"Elliott Wave Commentary Article(s)"
The Most Important Investment Report
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In January 2007, our friends at Elliott Wave International issued a special report called "2007: The Year
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Suddenly, It's a Bleak Midwinter for Housing and Lending
By Susan C. Walker, Elliott Wave International
January 7, 2008In the bleak midwinter,
Frosty wind made moan,
Earth stood hard as iron,
Water like a stone…
(From "A Christmas Carol" by Christina Rossetti)Shawn Colvin sings a beautiful song based on this poem by Christina Rossetti, reminding us of the bleakness of midwinter. That is exactly where the housing market seems to be now – facing its very own bleak midwinter of falling prices, rising mortgage rates and growing inventories.
The latest report of the S&P/Case-Shiller home price index shows that the price of houses fell 6.7% in October, year over year. That is the largest year-to-year decline drop since April 1991. Think of it – if you had bought a home for $300,000 in October 2006, it is now worth about $280,000. And suppose you just got a new job and need to move? You are going to have trouble selling it at that price, too, thanks to so many foreclosed homes on the market. One realtor in Phoenix explained to a Wall Street Journal reporter that local residents are now competing with foreclosed homes selling for $50,000 to $100,000 less than other houses on the market. "The sellers now are having to reduce their prices by 20% to 30% to compete," she says. (Wall Street Journal, "Pace of Decline in Home Prices Sets a Record," 12/27/07)
At a meeting of the New York Society of Security Analysts on January 7, U.S. Treasury Secretary Hank Paulson said this about the U.S. economy: "We will likely have further indications of slower growth in the weeks and months ahead.''
Paulson and central bankers at the U.S. Federal Reserve recognize that they, too, face their own bleak financial midwinter. It's not just the mayhem brought on by the subprime mortgage debacle, the implosion of the housing market and the ensuing credit crunch; nor is it that the U.S. economy lurches toward a recession and hard times.
No, it is something bigger than that. Public opinion or social mood, as we call it here at Elliott Wave International, has shifted from positive to negative. When that happens, financial heroes find themselves falling from their pedestals onto frozen earth hard as iron.
Exhibit A - The headline of a recent article on Bloomberg: "Paulson Gets Diminishing Return with Bush, Like Powell, O'Neill" and the lead: "Henry Paulson escaped the Nixon White House with his reputation enhanced. He won't be so lucky this time around."
Exhibit B - The lead from a recent column by David Ignatius in the Washington Post:
"When airport rescue crews are worried that a damaged plane may have a crash landing, they sometimes spread the runway with foam to reduce the probability of fire on impact. That's what the Federal Reserve and other central banks are doing in pumping liquidity into severely damaged financial markets. Make no mistake: The central bankers' announcement Wednesday of a new coordinated effort to pump cash into the global financial system is a sign of their nervousness…."
Nervousness is in the air now. Investors are anxious about the markets; everyone is worried about the housing market. Our Elliott Wave Financial Forecast December issue explains how housing starts (and stops) are intimately tied to recessions: "One key indicator of success in pre-dating economic downturns is housing starts, which are approaching the 1-million-a-month level that has preceded all recessions of the last 40 years."
And the Fed is nervous, too. So much so that it announced a credit giveaway with four other major central banks (the Bank of Canada, the Bank of England, the European Central Bank and the Swiss National Bank) in mid-December to try to bolster the financial system and the banks that keep it humming. The Fed reports that banks have been stepping up to its auction window each week to purchase $20 billion. Unfortunately for the banks, most of this "liquidity" isn't that liquid. It has to be paid back within 30 days, with interest of about 4.65%.
Editor's note: Elliott Wave International has agreed to make available to our readers a 2-1/2-page excerpt from Bob Prechter's Elliott Wave Theorist in which he describes exactly how the Fed's latest effort to shore up banks' balance sheets has become "High Noon for the Fed's Credibility." Click here to read the Theorist excerpt.
