Urban Survival’s Inside Report  # 6 November 25, 2001

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  What 's Ahead?   Assessing Some Trends    

As we head toward the end of what has been a frantic year, I thought it would be interesting to line up some of the present trends that are shaping our lives and see what's likely to change over the next year.  Although these are in no particular order, I think they might make up an interesting "truth detector" when taken as a whole; sort of a benchmark against which you can test various investment alternatives in the future.

Market Indicators

Markets:  We're still in cash.  Good old-fashioned long green - and gold.  The reason is pretty simple:  The way ahead is not yet clear enough for us to commit our money - yet.

The Dow, the NASDAQ and the S&P 500 are all down compared with where they were as the year began.  As a result, the long term Aggregate Index is also down.  At the end of the first week of trading this year, the Aggregate was at 9189 and change.  Presently, it's at 8015. That's a decline of around 13%.

The most immediate question before us is what happens next, for the Dow, the S&P, and those tech indices?

I don't know what your view of technical analysis is, but my belief is that the world works out as some combination of fundamental forces and technical "should be's".  In the case of the Dow, as you'll see in the chart below, the market is apparently doing either...

  1. A large Elliott five-wave decline, which will collapse in the Spring, or...
  2. A large Elliott three-wave decline has ended and a three or five-wave Elliott up cycle is underway.

The most recent peak in the market (B on the chart below) was 11,337.  Since then, the "C" decline took us down to 8235, a decline of 3102 points.  Given that markets generally retrace 50%, 60.8%, or 75%, the targets for the market are:

Last, but not least, is the chance of a perfect 100% retracement to 11,337 but without going on to a new high.  No, it's not likely, but in theory, it could happen.

This is the hardest time to be managing money.  If the low is really in, by not being long in the market, you miss a good bit of the run up.  But, if the bottom is not in, and you go long, then the bottom falls out from under the market, then you get your butt kicked....and it takes a long time to "make back" losses. 

Thanks to some ugly reversals (specifically because of Fed interventions in the market), we're still sitting on about $13-thousand in tax loss carry-forwards that we'd like to offset against some hefty gains.  But Mom didn't raise no fool.  If we get the wrong side of this market, the last thing we want is more tax losses to carry around.  No sir.

So as hard as it is to be patient, I'm still looking at the accounts and thinking "Gee, I could buy a bunch of calls on that, or a bunch of puts on this, but if I'm wrong, I lose..." 

So those are the targets I'm looking at on the Dow: a close over 11,337 is what I'm holding out for as confirmation that the bottom really is in.  Even then, I may stay in cash because of the risks of additional terrorist acts.  I may wait until we confirm that 1 is complete, and try to guess the bottom of wave two.  If there's one lesson to really take to heart from Bob Prechter's books, it's that the safest place to make money is in the third wave up or down.

With the quest for clarity foremost in mind, I sat down and studied the Aggregate Index, looking for some kind of clues as to what to expect.  Unfortunately, it looks the same way: No man's land for the near future.

In order to confirm that a new series of up moves was underway, I'd need to see the Aggregate top 9120.  From this week's position of 8015, that's a potential to move up 13.7%.  All of which would be dandy and worth playing except for the fact that at any moment before 9120 is exceeded, the bottom could fall out from under the market and we'd be on our way south and looking to take out the old lows set in September.

Cash may not be a very enjoyable place to park assets, and maybe I've been burned by pushing one to many options around within hours of expiration, but being careful and limiting risk seems like a reasonable strategy.

OK, so much for the "market feel".  Now let's see where some of the underlying secular trends are pointing:

Resources:  

The proposed existence of a New World Axis, consisting of Washington-London-Moscow, as suggested in last week's report, draws attention to a world-wide underlying fight to control natural resources and intellectual capital. 

As I read over the headlines this week, it was almost amusing to see how this resource dance was being played out.  In Afghanistan, the Northern Alliance, which is made up of noticeably few Afghans, and a lot of fighters from the neighboring "'stans" look like they will be a political handful once the Taliban are resoundingly defeated.

Still, a victory in Afghanistan, while helping the Russians with what could be perceived as an Islamic challenge to its southern tier, won't solve the continuing problem of militant Wahabism.  To put a lid on that problem, Washington is, according to reports, preparing plans to go after the Sudan, Somalia, and possibly (depending on which report you want to believe) Iraq.

