The Market Perspective

Market Begins to Fill Monday Gap Last Couple of Hours

Tuesday May 19 2020

Looks like the fourth wave got underway the last 1.5 hours of trading today. I would guess the target is the coalition  of  MAs around 23,900-24,000.

We noted there was not the kind of volume one would expect to push the Indus 900 points higher. So it will be interesting to see how high our fifth wave

goes.

What About Breadth, is it improving?

Glad you asked and here is the answer.

Despite the 900 point rally  the percent of S & P stocks over their  150 day MAS barely budged. Again this looks like a lack of breadth.  If this were a real bull market, this measure would be rising as more investors sought 'bargains.'

At bottom note PMO peaked  with what we believed to be the end of this WAVE, April 28-9. Since then it has fallen. This is what one would expect in the subdivisions of three thru five of the last wave, declining breadth and strength. All this coupled with the lack of expanding volume again suggests a market on borrowed tim

% Over 50 Day MA

If the Elliott analysis is correct this chart will NOT make a new high with the fifth wave. t bottom PMO is declining already.

 

e.

Monday's rally of course thrilled the new bulls, my e mail runneth over with thrils over the new bull market, what 36 million out of work, who me worry?

Hedge - Attractive Entry

Wed May 13 202

It has required patience but this bear fund looks like it too has bottomed. The breakdown in other charts seems to support this.

Everybody Owns Apple

NASD has been on a tear due to the Five FANGs.  And  Apple is in multiple indexes. Looks pretty toppy here. And that would coincide with Wave Three beginning.If Apple and FANG stocks break down that will accelerate the sell off.

A Crest in Housing Prices

Tuesday May 12 2020

 

Why Financial Trouble Brews on the "Home" Front

By Elliott Wave International

The world has been hearing a lot about "homes" in recent months, as in -- "stay there" to help halt the spread of COVID-19.

At the same time, the sales of those homes in the U.S. have seen a significant slowdown.

No doubt about it, the coronavirus has played a big role. Yet, a notable divergence was taking shape in the housing market long before the current pandemic.

Financial history shows that it's happened before.

Around the time of the prior housing bubble peak, the January 2006 Elliott Wave Financial Forecast, which is an Elliott Wave International monthly publication that mainly focuses on U.S. markets, the economy and cultural trends, noted:

Home sales are falling across the board now, but "virtually no investors expect sudden burst of housing bubble," says the headline of a UBS/Gallup Poll of investor attitudes: "Just 1% of all investors expect housing prices next year to exhibit a rapid decline." This sentiment is bearish for real estate prices.

Indeed, U.S. housing prices topped later in 2006. Lower home prices followed slowing sales.

Fast forward to this chart and commentary from the May 2020 Elliott Wave Financial Forecast:

The top graph on the chart shows the median price paid for houses sold in the U.S. ... In addition to the terminal five-wave form of the rise, a key to the forecast is seen on the bottom graph. It shows the dramatic divergence in home sales, which retraced just 45% of the 2005-2010 decline.

Individual homeowners would not be the only group hurt if real estate prices fell. Also be aware of this notable factoid and comment from the August 2019 Elliott Wave Theorist:

Since 2012, private equity firms have been buying an average of 10% of the annual inventory of properties for sale in the U.S. They now own huge portfolios of homes worth hundreds of billions of dollars.

You've just seen the Elliott wave count of U.S. median home sale prices.

Other financial markets are also at crucial junctures, so this is an ideal time to learn how to apply the Elliott wave method yourself.

Yes, the learning process does require work, but it's worth it.

As Elliott Wave Principle: Key to Market Behavior states:

All one really needs to know at the time is whether to be long, short or out, a decision that can sometimes be made with a swift glance at a chart and other times only after painstaking work.

If you're ready to learn, tap into the insights of The Wave Principle Applied, which is a 1-hour course that you can access for free through May 15 by joining Club EWI (membership is also free).

Keep in mind that Elliott Wave International normally sells this course for $99, so take advantage of this limited-time opportunity to learn how to spot Elliott wave patterns on chart patterns of financial markets -- 100% free.

Here's the link that gets you started: The Wave Principle Applied.