Just how bleak is the future for central bankers if this recently implemented plan doesn't work? Bob Prechter explains in his just-published Theorist:
"Nevertheless, this is probably the single most important central-bank pronouncement yet. But it is not significant for the reasons people think. By far most people take such pronouncements at face value, presume that what the authorities promise will happen and reason from there. But the tremendous significance of this seismic engagement of the monetary jawbone is that if this announcement fails to restore confidence, central bankers' credibility will evaporate."
"At least that's the way historians will play it. But of course, the true causality, as elucidated by socionomics, is that an evaporation of confidence will make the central bankers' plans fail. The outcome is predicated on psychology."
The "socionomics" Prechter refers to is a new social science he has introduced that studies how humans behave in groups within contexts of uncertainty – where fluctuations in social mood motivate social actions. It explains that rather than an event happening that affects social mood (for example, falling home prices make people feel bad), what really happens is that social mood changes first from positive to negative and then lousy things happen (for example, unhappy people make home prices fall). If you can adopt this point of view, then you can see that, in poetic terms, we are fast approaching a bleak midwinter for the economy and the financial markets.
Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.
Subprime Delivers One-Two Punch
By Susan C. Walker, Elliott Wave International
Just Like Hurricane Katrina Did
November 29, 2007The world is awash in bad news about the subprime mortgage meltdown, just the same way that New Orleans was awash in floodwaters from Hurricane Katrina two summers ago. A few examples:
- The median price for new home drops 13% since last year, the most in 37 years, according to a Census Bureau report on November 29. This due in large part to buyers not being able to get financing now that lenders have tightened their lending standards in response to the subprime debacle.
- Major Wall Street banks write off billions of dollars in subprime-backed securities.
- Dire forecasts estimate that the credit crunch caused by the mortgage problems will cause between $250 billion to $500 billion of losses at banks and brokerages before it's done.
If you want to see how this kind of news looks on a price chart, consider the chart that we published in the latest Elliott Wave Financial Forecast. It shows how confidence in the mortgage market has simply fallen off a cliff. "The ABX Mortgage Indexes are akin to the eerie music that starts to play right before the goriest scenes in a horror movie," write our analysts Steve Hochberg and Pete Kendall. Even prime-rated mortgages (the top line on the chart) seem to have been tainted by the cliff-diving exploits of the subprime and Alt-A mortgage indexes.
Editor's note: Elliott Wave International invites you to read more about this Mortgage Mutiny chart in a special three-page excerpt from the November 2007 Elliott Wave Financial Forecast, called "Transition to a Fear of Risk."
The continuing repercussions of the subprime meltdown since two Bear Stearns' hedge funds imploded in August remind me how closely this situation imitates the delayed punch of Hurricane Katrina in the summer of 2005. In fact, I wrote a column for Fox News on that very topic a few months ago, some of which is worth repeating.
* * * * *
[Excerpted from "Subprime Storm Mimics Katrina," originally published July 30, 2007]Wall Street may have reason to worry about a financial hurricane poised to do the same kind of damage Hurricane Katrina did — in terms of money and assets lost — in New Orleans in 2005. Given the latest storm warnings about subprime mortgages and the Dow’s dive last week, it looks like "Subprime Katrina" might become the financial storm of the decade.
Wall Street investment bankers who remember the devastation in New Orleans might want to start battening down the hatches. In fact, some of them seem to understand their pending doom as they try to cajole the rest of the world into thinking that the subprime (otherwise known as low-quality) mortgage contagion is contained. 'Sure, sure, Bear Stearns got hit when its subprime hedge funds lost their value, but everyone else is O.K.,' they say. 'Let's all heave one collective sigh of relief that we dodged that bullet.'
Does that attitude sound familiar? It's exactly how the people of New Orleans felt for the 8-10 hours after Hurricane Katrina whipped up the Gulf Coast and dumped its rain. It was over; they had dodged the bullet. Their beautiful city that is built below sea level and surrounded by sea walls and levees was safe. That's where Wall Street is right now – hoping the levees will hold as investment bankers try to sandbag the rest of us with lots of placating talk. Well, it turns out that New Orleans was about as safe as the subprime bonds that are now below their own "C" level.