NATO as a UN Replacement?

One notion that became apparent to me this week was in looking at Vladimir Putin's "Washington-London-Moscow axis" that was discussed down at the Bush ranch last week, was that we ought to be seeing some moves now to put the Axis into some type of formal structure.

Clearly, the U.N. would not be the right place for this to occur, as the U.N. has far too many players to make such an axis functional.  So absent the U.N., what organization exists that would be able to pull together a sort of "world government" for technology and resources?

Answer:  NATO. 

When you think about it, there's a certain sense of it.  Russia is now dancing around the edges of NATO membership and there's been much coverage in media (outside the U.S., of course) about how Russian historical ties to the future of Europe are more significant today.  If there is a "First World Club", then NATO is it.  Their membership consists of 19 countries, all keenly interested in the defense of European and American views.  The list of who's in is at http://www.nato.int/structur/countries.htm#fn02 .  Turkey might seem like an odd members, but it's vital to maintain control of waterways in the Middle East.

Recently, NATO has been adding "partners" like Lithuania, Romania, Uzbekistan, along with the Slovaks and the Swiss.  Russia is looking at some kind of relationship, but just what form it will ultimately take is not clear.  Not being a full-fledged member of NATO allows the Russians some freedom of movement politically, while playing along with  NATO gives them access to what's really going on in the "First World".

If you want an interesting speculation, write this one down:  Expect to see moves and pressure over the next several years to expand the scope of NATO to include all U.S. and European allies along with America's "best of the Pacific" including New Zealand, Australia, Japan, and Taiwan.  I don't know if you remember the old days of SEATO, but that organization was disbanded in 1977.

Today, there's nothing left as a regional military authority to deal with militant action in places like the Philippines. Usually, as in the past month, it has fallen to the U.S. to simply write a check (or promise a gob of foreign aid) should a problem come up that has the potential to set a dangerous precedent.

And speaking of the Philippines, the situation there is far from hypothetical.  You will see what I mean if you've been following the recent uprisings in the Autonomous Region for Moslem Mindanao.  If you follow the Pravda reports, you'll read that this problem will cost us U.S. taxpayers about $100-million in "security assistance".

Now if you subscribe to the notion that Islamic fundamentalist terror organizations are a worldwide problem, then it doesn't take a rocket whiz to figure that the costs should fairly be shouldered by all those whose way of life would be threatened.  You see?  Turning NATO into an international police force to deal with rogue elements - even if in the Pacific basin, makes a certain sense. 

Still, it's disconcerting in a way, when you remember that NATO aircraft are presently being used for surveillance missions over parts of the U.S. in the anti-terrorism "war".  I was under the apparently mistaken impression that we had a military that was strong enough - all by itself - to defend us from external threats.

There are only two conclusions I can draw.  Either:

  1. The U.S. military has been so gutted by misfeasance of previous administrations that we simple don't have the manpower to operate our resources (like all those mothballed jets in the desert), or,
  2. None of this is purely coincidence and it's part of a planned "migration" from a strong U.S. standing force to participation in a "shared governance" multi-national police force.

Either way, I don't remember voting for either of these outcomes, yet they seem to have been foisted on us without a vote.  That in itself is an interesting commentary on how the world operates: 

It's becoming more clear by the day that even though someone might be born an American, we're only allowed to vote on just so much directly.  Slash the military budget and yield control to NATO?  I didn't vote on that.  Force ranchers to keep their cattle and sheep of BLM lands?  I didn't vote on that either. 

All of which brings me to this week's conclusion:  We live in a world that is largely run by special interests and processes that are beyond the reach of the ballot box. 

