Could Dow 3600 Be Too Optimistic? ~ The Risk Averse Alert

Friday, June 26, 2009

Could Dow 3600 Be Too Optimistic?

Let me ask you something. Is General Electric (NYSE:GE) on the verge of collapsing to $0.00?

company chart (GE)

There are two reasons I ask this...

First, the company's CEO, Jeff Immelt, appeared on the Charlie Rose Show last night and informed the world that, GE's Capital unit is worth $20 billion.

Why is this of any interest? What makes Immelt's claim worth noting?

It reveals that not even corporate America's CEOs are immune to fantasy, living within the confines of a past status quo not likely to be restored ever again.

It would be one thing if GE Capital put its balance sheet to the Buffett test ... bringing some of those structured securities to market ... seeing what they get. I mean, this is a publicly traded company, and what's on the balance sheet is known to investors. If GE Capital is worth $20 billion, and this value is unaccounted for in GE's stock price, then does the investment world fail to recognize a bargain staring it in the face ... or is someone playing make believe, bursting with hope born in past circumstance that simply no longer defines contemporary arrangements?

I suspect truth lies much closer to the latter...

And Immelt certainly is not the only person in high places consumed with such fantasy! Indeed, delusion appears pandemic.

Talk of correcting an industry lacking any credible will to change its ways is not only cheap, it's insane. Indeed, amply demonstrated already among our nation's so-called "leadership" has been a thorough lack of courage to address the growing insolvency risk sweeping over both the private and public sectors, all because financial industry greed is still running wild.

Thus, the President's most frightful fantasy might be found (at 7:40) in his rejecting that, the current financial system should be scrapped. Truth is reorganization in bankruptcy is the only viable solution were avoiding further, destructive chaos, in fact, foremost desired.

company chart (GE)

Recall back a few months ago when GE was presented as a prospective canary in the coal mine whose under-performance in December '08 might have been foretelling the market's rough start in '09.

Well, GE's under-performance over the past two months adds another bit of evidence that, all is not well with financial institution "equity" ... possibly portending trouble ahead for common stocks in general.

This leads to the second reason why I wonder whether GE is on its way to Mother Goose Egg... Ready?

Now batting for team Elliott ... team Elliott ... it's the Dow Industrials' glue ... the business machine turned outsourcing whore to King Globalization ... give it up for Big Blue ... Big Blue.

company chart (IBM)

IBM, indeed, raises willingness to suggest a Dow 3600 objective might be far too optimistic a bear market target. Let this sink in.

The essential technical basis for projecting a dire outlook toward IBM is all Elliott Wave Principle ... first, in targeting the stock's prospective objective in the vicinity of $10 a share (at "the terminus of the fourth wave of one lesser degree") ... and then, by how IBM's unfolding since its peak in 1999 conforms to other Elliott Wave Principle rules and guidelines. Let's examine these a little more closely...

company chart (IBM)

First, the "Rule of Alternation" is revealed throughout the formation of waves A and B. This is just "textbook" to a "T."

Then, more recently, we see IBM retracing .618 of losses suffered following its peak in 2008. Waves 1 and 2 of wave C appear to be complete. Wave 3 of C — a third wave of a third wave — is due next. Thus, IBM's pending decline, given present anticipation for what typically is the most dynamic of all Elliott Waves (i.e. a third wave), could be nothing short of devastating.

I could not tell you what might be the detonator. All that's needed are lemmings who will rush over the edge should trouble become unmistakable. You can be fairly certain that, in risk-filled times like these a mad rush for the exits likely will develop should the bluest of blue chips begin a rapid fade and fall to its knees.

And if this should be the fate of the relatively more stable IBM, what might become of GE? Well, the image of a stuck pig, loaded to the snout with leveraged securities gone bad, might be about the only thing GE brings to life.

Now, let's return to consider fundamental conditions at present, because you should have no doubt that times we are living in are, indeed, frightfully risky...

