Reliving the 'Fun' Times 15 comments
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With the holidays coming to an end, my little burst of reading books (as opposed to newspapers and blogs) is coming to an end with the recent collection Panic, edited by Michael Lewis, which I got for Christmas. (I also got Snowball, the new biography of Warren Buffett, but that’s 900 pages long, so it may be a while.)
Panic contains several as-it-happened articles on each of four recent financial panics: the 1987 stock market crash, the 1997-98 emerging markets crisis, the collapse of the Internet bubble, and the thing we’re going through now. It’s long on entertainment - both the entertainment of hearing people say things like, “The more time that goes by, the less concerned I am about a housing bubble,” and the entertainment of reading legitimately good writing, some of it by Lewis himself. But given the format, it’s necessarily short on analysis, and its main point, if any, seems to be that all panics are alike: people underestimate risk, they think they are different, they do silly things, Wall Street people make a killing, and then bad things happen.
I believe the book was released in November, but it seems like the final touches were put on sometime in late spring or early summer - Bear Stearns had fallen, but Freddie and Fannie were still independent, and Lehman was just another investment bank. So the book provides this past summer’s perspective on the crisis: a collapsing housing bubble taking down isolated hedge funds that had invested in mortgage-backed CDOs, and one investment bank (Bear Stearns) for no clearly explained reason: Lewis’s own essay on the topic focuses on the inherent complexity of Wall Street firms and how even their CEOs don’t understand them. Reading the articles from 2007 and early 2008 reminds you how few people if any foresaw the impact the collapsing bubble would have on the financial sector as a whole.
There were a few especially thought-provoking bits, however.
An April article by Matthew Lynn in Bloomberg cites a study by Veronika Krepely Pool and Nicolas Bollen, two finance professors, of monthly returns reported by hedge funds. Analyzing those returns, they estimated that 10% of the returns were distorted; for example, gains of 1% were reported much more often than losses of 1%, implying that at the very least hedge funds were fudging their 1% losses upward and making up for it (or not) by fudging their larger gains downward in later months - in order to minimize the number of losing months. I think today everyone will get the reference.
In a July 2007 essay on the Asian crisis, Joseph Stiglitz seems to foreshadow the emerging markets troubles of the past few months:
Before the crisis, some thought risk premiums for developing countries were irrationally low. These observers proved right: The crisis was marked by soaring risk premiums. Today, the global surfeit of liquidity has once again resulted in comparably low risk premiums and a resurgence of capital flows, despite a broad consensus that the world faces enormous risks (including the risks posed by a return of risk premiums to more normal levels.)
Stiglitz points out that because developing countries spent the past decade amassing war chests of foreign currency reserves, they were less vulnerable to the type of panic that struck in 1997: “the fact that so many countries hold large reserves means that the likelihood of the problem spreading into a global financial crisis is greatly reduced.” Unfortunately, however, this time the problem spread in reverse - from the wealthy countries to the emerging markets - with similar consequences for the latter.
You’ll probably experience the warm feeling of nostalgia reading this book (especially when coming across articles you read at the time they were written). For me, I actually experienced the most nostalgia reading about the Internet bubble, which I spent at Ariba. (In September 2000, Ariba was worth about $40 billion, on sales of about $350 million and negligible profits. Explaining this to people, I used to say, “at our peak, we were worth more than General Motors.” That line doesn’t work anymore.) My favorite bit was hearing Jim Cramer (yes, that Jim Cramer) saying, in October 2000, that the Internet was over: “The idea that you can develop something for the Net today and have it be commercially viable is crazy. . . . It was fun for about three or four years. Oh, it was fun. It was cool. It was a really cool thing. Now it’s just something I wish weren’t in front of me.” Which reminded me of one of the best things about bubbles collapsing: All the people who just jumped on for the ride go away. -- James Kwak
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During the internet bubble, I recall countless talking heads telling us that many of the old metrics are obsolete and that new and expanded tools would be needed to fully value the potential of these new enterprises. In retrospect, the internet proved itself to subject to the old tools.
More recently, expanded P/E ratios were impatiently explained away by that such ratios are influenced (1) by interesest rates and expectations of inflation and (2) future growth prospects. While ratios have fallen from recent highs the SP500 still trades at close to 20X traling twelve month earnings...........abo... historical averages of 16 to 18.