Although Wall Street bankers have been doing one heckuva job, I think it's too soon to breathe easy, just as it was too soon for those in the Big Easy to breathe easy. Here's why: Wall Street was warned about the coming hurricane-force fall-out from subprime mortgages, and it ignored the warnings, buying up all the securities backed by subprime mortgages that it could. Now, Wall Street is having trouble selling more debt. It sounds like it may be too late for many Wall Street denizens to get out of town – and their positions – before the floodwaters start rising.
Remember, too, the finger-pointing and blaming that started as soon as the rest of the nation realized that the U.S. government was not doing enough to help New Orleans? The editors of The Elliott Wave Financial Forecast recognize a similar change in attitudes toward Wall Street:
"The unwinding process will be sped along by a flood of revelations about illicit hedge fund and investment banking activities. Just as Enron, Tyco and a host of other primary beneficiaries of the late 1990s bull market run became the focus of scandals, hedge funds and the banks that enabled them are starting to become a focal point for scrutiny." (The Elliott Wave Financial Forecast, July 2007)
Then will come the final installment. Just as the U.S. government was slow to come to grips with the disaster in New Orleans so that people were left to fend for themselves, so too will investment bankers and investors have to fend for themselves. They may find themselves clutching their worthless paper and wishing someone would bail them out from the rooftops of their now-worthless homes.* * * * *Now, here we are at the end of November, and the situation for investors and investment banks has played out almost exactly as I outlined. Hardly anyone is coming out smelling like a rose. If anything it's the opposite, as the stench from quarterly financial filings rises as banks reveal how many billions in dollars they must write off for their mortgage investments gone bad. Sadly, the conclusion to my Subprime Katrina column still holds true: "Heckuva Job Brownie – now known as Helicopter Ben Bernanke and his Federal Reserve team – won't have any more luck picking up the pieces on Wall Street than FEMA did in New Orleans."
Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.
Good news! The first two parts
of Elliott Wave International's Market
Myths Exposed video series are online now, and each turns conventional wisdom about the financial markets on its head, allowing you to think independently of the mainstream and call
your own shots regarding portfolio management. There's already a buzz about this video series among independent-minded investors and traders.
Read what a few of them have to say:
"Wow, it is a pleasure to know that there are great minds out there." - P. Rubin
"Thank You, The more I learn, the more I realize > how little the knowledge I have that is factual." - L. Paton
"WOW ... I am new to this method of trading, and Steve has given me some insight into how the U.S. > market operates." - L. Smith
"It's a real eye-opener for me! Thanks." - A.> Kelley
"Optionetic student, you have my attention. I'm looking forward to adding your subscription to my arsenal." - G. > Graves
> · "I really enjoy your honest and straight talk
> about the markets ... so much "brain-washing" by the media and the
> market TV programs. Thank you ..." - J. Foreman
> · "I found this video to be a real eye-opener.
> Thanks." - M. Clark
> · "Appreciate seeing the revealing Fed action
> plotted along with market action." - M. Thompson
Here are some of the eye-opening topics covered:
Why company earnings alone can't drive share prices up or down.
Why Economics 101 does not apply to the financial markets.
What's the deal with real estate?
Does a strong economy lead to strong financialmarkets?
Is the Federal Reserve manipulating market valuation?
Why do charts of the world's markets look so correlated?
And, most importantly, where should you put your money?
Plus a whole lot more ...
Many people pay hundreds of dollars to attend the conferences at
which Steve speaks. But now you can get a front-row seat to Steve's
intimate workshop setting without expensive plane tickets and hotel
reservations. All you need is a free Club EWI membership to watch!
Don't be fooled by market myths from the mainstream financial media.Think independently - watch the Market Myths Exposed video series
FREE! Sign Up to Begin the Video Series Now!
How To Recognize a Financial Mania When You're Smack Dab in the Middle of One
By Susan C. Walker, Elliott Wave International November 12, 2007
When you're caught in the middle of a bad storm, you don't really care whether it's a tropical depression or a full-strength hurricane. You just know you're hanging on for dear life. The same idea applies to financial markets. When a market is trending up strongly, it's hard to tell whether it's just a bull market or a more dangerous financial mania.