 

 

The Coronavirus is a MacGuffin to the Deflationary Collapse

Thursday April 23 2020

Crude Oil Kicks off Deflationary Spiral

Definition of MacGuffin

: an object, event, or character in a film or story that serves to set and keep the plot in motion despite usually lacking intrinsic importance

The coronavirus is the McGuffin in the developing deflationary spiral. Alfred Hitchcock was the first to coin the term and used it in his movies. It is distracting attention away from the greater problem. The long economic expansion from the 1932 DJIA low of 42 ended February 12 at 29,586.

There have been three stock market contractions since March 2000. The first was the dot.com induced sell-off, the second was the sub prime mortgage and now we have what is believed to be a virus induced contraction. No doubt the virus is hastening the contraction. In 1929 and 1973 it took a year and then two years for the DJIA to sell off 50%. Since February 12 it only took until March 23,, about six weeks to collapse stock prices 37%.

The FED and the markets responded to the 2000 and 2008 crisis by lowering interest rates to zer and buying billions in US Government bonds As the US Dollar is the World Reserve Currency, the US can print all it wants. And that rate reduction and monetary injection rallied stock and real estate prices. That has not been the case in the rest of the world. Only the US stock markets hit new highs. All the others failed to do so, a mammoth non-confirmation.

The result of this ‘borrow for free party’ has been the creation of ‘too much stuff TMS.’

Leaf through any newspaper. Retail stores are bursting with unsold clothing. Tens of thousands of cars sit unwanted on dealer lots. That inventory will likely put a lid on re-opening car factories. And then there is oil.

Amidst all this excitement, Russia and Saudi Arabia decided to flood the world with oil, apparently hoping to put the US Shale Producers out of business. No one is making any money with oil prices under $40. Today is the expiration date for the current oil contract. As explained here Sunday, the exchange allowed prices to go negative. Typically speculators are not hedging but speculating. As the May contract unwound, those not taking delivery found there were no buyers. And so the price fell to minus $37.63 for the Friday close of $18.27.   That is a drop of $55.90, , the biggest one day collapse in the history of oil trading. But with over-supply and no demand from autos, cruise lines, and airlines, one was paying someone else to take the barrels of oil.

For now everything from real estate to sports event tickets are on sale. Supply of everything dwarfs demand. Monday’s close and the pre-market open today have more than wiped out Friday’s 704 point gain. The deflationary spiral collapse has begun.

 

Recession Depression

Wednesday April 1 2020

it is said that to have a real financial crisis, it takes an absence off those who lived through the last one.

There are not many people alive today who actually remember the Depression of  1930-1948.  I recall living through the extended recession of  1972-1982.

And so we have the perfect set up for a depression.

https://keydifferences.com/difference-between-recession-and-depression.html

I see investors asking if it is time to buy stocks so obviously it is not, the market is down 700 DJIA points again pre open trade this morning.

All the FED was lower interest rates to zero since 2009 to restore real estate prices. Now with rates at zero the FED is out of ammo, and real estate is crashing.

Crude Oil

 

We have three parabolas, each of which has crashed.  Support is now 17, and then the 10 level of 1999.  I suspect that is where the oil price is headed.

Stocks Bounce

Weekend Oct 22, 2016

Of Two Minds Explains the negative impression of this election

It was an INTERNAl market correction

The percent of stocks over their 50 day MA has fallen from  95% ot  30%. But the SPX really had not corrected very much as far as the overall price. So we have had an internal market correction. This has taken us most of the way back to the February lows. Friday's action tested and bounced off market support in several indexes. So here we are. Does that make us want to buy three weeks before the election?  Even with an Obama win, the markets fell hard prior to and after  the 2012 election.

2012

IN fact the market really started falling right about now, so far it it has not. But that could change.

Is there any thing to like here?

How about Barclays still trading at 39% of book value.

On this weekly chart, BCS  fell with the Brexit vote then rallied and has pulled back. Just taking off again.

I think Crude Oil put in the low in February and is now trading around eventual support at $45-50.

One strategy would be to buy USO but it has moved a good bit already, the percentage gain is between here and $62.

How about RIG trading at 23% of book value?

RIG

A close up look at RIG

On this weekly chart price has had two big up weeks from the recent low at 8.75. Price is now above all three MAs. And the longer term of 34 weeks is turning up. This is a long term buy and hold as is BCS.

