Pete Kendall's Socio Times: A Socionomic Commentary

March 08, 2007
Prepare for Yet More Bull in the Market  
For the past ten days the financial world has been in a state of turmoil, inspiring lurid headlines about a global financial “meltdown.” What has been going on in financial markets? And what does all this chaos mean for the “real” economy of jobs, high street sales and houses? Both of these questions can be simply answered.

What’s happening in financial markets is that prices are going up and down. What all this means for the real economy is precisely nothing. The interesting question is whether this balance of bulls and bears has been reversed permanently, or only upset for a while.

This question presents a dilemma for stock market investors and central bankers similar to the one faced for years by house buyers in Britain. Academic economists have consistently cautioned that house prices were far above their historic averages and that buying property in Britain was foolish. Property specialists have argued, by contrast, that the historic averages established in the 1970s and 1980s had no relevance to present economic conditions and that houses were an excellent investment, even at seemingly “inflated” prices. We all know which side has proved right so far.

I suspect that the stock market bulls will also turn out to be right — and for much the same reason. The world has changed dramatically since the early 1990s and many of the rules of thumb established in the previous two decades — whether between house prices and average earnings or between share prices, profits and GDP — are no longer useful. If you believe these changes to the world economy will last for many more years, if not decades, you should remain bullish; if you believe that the world will soon return to the inflationary conditions of the 1970s and 1980s, you should sell everything.
The Times (London)

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With Dip Buyers Flooding Back, Go Ahead and Panic
Category: NEWS
By: Pete Kendall, March 9, 2007

There are NO bears, only bulls and bulls in waiting.
The EWFF Short Term Update, March 5, 2007

Why does this stock market remind us of the Kobe Club, the New York City restaurant with 2000 samurai swords suspended from the ceiling? Well, it has to do with an old stock market expression: “Never try to catch a falling knife” and the following observation from Monday’s EWFF Short Term Update: “We continue to be struck by how many commentators view this as a great buying opportunity.” This graphic from Sunday’s New York Post captures the underlying sentiment :

bomb shelter

Headline after headline pounds out the same “don’t worry” refrain:

Now Isn't Time to Panic Over Market
LubbockOnline.com, March 8, 2007

Prepare for Yet More Bull in the Market
Times Online, March 8, 2007

Wall Street Still Running With Bulls
Denver Post, March 8, 2007

Accept Market's Volatility
Monterey County Herald, CA, March 8, 2007
It’s a Fluctuation, Not a Market Crash: No Cause for Panic
Today's Zaman, Turkey – March 5, 2007

Why I'm the Mr. Happy of the Stock Market
Spectator, UK – March 7, 2007

And these are just from the first of 30 pages of headlines that pop up when you punch the words “stocks” and “panic” into Google news. One favorite is from Main Today: “The Sky Is Falling! Why You Shouldn’t Panic About the Stock Market.” The article soothes readers with bold face sections titled, “This is Normal,” “This is Natural,” “You’re OK,” and “You Can’t Predict or Control It.” Some measures of sentiment are somewhat oversold right now, but this is probably more than offset by an incredible, and perhaps unprecedented, collective urge to buy the dip. Even the decimated subprime mortgage area, which we covered here yesterday, is a target. In the three weeks leading up to the New Century Financial blow-up discussed here yesterday, three separate firms – Stifel Financial, UBS Ag and Bear Stearns – all upgraded their ratings on the stock. On Monday, several appeared to come to their senses saying New Century “likely faces liquidation or bankruptcy,” but then one day later on March 6, The Wall Street Journal reported:
Subprime Wreckage Entices Bargain Hunters
Some Wall Street Banks
Bet Big on a Recovery
In Risky-Loan Game

As fallout spread from soaring defaults on riskier home mortgage loans, some big investors see a recovery coming and are preparing to increase their bets on the so-called subprime market.

The article adds that “carnage only encourages bargain hunters.” The stock market rebound through the course of this week is another example of how well-honed this reflex is. The vast assortment of targets for this knee-jerk response is covered in today’s Short Term Update, which features an up-to-the-minute look at the all-the-same market scenario we’ve been tracking through a multi-month topping pattern. A good approximation of the danger to investors is captured by this picture.

               Bonzi!: The Kobe Club Ceiling with its 2000 Samurai swords

Like the blades suspended from the ceiling of the Kobe Club, a vast assortment of markets are on the ceiling and poised over the heads of investors; and relative to the usual knife-like threat of a decline, they pose the razor-sharp potential of these samurai swords. Despite the considerable breadth of the mounting declines and the likely speed that was hinted at on February 27, the subprime mortgage experience suggests that investors will try to catch them as they fall, for a while anyway. The faint of heart, says a giant media chorus, should do everything in their power to stay put. No matter what, in other words, don’t get out of the way. “The natural gut reaction is to look around for some possible ‘action’ to take,” says Canada’s Financial Post. “Unfortunately, the more one's nerves are jittery, the more one is tempted to take the wealth-reducing action known as ‘sell.’” Now that the word "sell" has become tantamount to wealth reduction, the sharp edges of a real bear market can let fly and realize full destructive capacity. 

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Your bearishness within your dip commentary is dead wrong long term. I have been buying dips since 1990 in the face of bears who have been warning NOT to buy dips since 1990. Who was right? I was. Short term Dow may drop 2000-3000 points which is JUST MORE OPPORTUNITY.
Posted by: buy the dips
March 9, 2007 01:54 PM

The Times (London) article of March 8th says it all : "if you believe that the world will soon return to the inflationary conditions of the 1970s and 1980s, you should sell everything." The terrible irony, of course, is that we HAVE been undergoing hugely inflationary conditions in assets, equities, commodities and property right through the 1990s and particularly through this decade.The only way to judge inflation is through the lens of credit inflation. The chart shown on page 11 of The Elliott Wave Theorist in December showing the diminishing return of each dollar of new debt demonstrates the astonishing level of mal-investment that four decades of rampant credit inflation has led to. The only sensible conclusion is that this will reverse leading to a deflation of historic proportion.
Posted by: Nick Marshall
March 9, 2007 01:54 PM

Th idea of the Kobe Club is a fascinating Socionomic epic in itself. Dining under 2000 Samurai swords pointed downward! To me this foreshadows what is coming for a great many Americans who will have a high probability of being fatally skewered as they try to "catch a falling knife" in a Grand Supercycle decline. Completely, totally, utterly bizarre.
Posted by: Sheila
March 9, 2007 01:54 PM

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