Analysts: Stock Market Heading Toward Crash;
Present Rally Called 'Comic Relief'

by Joe Taglieri, FTW Staff

[© Copyright 2002, From the Wilderness Publications, www.copvcia.com. May be copied or distributed for non-profit purposes only.
MAY NOT be posted in any Internet web site without express written authorization.]

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 stage."

"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 our estimation."

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 market peak.

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 Hochberg.

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 few months.

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 in derivatives.

"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 rating downgrades."

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 wrote.

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.