The Next Bubble 23 comments
-
Font Size:
-
Print
- TweetThis
Famed scientist Liberty Hyde Bailey was quoted as saying, "Every decade needs it own manual." What does the investment manual say about this decade? It says we have gone from one bubble to the next with each burst leaving us worse off than before. Tech hasn't even recovered half of its value from Nasdaq 5,000 nine years ago. Most of the financials (XLF) have been decimated 70%-90% because of the lending/housing bubble. Now we are seeing the fallout from the commodity bubble. How long before the automotive industry recovers? How about airlines? Will agriculture stocks like Potash (POT) or Agrium (AGU) ever regain their bubble inflated highs? Such consequences have not been good for the broad market; the ten year return on the S&P 500 is an anemic 4%.
So what is the cause of this short sighted investment euphoria? The cause can be traced to the hedge funds. PerTrac reports that over the last ten years the number of hedge funds has increased from 600 to 13,600. Assets under management have skyrocketed from $100 billion to an estimated $2.2 trillion. Hedge funds have become mainstream in a way that was never intended. On any given day 25%-60% of global trading is handled by these unregulated funds. Knowing that each of these hedge fund managers are forced to cope with +20% return expectations you can see why momentum has become more indicative of future stock price than fundamentals. These managers need quick returns and they'll go to any length to satisfy investors. Their use of leverage, long, short, and derivative positions during volatile times has caused this decade to feel like the wild, wild west.
As oil (USO) continues to drop and we deal with the bursting commodity bubble the question on investors minds is-will we see another bubble? As long as hedge funds exert this kind of influence on world markets you better believe we will see more momentum mania. For the time being, the momentum play is to pick off the weak financials. Once the SEC removed the temporary ban on naked short selling it was all systems go to profit from the demise of Lehman (LEH), Washington Mutual (WM), and whoever will be next. Reaching a bottom to the credit crisis only happens with industry consolidation and the Fed's already set the precedent that consolidation will wipe out shareholder value. As a result, the market bears remain in control.
While this current action keeps everyone busy, other market cycles are beginning to emerge that have set the stage for the next hedge fund bubble. Struggling overseas economies combined with the steady climb of the US dollar leads us towards US equities. Record amounts of cash are being pulled from oil and other commodity funds along with the international outflow. That cash needs a place to go. The stock market will heal before the US economy, as is common during recessionary times. Certain sectors within this market will separate themselves to become like their own asset class, just like oil has done.
Stay tuned for part two of this article as I analyze which sectors will receive the coming boost. In the meantime, check out our stock and option LEAPS picks at www.lonepeakportfolios.com. This is a key market moment as we consolidate financials and phase into the next bull market. Many investors are feeling the fatigue of a difficult 2008, don't worry, there have been many positive developments in the midst of the rough times. Those positive developments are close to revealing themselves as investment winners.
Disclosure: Short USO, Long UUP.
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Philip Davis
-
3
Bill Gross
-
4
Tyler Durden
-
5
TraderMark
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 23 comments:
"...we have gone from one bubble to the next with each burst leaving us worse off than before." Such incredible, easily discredited nonsense.
"Tech hasn't even recovered half of its value from Nasdaq 5,000 nine years ago."
So now what you're saying is that there was a bubble. No kidding. But your premise was that bubbles leave us "worse off than BEFORE" [emphasis added]. The tech bubble can logically be defined as the period of 11/01/98-2/22/01, using the NASDAQ's divergence from the S&P 500 as the definition. Prior to this period, the NASDAQ tracked fairly well with the S&P500, as it did following this period. So where were the markets at the beginning and end of this period? NASDAQ up some 22%. CLEARLY, not worse.
"Most of the financials (XLF) have been decimated 70%-90% because of the lending/housing bubble."
The start of the housing bubble is harder to define; I'm going to say Q203. What's interesting about this is that the financials, which you say were decimated by the housing bubble, did not experience a bubble in their prices compared to the larger market. So in April 03 the XLF was at 21.93. Today - 21.45; not much worse. Now, the financials pay much more in dividends than most, so this doesn't tell the whole story, which is that the XLF's performance over this period is somewhat better than what the XLF shows. Also, I would argue that the XLF is oversold, and that it will be considerably higher once the market normalizes following the bubble.
"Now we are seeing the fallout from the commodity bubble."