The recent tremendous ride up for global and U.S. financial markets, including the Dow, looks and feels more like a mania than a mere bull, says Elliott Wave International analyst Peter Kendall. This distinction is important to recognize in the rising stage, because manias always result in a crash that takes them back beneath their starting point.Kendall recently published his research into current financial manias throughout the world in SFO (Stocks, Futures and Options) magazine. The article, titled "Financial Manias and the Trade of a Lifetime," suggests an even more stunning finish for the current manias: "The speed and global scope of the unfolding credit crisis suggest that most of the fast-rising markets of the last decade will crash in unison," he writes.Editor's note: Elliott Wave International invites you to read the full five-page article with charts from the October 2007 SFO magazine by Elliott Wave International's Pete Kendall called "Financial Manias and the Trade of a Lifetime."
As co-editor of The Elliott Wave Financial Forecast, Kendall searches for trends that help traders to move in and out of markets. By comparing other historic manias with the impressive rise of the DJIA since the late 1970s, he focuses on the skyscraper pattern that they all have in common. The four historical manias are the Dutch Tulip mania of the 1630s, the South Sea bubble of 1720, the U.S. stock crash of 1921-1932 and the dot.com bust of the 1990s and early 2000s. Once you can see the similarities, you will be better prepared to face the music when the crash comes. As Kendall writes, "once the belief that the markets will always rise becomes widespread, it actually signals the start of a price swing that tends to be a career-breaker for any trader who tries to oppose it."He also discusses current manias, such as the Nikkei, which has yet to return to its start after a manic rise to its all-time high in December 1989, and the Dow, which reversed from its rise in 2000 but made a U-turn in 2002. The starting point for the Dow's mania as shown in the chart included in the article is at the 1000 level.Kendall, who is also writing a book about financial manias, titled The Mania Chronicles, describes five telltale signs that help an investor to tell the difference between a regular bull market and a mania. It's a mania if:
1. There is no upside resistance, and rising prices seem to be perpetual.
2. Everyone in the market looks like an expert.
3. There is a flight from quality investments to riskier investments.
4. As financial bubbles pop in one area, they bubble up in others.
5. The crash after the peak takes back all the gains the mania made.No. 5 can be viewed only with hindsight. But the first four signs provide essential clues to what's shaping up
in the markets."By studying past mania experiences, traders can gain valuable insight into the collective emotions that drive their markets," writes Kendall. "It's possible to make significant money in the advancing stages of a mania with no knowledge of its existence. But there is nothing like recognizing a mania for what it is in real time to help a trader keep those gains and deal with the relentless crash after it peaks."
In the last part of the SFO article, he asks the key question, Are we at the peak yet? Find out his answer by reading the whole article for yourself.
Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.
Why the Fed is Such a Lousy Wizard of Oz
By Susan C. Walker, Elliott Wave International September 7, 2007Central bankers who "follow the yellow brick road" end up in Jackson Hole, Wyoming, every Labor Day weekend for their annual symposium sponsored by – who else? – the Kansas City Fed. (Who can forget Judy Garland saying to her little dog, "Toto, I've got a feeling we're not in Kansas anymore," in the 1939 movie, The Wizard of Oz?)The Jackson Hole Resort serves as the Federal Reserve's equivalent of the Emerald City, as Fed governors and presidents meet with central bankers and economists from around the world to discuss economic issues. This year, the symposium focused on housing and monetary policy. Usually, the Fed chairman kicks off the symposium and, this year, the new chairman, Ben S. Bernanke, did the honors. He closed his speech with these words:
Elliott Wave International’s Market Myths
Good news! The first two parts of Elliott Wave International’s Market Myths Exposed video series are online now, and each turns conventional wisdom about the financial markets on its head, allowing you to think independently of the mainstream and call your own shots regarding portfolio management.
