Treasury notes and bonds have just plunged to the lowest level since July 2002.
Mortgage bonds are falling even more quickly, driving mortgage rates through the roof … sending mortgage company stocks into a tailspin … and raising serious questions about the viability of the entire housing market.
Bonds are also crashing in Latin America, Europe, and Asia: Brazil’s 2040 bonds just plunged 3.4% on Friday. Turkey’s bonds did even worse, down 4.8%.
The world’s stock markets are falling in tandem. On Friday alone, the Dow Jones World Stock Index plunged a whopping 2.71%, the equivalent of 277 points on the Dow Jones Industrials.
In the U.S., the stock market decline was not quite as deep, but it was certainly broad-based:
Elliot Wave International points out that, on the New York Stock Exchange, a whopping 3,135 shares fell on Friday while only a meager 255 rose — the third-worst ratio of advances to declines since October 16, 1987, the Friday before Black Monday.
Bank stocks have gotten smacked — down by 4.3% in the last four days, or more than double their rate of decline over the past month.
Individual banks shares — especially those with heavy mortgage exposure — are down even more, some as much as 14% in the past week.
Another sign: The Russell 2000 Index, heavily weighted with small cap stocks, is the first to bust through its recent 2004 lows, forming an ominous “M” in the chart, a telltale sign of a landmark top in the market.
All the other major indexes — the Dow Jones Industrials, the S&P 500, and the Nasdaq Composite — are on the brink of doing the same.
What’s next? For an answer, let me share with you some …
PERSONAL LESSONS FROM THE PAST
Dad used to tell me proudly how he made a fortune in the great bear market of 1929-32.
But he was also the first to admit that he sometimes fell for false alarms; that no one can pinpoint when a crash will strike.
He began teaching me about the stock market in 1952, when I was six years old. While most kids were cheering or booing the Dodgers or the Yankees, I was cheering or booing my Dad’s favorite long or short positions in the market.
Years later, when I was a teenager, he taught me how to try to guess what the market was going to do — often by using charts.
There were no computers, and published charts were always out of date. So, we had to maintain our own charts by hand — working together in the evening or on weekends. Mom didn’t like newspapers and charts piling up on our living room floor. So, Dad and I would walk over to my uncle’s old penthouse apartment on 16th Street and 3rd Avenue in Manhattan. That was our “off-hours research center.”
A friendly Hungarian elevator man gladly took us to húsz, the 20th floor.
As you walked in, the first thing you’d see was months of Wall Street Journals and Barron’s stacked in top-heavy piles in the living room.
The kitchen table was decked with spreadsheets and charts; the bathroom shelf, lined with old Federal Reserve bulletins.
A wide, red-brick terrace surrounded the apartment on three sides, providing additional workspace. As long as there was no cold, northerly wind or no soot particles raining down from Con Ed’s East River smokestacks, it was our favorite place.
In the summer, Dad would change into his bathing suit, gather up a week’s worth of newspapers, take them outside, and sun himself on his lounge chair, face down.
With his head just far enough over the edge to see the stock listings on the not-so-clean floor beneath him, he’d call out the open, high, low, close of the Dow averages, IBM, and a dozen other key stocks.
Then he’d look up the rates on five different Treasury-bill maturities in the secondary market, ranging from six weeks to a year.
My job was to sit at a makeshift desk nearby and draw in the appropriate lines and bars with a #2 pencil. It was a tedious task. But when we were done with each chart, the pay-off for me was the chance to look for patterns, review the fundamentals, and debate with Dad about the most probable future outcome.
BASIC PRINCIPLES
I have never forgotten some basic principles I gleaned from that experience.
I learned that no one can foretell the future with certainty or consistency. There is no fool-proof system, no holy grail.
I also discovered, however, that in the days preceding rare and MAJOR history-making events, the clouds begin to shift noticeably.
You can discern not just one pattern, but a whole series of confirming patterns, all sending a similar message. First, you see a “set-up,” as if a gun is being cocked, ready to fire. Then one day, if you’re listening carefully, you can virtually hear the trigger go off.
