Analysts: Stock Market Heading Toward
Present Rally Called 'Comic Relief'
Joe Taglieri, FTW Staff
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Oct. 23, 2002, 16:30 PDT (FTW) -- The Dow Jones Industrial
Average will plummet 50 percent within six months and
several years from now will trade below 1,000, according
to Wall Street research firm Elliot Wave.
The Dow closed today at 8,494.27, up more than 1,000
points since the end of September. But a CBS MarketWatch
report by columnist Thom Calandra warns that Elliot
Wave's forecast will prove correct, and the rally will
be remembered as "comic relief on a battered fiscal
"By far the greatest threat facing the United
States in the next three to five years is a deflationary
depression," the Georgia firm's senior analyst
Steve Hochberg told Calandra. "The mere mention
of this elicits a reaction of either total disbelief
or complete derision from most mainstream analysts.
We certainly understand that initial reaction, because
a deflationary depression is so rare. But the evidence
for just such an occurrence now is overwhelming, in
Robert Prechter, Elliot Wave chief, pointed to several
signals indicating the first phase of a deflationary
depression has begun. He mentioned the rapid decline
of the stock market this year, and a large drop in
bank lending to corporations.
"The last major area will be a fall in real estate," Prechter
told Calandra during a video interview. "And my
guess is that the real estate frenzy we saw this summer
was a replay of the stock frenzy we saw in the first
quarter of 2000." He noted the real estate market
historically has peaked within two years of a stock
The recent rally also fits a historic trend. Since
the end of World War II the market has spiked upward
during election years, notably in the month prior to
a November election day.
However, this is definitely a short term phenomenon
subject to the overall economic context of a given
point in time.
"The important point is that this is a bear-market
rally and that the advance will be completely retraced," said
Stan Chadsey, a New York-based money manager, had a
similar take on today's economic climate. "The
reason the market has really had an upswingßis that
primarily, it has been oversold," he told FTW. "Over the previous several weeks a lot of news
came out that depressed investors."
Chadsey said that news included the uncertainty surrounding the
push toward a U.S. invasion of Iraq, and corporate
scandals centered around the breakdown in the financial
reporting system. "All of those things made people
very pessimistic and therefore there was a lot of selling," he
said. "That got somewhat overdone, and I think
we saw an adjustment."
Late last week hedge fund Beacon Hill announced massive
losses. The company lost 54 percent of its investors'
capital, totaling more than $400 million in only a
Powerhouse investment bank JP Morgan is also reported
to be on shaky ground, adding to the atmosphere of
uncertainty on Wall Street. The company last month
reported a 91 percent drop in earnings and holds $26
trillion of the $110 derivatives market.
Standard & Poor's downgraded JP Morgan's credit
rating and lists the company as a risk for more downgrades.
MSN Money Markets Editor Jim Jubak in an Oct. 9 column
constructed a "disaster scenario" based on
JP Morgan's recent downgrades and its massive holdings
"The downgrades are enough to encourage some oF
JP Morgan's customers to take their business elsewhere," wrote
Jubak. "That -- plus the other big problems at
the bank that are part of the general carnage among
investment banks and its portfolio of bad telecommunications
loans -- takes another bite out of earnings; which
leads to a further credit rating downgrade; which leads
to more earnings declines; which leads to more credit
During this process, wrote Jubak, JP Morgan would discover
it has more at risk in derivatives than cash. At this
point "something bad happens," and "whether
it's an outright failure or simply a near-failure that
requires a Federal Reserve-led buyout, the event would
certainly send shock waves through the financial markets," Jubak
He cautioned that the scenario outlined above would
be too orderly and predictable to lead to an all-out
market crash. Only an "irrational and unpredictable
event" that calls into question the basis of the
market's operation would have such a disastrous effect.
[Ed. Note: FTW has
been calling into question the basis of the market's
operation since it's inception in 1998.]
According to Jubak, a JP Morgan collapse is not as
dangerous to the market's survival as mounting investor
fears. This fear is what many analysts cite as the
primary force driving the present stock market deflation,
and as far as Elliot Wave sees things, a coming depression.