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The Elliott Wave Theorist

It’s one small rejection in a sea of Justice Department approvals, but they have to start somewhere. Some of The Elliott Wave Theorist’s May 2000 discussion of anti-trust activity is available below in additional references. The difference between the current peak and that of 2000 is that the target is a relatively small one. Once the turn is firmly in place, however, the government will probably go after lot's more pending or even completed private equity deals that come to be seen as violations of the public interest.

The report, “Socionomics in a Nutshell” (December 1999), demonstrated in brief that in the realm of economics, politics, demographics, war, and even the threat of nuclear destruction, events are not causal to social mood and stock market trends. In every case, the direction of causality is the opposite of that generally assumed. The performance of the economy does not govern the stock market; the social mood as reflected by stock market trends governs economic performance. Politics do not govern the stock market; the social mood as reflected by stock market trends governs politics. Demographics do not govern the stock market; the social mood as reflected by the stock market regulates the overall rate of procreation. Changes in the threat of nuclear destruction do not affect stock prices; the social mood as reflected by the stock market affects the level of the threat. In each instance, social mood trends as reflected by stock market trends dictate the character of events, not the other way around. How, then, would a socionomist respond to the question posed at the start of this report? Before answering, let’s explore some data.

The Timing of Attacks on Successful Corporations
In 1890, a year after a new all-time peak in stock prices that would last a full decade, Congress passed the Sherman Act, which in vague language outlawed “trusts,” which in fact means companies that service a large market without significant competition. The government’s antitrust suits against U.S. corporations, particularly the landmark suits that make the history books, consistently come near stock market peaks, usually slightly afterward. Often the correlation is so close as to be within weeks of a major top that leads to declines in the averages of 50% or more.

Railroads were arguably the most successful U.S. industry in the late 19th century. On the run-up to the stock market peak of June 1901, the stock of Great Northern Pacific railroad, which later became part of Northern Securities Co., increased more than ten fold in less than a month. Shortly thereafter, the government sued Northern Securities Co. in the first major application of the Sherman Act. In 1906, the year of a peak that was not exceeded for ten years, President Theodore Roosevelt filed his famous suit against one of the country’s largest company, Standard Oil. During the Panic of 1907, the President offered no objection to a merger involving U.S. Steel when asked to do so and explicitly directed his attorney general not to bring an antitrust action against International Harvester. In 1911 and 1912, after stock prices had recovered, President Taft’s antitrust division filed suit against both companies. A month after the all-time high of 1929 and before the crash, the U.S. attorney general announced that the Justice Department would deal “vigorously with every violation of the antitrust law.” In 1930, the Justice Department filed suit against one of the biggest success stories of the 1920s bull market, RCA. In 1937, the year of a major top in stock prices, the government sued aluminum maker Alcoa. The antitrust movement saw little action throughout the nearly two-decade long bull market of 1949-1966/68 until the very end, when the stock market reached a top of the same Elliott wave degree as that of 1937. In 1967, the government ordered Proctor & Gamble to divest itself of Clorox, and in January 1969, a single month after the most speculative bull market peak since 1929, the Justice Department sued the country’s most successful company, IBM. From 1982, antitrust activity again virtually disappeared during nearly two decades of bull market. On May 18, 1998, just one month after the final high in the advance-decline line, which had risen for 24 years, the Justice Department sued the world’s most successful company, Microsoft. On April 3, 2000, a single week after the closing high in the NASDAQ 100 index, the court sided with the U.S. Justice Department in ruling that Microsoft had unlawfully violated the Sherman Act. Like his predecessors at prior historic turns, U.S. District Court Judge Thomas Penfield Jackson, representing “the people,” has pursued and denigrated Microsoft with a fervor that borders on the evangelical. His desire to break up the most successful company of all time as measured by percentage gain in value per year by a major corporation is a passion born of the passing of a social mood peak of even higher degree than that of 1929. As you can see from this century-long history, major antitrust suits coincide remarkably consistently with the passing of major stock market tops.

A fundamental analyst might guess from this evidence that antitrust suits cause stock market declines. This response does not answer the question of why the entire economy would be affected by a single suit, an idea bordering on the preposterous. Presumably, competitors would benefit as the target suffered, neutralizing any broad effect. The erroneous conclusion, moreover, is utterly negated by the fact that the target of the latest suit, Microsoft, tripled in price after the suit was brought, with the last doubling taking place after the November 1999 “finding of fact” in which Penfield ruled, “Microsoft Corp. is a monopoly with practices that wounded competition and consumers and hurt innovation.” More important, and typical of fundamentalist explanations, the suggestion of a causative link between antitrust actions and falling stock prices goes against the assumptions of many other fundamental analysts. The majority of economists believe (mistakenly) that “trust-busting” is good for the economy. If they were correct, and if their assumption that the economic performance dictates stock market trends were correct, then stock prices should rise after an attack on a presumed monopoly, not fall. Finally, this conclusion about causality does not answer the question of why antitrust suits are typically brought after the stock market has climbed for years or even decades to a state of overvaluation in a climate of rampant speculation rather than at any other time. For the most part, the Justice Department leaves successful corporations alone near the end of bear markets and through 90% - 100% of bull markets. What is really going on?

The bear market mood begins to creep into collective thinking late in a bull market. Democratic governments are instruments of egalitarianism. At some point, their representatives cannot stand watching some companies succeed wildly more than most others. When the bull market reaches exhaustion, the old supportive mood begins to crumble, and the new punitive mood bursts forth. One result of this metamorphosis in social character is governmental attacks against highly successful enterprises. In fact, they typically start with a major attack against the most successful enterprise of the time. This socionomic perspective is quite comfortable with the fact that Microsoft tripled after the suit was announced. The environment of stock market tops is one of rampant speculation fueled by a manic psychology. Reason and outside event causality are no part of this landscape. Bullish fever among speculators and righteous anger among egalitarians can coexist for brief periods as major social mood tops are being formed, thus producing the anomaly of a soaring stock price for a company that is being attacked in court by its own government.