Weatherford WFT

After months of consolidation, WFT is attempting to poke above its 200 day MA. Yes it is awash in debt but the current ratio is 2.0 and there is $452 M in the bank in cash.

These are probably long term holds requiring at least a year of patience.

Bonds

Yields on the thirty year bond are not trying out the  200 day MA.

This is another clue that rates have seen their lows no matter what the FED does or does not do.

The ETF for Utilities is sending the same message.

Yes XLU made a bounce but that is about it, the downtrend channel remains in place.

REITs

The REIT charts look pretty much the same. This will eventually be good news for savers but for now, one would be trying to catch the falling knife in either of these two dividend payers.

 XAU

The XAU index of gold stocks continues its weekly correction. Not time to buy here yet.

 Bottom  Line

The outcome of the election may pose just as much mystery as we have before the election.   It appears the Republicans will hold the House, Senate may go Democrat if Hillary wins enough of those states in play with Senate elections. but well then what?  Then we are back to gridlock, executive orders, and exclusionary politics.

Cash seems like a comfortable spot for the next three weeks. And as I suggest above, it may be that the election results will cause more not less uncertainty, which cold lead to a stock sell off.

 

 

Pop Trends Price Culture

Robert Folsom presents a long look at Presidential elections. The paper presented shows that if the stock market is at least moving up at the time of the election, the incumbent is favored to win.That would tip the scale to Hillary.

As Rich Lowry notes in his column today, Mike Pence is twisting himself int o a pretzel rationalizing his support for Trump. The same can be said for both candidates who are still recording high negatives.  But it is hard to imagine that the bookies could be wrong by this spread.

[email protected]

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance and no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.

 

 

OIl and Stocks in Topping Phase

Weekend Oct 8, 2016

C H Smith criticizes Clintion Foundation, Wikipedia Spot Removed

Charles wonders if this is quid pro quo, and just what we can expect from either party

Stocks Topped in August and have quietly retreated since.

 

NASD Summation Index

Neither of these graphs is really alarming, but each speak to developing weakness. And that is occurring amid massive uncertainty about the election now just

one month off. See our comment in social mood on how Trump has now completed a near perfect parallel with Clayton Williams back in 1990.

NYSE Summation Index

The NYSE has gone to a new low, weaker than the NASD which has been supported by Apple.

 DXD Bear Fund

Some money is moving to the Bear DXD fund, see Money Flow at Bottom.

Bond Prices Register Final Top in Price, Low in Yield

Thirty year bond price is now already below the 200 day MA. All those low to negative yield Euro bonds will soon become toxic with no bids. What were the buyers thinking?

D Utilities Smackdown

Dow Utilities have reacted quickly to the prospect of higher rates. I count five waves down, time for an upward correction but the future is higher interest rates.

REITs, the same

 US Dollar

The world scrambles for Dollars.  Gold and the British Pound drop.

Gold

I recall John Bollinger saying years ago that gold likes round numbers. 1200 seems a reasonable target about half way back.

XAU

I am thinking 65 for support for the XAU.

 

 

 

 

Social Mood

Pop Trends Price Culture

The parallel between how Williams lost to Richards and where Trump is now is complete.

Each made disparaging comments about women and then it came out neither had paid any federal income tax. The voters bolted for Richards.

Analysis

Donald Trump is the arrogant son of inherited wealth.  He  held an elected office in his college fraternity.   That office means far more to him than his eventual degree.

He never studied for an exam, that would be beneath him. The tedium of study would suggest he cannot succeed simply on the strength of his own personality, study is for losers with no personality don't you see.

Dad pays for the fraternity dues of course. Don't transcript is littered with Qs for Quit. But he did not quit because he was not making an A or B, he quit to save himself from a D or F.  In fact he is a C average student. (This explains his shallow analysis of issues in the debates as 'this is bad....')

His girl friend is in a sorority and is seen at all the events on his arm. She is disdainful of his brash attitude but his credit card and membership allows her to maintain the social whirl she craves, so she puts up with his boorish attitude.

He is impenetrable, listening to no one, aloof and self confident to a fault. He will not listen and as a result never improves.

