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This month's issue of The Elliott Wave Financial Forecast covers the latest chapter in Wall Street's never ending saga -- from abject misery and scandal at the lows to outlandish pay-outs and yacht buying at peaks. We must be near a high because, this time, traders and investment bankers aren't even waiting for their year-end bonuses to start spending. Sports car and yacht dealers in the Manhattan-area report another historic uptick in conspicuous consumption among Wall Street types. As the May 2000 entry in Additional References below  indicates, hiring binges are another industry trait that always coincide with the end of long advances. The latest one will probably reverse the trajectory of many Wall Street professionals for the last time.

EWFF, August, 2001
Wall Street Rolls Over
The attached chart (click here to view) presents a time-lapse picture of Wall Street accelerating into a turn of Grand Supercycle degree. The bear market’s role is to bring down the wall of confidence represented by headline Nos. 1 through 9 on the rising side of the NASDAQ chart. In 1996, the first full year of the mania, Wall Street finally brought back everyone that was fired in the wake of the 1987 crash and began an unprecedented push for the business of small investors. By September 2000, when the first leg of the NASDAQ’s bear market was half over, the bidding for the public’s stock-buying business was still climbing. In addition to a litany of Wall Street excesses, the story under headline No. 9 mentioned a flurry of merger activity in which banks paid premium prices for Wall Street firms: “Chase Manhattan Corp. announced it was buying J.P. Morgan & Co. for a steep $34.3 billion. Two Swiss banks, Credit Suisse and UBS AG, are paying some of the highest prices Wall Street has seen to acquire two of Wall Street’s remaining independent firms: DLJ and PaineWebber Group Inc.” This activity constituted a long-term sell signal on a host of different levels as the October EWFF demonstrated by saying, “Foreign buying is a classic signal of the end of an uptrend. Banks are also notorious for getting caught holding the bag at the end of long-term uptrends. Now we have both together!” In purchasing J.P. Morgan, Chase was acquiring the assets of an institution that had been hacked into pieces by the government at the bottom in the 1930s. As EWFF further noted, “So, here again, we have a potent symbol of the bull market redoing at the top what was undone at the bottom.”

The seeds of the next dismantling can be seen in the bottom right hand corner of this chart. As the bear market progresses, succeeding lows will produce a toll that is far more extensive than the items shown, but the basic transition from binge to purge has occurred. Recent Congressional hearings, the NYSE postponement of its stock offering and Merrill’s record settlement with a disgruntled customer only hint at the changes to come. Remember back in 1997 when the blue-bloods at Morgan Stanley fell prey to the blue-collar crowd at Dean Witter (see second headline on chart)? On April 2, Morgan Stanley dropped the Dean Witter name. According to an executive with the branding firm that advised Morgan Stanley, the name Dean Witter, “the brokerage firm that once sold stocks among the socks in Sears stores,” was dropped partly “to appeal to an increasingly important base: institutional investor clients.” In other words, the retail customer was king, but the institutional investor has reclaimed the throne.



An interesting parallel to the current juncture is shown by the above chart of Wall Street employment. The beginnings of the wave 2 and 4 declines in Wall Street employment also lagged important stock peaks. In fact, wave 2 started at a temporary market low in September 1969 and wave 4 started in February 1988 when the Dow had also resumed an uptrend. Apparently, when stock prices stop going up after a long rise, Wall Street’s initial response is to keep the petal to the metal. After the initial bout of selling, in its typical trend-following fashion, the Street slams on the brakes. The result is the start of a wreck that eventually leaves behind a twisted heap of lost jobs, scandals, lawsuits, investigations and, ultimately, if the turn is of large enough degree, reforms designed to protect investors from a bear market that has already run its course. At the bottom of the chart, notice how the three-month rate of change has broken the trendline that underpinned the hiring rate of the 1990s. Similar breaks occurred in 1969 and 1988, at the start of the two biggest contractions of the last half century. The loss of more than 1000 jobs since the Dow bottomed in March 2001 is the steepest quarterly decline since 1969, the aftermath of the last speculative blow-off of Cycle degree. The chart shows that when employment reverses to the extent that it has over the last three months, the decline has further to go. Last year, EWFF identified the 50-year-long, five-wave pattern as another sign that the industry “is also extremely ripe for a downturn.” The brokerage industry should now experience the largest contraction in its history. A rally in the Dow may stem the tide, but survivors should lay low rather than claim a corner office. Once the Wall Street axe falls, heads usually keep rolling for many months.

EWFF, May 2000
Show Me a Sign
The [new Times Square] NASDAQ board is one piece of a wide panorama. It is located directly across from the Dow Jones zipper, which is right above Pokemon’s tribute to price bubbles as a popular form of public recreation. The Dow zipper went up last year, replacing the original, which was first erected in 1928, one year before the crash. On the jumbo TV screen shown above the zipper, CNBC appears through most of the market day. As Business Week said recently, these days, “CNBC is more than popular it has become a cultural phenomenon.” In Times Square, you can watch commuters coming up out of the subway look up and lock onto the network’s giant talking heads. Also visible from the spot where this picture was taken are the new Reuters financial tower, a blinking Bloomberg sign and a new “Disneyesque” visitor’s center that is being added to the NASDAQ site. Turning north, Morgan Stanley Dean Witter’s rapid-fire streamer flickers out stock prices at the far end of the square. Another unmistakable sign of how the financial markets have subsumed the world’s most famous entertainment district is the fact that many big brokerage firms have abandoned downtown Manhattan and even Wall Street itself for this part of town.

In 1983, The Elliott Wave Theorist identified the drive “to clean up 42nd Street” as a sign that the bull market was in its early stages. From pickpockets and porn in 1980 to a financial phantasmagoria in 2000 may not necessarily constitute a cleansing, but, by capturing the dazzling glow of Broadway, Times Square’s financial makeover certainly exceeds the ebullience achieved during any prior stock market advance. The chart of Wall Street employment on page 6 shows the increasing numbers that have been lured by the bright light of the market. As that light flickers and then fades, this line will turn down fast. (Yes, we can see a clear five up, but lacking data from before 1960 we will refrain from placing a wave count on it.) A recent rebellion by “oppressed” junior level analysts indicates that sentiment within the industry is also extremely ripe for a downturn at any moment. Executives at several firms recently capitulated to demands for more meal money, better laptop computers, casual dress codes and access to the company gym on weekends. “It wasn’t that long ago that to become an analyst was to trade your life for a career path.” Wall Street only rarely intersects with Easy Street. The problem with careers that begin near these intersections is that they tend to stop suddenly. The chart [see updated version from August 2001 issue above] shows what happened in 1968 and 1987. This time, the damage will be far greater, and it will probably be reflected on the streets of the world’s financial capital in record time. When the surviving brokers have shuffled back to Wall Street, the NASDAQ’s sign has gone dark and the underworld has reclaimed Times Square, that will be a lasting bottom and truly a great time to buy the pullback. How many will be positioned to do it? We hope that you, as a reader of EWFF, will be among them.