Thursday, July 05, 2007

The Voice of Optimism

Everyone knows the old saying: "If you Can't Beat 'em, Join 'em". So I submit myself to the New Normal. I embrace that Things Are Different This Time. I surrender my soul to the wisdom of the bulls. Let us gather hands around the truth together.

Corporate debt is a positive. First, because interest rates are so low, it represents virtually free money for private equity firms to maximize value to shareholders through buyout transactions. Those making access to this debt are trained professionals and are managing the debt load - and its risks - responsibly.

The booming Chinese economy is putting some strain on the environment, yes, but the Chinese have learned from the lessons learned in the British and American industrial revolutions and have taken the steps necessary to protect their environment for the sake of those that consume their products, for the sake of the economy in the long term, and for the sake of future generations.

The manic building in Dubai, Shanghai, and other emerging economies is exhilarating, and the race to see who can wind up with the world's tallest building just adds to the fun. The building boom is not overdone. On the contrary, Dubai - - until recently, a sweltering, barren desert - will become the top tourist attraction on the planet. The strength of the oil economy will allow this entire region to blossom for decades to come as the new epicenter of global capitalism and prosperity.

The housing "bust" is completely overblown. Yes, there are some isolated instances of damage from the sub-prime lending debacle, but it is completely contained. Although the red-hot pace of housing gains from years past will rest steady for a while, there is in fact no housing "bust", and thus no aftereffects to the economy at large.

The fact that the savings rate has dropped into negative territory is simply illustrative of strong consumer spending. We live in an age of rapid change, and adapting and embracing that change takes money. Here in the United States, we are simply helping lead the way by taking part in an exciting new time of electronic and communications wizardry.

The U.S. equity markets are not overpriced. Indeed, as the private equity buyouts of late illustrate, stocks in the U.S. are undervalued.

By the same token, the Chinese stock market offers a store of value that will only continue to rise. A value of 8,000 on the Shanghai index seems almost a foregone conclusion, particularly since the number "8" is widely considered to be lucky in China.

Some many say that the tremendous push of wealth to the highest echelons of society will create social unrest and turmoil. "Some" are wrong. There are about 1,000 billionaires in the world today (up from zero in 1915), controlling nearly $3 trillion in wealth. The couple of billion people in the world that live in poverty will view these billionaires as inspirational.

There's plenty more good news in the world. The Blackstone IPO was not an opportunistic event meant to exploit the naivete of investors buying at the top of a market. It was simply a means by which the principals in the organization could tap into some of the value they had built while at the same time providing a means for the common man to participate in this exciting new investment vehicle.

The entire "terrorism" issue is completely overblown. Once the war in Iraq withers away to a close, terrorism will be a smattering of unrelated incidents that no longer affect the Homeland.

We have outgrown inflation, and it has about as much chance of returning as the fads of the 1970s that accompanied it. Food and energy are notoriously volatile components, so if we strip away the ability to feed and transport ourselves, the core inflation numbers are comforting.

Next year, when a Democrat is virtually guaranteed to win the Presidency, the combination of a left-leaning Congress and President will be just the kind of "one-two punch" the economy needs to really kick into high gear. Taxes will be reduced or at least be kept low. And the entirely Democrat federal government will provide business all the assistance it requires to continue to thrive.

And, just to put a cherry on top of the whole thing, watch this:

I am now cleansed. And I no longer have to bother with this bearish claptrap. I've had enough.


beingpossibility said...

AMEN! Well said. Now if only the financial floor will collapse I will profit handsomely.

Frank said...

You are TOO FUNNY! Always love your writing! And also you forgot to mention, we don't have inflation! Who care about headline inflation, we are all superman and can all live WITHOUT food and energy! So party on, energizer bunny!


Louis said...

Yes you have been cleansed.