There's already a buzz about this video series among independent-minded investors and traders. Read what a few of them have to say:
- "Wow, it is a pleasure to know that there are great minds out there." – P. Rubin
- "Thank You, The more I learn, the more I realize how little the knowledge I have that is factual."
– L. Paton- "WOW ... I am new to this method of trading, and Steve has given me some insight into how the U.S. market operates." – L. Smith
- "It's a real eye-opener for me! Thanks." – A. Kelley
- "Optionetic student, you have my attention. I'm looking forward to adding your subscription to my arsenal." – G. Graves
- "I really enjoy your honest and straight talk about the markets ... so much "brain-washing" by the media and the market TV programs. Thank you ..." – J. Foreman
- "I found this video to be a real eye-opener. Thanks." – M. Clark
- "Appreciate seeing the revealing Fed action plotted along with market action." – M. Thompson
Here are some of the eye-opening topics covered:
- Why company earnings alone can't drive share prices up or down.
- Why Economics 101 does not apply to the financial markets.
- What's the deal with real estate?
- Does a strong economy lead to strong financial markets?
- Why do charts of the world’s markets look so correlated?
- And, most importantly, where should you put your money?
- Plus a whole lot more …
Many people pay hundreds of dollars to attend the conferences at which Steve speaks. But now you can get a front-row seat to Steve’s intimate workshop setting without expensive plane tickets and hotel reservations. All you need is a free Club EWI membership to watch!
Don't be fooled by market myths from the mainstream financial media. Think independently – watch the Market Myths Exposed video series FREE!
Sign Up to Begin the Video Series Now!
Elliott Wave International’s Market Myths
Exposed 3-part video series turns conventional wisdom about the financial markets on its head, allowing you to think independently of the mainstream and call your own shots regarding portfolio management.
In these three videos – originally presented to a full workshop at the 2007 San Francisco Money Show– Elliott Wave International Chief Market Analyst Steven Hochberg, editor for EWI’s Financial Forecast Service and close associate of distinguished market forecaster Robert Prechter, debunks some of the most widely held market myths and answers some of today's toughest questions for traders and investors, including …
Why company earnings alone can't drive share prices up or down.
Why Economics 101 does not apply to the financial markets.
What's the deal with real estate?
Does a strong economy lead to strong financial markets?
Is the Federal Reserve manipulating market valuation?
Why do charts of the world’s markets look so correlated?
And, most importantly, where should you put your money?
Plus a whole lot more …Many people pay hundreds of dollars to attend the conferences at which Steve speaks. But now you can get a front-row seat to Steve’s intimate workshop setting without expensive plane tickets and hotel reservations. All you need is a free Club EWI membership to watch!
Don't be fooled by market myths from the mainstream financial media. Think independently – watch the Market Myths Exposed video series FREE!
Sign Up to Begin the Video Series Now!
Subprime's New Song: The Worst Is Yet To Come
By Susan C. Walker, Elliott Wave International
August 28, 2007Remember that catchy love song that Frank Sinatra made popular in the 1960s, "The Best Is Yet To Come"?
"The best is yet to come and, babe, won't that be fine?
You think you've seen the sun, but you ain't seen it shine."At the risk of mixing musical metaphors and styles, it looks more like the sun has deserted us right now in the financial markets, and we're about to see "The Dark Side of the Moon," the title of Pink Floyd's 1973 smash album. With the subprime mortgage problems reaching farther and farther out to touch hedge funds, U.S. and European banks, mortgage companies and money-market funds, what we're going to experience sounds more like "The Worst is Yet To Come."
That's because the financial markets must contend not only with the credit crunch brought on by rising foreclosures now; they must also deal with the repercussions from more foreclosures over the next 18 months as more adjustable-rate mortgages (whether subprime or not) reset from low teaser rates to higher interest-rate levels.
How bad can it get? Investment adviser John Mauldin recently published a month-by-month account of the dollar amount of mortgages that will be reset through 2008, and the largest reset amounts pop up in the first six months of next year. In fact, as he points out, the $197 billion of mortgage resets so far this year is "less than we will see in two months (February and March) of next year. The first six months of next year will see more than the total for 2007, or $521 billion."
