Any day now, we may be able to remove the “ever-so-slowly” from this month’s observation about the oncoming economic contraction. Each of the areas mentioned in The Wall Street Journal article at left was covered in this month’s issue of The Elliott Wave Financial Forecast, and in each case, analysts are detecting further deterioration.
The lone bright spot is the “wealth effect from the booming stock market,” which is countering the negative effects felt by homeowners troubled by stagnant or even declining home prices. The Journal interviewed the Frank and Roy Dalene, the principals in Long Island home building company that operates in the $15 million to $60 million range. The $8 million and up market is “very strong” says Frank Dalene. “There's no correlation to our market with respect to the rest of the country,” he adds. But there’s obviously an extremely close relationship to the stock market as “some 80% of his clients come from Wall Street." This is exactly what The Elliott Wave Financial Forecast was getting at in this month’s write-up on the luxury binge. To illustrate the tight relationship, we placed a new index of luxury stock produced by Merrill Lynch under an index of the eight biggest investment banks and showed that both groups tracked the rise in the Dow Jones Industrial Average. There was one important difference, however. Thanks to the liberal use of financial leverage and an almost unquenchable demand for luxuries, the investment banking index and the Merrill Lynch Lifestyle Index have risen at twice the rate of the S&P.
In other words, finance and luxury are two key industries that have contributed as much as any other to the stretching the mania to its unprecedented heights. The latest issue of EWFF reveals, however, that there is a potentially important divergence between a January peak in EWI index of key investment banks and the Dow Jones Industrial Average, which continues to make new highs. EWFF also points out:
Relative strength in the luxury sector in 2001 was a harbinger of the Great Mania’s ability to morph into housing, hedge funds and a renewed stock bubble in 2002. With its latest rally to a new high, however, it confronts the top of the trend channel that contains its five-year rise. This may be the end of the line for luxury.
Confirmation may have come from Toll Brothers Inc. Today, the largest U.S. luxury home builder revealed that its second-quarter profit is lower than earlier forecasts citing “a lack of buyer confidence amid the subprime mortgage.” Meanwhile, the Merrill Lynch Lifestyle Index is backing off from the key trendchannel shown on page 3 of this month’s issue. The index peaked on April 25, as the Dow powered through 13,000 for the first time. After such a big rise, it may only be catching its breath, but it bears watching. If it’s pealing off into a decline accompanied by the investment bank stocks, it may be the first sign of a one-two punch that’s likely level the economy. If there’s anything that will cause a financial wreck right now, it’s a bunch of fiscally conservative financiers. |