Dad had that experience several times in the 1929-32 bear market, when the market fell by over 90%. Plus, he and I had a similar experience in the days leading up to …
BLACK MONDAY, 1987
It was September. Dad and I noticed that the smart money in the stock market had been selling in droves, unloading their positions behind the scenes.
We also noticed that, like today, interest rates were surging and bonds collapsing. Soon foreign bonds, foreign stocks, U.S. bank stocks, and small cap stocks began to tumble as well. That was the set-up.
Then on Friday, October 16, 1987, the Dow Jones Industrials plunged 108 points. That was the trigger.
But few batted an eyelash. In the Wall Street Journal, Tim Metz and Beatrice Garcia put it this way:
“By 8pm at Harry’s Bar, the Wall Street watering hole, hordes of yuppie brokers and traders clearly were preoccupied with getting dates for the evening rather than with the market collapse. Of course no one is forecasting a crash like that of 1929.”
Of course.
But three days later was Black Monday, October 19, a day that made the previous Friday’s decline look like a Sunday picnic.
In just one trading day, the Dow Jones Industrials lost 22.6% — DOUBLE the decline of the great Crash of ’29, the worst previous stock market collapse in recorded history.
THE SET-UP — AGAIN!
Fast-forward to Monday, May 10 — today.
For over a year, the stock market has been in a rally — sparked by the fall of Baghdad, driven by record low interest rates, and pulled up by earnings improvements that always looked dramatic when compared to deeply depressed year-ago results.
But now, each of those forces has begun to fade:
The victories in Iraq have turn sour …
Interest rates have turned higher …
And from now on, most earnings changes, when compared to already-high results of previous periods, are expected to be FAR less exciting.
Meanwhile, earlier this year, we noticed how major corporate insiders began selling in droves:
* In the cellular services industry, chief executives and other top insiders recently reported selling $32 million of their own stock. How many purchases were reported by the same insiders during the same period? None!
* In the computer and office equipment industry, it was even worse: 62 insider sales worth $68.1 million … and again, not a single reported purchase!
* And insider selling in the computer services and software industry has been literally off the charts: A total of 229 sales — worth nearly ONE BILLION DOLLARS — and not a single share of stock purchased!
Many of these insiders were even publicly touting their companies — while quietly selling their shares hand over fist. Examples:
* Red Hat’s CEO Matthew Szulik plugged his stock on CNBC last December, and then again in a Barron’s article in January. Meanwhile, he was selling shares in the company hand over fist, dumping a net total of 1,590,368 shares (or 68% of his holdings).
* Cephalon Chairman Frank Baldino, Jr. gave a televised Bloomberg News interview on February 13 … and 11 days later, sold 40,000 shares (or 12.7% of his holdings).
* Bluefly Chairman Kenneth Seiff talked up his company for a January 3 Bloomberg News article … but then sold 350,000 shares — more than 69% of his holdings — between the 20th and the 23rd of February.
Plus, in a recent quarter …
* Bank of America (BofA) CFO James Hance predicted a bright future ahead, citing strong consumer loan demand going forward. In the very same week, Mr. Hance sold 50,000 shares of BofA stock worth $3.8 million.
* Larry Mosner, chief executive of Deluxe Corp., reported that his company had a very, very stable business with strong cash flows. A few days later, Mr. Mosner sold 143,169 shares worth $5.8 million.
* Phelps Dodge Chairman and CEO J. Steven Whisler bragged about everything he was doing to grow his company. A little over a month later, Whisler sold 144,334 shares worth $8.9 million.
Now, despite some of the greatest Wall Street hoopla and the loudest Washington fanfare I’ve seen in decades, the Dow, the S&P, and the Nasdaq are down for the year.
Even in the wake of some of the best-sounding economic news of this century, the market has been unable to go up, let alone sustain a rise. That’s the set-up — the cocked gun.
Now get ready for the trigger.
No, not every day will be a down day. And not every stock will go down. But be sure to prepare for the worst … and hope for the best.
Good luck and God bless!
Martin
Martin D. Weiss, Ph.D.
Editor, Safe Money Report
Chairman, Weiss Ratings, Inc.