So, we haven't even begun to feel the pain yet. It's bad enough for the folks who will find that they can't keep up with the higher mortgage payments and will have to move out of their homes. But the financial markets won't be catching a break either. The antiseptic phrase used to describe the situation is "repricing risk." That means that investors have woken up to the fact that the AAA-rated mortgage-backed securities and derivatives they invested in look more like junk bonds now. This eye-opener causes them to want higher yields from what they now see as riskier vehicles.
That new investor caution plays out this way: investment banks, hedge funds and any other entity that bought securities backed by subprime loans now find it hard to sell the darn things. It's almost the same as homeowners trying to find buyers for their homes – nearly impossible in a market where home prices are falling. In the financial markets, it's nearly impossible because no one even wants to attach a price to a collateralized debt obligation today for fear that it will be priced much lower tomorrow.
The Fed can try to calm such fears all it wants by lowering the discount rate and giving banks more time to pay back loans (from overnight to 30 days), but the real problem can't be fixed with more access to credit. The fact is nobody wants any more of that. What they really want is cash to pay off their debts, be it a mortgage or an unwinding of a securities bet.
Wall Street's denizens are in the dark about how much their schemes depend on the ocean of liquidity created by the bull market, say Elliott Wave International's analysts, Steve Hochberg and Pete Kendall. They are particularly struck by the image of the Grim Reaper that Business Week magazine put on its cover recently with the headline, "Death Bonds:"
"The grim reaper is the perfect visage to welcome the arriving wave of liquidation; it will wreak havoc with their work. The field's dark fate is clear in one fund manager's description of what caused 'forced sales' at another fund: 'The models work when they look at history, but not when history is all new.' What's 'new' is that for the first time in the experience of many model makers, confidence is on the run. As they rob Peter to pay Paul, all assets will be impacted in negative ways that do not compute in their models." (The Elliott Wave Financial Forecast, August 2007)
And the bad news just keeps accumulating:
- Housing prices dropped 3.2% percent in the second quarter compared with last year, the largest drop since Standard & Poor's started tracking home prices in 1987.
- CIT Group closed its mortgage unit this week, while Lehman Brothers closed its own last week. Mortgage companies that specialize in low-quality mortgages are either going out of business (London-based HSBC) or struggling (California-based Countrywide).
- The Wall Street Journal lists the number of fired employees at seven mortgage companies, including First Magnus (6,000), Capitol One's Greenpoint (1,900), Associated Home Lenders (1,600) and Lehman (1,200), which totals more than 12,000 suddenly unemployed mortgage writers.
To top it off, Bloomberg reports that the subprime mess may lead to lower bonuses for the first time in five years on Wall Street, according to Options Group, a company that's been tracking this kind of information for a decade.
Somewhere, the world's smallest violin is playing a sad song for the fund managers and investment bankers who won't be taking home that million-dollar-plus bonus this year. And Frank Sinatra is singing a sad refrain… "The worst is yet to come."Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.
For more information on the housing market and the credit crisis, access the free report, “The Real State of Real Estate,” from Elliott Wave International.
Wanted: Prime Suspect of Housing Market Murder
By Susan C. Walker, Elliott Wave International
October 8, 2007Helen Mirren accepted her Emmy award for best actress in the mini-series, "Prime Suspect" with elegance and grace. Just the opposite of the tough detective superintendent character she plays who tracks down murder suspects in England. Who would Jane Tennison pick out as the prime suspect for the murder of the U.S. housing market and the resulting gruesome credit crunch?