Notwithstanding the relationship between P/E ratios and interest rates, which I should is more of a general relationship than a hard relationship, I think P/E ratios will to 15 or posssibly lower to correctly reflect the conditions of the current environment. They should fall below the long term mean in the midst of this mess.
The message is simply that fundamental metrics and financial relationships, including risk premiums, are valuable tools and should not be pushed aside to justify unsustainable market prices or preferred outcomes.
i always said does this turkey have any earnings?
the answer always was earnings don't matter jack.
at which point i just hung up the phone. the problem was the wall street journal is happy to sell their mailing list to anyone who would pay a few bucks for it, and these guys (it was always guys, gals are too ethical) just wouldn't go away. soon after that the NASD wasn't at 5000 any more.
> jack
Don't we have to completely re-think orthodox and prudent views on justifiable P/E ratios in the light of the partial, and perhaps eventually complete, nationalization of the banking system?
Adjusting expectations about what the appropriate P/E ratio to apply depending on where we are in a business cycle has surely been eclipsed by the dramatic changes to the underlying financial infrastructure.
Just a hucnh but we may be looking at a long term downward revision on not only earnings forecasts but also what is a sustainable P/E ratio for global equities.
Perhaps the most worthwhile thing for me in this article was:
"...Jim Cramer (yes, that Jim Cramer) saying, in October 2000, that the Internet was over: “The idea that you can develop something for the Net today and have it be commercially viable is crazy. . . . It was fun for about three or four years. Oh, it was fun. It was cool. It was a really cool thing. Now it’s just something I wish weren’t in front of me.”
This makes me think about where we are in the current crisis. When Cramer made his statement he was we past the denial stage, and somewhere between anger and despair. It is now obvious that his statement of over reaction (emotional) failed to recognize that great businesses and applications for the internet had been started and there would continue to be new applications in the future.
We are mostly still in the denial stage for the housing/credit/financi... market crisis, although some may actually be approaching full recognition of the problems. Anger has definitely started and great dispair will come.
Only after all this will come acceptance of reality and a new beginning.
"When Cramer made his statement he was we past the denial stage, and somewhere between anger and despair."
Should read:
When Cramer made his statement he was WELL past the denial stage, and somewhere between anger and despair.
During the internet run-up, I woke up one morning, clicked for a quote on my pet stock, and then, over the next 30 minutes, watched it go from 60 to 100. Wow! That was something. But a 75% gain in 30 minutes was not enough for me. So I held, and eventually sold at 15. This stock now sells for $4 9 years later. Another stock that I inherited from my grandmother who had held it for 80 years was acquired by a high flyer, quadrupled in 3 months, and then went bankrupt shortly thereafter.
I got so burned that I vowed to stay out of the market forever. Well I did until 2007 when I decided to venture back in because I needed income. I only wanted top quality dividend payers with strong balance sheets so I focused on banks like BofA, Citi, Wachovia, Wamu, and a few strong BDC's like ACAS, and ALD (paying an increasing dividend for 40 years!).
I am the Heard. I am every man. The more I know, the more I am likely to put myself in harm's way.
What am I thinking now? On a macro level, I am beginning to be convinced that we are headed for a financial armageddon that is unlike anything we have ever seen. The reason? The CDS market is a $500 trillion market that is about to explode and the measly couple of trillion that the central governments can throw at the problem will be like throwing a pail of water on a raging inferno.
I have been increasing my positions in gold and reducing my dollar holdings while shorting treasuries. (A bullish signal for the rest of you!).
What can be learned from this 1929 kind of crash, a lot.
I want to mention only one thing that tells it all, the returns of 15% a year from stocks are not sustainable as current market storm proves it very nicely, all previous asset valuations models from the biggest experts on finance are nothing else than a theory, in other words fairy tales writing.
The difference that will make a change for returns in the future, it's a difference of investors class.Those investors 30 years ago were there we will be in maybe in 10 years, they bought anything and it all was very cheap then, it had nothing to do with real value of stocks, economy was growing,productivity and everything else was expanding worldwide.
People had money then and luck to buy cheap, today new investor class is not active yet, their just newborn, the current investors already lost a lot and can not afford to buy, they need money for retirement that already looks half of what it was worth just 2 years ago.
Don't expect the stocks to rise too much, if markets correct 10-15% it is not because everything bad passed, it is nothing more that dead cat bounce.The market has a weakness, there is no money on the table to buy.
