The Market's Fictitious Infallibility
Upon reflection, the odd thing about the past ten years is how I have felt about the market through much of this time.
And my dominant feeling for the majority of the past ten years, depending on the market, has been “Wow, this market sure is stupid.”
First there was the dotcom bubble, where investors, in their “wisdom” bid up Talking Sock Puppet companies to market values in the billions of dollars even as those companies often had a mere few million dollars in revenues.
Then came real estate. We spent a good deal of our time in the first year or so detailing the idiocy of the real estate bubble in both residential and commercial real estate. Two years ago, the all-knowing market thought it wise to bid up commercial property rates to cap rates of 3%-4%. Dividend yields of 3% on REITs were rationalized as being appropriate because of the infinite growth in lease rates that lay ahead. Today, dividend yields on REITs are around 15%.
Next were the commodities. Investors figured that potash prices of $1000 a pound were rational. Coal stocks such as Patriot Coal (PCX) nearly quadrupled in four months. PCX then fell from $80 to $8 over the next six. Oh, but the market got it right in the summer, didn’t it?
Let’s not forget credit. Less than two years ago, junk spreads were at all time lows. Emerging market sovereigns were trading as if they were on the verge of becoming developed world credits. (Okay, Greece and Italy, but still developed world.) The infinitely intelligent market was telling us how low bankruptcies were and how the world was in the midst of the strongest period of co-ordinated global growth in its history.
Sure is smart, that market.
Today, the market is throwing out risky assets and putting them on sale as never before. From junk bonds to investment-grade bonds to stocks to commercial real estate, anyone with a time frame longer than one’s nose is able to buy risky assets at remarkably stupid prices.
This morning on Bubblevision FinancialVortexVision, I watched one of the talking heads argue that the market is always right. Well, thinking about the past ten years, watching the market over-react to just about everything, I have to disagree, at least if your time frame is longer than your nose.
But the market does not care one damn bit what I think. Mr. Market will do whatever it wants. And Mr. Market will do anything it wants.
If you are playing the long side as a trader, this is a horrible market. It still feels heavy to me and there is probably more downside to come.
If you are playing the long side as an investor, however, the market is offering up what may be a generational opportunity to buy.
I remain a buyer of (almost) all things risky. I care not that I am early.
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This article has 6 comments:
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Smarty_Pants
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1114 Comments
My Website
Dec 02 04:53 PMMost speculative manias of the past stemmed from an initial ballooning of easy credit which fueled the booming asset price whether tulips, south sea trading companies, dot com stocks, or real estate.
Each time the easy credit poured into the asset until it built the 'knowledge' that prices on tulips/foreign trading companies/dot coms/real estate always goes up. Prices become so high that leverage comes into play, at first to multiply profits but eventually just to get a foot in the door. Prices zoom on a foundation of cheap debt,
Until ...
everyone discovers that speculators can't pay off the debts and the 'knowledge' of ever increasing prices unravels, then unwinds, and finally plunges. Often to levels as far below rational as they were above.
Speculative manias aren't new, just different and usually more than a generation apart. Long enough for the society to forget the lessons from past manias.
Be careful that the overshoot to the downside runs its course before snapping up what appear to be bargains. Despondency can spread as far as mania can.
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DougM
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110 Comments
Dec 02 06:39 PM-
jepittman
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287 Comments
Dec 02 09:52 PM-
RatWatcher
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23 Comments
Dec 02 10:28 PMOn Dec 02 06:39 PM DougM wrote:
> Risk assets? Are you serious? No matter how many dollars Bernanke
> prints up nor how big Obama's deficits get, the entire world is going
> to keep spiraling into deflation. All those billions of people in
> China and India are going to go back to a peasant lifestyle. The
> place to be for the next 30 years is US treasuries paying south of
> 3.5%. Lock in those high rates of return now while you still can!
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The Bumpf
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1 Comment
Dec 03 12:34 AM-
CJJ
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19 Comments
Dec 07 09:23 PMAll of the doom and gloomers who seem happy that a depression may be on its way, or the 100 year bear market Paul Farrell foolishly is calling, don't realize that if anything a tenth as bad as you are calling for there won't be a market in 100 years. At least it won't be the market out there now. Long before that there would be widespread war(and not the near past type of war, but a war where countries took control of the land and resources of their winnings) or there would be a completely new system implemented.
Walmart is part of the problem and you want them to be the only company around.