4 May 2005

A Valuation Canary of a Different Feather

Two to three weeks ago a large trading gap to multi-week lows occurred in
the Australian, Japanese, Dutch, Taiwanese, German, French, and Italian
markets, as well as the United Statesı own NASDAQ. This gap represented a
fractally predictable nonlinear devaluation movement and occurred at the end
of a second fractal cycle with the first fractal cycle commencing in August

Using the YAHOO one-year charts for the DAX and CAC, the first base (X) of
18 three- day units started in August 2004 and was followed by a second
cycle of 2.5X or 45 three- day units with the nonlinearity gap breakdown
occurring toward the end of the second cycle: at the 41-42 three-day unit.
Nonlinear breakdowns in terminal portions of second cycles usually occur
between the timeframe of 2X and 2.5X of the second cycle - in this fractal
sequence between the 36th and 45th three-day units.

There is possibility that that the United States is at or near the terminal
portion of a second great fractal cycle starting in 1858 with a similar
near-term nonlinear movement of proportionally greater magnitude. The
current macroeconomic conditions of high debt load, forward consumption,
overvaluation of assets, and countervailing oil related product inflation in
the consumer pipeline provide the necessary thunder storm environment for
such a lightening event. It is the timing that remains the question - not
if, but when. The first great fractal cycle was approximately 70 years in
length. The second cycle is now between the 2X and 2.5X time period.

If the various markets fill their recent gaps there is a possibility of
further equity valuation. If either the valuation canary dies before filling
the gaps on the various bourses or makes new multi-week lows, a near­term
nonlinear devaluation of major proportions is possible. Watch the activity
in the cited European and Asian markets. The marketıs growing or decaying
valuations above the gaps or below the multi-weekly lows will answer quite
clearly the preeminent question: is the ongoing credit expansion through
debt creation exceeding debt default, increased cumulative debt servicing,
and higher interest rate junk bond servicing.

G. Lammert