Stock markets closed higher today, Monday, August 6, 2007
Things are getting wild out there. The S&P 500 had its biggest one-day drop in 6 months on Friday (August 3), the same day Bear Stearns CFO said the "bond turmoil is worse than the Internet bubble." Cramer threw a tantrum on CNBC. Industries, funds, markets and individuals are hemorrhaging money. A million homeowners will enter foreclosure this year. You're probably wondering what will happen next.
Many subscribers tell us they have gradually reduced their debt, real estate holdings and exposure to risk because they read Bob Prechter's Conquer the Crash. Elliott Wave International's long-term perspective of the relationship between social behavior and markets helped prepare these folks for what's happening today. If you want to know what's next, please read this book.
In the near future, keep an eye on adjustable rate mortgages. Mortgage defaults are spreading beyond the under-qualified first-time buyers. The next big default acceleration could happen in October, when more than $50 billion in mortgages adjust for the first time.
Diversification is the foundation of modern portfolio theory, but it is not a useful strategy when massive liquidity flows cause markets to move in unison. People outside EWI are finally noticing the "all the same market" correlation that Conquer the Crash described in 2002. Today's Wall Street Journal (Aug. 6) says, "It is becoming more difficult to find assets that aren't highly correlated… In recent weeks, assets around the world have fallen in lockstep. Stocks, corporate bonds, emerging-market debt and a host of derivatives backed by mortgages and other types of borrowing have been hit hard."
"Britain's Financial Services Authority, which regulates the London markets, listed [correlation] as a potential risk for 2007 in its report, Financial Risk Outlook." (WSJ)
A chart in the just-published Elliott Wave Financial Forecast shows you that even gold and silver -- which supposedly offer "shelter" in times of crisis -- are in tight correlation with stocks.
Financial assets that survive the credit collapse will eventually rise in value, but financial safe-haven is scarce indeed. The contraction of an enormous credit bubble will carry most assets lower, precious metals included. Because most people are still focused on offense (seeking gains) they are not considering the one place to find shelter from the storm… cash.
"As the suspension of redemptions at one hedge fund after another in recent days attests, the financial markets are rapidly becoming a cash-only enterprise." (August 2007 Elliott Wave Financial Forecast online now.)
So far, the deflating confidence/credit bubble is slamming the building industry, homeowners and a variety of funds. When it begins earnestly spreading into the stock market, it should accelerate. It is not too late to learn how to reduce its impact on you.
**********************