 Harry Truman swore he would never 'cash in ' on his White House years. The Clintons have the exact opposite approach swearing to never miss a thousand dollars that might be theirs by dangling the right offer to some one.  And no offer is too insincere or beneath they, want to be my $17 M Chancellor of a For Profit University while Obama shuts down two others not so well connected, no problem!

_____________________________________

But no one is voting for Trump so what he says matters not. They are instead voting against PC, the Clinton Foundation, the continuing deceptions and untruths, which is why the Clinton machine has been unable to de throne Trump, it is they who are the target of the voter wrath.

Will the superior Clinton ground game win out, perhaps. Unless Trump can really stay on point by criticizing Dem policies, it is hard to see him winning independents with attacks on beauty queens. In that tactic he is just irrelevant.

 

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The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance and no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.

 

A Correction or a Top in the Markets?

Weekend Sept 10, 2016

 

• Markets

Rate-Rise Fears Trip Up Markets

Dow industrials tumble nearly 400 points, as doubts over central banks’ willingness or ability to stimulate economic growth sends stocks and bonds tumbling

By

Aaron Kuriloff,

Jon Hilsenrath and

Corrie Driebusch

Updated Sept. 9, 2016 7:10 p.m. ET

Major markets had one of their worst days in months, as doubts over central banks’ willingness or ability to stimulate economic growth sent stocks and bonds tumbling.

 

This is the lead for an article in the weekend WSJ. The media is forever trying to find and event that is causal to the news. But that is not the way social mood works. Internally generated social mood results in social action. The Social Action on display friday is the result of a conjunction of long term cycles. We have discussed this for the last year here. As it has not happened, and stock prices rose to new highs, readership here has fallen. Perhaps that is about to change.

Central Banks all over the world have done the only thing they can do, lower interest rates. Europe and Japanese banks have actually driven rates negative. The problems with this are as follows.

1. It didn't work. All that happened was it enabled companies to buy back shares which increased earnings per share which boosted stock prices which allowed their stock options to gain in value.
2. If there is anything to the idea that low rates spur an economy,the Central Banks are now out of bullets, With rates at zero, there is no way to lower them further.
3. But that is not going to happen anyway. What is much more likely is that the fear of default is causing rates to move up. Already rate sensitive issues are falling hard. Cohen and Steers REIT fell 3.77% on Friday, wiping out months of yields to investors.
4. I have posted several articles about he dangerous condition of underfunded pensions on my academic site. http://www.professorelam.typepad.com  Many funds assume unattainable annual returns which means they are grossly underfunded. The Dallas Police Fire Funds is underfunded by over $200,000 per retiree. These problems of these zombie funds, walking dead, will soon be front and center in the news.
5. Recall the European PIGS debt crisis from 2010?  Did anyone ever do anything about it?  No, just lower rates with the same non results there as here.
6. Alastair MacDonald in his latest Parallax Letter points out that for decades stocks had an average annual return of 4%. But since 2009 they have been averaging 15% and more including dividends. How will the numbers return to the mean of 4%. By drastically lowering prices, that's how.

Interest Rates

ICF

This may be the one picture says it all chart for the week though I have just begun looking through the charts. Clearly this is signalling higher rates ahead as individuals buy REITs for yield.  Shares are sold in fear that higher rates will lower prices. And in a softer economy, REITs will have a harder time renting space.

Five Year Note Yield

I suggested the five year note yield would be valuable in tracking yield direction. The point again is that the market is not waiting for Janet and her buddies at the FED to do something. Yields are rising.

Given that European bonds have negative yields, in a higher rising rate environment we may have a situation where there are no bids for such money losing vehicles.

Yield on the 30 year bond jumped 2.88% Friday  With rates at all time lows the potential for bond market disaster for those holding such low yielding bonds is, well, tremendous.

Thirty Year Bond Yield

Just recovering half the fall would take yields to 5%, double today's rate. In bond math that means the bond price would be cut in half.

And if we take the chart all the way back to 1982-84 when rates peaked, half way is more like 7&.

Just stop and think what that would mean for Central Bank Balance Sheets now holding trillions of dollars of near zero yielding bonds. It means huge losses.

Stocks Bullish Percent 50 Day

The bullish percent chart shows the overall market really peaked last April in terms of breadth.  Despite some higher index readings, the breadth of the market has been falling.