Just look around you! No one seems willing to face reality. Instead, we find much of the world largely living within the confines of hopes and dreams residing in a past that simply has little likelihood of returning ... at least not in our lifetimes.

No one recognizes astronomical risk to equity revealed by how the role once played by private finance in building the grandest Ponzi scheme ever seen — structured finance — has been hopelessly paralyzed.

It's the "private finance" part of the equation that's key. Credit created out of thin air whose risk was mitigated by slicing and dicing, winking and smiling, no longer exists to accommodate the dream world of those who think inside the box about today's investment climate. So many folks buy into the thinking of yesteryear, when then, like now, few had any idea what really was going on: what incredible risk was being built up in the global credit system. Mother, apple pie and Chevrolet were (and still are) enough to satisfy belief in the investment game's continued viability. Reality, however, might as well have these folks living on Mars, because at least then there would be an excuse for their continued ignorance.

Now, at present, a U.S. Treasury credit bubble may be filling the void left by the death of Wall Street's structured finance — the infinite credit creating machine that former JPM CEO, John Lipsky, once called, "the lynch-pin of the U.S. economy." Yet recall what we saw last fall — what was necessary to prod government action. This did not come without considerable convulsion.

Enter the trend that's your friend now...

See Congress standing up to pawns like Bernanke, condemning the extortion that was necessary to "save the system." Consider the timing of this week's challenge, because California and another 18 states face the imminent threat of bankruptcy at the start of their new fiscal year on July 1st. Brace yourself, because a fight is brewing and things literally could turn bloody.

Clarity tonight has me very concerned.

So, I wish to ask you a favor...

Do you read other blogs, occasionally coming across articles in which the author expresses some sanguine attitude about what lies ahead in the economy and in the stock market? Maybe touting some stock as being attractive?

Would you help spread the word about the extraordinary risk to equity that might be at hand?

I have made it really easy for you to do this. Take a look at the comment area to this post appearing below. Simply copy and paste my remarks to any relevant article you come across. If you wish, you can even use my name (initials are fine) and email address.

The important thing is that, when posting your comment you include the website I have indicated. This will bring the reader here, where risk averse enlightenment awaits the more thoughtful investor like yourself.

(These same remarks also are posted in this Seeking Alpha article. Check out the rating on my comment, and you will see an objective measure of the pervasiveness of fantasy-filled hope I am alerting you to here. See for yourself a demonstration of how deluded is the world at-large toward the risky asset class called "equity.")

I hope this does not seem an odd request. If I'm right about what's ahead, you might in fact bring hope to someone presently unaware. Seriously, please think about it.

Here's the link again to the comment area below.

Go nuts, because time might be running short...

Fast Money
* * * * *

© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

There's an easy way to boost your investment discipline...

Get Real-Time Trade Notification!


TC said...

Thanks for taking a look at this. Let me suggest you copy what's below, paste it into a NOTEPAD document, then save it to your computer. This way, whenever you come across an article expressing fearlessness about what might lie ahead in the stock market, you can open your NOTEPAD document and copy and paste the following:


Equity is DEAD money. I don't care what "company fundamentals" suggest.

Why do people find it so hard to understand that, with a mountain of debt existing higher up on the accounting food chain, and with capacity for servicing it continuing to collapse (just keep your eye on that moribund real estate market), equity in all forms is at incredible risk of being indiscriminately sold simply for the sake of raising capital that's needed higher up in the financial food chain?

What do you think was behind last year's equity sell-off? This risk remains intact.

Truth is -- and all the evidence supports this -- yesterday's status quo will not soon return. Wall Street's infinite credit machine called "structured finance" -- the principle lever behind rising equity prices since 1995 -- will not be restarted. Do you really think that with the very Federal Reserve's credibility coming under attack the capacity of private financial firms to infinitely create credit will soon be restored? Please. Send me whatever you're smoking if you do.

Nevertheless, debt liabilities underlying the dead game of structured finance hang in the balance. Thus, all equity values remain at great risk.

Paul Davis said...

Amen, brother! Cam I hear a hallelujah!