Al Gore seems to be the powerful antichrist, trying to slow down wonderful progress of perfectly fine civilization. And property value should go up, up, & up and why not? Everyone wants to be here!
Talking about LBOs , CDOs, CDSs, If one cannot buy a company with heavy leveraging, and if one cannot resell again & again & again at ridiculous margin simply changing the wrapping papers, can we really call this country the "Land of the free! Land of opportunity!"?
People are panicking for nothing. GS, BSC, MER... These guys are true pioneers. Lewis & Clark of our age, the brave visionaries. Let them blame, let them criticize. Negative ones will stay negative, but brave ones must move on. Let's join in the eternal bull run. AAPL target $550(This year), RIMM $1.250, GS $5,001(after the aquisition of FBI, ATF & CIA)

Controlled Trader said...

Human Psychology is strange thing.

Yesterday's Genius and Today's Moron could again be Genius tomorrow only to become Moron day-after. Market makes everyone humble.

Feeling Pathetic.

Frank said...

Yes, talk about banking sector. Who needs them. Bond lead stock?! Not in bull's dictionary. Higher interst rate, who cares? And best of all, we don't need consumer to keep this bull running! I have no idea what this guy is talking about because I'm a bull:

Am I over doing this? :)


Gary said...

Everything you said is true. However if the big money is buying stocks then it is also meaningless. Let me point out that there has never been a bull market that didn't have these negatives associated with it. That's what makes the bull go up. So forget the fundamentals for a while. Fundamentals only matter when they matter and as long as the big money is buyiny then they don't matter. Sooner or later the smart money will start selling this market. Until that happens I just can't see any good reason not to make money on the long side.
Take 99 for example the bears said that most of the tech and .coms were bogus companies with no earnings, ridiculous P/E's, no hope of ever earning enough money to warrant the prices they were selling for and that most would probably go bankrupt. Every bit of it was true. It didn't stop the Nasdaq from gaining 80% in 6 months though did it. You want to know what did stop it. The commercials started selling and they proceeded to sell heavily until Mar. of 03. Coincidence...I think not.

ctkwtk said...

Glad to see you've finally come 'round, Winston,I mean,Tim. I too love Big Brother!

JakeGint said...

Gettin' pretty bitter here, Tim....

Even if you DID say "Jehova!"

DirtyTed said...

Gary has a good point. Also Tim, before you go off on how stupid buyers of this market are, realize a different group of bulls exists. Shrewed professionals are making plenty of money riding some of these markets. The best indicator of the trend is the trend. What do you think Livermore would be doing? It's a bull market you know.

P.S. The whole analog chart thing to exaggerate your point is pretty funny. Didn't you recently post that only the media uses analog??

Oneway said...

"...with a Dem. president & congress...Taxes will be reduced or at least be kept low...'


Fuggin' funniest thing you've ever written!

Tim, this is one of your best posts. The longer-term, vertically-stretched index charts speak volumes.


Tim Knight said...

Wow. Some people are taking this seriously. Goodness.

You are right about the arithmetic charts, DirtyTed. Might as well dramatic if I'm going to be hyperbolic, wouldn't you say?

I just get kind of tired of rehashing stuff if the market doesn't do much of anything (like today). So I thought it would be a nice change of pace.

The fact that totally new faces are here in the comments section tells me it's good to stir things up now and then with a very different post.

"Look, I'd had a lovely supper, and all I said to my wife was - that piece of halibut was good enough for Jehovah!"

Tim Knight said...

"You want to know what did stop it. The commercials started selling and they proceeded to sell heavily until Mar. of 03. Coincidence...I think not."


I deliberately deleted a COT reference in my sarcasm-laden post since you are a good sport and seem like an intelligent and rational person.

But I've got a challenge for you - - and this isn't rhetorical; I mean it seriously.......can you produce a link to ANY site - - anything at all - - where sometime in the first half of 2000 someone said "Based on the COT, it's time to sell!". If I could see something like that, I'd pay a lot more attention.

I'm deliberately making this a very broad request - - a six month timeframe and any breathing human will do - - but I just want to see proof that someone actually said something during the time, and not seven years later.

Controlled Trader said...

Laughing out loud to see other blogger sp500speculator missing the point of today's post. Are you thinking to change blog's title to 'The Wall of Worry.... with Tim Knight' . May be tomorrow (the way bulls are kicking butts it may be even before tomorrow.