Which is what? MUCH higher commodities stock prices than before the bubble?
"How long before the automotive industry recovers?"
The auto industry will respond to this shock, producing better cars that are more efficient, and will come out just fine. In this case, the commodities bubble clearly makes society better off in the longer run.
"Will agriculture stocks like Potash (POT) or Agrium (AGU) ever regain their bubble inflated highs?"
You don't even notice that you're not arguing your central thesis, which was that bubbles make us worse off, do you? The top is not what's important - it's the overall effect of the bubble.
"Such consequences have not been good for the broad market; the ten year return on the S&P 500 is an anemic 4%."
Your assertion of causality is completely unsupported. You could just as easily blame the S&P performance on George Bush's economic policies. I know you wouldn't, though, since you wrote that Sarah Palin's convention speech had "struck a cord with businesses across the country" before almost any of those businesses had opened for business the next morning.
"So what is the cause of this short sighted investment euphoria? The cause can be traced to the hedge funds. PerTrac reports that over the last ten years the number of hedge funds has increased from 600 to 13,600. Assets under management have skyrocketed from $100 billion to an estimated $2.2 trillion."
First off, what you're saying here is that the largest bubble - the tech bubble of 2000ish - was NOT caused by hedge funds. Pretty serious wound to your argument. Secondly, are you saying that hedge funds caused the second largest bubble - the housing bubble? Of course not. Now your argument has two very serious, self-inflicted wounds.
What makes much more sense is that the hedge funds are the best able to profit from the inevitable popping of these bubbles, because they are able to make up a much larger percentage of all short positions than they are long (though I've no data to back this up, just consider that most of the largest mutual funds have ZERO short positions). As such, it may be that hedge funds help to resolve bubbles more quickly. It's possible that in the case of the financials this acceleration is undesirable; in general, however, I believe most economists would argue that getting through the pain faster is better.
Which would mean that in general, hedge funds are helpful!
Tech is now a a solid supplier and makes solid returns but still have overvalued stock so yields are and will remain low.
The Finance bubble is based on dishonest balance sheets that owe more to fiction than accountancy presented by dishonest fianciers. Their shredded Balance sheets will take a decade to repair and restore - if they survive.
The best strategy is put your capital where it makes a modest guaranteed return and have a handy lump (say 20%) for special situations and aim top make a modest doubling of the gambling pot every twelve months overall so you can aim for 10% return after inflation.
S & P 4% decadal yield - is that a surprise ?
Currently hedge funds are doing VERY poorly. The problem with any type of fund is that when a few are doing it, it works, When everyone is, nobody makes any money, hedge fund or not. Why? Because the once everyone targets the same stocks, they are quickly played out. The black box boys are hurting bad this year.
Here you go:
news.moneycentral.msn....
Always apply the sniff test with one eye on the clock. Too much $$ made too easily is always a prime indicator. Nothing is too far a stretch--even tulips. Often present is-"Pssst--water makers-(use any sector)-- are set to explode--Big Time!!". Mini bubbles smelling like methane gas, recently exited with big unfounded gains pop by the hundreds is the speculation swamp.
Go look at the chart of these banks. The exponential rise in each of them looks like they are biotech startups, not mature, stodgy financial institutions. How did all that happen? Hyper leverage on credit. So now that they are unwinding all of that, it's a hedge fund attack.
Get real. This is the insti long bailing on companies that never should have bubbled up in the first place.
The difference with POT, MOS, etc. is that fertilizer prices are still rising as we speak, unlike the grains, oil and precious metals. So with the underlying commodity price still rising and the value of the stock down 30% or more, I would suspect you haven't seen the end of the AG "bubble" as far as the fertilizer companies are concerned.
Just something to think about. I found it interesting.
From page 19 of the Berkshire Hathaway 2007 annual report.
The author's thesis (hedge funds are the cause of volatility) is bogus; there are many different kinds of hedge funds with different strategies and styles; they have a decent chunk of money under their control but they are dwarfed by the bond market and even the overall equities markets. They are big players, to be sure, but they do not necessarily act in concert and they cannot move deeply liquid markets by themselves. Nevertheless, his conclusion that there is sure to be another bubble is spot on. Paper money is plenty cheap for those with good balance sheets, and it has to go somewhere. Every sensible trader has to be wondering where that somewhere will be, because if anything dollars are about to get even cheaper when the Fed makes its next rate cut.