at $48. I'd buy under $9 and again under $5, and sell if it gets to $21.

This week, the Mortgage Bankers Association's first quarter report showed that a record 2.5% of all home loans being serviced by its members are now in foreclosure, which works out to about 1.1 million homes. That's up from the 2% of loans, or about 938,000 homes, that were in foreclosure at the end of 2007. The report also showed that 448,000 homes, or about 1% of loans being serviced, began the foreclosure process during the first quarter. That's up from about 382,000 homes, or 0.83%, that entered foreclosure in the last three months of 2007. The number of homeowners behind on their mortgage payments also hit a record high. Nearly 3 million home loans are now at least one payment past due, while about 737,000 are at least three months past due but not yet in foreclosure. This marks the sixth straight quarter in which a record percentage of loans went into foreclosure. The trend has led to a widespread decline in home prices, as well as huge losses for banks and other financial firms that issued or invested in the loans. Nearly half of the homes in foreclosure are concentrated in six states. But those states are undergoing two very different types of housing meltdowns. California, Florida, Arizona and Nevada have been hit by a hangover after a home building boom in the middle of the decade, which was fueled by rising home prices and investors snatching up real estate using risky mortgages. Those four states have about 368,000 homes in foreclosure, or a third of the nationwide total. Roughly 3.7% of all of the loans in these states are now in foreclosure. The other two states that are ground zero for the crisis - Michigan and Ohio - have been hit by the more traditional economic woes stemming from rising job losses, particularly in the automotive sector.

Last week, the government reported that 47 out of our 50 United States have more than 20% increases in foreclosures than the same time last year. Even Seattle and Portland are experiencing a slowdown in home sales, due to a lack of price decreases and stricter lending parameters. Many Governors are proposing that people walking away from their defaulted mortgages be safe from negative credit history reporting. Did we actually elect those idiots? Let's make sure we don't re-elect them in November. Imagine letting those that don't pay their bills get off free of charge? What message does that send to those that do pay their debts? What about the children?

Remember my comment on May 9 regarding municipal bonds and how they are a safety trap? Well, Vallejo, CA just filed for bankruptsy, defaulting on their muni bonds. They are trying to get the court to let them out of obligations and contracts that they say have forced them into the largest municipal default in California's history. The example this could set could lead to widespread city, county, and possibly state default in the coming years. Again, this is NOT the time to buy or hold muni bonds. It's a mine field and little guys like us cannot possibly determine the true risk of ANY municipality. So, don't kid yourself into thinking you can or your stock broker can, let alone your bond fund manager. As I write, muni bond insurers MBIA and Ambak have been placed on the review list at Moody's Bond Rating. Apparently, there is question whether they'll be able to withstand a massive municipal bond default scenario. You read it here first...

Fed Chairman Bernanke said today that the current housing decline has erased more family net worth and faster than the housing recession of the 1980's. If you "need" a new house to live in (by no means the right time to buy for investment purposes), this is a reasonable time to be looking. If you have the credit rating, you can get a great rate on a 30 year fixed mortgage, and in most cities in the country, you can get houses at 20%-50% below the prices they sold at in 2006. If you are in a market that is only 5%-15% off the highs, there is likely room for prices to fall further, but ANYTIME you can buy with a 40% discount to the recent highs, it pays to do so, since historically, that has been a good correction point. Don't talk yourself out of looking and making low ball offers though, as even in Seattle, you can find plenty of values at dramatically discounted prices. And realtors will not tell you about them, nor help you hardball negotiate. Remember, they want the commission, so any transaction is good for them. It's a rare market where buyers have the power, rather than the normal sellers market. So use it to your advantage, and make sure you really want to live there. This is NOT a flipping market, since most people can no longer qualify for housing prices above 500k. Make sure you don't get caught in the year over year "sales numbers" that, in some areas, show April '08 sales are up 25% to 45% over April '07. Remember, those cities have been in the toilet for two years, and 3 sales this April vs. 2 sales in '07 represents a 50% increase in home sales. Expect the numbers to misleading for many months/years to come, and make sure you know the actual number of sales, rather than just the percentage increase.

Speaking of great opportunity...if you don't care how "green" your car is, you can really find values in late model, used SUV's. There are reports that you can find 2007 gas guzzling vehicles at 50% of their new car prices, as people panic out of their exuberant car purchases. This explains why GM is trading at the lowest price since 1982. Normally, it takes about 4 years for a car to fall to half price, at least at the upper end of the price spectrum. So, if you can grab that discount after only a year of usage, with warranties intact, you can afford to burn twice the milage for a long, long time, and still not eat up the difference you saved on the great price.

If you like to trade the leaders of the current, keep your eyes on the "four horsemen" of the current apocolypse: GOOG, AAPL, RIMM, AMZN. The fate of these four will determine the Nasdaq's path. Each of these horsemen have rocketed in the past years and months, but are showing signs of weakening momentum, and waning institutional interest. They are all on my "lighten up" list below, with specific target zones.

Popular stocks to lighten up on at current prices or higher are: CSCO above 25 (but buy near 18), EBAY above 30 (but buy near 20), AMZN above 80 (but buy near 50), COST above 70 (but buy near 53), INTC above 24 (but buy near 18), YHOO above 27 (but buy under 18), SNDK above 30 (but buy near 15), RIMM above 131 (but buy under 80), AAPL above 180 (but buy near 100), BA above 82 (but buy under 50...any close under 70 will activate a head/shoulder top, with 40 as the target), GOOG above 560 (but buy under 350), DELL above 23 (but buy under 15) to name a few.

Interesting stocks to add to gently (if you have to): GE from 30 could test 36, SBUX from 13-15 could test 23-25, GRMN from 40-42 as pointed out for weeks (touched 55 so far) could test 60-75, AMGN from 40 (touched 45 so far) could test 52-58, ABK from 2-3 could test 20+ if not in bankruptsy a year from now, WM from 7-10 could test 18-23, BAC from 27-32 could test 42, C below 20 could test 40 in coming 12 months, and MSFT from 24-27 could test 31 by year end. More to follow in coming months as prices decline.

For what it's worth,

Ken