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Don't Cough   (May 12, 2007)

If you will forgive a moment of sophomoric humor, please read this joke:

The owner of a drug store walks in to find a guy leaning heavily against wall. The owner asks the clerk, "What's with that guy over there by the wall?"
The clerk says, "Well, he came in here this morning to get something for his cough. I couldn't find the cough syrup, so I gave him an entire bottle of laxative."
The owner says, "You idiot! You can't treat a cough with laxatives!"
The clerk says, "Oh yeah? Look at him, he's afraid to cough!"
I humbly submit this is a perfect metaphor for the U.S. stock market and indeed, the entire U.S. economy: don't cough, or the fresh manure will hit the circular spinning air movement device.

It is almost laughable how former Federal Reserve Greenspan is trotted out after every modest dip in the stock market--regardless of where he might be on the planet--to dutifully reassure us peasants that a recession is unlikely, despite the overwhelming evidence that a prolonged recession lies just ahead.

The laxative which has been administered in excess is credit, and the unfortunate consequence is excessive borrowing and the misallocation of that borrowed capital on leveraged buyouts, re-purchase of shares (which generates no new products, services or jobs), energy-wasting McMansions and an astonishing array of largely underutilized or just plain worthless consumerist gew-gaws (please see the Readers Journal entry by James C. this week for elucidation).

But enough of tasteless metaphors. Let's look at a chart of the fabulous, ever-rising, never-will-decline-again Nasdaq--which looks like it can't hold back a good hard cough much longer:

Note the similarity between the divergence between price and RSI/MACD which presaged last May's sharp decline in the market and the past few month's divergences. It's just a guess, but based on this chart, it sure looks like Nasdaq's long-suppressed cough may come, depsite Greenspan's plea for continued complacency.

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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