The Chart du Jour

Hold Onto Your Homburg

March 20, 2000

Paul Montgomery of Universal Economics has long been the leader in interpreting the significance of magazine covers in major popular magazines as a contrarian sign that the trend depicted is about to change. Put Jeff Bezos on the cover of Time and it's probably time to sell Amazon; put Alan Greenspan "trapped" within a bubble on the cover of the Economist back on October 1, 1999, and the bubble is sure to just continue expanding; picture the world awash in oil as the Economist did in late 1998, and oil is most likely set to launch the rally of all rallies.

So it is that we note that the venerable New York Times chose to devote its Sunday, March 12th Money & Business section headline to "The Metamorphosis of Germany Inc." Pictured was a young blond-headed executive talking on a cell-phone pushing aside a heavy-set German dressed in a green felt coat, niederhossen, and other traditional Bavarian garb. The article spoke of the dismantling of post-war bureaucracies and the tax-free unwinding of $100 billion in corporate equity cross-holdings -- the effective "unravelling of Germany's corporate safety net" and a "frenzy of mergers, acquisitions and spinoffs" across Europe.

Fundamentally we, like most analysts, certainly view the German government's radical tax plan to allow corporations to shed cross-holdings tax free as a positive proposal. Germany needs to somehow avoid the morass of problems cross-holdings have caused in countries such as Japan in recent years. They need to put more equity shareholding in the hands of their companies' employees and the public, and by doing so, help to guarantee that German corporations will be more dynamic, efficient, and accountable than they have been in the past.

But we also find it ironic that the New York Times chose March 12th to publish such an article -- right at the top of the DAX and directly before the 5-wave descent that has since transpired! Because the descent in the DAX took a 5-wave form last week, the rules of Elliott wave analysis tell us that this decline cannot have been the entirety of the move. At best, it is only the first part of it -- either an A-Wave of an A-B-C corrective period or a potentially more serious 1-Wave down (we can't be sure which), but NOT a completed correction. We picture below the daily June Dax futures chart both on a daily and hourly basis to show you what we are talking about.

So Germany may well be entering a period of "metamorphosis," but the price action of the DAX does not suggest that this is the time to jump in and grab a slice of the new equity pie. It suggests instead a more protracted and deeper move lower first -- at least to the circled 7000 support area near the 200-day moving average. This would represent a full 38.2% retracement of the August 1999- March 2000 advance.

So read newspapers and magazines to keep abreast of global news, but be aware that the news they offer may only represent a rear-view mirror -- not a good investing opportunity. Newspapers tell us what has already happened, not what will. The DAX is far more vulnerable than the New York Times by itself would lead you to believe.

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