Classic Distribution in Stocks

During market tops,the smart money will bid shares up. This enable them to have a ready market to sell into at higher prices.

I recently switched one of my accounts to allow for more flexibility in trading. The 'advisor' was certain we were headed for Dow 20,000. No doubt this is the predominant thinking in the advisor community.

The Transports lost 3.15% Friday.

Our ten week cycle was up last week. The markets should head down now for another ten weeks if this cycle continues. Certainly Friday was a potential kick off to the downside.

Euro

As we mentioned previously, nothing was ever really done about the PIGS failure to adhere to the EU rules of spending versus GDP. Here we put the French CAC index under the Euro. And sure enough,the French stock market rises and falls with the Euro itself.Lower prices are ahead here.

Energy

The big story is Apache and its discovery of an oil and gas field in the Davis Mountains. This area has had zero activity in oil and gas and once again, new technology proved the existing wisdom dead wrong. See our column in a separate post.

XLE

For now the XLE trend remains up. Major oil company stocks fell with the overall market.

Crude Oil

The 48-49 are is now important resistance to overcome if the trend in crude is to remain up.

A potential wave count for Crude Oil

One possibility is that oi is now in a fifth wave of five. The firs 1and 2 up down sequence may be complete. If so this third wave needs to quickly advance

and take out resistance at 49.

If not, we have an A B C correction with C at the top around $52. If that is the case, the market is headed down. Frankly the lower lows seem to favor the latter case to me.

XAU

The XAU appears to be in a  4th wave on the weekly chart. This suggests silver and gold have higher to go as well.

The Bottom Line

Our friends at Elliott Wave favor the idea that there are higher highs left for stocks. The strength of the sell off with18 stocks down for each one up suggests to me that this is a change in trend. We shall see.  the inverse stock fund DOG has not given a weekly buy signal yet.

DOG and DXD bear watching for a significant turn.A significant turn will occur on a drop in the S & P below 2101.

Best estimate at this time is for a serious sell off with the first leg down in Sept then a rebound in Oct and then another decline in November.

The Euro is weakening and the US Dollar is strengthening which is another negative for oil.

Gold and silver look higher.

Crude oil must take out the 49 level to remain in an uptrend.

Social Mood

Trump needs to move over 40 and Hillary needs to drop under 60 to really reverse the trend.

If in fact the markets have topped and are headed down into the election, that could be the trigger to cause a big reversal in the chart above. The chart is from the Iowa Electronic Markets.

Trump does not see the world in liberal or conservative terms. He only sees winners and losers. From that perspective, his comments on Putin's popularity are correct. In fact at this time Putin may be the most popular leader in his own country among all leaders in the world.

Consider the throw the bums out attitude in Argentina, Brazil, Venezuela, France, Germany, and Italy. Social mood towards politicians is negative. This past week the President of the Philipines referred to Obama as an SOB. Now that is negative mood.

The Clinton Foundation has collected millions of dollars from various parties seeking present and future access to the presumed winner of the 2016 election. No wonder the headlines are now saying things like 'Wall Street Backs Clinton".  For sure there are not going to be any refunds from the Clintons if she loses.

Pop Trends, Price Culture

Of Two Minds comments on our Consumption Society

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The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance and no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.

 

 

 

 

 

 

Ten Weeks and Counting...

Thursday April  21, 2016

We are in our tenth week from the February 11 low. We have been looking for a reversal and as we write on Thursday afternoon, the market has not closed yet,  the Dow is at least down over 100 points.  A close under  17, 700 is needed to re enforce this idea.

Apple Falls into Bear Territory  Apple is one of the FAB Five which has been holding the NASD up, so one down, four to go.

Stock Market Exposure is the highest since June 2015

Zero Hedge on three Classic Recession sings

Of Two Minds on Three Stick Top

Also be sure to take in Doug Short's Price Adjusted Chart shown below

This looks the same as the previous peaks.

Interest Rates

Dow Utilities

See the accompanying article in the next post. The big story ignored by most this week was a surge in commodity prices and

a down turn in interest sensitive sectors. Here a weekly PAR SAR sell signal is generated in the DJU.Utilities dropped 3.47% for the week.

