Additional References
February 2000
A Long Build-Up has Led to this PeakThe bull market's attendant accounting gimmicks will get a lot more ink as the blinding light of the new era gives way to sober reflection and recrimination.
May 2000
Anger and Recrimination
When the global decline started in Asia in 1997, The Elliott Wave Theorist called the battle against the IMF "a crystal-clear window to 'the approaching chaos' alluded to in the final chapter of At the Crest of the Tidal Wave. In financial historian J.K. Galbraith's vernacular, it is experiencing the 'final common feature' of a financial euphoria, 'anger and recrimination.' The classic symptoms of this post-bubble backlash have emerged in all the countries affected by plunging markets." At that time, it did not include the United States. Its arrival on U.S. shores has been signaled by more than just the IMF protest. According to the SEC, investor complaints are pouring in. Just four days after the April 14 smash in the NASDAQ, the following headline appeared in USA Today: "Losing Investors play blame game." "The pain of stock market losses is making some people lash out in anger," says the story.
If a moderate sell-off yields this kind of negative emotional release after just a few weeks, imagine what a grinding decline over the course of a few years will yield. By the end of the bull market, protests will turn to violent confrontation and television's largest viewerships will be dedicated to antiheroic behavior. The Wave Principle is great at times like this because it is the one tool that identifies the true source of all the agitation and conflict. From this vantage point above the fray, we can stand ready to pick up valuable assets when everyone else is casting them aside.
July 2000
The "New Reality" Bites
There is a common theme in the press now. Writers are calling the stock market setback a "new reality," or "rational exuberance" or "the culling of the weak." The Red Herring's July cover refers to it as "The New and IMPROVED ECONOMY." "It is a good thing," says the editor. As we said last month, and as the history surrounding the declining side of the South Sea and Nikkei charts illustrates, "a sudden onset of sanity" is not a bullish thing because it is a sure sign that the increasingly delusional psychology that created the mania has stopped waxing and has begun to wane.
Last month, we reported that the exposure of slack bull market accounting standards and outright frauds was worth watching as an indication that the "return to sobriety" was gaining ground. Even as stocks rallied modestly in June, there were further revelations about boomtime financial practices. The New York Times revealed on June 13, for instance, that in a declining market, stock options can be as hard on investment performance as they were a lift on the way up. In various academic papers and commentaries, "economists and investors warn [that] companies and their shareholders will find themselves paying a heavy price for something they thought was a free lunch." Another big story focused on Cendant Corp., the same firm that our September 1998 issue placed at the leading edge of revelations about slack bull market accounting standards. It turns out that Cendant's accounting shenanigans date all the way back to its initial public offering in 1983. As columnist Floyd Norris notes, "For investors, the most interesting question is not whether" the firm's founder "will go to jail. It is how this fraud managed to go on so long." The answer, according to a professor of accounting who has studied a report on Cendant's bookkeeping practices, is that "auditors were fooled because, in some measure at least, they wanted to be fooled." This, at bottom, is the thesis of socionomics. The social mood dictates how people treat real data. From 1983 through 1999, public mood was in a bull market. This year, it all changed, and so has the socially perceived reality.
A steady stream of big-time financial scams gave the world its first hard look at the scale of financial fraud that bull market psychology has refused to expose. On June 15, reports revealed the "largest securities fraud sting in history," as the FBI arrested 120 people and broke up "a ring of organized crime on Wall Street" that has been operating for five years. Five days later, the damage done by "the mob" was eclipsed by a money laundering scheme that was many times as large. According to accounts, there is no hope of ever getting to the bottom of it. When the Royal Bank of Canada was charged with stock manipulation, a Toronto paper said, the "practice of manipulating stock prices and pension fund performance has been suspected for so long, the only real surprise is that Canada's largest bank got caught first." This acceleration in the size and scope of fraud exposure is exactly what The Elliott Wave Theorist has said we should expect in a post-mania environment.
EWT first made this prediction in August 1991 with reference to Japan and the collapse in the Nikkei. Scams and scandals grow with prosperity and then become even more severe as financial distress pushes many schemes over the edge. Reports of rising damage from fraud "are typical of psychology in transition from an earlier state of happy acceptance and trust. Ultimately, they pave the way for a full fledged bear-market psychology of mistrust and avoidance."
November 2004 EWFF
More Storm Clouds Over the Corner Office
It's time for the clamps of government control and oversight to be reapplied. The negative social psychology is now powerful enough to wipe out billions in profits – in the blink of an eye. Prepare for another spate of scandals and the desire for corporate executives blood.
March 2005 EWFF
More Storm Clouds Over the Corner Office
As the rally from March 2003 peters out, one key indication that the developing decline is a continuation of the post-mania slide to much lower levels is that the backlash against many of the stars of the old bull market is reappearing. In August, EWFF identified the outline of a new wave of attacks, and it is now visible across the breadth of corporate America. From Fannie Mae, where federal regulators have uncovered still more accounting irregularities, to new revelations about conflicts of interest in the investment banking industry, the scandal mills are heating up. After several investments banks settled suits, Reuters reported that derivatives litigation is "Set to Explode." In December, when The New York Times insinuated that New York State attorney general Eliot Spitzer was about to relinquish his offensive against various financial giants, Spitzer quickly disavowed the notion. Since then, he has opened up a new line of attack against insurance giant AIG and issued subpoenas to major record labels and investment consulting firms. At the same time, post-peak revelations are spilling forth in the trials of former mania-era heroes at WorldCom, Healthsouth and Tyco.
Don't be fooled by reports of besieged corporate leaders; it is only a preview of coming attractions.
June 2005, EWFF
The Jury Finds In Favor of the Bear
Back in mid-1998 — immediately after the Value Line Geometric average made its all-time high — the story of cooked books at Sunbeam was one of the first accounting scandals to break. When it did, EWT identified it as a part of "a slow awakening" to an emerging social mood downturn that was "beginning to shatter the collective financial delusion. These stories can 'now be told' because people are disposed to listen to them. As the bear market unfolds, many more 'scandalous' cases will be revealed."
On the far side of the peak, Sunbeam has returned to the spotlight as its acquirer sued Morgan Stanley for not disclosing accounting fraud when it purchased the firm in 1998. As the trial closed, The New York Post reports that Morgan's attorney "warned jurors that if they didn't let Morgan Stanley off the hook, it would hurt the American economy. 'What would be the purpose of severely hurting one of our two top investment banks? We're talking about hurting a pillar of our economy. . . that's not justice, that's self-destruction . . . Are you so angry at Morgan Stanley?'"
The jury's answer? Absolutely. After a five-weeks of complex financial testimony, the jury returned a verdict worth $604.3 million to the plaintiff in less than two days. An additional $850 billion in punitive damages was awarded with less than four hours of deliberation. The winning side said the $1.4 billion judgement "should send a clear message." Yes, it does, and that message is: "It's a bear market." The first hint of scandals in 1998 signaled the start of the bear market's discovery phase. The jury's bludgeoning of Morgan Stanley marks the start of the punishment phase. It should ultimately become the most punitive in the history of Wall Street. |