From the Poop Deck:

Food: I notice that prices have stabilized on the couple of shopping trips I've taken this week.  Milk, butter, meat, most of the vegetables, even beer and booze prices are around where they were a month or two back.  If there's deflation in the cards (and pending economic calamity) it seems to be in a resting phase here.  Another sign that urges caution.  Shelter:  Home refinancing continues at a sweltering pace.  Low interest rates are here today, but will they be here tomorrow?  Speculation continues to run through the web that the Fed may be done with hacking rates, and if this is the case, bonds will lose some of their luster.  Transportation:  Consumption figure continue to show the U.S. has been able to continue selling things to consumers.  But more troublesome is how it was done: Largely through the sale of cars.  With zero interest rates, buying a car is easy enough, but remember that there's a second edge to that sword.  As the price of new cars comes down (in terms of monthly payments) it also drives down the prices of used cars even more quickly.  Used cars are darn near cheap in many places around the country.  Energy: Biggest thing to watch domestically is what will California do with all the power contracts it bought when times were tight?  Looks like there will be a surplus of power in the Golden State at least in the near term.  But what's interesting is that prices for power won't come down.  Many contracts were negotiated in "panic mode" by state officials and none of the power producers has volunteered to "renegotiate lower prices" although the state had the balls (or lack of brains) to ask.  Internationally, the price of oil keeps declining.  Until we get a recovery and consumption starts to pick up, there will not be any oil pricing pressure, and as I reported to your in a previous newsletter, if there really is a non-Muslim oil producing effort afoot, I would look for continued low gasoline prices for a time. Finance:  Keep an eye on the bond rates.  Look at the chart at a chart of the Dow to 10-year bonds and ask yourself "Is holding bonds looking riskier now?"  You have to wonder if maybe bonds are peaked.  If so, it means a renewal of prices going up (Inflation) and that should spell appreciation for gold.  Might reign in some of the housing price declines too, which means maybe in hard hit areas, like the Pacific Northwest, a moderately priced home might be a good investment.  But again, that's only if the bonds start going up.  Watch the short maturities.  Communication:  Nothing much going on in this sector, except reports that the FBI is working on more ways to monitor email - without having to do a sneak-and-peek warrant.  Different technology than is used by the Echelon surveillance system. You might want to check out http://www.echelonwatch.org/ now and then.  This whole issue of [privacy is a tough one for me.  I remember what my late father taught me:  "If you're innocent, you have nothing to fear."  But, the flip side of that argument is, "Yes, that's true, if the people who are watching are all honest and above board players".  I think we've had enough breakdowns in honesty and candor in government, that asking folks to believe the government will always operate at the highest ethical plane is asking a hellavah lot...Environment: Nothing caught my eye this week.

A closing thought:

I had a nice conversation this past week with bond trader and collateralized mortgage obligation (CMO) whiz Howard Hill.  We're both wondering about what's next for the economy, but Howard brings up the point that what may be going on is a three step major recession.  The way he explained it, the first step has already happened and that's the capital spending recession.  That's the one that hit the tech companies so heavy because not everyone wanted to put fiber networks in their offices in place of the old CAT-5 cables.  Fine. 

So the second step of the three is where we are today:  A lot of butt covering is going on at the highest levels of most firms on the "street" to cover up for past sins.  There's a tremendous amount of head-rolling and ax murders going on in the corporate lairs.  Good people who did what they could are being kicked out by people who are operating in largely self-indulgent and self-interested ways.  In the meantime, the tracks are clear if you know where to look: the huge number of "special items" in financial statements, the increasing number of people who can't keep up with the pressures of all the "special meetings" that are being called where nothing really gets accomplished. 

What Howard thinks may be the third step would be a real slow down on the part of consumer spending next year.  Yeah, we might get through the end of this year, but along about January and February, the layoffs that hit us in the late summer and early fall of this year (including yours truly) will start to weigh on the balance of the population.  I am doing my own oil changes and tune-ups on the Porsche - and we're living with one car for now.  Christmas this year?  Yes, we'll do stocking stuffers and phone cards so our kids can call and things like that, but big diamonds, furs, or spendy gifts?  Not unless we win a lottery or something...Who needs another mink on a boat anyway?

At some point that will catch up with everyone.  The question we'll get into next week will be the concept of "value" and how it is that we are able to scam farmers out of food in return for pieces of paper. 

Today?  We'll maybe go to a swap meet and put up the Christmas lights on the boat.  I spend $10 most years doing that and figure folks driving by will get at least that much value out of seeing a 40' high tree floating out on San Diego Bay. 

I'll let you know if we find a Christmas Ship Parade down here.  In Seattle, they were a real challenge in high winds and horizontal rain.  Here?  Should be a piece of cake.

Fair winds,

George