Suspect No. 1 – Phil Spector
No – sorry, wrong case, wrong suspect. Spector has been on trial for the murder of a guest at his home (the judge declared a mistrial this week), but Spector has nothing to do with the subprime mortgage fallout and ensuing credit crunch. O.J. Simpson, who stands accused of trying to "recover" his sports memorabilia, is not the prime suspect either. If the crime doesn't fit, you must acquit.Suspect No. 2 – Alan Greenspan
Says that he didn't catch on for a few years that subprime mortgages could create a problem for the economy. As chairman of the Federal Reserve, he let easy credit ride, which facilitated the housing bubble and the subsequent implosion. Could liken his behavior to supplying the gun to a rampaging murderer. Guilty of aiding and abetting, but he's not necessarily the prime suspect.Suspect No. 3 – Angelo Mozilo
Angelo Mozilo, CEO of Countrywide Financial (largest mortgage company in the United States), says he kept his staff writing subprime mortgages day and night, because if they didn't, then home purchasers would just find someone else to give them a low-quality mortgage. Company went from writing 4.6% of its overall mortgages as subprimes and low-documentation loans in 2004 to 8.7% in 2006. Guilty of greed and a poor business plan but not murder.Suspect No. 4 – S. & P. and Moody's
Oh, whoops, say these rating agencies, we thought that once you sliced up a BBB security thinly enough and packaged it with other more desirable collateralized debt obligations that we could call it AAA. Did we mislead anybody? Again, aiding and abetting but not a prime suspect.Suspect No. 5 – Goldman Sachs and other investment banks
Says that their investors wanted higher returns and that collateralized debt obligations spiced up with subprime mortgages served the purpose. And besides, they say, the rating agencies gave them an excellent rating. Guilty of acting like a fence but not the prime murder suspect.The True Prime Suspect
All of these are worth a look as suspects, but the true prime suspect has neither a first name nor a last. It's known as "social mood," and its m.o. is "herding behavior." That's our real murderer, the one that quashed the hopes and dreams of those who believed that house prices would always go up. Social mood changed, and with it changed the idea of what were smart financing moves to purchase a house. Suddenly, as house prices began to fall and subprime mortgagees began to default on their loans, the stick house built on low-quality mortgages seemed like a really bad idea.Who knew? When social mood was positive, mortgage writers pushed people who couldn't really afford a mortgage into believing they could. Then they sold the mortgages to eager investment bankers who sliced them up into small packages of risk and re-packaged them with less risky securities. Then the ratings agencies gave their stamp of approval: AA? Why not AAA? And eager investors who wanted higher returns bought them up.
But now the game is up. When social mood turns from positive to negative, fear replaces greed, and people begin to see the riskiness for what it is. When social mood changes from positive to negative, markets turn from bullish to bearish. And no one can stop it – not even the Fed.
This is how Bob Prechter, president of Elliott Wave International, describes the phenomenon:
"Like credit inflation, credit deflation is in fact an intricate, interwoven process, whose initial impetus is a change in social mood from optimism toward pessimism. If you are still on the fence about this idea, ask yourself: What changed in the so-called “fundamentals” between June and August? The answer is: absolutely nothing. Interest rates did not budge; there were no indications of recession; there were no changes in bank lending policies; there were no chilling government edicts.
"The only thing that changed was people’s minds. One day sub-prime mortgages were a fine investment, and the next day they were toxic waste. There was no external cause of the change.… According to socionomic theory, the stock market is a sensitive indicator of such changes in mood. This is why The Elliott Wave Theorist has continually said that the financial structure will hold up as long as the stock market rises. A downturn occurred in mid-July, and its consequences in terms of negative social mood are becoming swiftly evident. Remember, C waves (see Elliott Wave Principle, Chapter 2) are when optimistic illusions finally disappear and fear takes over. Sounds like now." [Elliott Wave Theorist, September 2007]
How To Protect Yourself from the Prime Suspect Who is Still on the Loose
Social mood has turned ugly and is likely to continue its murderous rampage, leaving the policymakers helpless. As analysts Steve Hochberg and Pete Kendall write in The Elliott Wave Financial Forecast: "The Fed does not "inject" liquidity; it only offers it. If nobody wants it, the inflation game is over. The determinant of that matter is the market. When bull markets turn to bear, confidence turns to fear, and a fearful people do not lend or borrow at the same rates as confident ones. The ultimate drivers of inflation and deflation are human mental states that the Fed cannot manipulate."