REITs likewise turned down.

Ten Year Yield

Ten year yields soared a whopping 7.7% for th week.

the finance XLF has finsihed five waves up as well.

DB Commodity Index

The DB, the Dow Jones and the Goldman Sachs Commodity indices all exhibit

textbook five wave patterns to the upside. So we have interest sensitive prices down, interest rates up big time, and

commodity prices surging.

XOM breaks to a New High

And the big daddy leader in the oil patch breaks to a new high. Quite a move since 66 last September!

Stock Market Overbought Pullback Begins

 As we said last week 95% is as good as it gets. The question is whether we have a mild correction or a more serious sell off?

Transports

The Transportation sector continues to move in step with energy prices, both moved down together and now they are moving up.

Rails are moving up quite well. And the EMAs look like they are about to cross. If that is the case the sell signal from the top in late 2014 may be erased.

And if commodity prices are moving, rails and trucks will be employed to move more commodities and materials.

 AMLP

AMLP looks to have completed five waves up form the low. I would like to buy it on a pullback to the  10.25-10.50 area.

 The Bottom Line

The economy slows but the Transports rally. Interest rates are now rising and commodity indices have risen. Energy has put in a bottom

and the entire sector is now rising. The inflation the Central Banks have wanted is likely to be on the rise this year.

 

Social Mood

Pop Trends Price Culture 

features yours truly this week explaining how mood affected tthe careers of black comedians from  1966-1984.

[email protected]

The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance and no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.

 

London Housing Prices Topping Out

Monday March 21, 2016

This is London Falling

By Elliott Wave International

Editor's note: The following article is adapted from the State of the Global Markets Report--2016 Edition, one of the most anticipated annual reports for technically minded investors and analysts around the world. For a limited time, we are making the report available 100% free of charge. After that, it goes to $99 per download, where it will stay for the rest of the year. Click here to get your free copy now >>

This Financial Times article alerts readers to another bygone bubble where a surging comeback has recaptured investors' imaginations:

Britons Pin Their Pension Hopes on Property
The UK has fallen in love with property as the best way to make money for retirement

--FT, Nov. 11, 2015

Once again, fast-rising home prices have "convinced the public that bricks and mortar are likely to provide the most comfortable retirement." (FT, 11/11/15)

A recent survey of 10,000 Britons finds that 44% believe property will be their biggest moneymaker during retirement. Pension income came in a distant second place at 25%, while stock investments took third.

Here's how one retirement specialist captures the magnitude of society's preoccupation with property: "For many people now approaching retirement, their property ... will be particularly relevant as a capital reserve for costs such as later-life care." (FT, 11/11/15)

By itself, the widespread belief that real estate is the financial equivalent to cash is one of the most dangerous ideas going. Cash is liquid by definition, whereas property requires time, energy and money to off-load. Cash generates income; homes generate expenses. Cash is boring and, as an investment, cash exists in a financial corner that is totally off the average investor's radar. Real estate, in contrast, is caught in the throes of another speculative frenzy that nearly everyone expects to continue.

Take the chart below, which compares London home prices to first-time buyer affordability (mortgage payments as a percentage of mean take-home pay).

It shows a rising lower graph, which indicates the declining affordability of London homes, because a greater percentage of income goes to meet mortgage payments.

When buyer affordability hit 69.6% in the fourth quarter of 2007, London home prices promptly plummeted 20%. Prices bottomed in the first quarter of 2009, sending mortgage payments back below 50% of take-home pay.

But, today, nearly 66% of Londoners' income is going toward mortgage payments, just a few percentage points shy of the 2007 peak.

More important, the top graph depicts an extended fifth wave in London home prices, with wave (5) of 5 reaching equality with wave (1) of 5. This is a common wave relationship.

As the textbook Elliott Wave Principle observes, fifth-wave extensions "are typically followed by swift retracements," which usually return to the price territory of the "fourth wave of one larger degree." So, by common wave relationships alone, London home prices are set for a 30%-50% decline.

Either way, unaffordable homes are once again colliding with euphoric sentiment and complete Elliott wave patterns. The combination should prove to be even more deadly than it did in 2007.

Click here to continue reading the rest of the 50-page State of the Global Markets Report--2016 Edition 100% free >>

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