Note to Senate Democrats: larding the bailout with pork spending and tax credits the nation can ill-afford merely multiplies its pernicious effects. You're still borrowing money from our children to give to wastrels and spendthrifts now--not only unwise but unconscionable.


A number of readers have asked for some downside targets for the U.S. stock market. Your wish is my command. The short answer is: a 33% haircut is entirely feasible.

As usual, I asked frequent contributor Harun I. for assistance with the charts, and also as usual the comments/interpretations are mine; these are NOT investment advice: please read the HUGE GIANT BIG FAT DISCLAIMER below.

I don't give advice here, but I will report that I told my sister to sell sell sell all the stock and bond mutual funds in her 401K now, immediately, and get everything into gold funds or cash. That is not advice, just a report of my opinion to my family members.

OK, first up, two charts of the Dow Jones Industrial Average: one for 2008, the second one a long-term chart illustrating 1994-2008:

We do not need to be technical-analysis wizards to note the correlation of various support/resistance levels and the basic fibonacci projections.

The January 2000 high of 11,722 is a key support/resistance. Now that the DJIA has busted decisively through that, and failed to close decisively above it despite numerous tries, then the next line in the sand is around 10,700, which also happens to correspond closely with the January 2008 low.

As I type the cheerleaders, PPT and Bulls are making a valiant if doomed effort to rally the faithful for one more assault on 10,700. If they fail--and the odds certainly favor a decimation of all those foolish enough to "banzai" charge that height--then the next intermediate target is around 9,900, just below the "magic" number of 10,000.

The media and traders alike are drawn to round numbers, so some defense of 10,000 should be expected. But if that fails, then the next target is around 9,000: a projection noted on both short-term and long-term charts.

Below 9,000, the 2002-03 Bear market low around 7,200 is the next key target. That would represent a 33% drop from the 10,700 level the cheerleaders and Plunge Protection Team are desperately trying to defend.

Below that, 6,000 beckons, and below that, well, the "impossible" target of 800, with a potential way station around 3,000, a once-impossible goal for market Bulls which was finally surmounted in 1992, at the start of the glorious 1990s Bull Run.

It is easy to foresee a trading range between 3,000 and 2,700, which corresponds to the 1987 high.

Louise Yamada and other long-term chartists have long pointed out that at real market bottoms, gold and the DJIA are in rough correspondence. Thus should DJIA 6,000 be the bottom, then we can anticipate gold also being about $6,000/ounce. Perhaps more likely in a deflationary era would be 3,000 DJIA and $3,000/oz gold.

Harun reminds us with this chart of the DJIA and gold that the DJIA or indeed any stock market is only a relative measure of value and purchasing power; the more accurate measures of purchasing power are gold and oil. Thus we see in the following charts that relative to gold, the DJIA has already dropped to the July lows in terms of the amount of gold a share of the DJIA could buy.

If we look at the S&P 500 and gasoline, we see that even selling during the mini-"crash" of 9/29/08, you could have bought more gasoline with a share of the SPX than if you'd sold at the July low.

This reminds us that the market is a poor metric with which to measure our purchasing power; should the dollar drop in half and oil double in cost, then a return of the DJIA to 14,000 would not signify a return of purchasing power wealth; it would undoubtedly be touted in the cheerleading MSM as a great victory but it would actually mask a catastrophic decline in actual buying power.

Thank you, Harun, for these charts and insights.


Reader Essays:

The No Banker Left Behind Bill
(Chuck D., September 29, 2008)

I have been mulling over the proposed bailout bill (which I have decided should be called the No Banker Left Behind Bill). I have the feeling that no matter what they do, something big this way is coming. I just don’t know what form it will take.

The proposed 700 billion dollar bailout cannot really “work” from a system level. I know it’s real intention is to cover the butts of Wall Street investors, but you have the same problem in macro that homeowners have in micro. Nobody knows what homes are worth right now, so buyers are sitting it out. It isn’t about restricted credit (even though that is a factor). It isn’t about being too cash strapped to make a down payment (though that too is a factor). It’s about not wanting to be suckered into buying something that may still be overpriced.

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--An anonymous comment about CHS posted on another blog.

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