Oneway said...


any forecast on what the return of the pre-1929-no-downtick-rule will do for shortsellers?

DirtyTed said...

Tim, I'm just trying to convince you to buy and help my positions, haha. I will say this though, it seems to me that solar stocks (i hate to agree with Beanie)truly are leading this market higher, and will likely keep on going. FSLR and JASO that is. Also if anybody trades commodities, my trading system is indicating very strong buys across the grains markets, I went long wheat yesterday and corn today. look into it yourselves, it looks like a damn good opportunity.

Gary said...

Well I do know that Larry Holmes was trading the COT reports at that time and I know he was short. However I'm not sure of the relevance of whether someone posted or wrote an article calling attention to the fact that the commercials were selling at the time has to do with today. I expect when they start selling this market again then we will see a market decline, maybe a big decline. Why do you doubt that the COT report gives us a great tool to determine what the big money is doing? So far it has proven very reliable in determining market trend wouldn't you say? If you will look back at your posts pre Feb. 27th you will find that I was bearish at the time. The commercials had a large net short position pre Feb. 27th. It seems pretty simple to me although like any system having the discipline to follow it is tough. I really get no enjoyment watching anybody lose money. Honest. I've tried many times to get the bears to just be patient and stay in cash till the odds improve in their favor. So far I haven't had much luck. Trust me when the big boys start selling I will be the first one to let everyone here know.

Clint said...

Hi Tim,
I look forward to your blog every night. I still think the RUT looks weak(er). The move in the NDX was painfull for my bear call spread.

Bear: Jehovah!Jehovah!Jehovah! You can only kill me once!

Vic said...

If the Iwm gets above 85 then I will throw the towel in. The volume is lacking - the COT guys are in the Hamptons sipping stirred martinis. This week the market has been driven by the retail side. Tim's level of frustration has been a reliable turning point indicator. Alcoa will set the tone right Monday.

the crooked brief said...

I think that most don't understand economics. The markets are the arena of greed. The panic buying and selling on rumour and fashion demonstrate as much. And that satisfies the surfers.
But for me the problem with the western economies is low inflation and salaries based on short term results alone. The subprime problems are indicative of this approach. I see very deeply layered multiple debt and structural deficiencies in the US and UK economies the remedies for which are very unpopular with the powerful in our societies so they are not addressed.
The private equity firms rightly expect forex and inflation to cover the interest and a large share of the capital borrowed.
The US and UK governments and mortgage providers have their heads in the sand. The irresponsible lending of the last 7 years endangers the banking system. The US has had a small taste. But in the UK house prices have gone mad for 10 years. Over 50% of mortgages have been subprime since 2001. The majority of first time homes are now owned and rented out by middle aged people as a 50 to 80% leveraged pension. Already the rents don't cover the costs on 50% leverage. If prices move down 2 or 3% panic will set in.
In europe and the uk demands for real wage rises are being made and met. They just aren't being publicised.
I anticipate an average falll of at least 40% maybe 65% in stock values. I expect big subprime lenders to go under once the accounting shinanigans are evident. Afterwards inflation will stay at a healthier level of 5 to 8% for 20 years.

Inflation is good. It skews the economy towards the working consumer which means young people with families, a vibrant economy and hugely reduced welfare payments. Thus it balances those who rely on returns on capital for consumption who protect their money by tending towards conservative anti-innovation.

Frank said...

Hi Gary,

I'm sure COT is a good tool. But it should just be ONE of the tool. If it were that simple just to follow COT and works everytime, then it wouldn't work at all. System works 100%, everyone follow, render it useless. Plus, if it were that simple, everyone would just trade using it, wouldn't they? But then again, wouldn't the boat sink then?


Gary said...