What should you do to protect yourself in this time of falling home prices, a powerless Fed and a contracting economy? Bob Prechter wrote one of the best how-to books. It's his business best-seller, titled, Conquer the Crash, How To Survive and Prosper in a Deflationary Depression. You might want to start there.
Editor's Note: You can read a FREE 9-page chapter from Conquer the Crash –
You will learn the implications of the massive credit expansion, what triggers the change from boom times to recession, and more.Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. Her columns also appear regularly on FoxNews.com.
Don't be fooled by market myths from the mainstream financial media
Market Myths Exposed is one of the most substantial free resources we’ve ever given away to Club EWI.
The three videos in this series total nearly 40 minutes of market commentary.
Start watching the videos now >>
There's already a buzz about this video series among independent-minded investors and traders. Read what a few of them have to say:
- "Appreciate seeing the revealing Fed action plotted along with market action." – M. Thompson
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- "Thank You, The more I learn, the more I realize how little the knowledge I have that is factual." – L. Paton
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- "This is the clearest explanation I've found for what's occurring in the overall marketplace. I would recommend that everyone view it." – D. Pettijohn
In these three videos – originally presented to a full workshop at the 2007 San Francisco Money Show – Elliott Wave International Chief Market Analyst Steven Hochberg, editor for EWI’s Financial Forecast Service and close associate of Robert Prechter, debunks some of the most widely held market myths and answers some of today's toughest questions for traders and investors, including…
- Why company earnings alone can't drive share prices up or down.
- Why Economics 101 does not apply to the financial markets.
- What's the deal with real estate?
- Does a strong economy lead to strong financial markets?
- Is the Federal Reserve manipulating market valuation?
- Why do charts of the world’s markets look so correlated?
- And, most importantly, where should you put your money?
- Plus a whole lot more …
As a regular speaker at investment conferences worldwide, Steve always draws a crowd, and in these videos, you get a front-row seat. Nothing is edited. You can hear the audience’s “oohs,” “ahs” and “ahas.” You get the attendees’ questions and comments. You get Steve’s presentation exactly as he meant for you to see it – in an intimate workshop setting.
Many people pay hundreds of dollars in travel expenses to attend the conferences at which Steve speaks. You can get instant access to Steve’s intimate workshop setting without expensive plane tickets and hotel reservations. All you need is a free Club EWI membership to watch!
Don't be fooled by market myths from the mainstream financial media. Think independently – watch the Market Myths Exposed video series FREE!
Start watching the videos now >>
About Club EWI
Club EWI is the world’s largest Elliott Wave Community with more than 125,000 members. In addition to your instant access to EWI’s Market Myths Exposed video series, you will gain permanent access to the valuable club resources featured below plus the latest valuable new resources on your Club EWI homepage.
- Special Reports
- EWI's Advanced Online Tutorial
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- Invitations to Club EWI only Events
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There's no obligation and no credit card information is required.
Financial Manias and the Trade of a Lifetime
A Free Report From Club EWI
When you're caught in the middle of a bad storm, you don't really care whether it's a tropical depression or a full-strength hurricane. You just know you're hanging on for dear life. The same idea applies to financial markets. When a market is trending up strongly, it's hard to tell whether it's just a bull market or a more dangerous financial mania.
And if you can't tell the difference, then you can't properly position yourself before the market makes its moves.
That's where EWI's free report, Financial Manias and the Trade of a Lifetime, will help you. The five-page article, originally published in Stocks, Futures, and Options magazine, contains six eye-opening charts and crucial analysis by EWI Analyst Peter Kendall.
Join Club EWI FREE and download EWI's FREE report, Financial Manias and the Trade of a Lifetime. It takes just 30 seconds.
You will learn:
Club EWI is the world's largest Elliott wave community with over 125,000 members. In addition to downloading Financial Manias and the Trade of a Lifetime, you will gain access to over 10 free reports, videos, and tutorials that contain the unique Elliott wave perspective you wont find anywhere else.
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Dig in and learn! This informative beginners piece on the basics of the Elliott Wave Principle will introduce you to the basic Elliott Wave pattern and how to identify key trends and turns in the markets, plus much more. Click Here
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