Bankruptcy Candidates for 2002

After years of denial and complacency, Americans are finally starting to realize that the U.S. financial system is one megalithic house of cards on the brink of collapse. Enron has been the headline rage of late and derivatives were its undoing. Now that consumers are starting to find out just how big the derivative problem is, it's only a matter of time before widespread panic sets in and things really start getting out of hand.

We are compelled to offer our thoughts and forecasts on what the coming year might unfold in the way of bankruptcies, panics and (debt) collapses. At no other time in recent history have so many candidates for collapse crowded the field. (In the interest of simplification we'll use the all-encompassing term "bankruptcy" for the rest of this article when referring to any type of debt-related collapse, panic, crash, etc.)

The first candidates for collapse and foreclosure in 2002 are the South American countries of which Argentina is the most prominent recent example. We won't focus on this aspect of the coming wave of 2002 "bankruptcies," but we recently came across a very telling prophecy from long-time market sage Richard Hoskins in his classic book, "War Cycles, Peace Cycles." (Incidentally, we spent nearly two years tracking this book down only to discover it has recently been reprinted. This book definitely rates as a MUST-read and is the single best book on cycles/politics/economics/history we have EVER read. We plan on reviewing this book in a forthcoming Gold-Eagle article.) Hoskins presciently observed, "South America, with the exception of a few isolated pockets, has become amalgamated into a [debt-ridden] continent's twisted, wrung-out husk of what might have been. The continent undoubtedly will be 'foreclosed' nation by nation and slide quietly into the New World Order."

We must always keep in mind that this year more than any other year will prove critical in either making or breaking the economic fate of nations, economies and peoples. There are so many descending long-term, intermediate-term and short-term cycles due to crash this year than at any other time in nearly 60 years. Add to that the exceedingly precarious position of the Western world with respect to debt and other financial ills and that leaves a recipe for disaster. We predict that the damage will be in the trillions when the smoke finally clears.

It isn't the cycles in and of themselves that cause companies and economies to collapse. It is the combination of descending cycles and the improper response to them on the part of human actors (that is, poor management) that causes things to fall apart (businesses, economies, nations, etc). Probably the single biggest element that ensures a business won't survive a down cycle is debt, the more of it the less likely the chances for survival.

Our second likely candidate for bankruptcy in 2002 is the United States. Many people ask if the average American will survive his "date" with K-wave destiny as the major long-term cycles descend toward the latter part of this decade. To answer that question, all you have to do is take a look at the ever-growing number of TV commercials which offer several ways to "get out of debt" or "reduce your credit card payments." These ads are a bold-faced admission that the country is on the verge of a gigantic debt collapse since most of these so-called non-profit "credit counseling" companies are being sponsored by the major banks (who rightfully fear a massive default on consumer credit loans). One credit counseling service advertisement puts the average U.S. household debt at around $8,000. Actually, if you figure in mortgage debt, auto loans, consumer and scholastic debt the number would be closer to $100,000 per household. Does the U.S. have a debt problem? You tell me.

Another positive indication that the debt problem is about to spin out of control is the announcement this week that Congress is considering raising the minimum age for eligibility to receive full Social Security benefits from 65 to 67. The proposal would raise the age for federal retirement benefits for those born in 1960 or later. This is not surprising considering the horrendous shape of the economy not to mention the enormous federal debt. Couple that with a rising retiree-to-worker ratio and all the ingredients are there for major problems with Social Security. We've said for years the day would come when the government would be forced to raise the minimum S.S. age from 65 to 70. It now appears we are one step closer to realizing this eventuality.

Moving on down to the corporate scene, the big news in January was that retailing giant Kmart filed for bankruptcy. This negative news coincided with the short-term cycle bottom and was a psychological indicator that the worse was over for a while. We predicted 1 ½ years ago in the newsletter that Kmart would be forced into bankruptcy within 1-2 years. This was easily visible from the chart, which had been crashing for the past couple of years and was below $10/share. Whenever big businesses start selling for under $10 for prolonged periods, it means they are about to go under. You could also tell by looking at the tape that there were massive insider transactions taking place since Kmart's executives knew in advance this was coming. Yet another obvious sign that Kmart was on the rocks is when they sold their credit cart about two years ago.

Incidentally, the Kmart bankruptcy is a premonitory warning of the vicious bear market to come in 2002. Keep in mind Kmart is the largest retailer ever to go bankrupt, and this combined with dismal holiday sales and a declining economy buried the business. Big stores that have been around for over 40 years don't just go under for no reason. We are entering headlong into a K-wave deflation that will rock the U.S. economy to its very foundations, and there will be many more Kmarts and Enrons along the way.

Scanning the charts and examining the insider data, here are some other potential wash-outs for the next 1-2 years ahead: Kroger (KR), Gap Inc. (GPS), and Tommy Hilfiger (TOM).

But here are even more eyebrow-raising examples from the Dow 30 Industrials. AT&T (T) is in big trouble this year and the chart clearly shows it. The telecommunications giant has shot its proverbial wad in recent years with deficit spending for advertising and unwarranted expansion, not to mention "stealing" customers from other competitors and spending enormous sums in doing so. Although it is doubtful AT&T will actually go under, expect some sort of announcement from the corporate giant this year followed by a federal bail-out.

Another major player that will experience massive problems in 2002 is Walt Disney (DIS). Expect an urgent announcement from Disney head Michael Eisner later this year. First there will be a huge wave of employee cut-backs followed by closing down some of their non-performing amusement parks globally. Then will come the corporate chopping block.

This next one might surprise you. McDonalds (MCD) is having unpublicized internal troubles that will come to the fore this year and elicit a huge reaction from the market. McDonalds is another one of those corporate monoliths insistent upon saturation bomb advertisement at all costs. They are monopoly-oriented, and like all great monopolies are destined to fall. There has been significant insider selling in McDonalds and the chart pattern forecasts a further crash in stock price this year. The cycles are down in McDonalds for at least another year and its price has not responded well in the past year; in fact, McDonalds is one of the few Dow 30 stocks which has visibly reacted to each and every cycle in the 120-week cycle series, regardless of cycle length. From a technical and a fundamental standpoint, this shows extraordinary weakness within the company. We do not say that McDonalds will "go under," but something really big (and extremely negative) will happen to the company this year. Just wait and see.

Also expect major announcements this year from Eastman Kodak (EK) and General Electric (GE).

Another recent headline proclaimed that Mars Inc., makers of M&Ms candy, will begin making M&Ms with new colors-including lighter tones. This represents the first time in over 50 years that M&M colors have been altered from the standard red, blue, green, yellow, black, brown scheme that has become so famous. This reminded us that just about every major manufacturer of consumer commodities has been making major changes to their product lines in the past 1-2 years. Big consumer-type businesses are coming out with all sorts of off-the-wall products and packaging gimmicks in order to get every last consumer dollar they can. This is very typical of runaway K-wave deflation (just before things really get out of hand), because in deflation money becomes more elusive to businesses and they have to pull out all the stops in order to keep things rolling. At some point, even these new twists and gimmicks will fail to bring in the money from the ever-shrinking money supply.