The COT has a 3:1 historical win loss ratio over the last 21 years. The average winners are larger than the average losers. The average annual historic return without leverage is roughly 20% per year. That is the best mechanical system that I've ever been able to find. Buffett became a billionaire with similar consistent returns. Having the discipline to follow the system even when it is losing is always the hard thing to do with any system. Every little correction I've endured the bears taunts about how the COT is worthless. Of course having learned my lessons the hard way I've ignored all of this comment and held my position and so far the odds have come to my rescue everytime and the COT is on track to again produce a "typical" year. So there I've given anybody who wants it a great system that has consistently produced superior returns and they still can't trade it. That's why I don't worry about the COT being discounted by the market. Almost no one has the discipline to stick to it.

2sweeties said...

the reason why your system is a winner it's not because of the COT report, it's because you BUY&HOLD and Index with a leverage 1-2.

Buying an Index eliminates the high risks implied with single stock picking, holding eliminates the risks of swingtrading/daytrading activities and the low leverage gives you time to sell without damage if the market falls.

I think it's a very good trading system, probably the best out there and Warren Buffett is the living example that BUY&HOLD make much much more money than daytrading or swinging.

But this pathetic COT report does not add anything to a BUY&HOLD strategy, just put a stop loss at -5% of your investment and you get the same results: you don't mind anymore any pullback minor than -5% and you remain always invested to profit from the upmoves.

I am sure you will sell if the market falls, no matter what your beloved COT says, so why bother?

Just stay invested and sell if the drop is >5%...

Gary said...

It most definitely is not a buy and hold system. The Cot got me short for both the May-July decline last year and for the Feb. 27th fall. How is that buy and hold? The COT is a very good tool for predicting intermediate trend changes. Instead of always bashing the system maybe you should take the time to study it.

beanie11111 said...

JSDA bears being pulverized!!!


beanie11111 said...

The invincible solar stocks ride again!!!

No shorts dare to play.

Mike said...


The bear market will come, but I thought we are to ride the overall trend that is in place until the trend changes. Fighting it is senseless.

SIMO breaking out today --- Semis being bought up.

beanie11111 said...

Bears' Last Stand:

Bears' ultimate battle needs to be with solar stocks. I challenge all permabears to take down solar. Gather up, and make your last stand.

Thomas said...

Please, just ban Beanie1111. He has a solid beat-down coming to him.

Like the stats and the reasoning though it has little to do with technical analysis. I must point out that you are all wet on the U.S. savings rate and the measurement has been worthless for years. I love how this hoary old stat is ALWAYS trotted out by doomsayers that need to buttress their flimsy arguments. I hate to put you in the company of those economists--Schiller and Krugman--but you forced it upon me. IF Americans are tapped is not because this statistic tells you so--Total Earnigs/Output-Total Expenditures. It does not take into account 401(k), IRAs, wealth built through the stock/bond markets, wealth in real estate, Social Security, pensions, etc. Americans are in a far better place with respect to savings than the rest of the world with the possible exception of Japan. Someone has to tell you, Tim.


Controlled Trader said...

Country P/E Ratios
by BeSpoke group, Looks overvalued, isn't it?

Maheshwaran said...

Nice Post.

Could you give your comments on SBUX and MA.Not sure if i should be asking this here.

william bills said...

you can paint any picture you wish with economagic - i notice you did not post a chart of corporate profits as a % of GDP - they're runnin at around 8% - historically, they've average 4%

also, as a technician - you know better that anyone those ultra long term dow charts have to be in LOG scale - the nominal chart you posted is meaningless.

using NIPA personal savings rate is meaningless - it was created during a time when consumers didn't have near the access to new financial products that are available today.

as for the distribution of wealth - thats always been the case - i would like to see a time series of that data going back at least 100 years - i think you find the top 1% controls less and less as time goes by.

Glen said...

Comments for William Bills:

You imply consumers are wealthy and thus savings rates are meaningless. Ok, why has the US consumer gone head over heels in debt during the past six years? Can't be all that wealthy, otherwise they wouldn't need to borrow. Household liabilities have exceeded household assets for each year since 1998 and the gap grew much wider in 2006.

Yes the markets have priced paper assets over the moon during the current bull market, but it is only paper, after all. Growth in paper asset prices does not represent real increases in wealth, as the coming bear market will teach.

The US is in big, big trouble financially and the outcome is assured: a massive recession sometime in the next twelve months as credit continues to shrink. The bottom will be when loans are again hard to get.