Mark Medayski
Elizabeth Kubler-Ross' stages are:
1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance
This anger stage, which will be next, worries a lot of people, including me. A lot can be wiped-out in this stage...
On Jan 17 10:04 AM John Lounsbury wrote:
> James - - -
>
> Perhaps the most worthwhile thing for me in this article was: <br/>
>
> "...Jim Cramer (yes, that Jim Cramer) saying, in October 2000, that
> the Internet was over: “The idea that you can develop something for
> the Net today and have it be commercially viable is crazy. . . .
> It was fun for about three or four years. Oh, it was fun. It was
> cool. It was a really cool thing. Now it’s just something I wish
> weren’t in front of me.”
>
> This makes me think about where we are in the current crisis. When
> Cramer made his statement he was we past the denial stage, and somewhere
> between anger and despair. It is now obvious that his statement of
> over reaction (emotional) failed to recognize that great businesses
> and applications for the internet had been started and there would
> continue to be new applications in the future.
>
> We are mostly still in the denial stage for the housing/credit/financi...
> market crisis, although some may actually be approaching full recognition
> of the problems. Anger has definitely started and great dispair will
> come.
>
> Only after all this will come acceptance of reality and a new beginning.
www.bloomberg.com/apps...
On Jan 17 01:53 PM stockguru32 wrote:
> I would expect an obama bump this next week followed by some serious
> problems, see here crashmarketstocks.com/
It is like genetic sharing between bacteria, once banks figured out what shennanigism was being done by brokerages that too started copying the same behavior leading to the exinction of one species (the brokerages) and the collapse of the other.
As for the Internet business. Things get a bit frothy sometimes but technology ploughs on leading to cultural benefit. Without it we would really be aware how much less we have today than we had say 10 or 15 years ago. That is unless you are living way beyond your means which is the casuse of the 2nd bubble (housing). What we are doing to solve that is frightening.
that said, I am going to help you out here:
1) Take 1/4 of your gold money and buy TNH - wait until we get the next 200+ point down day in the market - don't buy it on an up day.
2) Take the 2nd 1/4 of your gold money and buy CHW. Same thing - wait for a down day.
3) Take the 3rd 1/4 of you gold money and buy USO - (look at the 12 month chart - remember the key is to buy low!) and again, wait for a hard down day. Or if you want dividends, buy PWE, PGH or BPT instead.
4) Take the last 1/4 of your gold money and buy IBM - wait for a hard down day.
5) Take all dividends in cash and pay off charge card debt with the $$. If you have no debt, use all your dividends to buy NRO and HSA, 100 share lots minimum, buy only on down days.
6) Turn off your trading software and ingore these new holdings for at least 3 years. When you next look after that, you will be pleasantly surprised.
7) Good luck.
On Jan 17 12:30 PM mrfreddo wrote:
> Someone should put me in a room, give me a computer, and when I jump
> in to something, just make the opposite trade and you would be rich
> beyond belief.
>
> During the internet run-up, I woke up one morning, clicked for a
> quote on my pet stock, and then, over the next 30 minutes, watched
> it go from 60 to 100. Wow! That was something. But a 75% gain in
> 30 minutes was not enough for me. So I held, and eventually sold
> at 15. This stock now sells for $4 9 years later. Another stock that
> I inherited from my grandmother who had held it for 80 years was
> acquired by a high flyer, quadrupled in 3 months, and then went bankrupt
> shortly thereafter.
>
> I got so burned that I vowed to stay out of the market forever. Well
> I did until 2007 when I decided to venture back in because I needed
> income. I only wanted top quality dividend payers with strong balance
> sheets so I focused on banks like BofA, Citi, Wachovia, Wamu, and
> a few strong BDC's like ACAS, and ALD (paying an increasing dividend
> for 40 years!).
>
> I am the Heard. I am every man. The more I know, the more I am likely
> to put myself in harm's way.
>
> What am I thinking now? On a macro level, I am beginning to be convinced
> that we are headed for a financial armageddon that is unlike anything
> we have ever seen. The reason? The CDS market is a $500 trillion
> market that is about to explode and the measly couple of trillion
> that the central governments can throw at the problem will be like
> throwing a pail of water on a raging inferno.
>
> I have been increasing my positions in gold and reducing my dollar
> holdings while shorting treasuries. (A bullish signal for the rest
> of you!).