Glen said...

Gold stock breakout alert!

Appears to be a very low risk entry point for a 20% move now. If the gold stock move is trying to say the dollar is about to collapse, then I would be careful about shorting the general market too, because when the dollar goes down, it will mean that interest rates are likely to remain flat or decline in the US. The prospect of higher US interest rates tend to prop up the dollar and the stock market has more trouble in that environment.

william bills said...

i never implied consumers were wealthy. i just took issue with the NIPA savings rates; - which also don't factor in insurance, which is contractual savings - all i was saying is that financial innovation has rendered traditional measures of savings meaningless.

as for the debt..........gimme a break - if you have a somewhat stable job, why wouldn't you take on new debt during the last 6 years - it was the cheapest in over 40 years - supply/demand? - as the price goes down more of a given quantity is demanded at each lower price - including debt!

care to comment on some of my other points?

beanie11111 said...

BIDU on fire!!!!!!!

And it sure is cheap.

beanie11111 said...

I expect BIDU to see $300 by end of August.

Too cheap to ignore any longer.

Potential is huge. It already has over 3,000 employees; so it's no fly by night outfit.

BIDU owns almost 60% of search in China, while GOOG has about 19%.

Anonymous said...

Tim will remember the mid-80s with the loaming financial crisis with regards to debt. They even put it in the movie Wall St., GG's speach at Teldar Paper...

beanie11111 said...


The scary thing for the permabears is that the stock market rally that we had the last 4 years did NOT come with exuberance in public sentiment; in fact, it came with an endless wall of worry ALL THE WAY!

At absolutely no point were people elated. In fact, nobody i personally know actually talks about stocks or trades the markets (anymore).

beanie11111 said...

holy sh%t! The way solar stocks closed, they're going higher next week!


Glen said...

Ok William Bills, a couple of more comments. First I completely agree that a long term chart must be logged for perspective. Tim's chart is misleading, but spectacular.

As for corporate profits, they are high relative to GDP recently, some of which reflects foreign profits based on a falling USD. I'm more concerned about what the corps are doing with their profits; in a healthy economy they re-invest in capital. The current investment rate is very low, and what the corps are doing instead is buying back stock. And they are now borrowing to do so as profit growth has slowed, same as occurred in the late 1990's ie. the corporations are funding the bubble and not investing anything extraordinary into the real economy. Households with stock are getting the benefit now, but down the road will this contribute to future real growth? No. This is a bubble economy.

beanie11111 said...

BX surprises the disbelievers!


william bills said...

here's the strange part about your comments - you acknowledge that corporate profits are high relative to GDP - then you complain about share repurchases! - i.e. - maybe companies believe the safest way to invest right now is to buy back their shares they believe are undervalued - further enhancing the wealth effect. and, all the while recognizing that corporate profits are high, you claim its a bubble - inflated, or unjustified.

yes yes - the growth rate of profits is slowing - but we'll find out just how much, if at all, starting next week.

i believe too the dollar is in the process of implosion - but if your invested in the stock market - indexing - you still, although barely beat out that decline.

Glen said...

Corporations buying back shares is a win-WIN - the ordinary shareholders like it because the shares often go up but the executives like it even more. Every dollar the stock rises can be a 20%-50% rise in the option value that the excutives partake in. So, I say greed is at the root of the share buy backs, just like it was in 1998-2000. There is no productive value for corporations to use cash or borrowings to buy back stock. Greed has taken over the excecutive offices of many American corporations and is just another sign of the impending big, ugly, bear market.

william bills said...

about corporate buybacks - i will refer you to a man much smarter than i - he's a pro bond portfolio manager - and this post in particular

Bullish Jim said...

Tim- I love your site and I visit often. That said I do have trouble understanding why you fight the tide sometimes. Why not forget about what the market should be doing and just trade based on what it is doing? There's always bad news you can hang your hat on but it doesn't necessarily mean a crash is imminent. If the prevailing trend of the market is up why not go long and just keep stop loss orders in?

All that said, I do think we're due for a short term pullback...

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