The "Speculator" Well has run Dry

A few random thoughts today:

I continue to be fascinated by the "schitzo" market that we now see before our very eyes. The markets in the new millennium are definitely different than the markets from previous century.

I blame a lot of this on the "speculator" money that has taken over a lot of the price action that is seen in the markets. Hedge Fund growth has soared and the larger ones now rival some of the investment banks in terms of assets. E-trade signs up 3000 new "daytraders" a day which just enhances the speculator froth.

Computer "quants" continue to grow and add to the confusion as they trade billions of dollars based on price movements in the stock markets on a day to day basis. Heck, its gotten to the point now where the quants seem to be making trades based on minute to minute price action.

So where does this leave the long term investor?

LOST! Its gotten to the point where its hard to make any long term calls because the stock movements are so violent on a day to day basis. Financials can rise or fall 10% each day depending on the news.

This makes it very difficult to buy stocks as a long term investor. If you buy on the wrong day, you may find yourself 10-20% underwater in a matter of days if bad news hits the markets. On the flip side, bear market rallies can toast the shorts during the same time frame.

So how did we get here?

Speculation, greed, and bubbles. Its pretty simple, when you have 25 straight years of prosperity(minus our little tech mess) and consumer growth, you forget the value of a dollar. As a result, you throw money around like candy thinking that you can always make more if you make a mistake.

We were quickly able to recover from the tech mess by simply blowing up the housing bubble. This was an easy recovery because the banks were very solvent and unemployment stayed at fairly low levels. When the Fed dropped rates to almost zero and held them there, the banks took the money out of their coffers and turned into Santa Clause.

If you had a pulse and job you were qualified for a loan! All of this easy access to money fueled the "speculation" mentality that now dominates our society. As a result, when the bubbles were allowed to form like housing via Fed policy, Wall St. and the speculators went hog wild buying and selling homes like they were baseball cards.

The mania of easy money spread into all parts of our economy. It gave private finance the ability to buy a huge car company like Chrysler. Homeowners borrowed against their home equity and bought Hummers and went on dream vacations. Americans stopped saving because they assumed their "home" equity was real money. Life was good until the music suddenly stopped.

So where are we now?

This is what the speculators are now asking themselves now that commodities are in a free fall. This was the last bubble left from the bull market that began in 2003 IMO. The bubble days are over folks. The easy money is gone, the banks are broke and so are many Americans.

The specs are now attempting to rotate into stocks. This move up has been moderatley effective so far but it will fail in the long run. Why? Because the economy sucks!!! Unemployment is creeping up towards 6%, the consumer has disappeared, and housing prices are free falling.

On top of this, the financials are broke and more importantly have lost their ability to make money going forward. Their business models are completely broken. Almost all of their profit was based on housing which is now dead.

So I ask one final question

When reality sets in and poor earnings are unable to prop up stock prices, where do the speculators go next?

My answer is nowhere. You must have liquidity in the market in order to raise the value of stocks or assets. Something has to have value or it will eventually fall in price. Right now there is very little value in stocks as we head into a consumer led recession.

When the speculator is forced to rotate into another sector and they realize there is nowhere else to go is when the markets are going take a big nosedive.

The rotation from commodities to stocks trade is working for now. What the speculators don't realize is they have rotated back into stocks that are littered with garbage, potential shoe drops, and reduced earnings power.

I am amazed at the piece of crap companies that have doubled during this rotation. MBIA, Ambac are up 100-300%. Hell even Washington Mutual is up 20% since this absurd rally started. Based on what? Do we now all of the sudden pay more for zero earnings growth? Is the stock market now valued based on how much money a company loses versus what it earned? This is insane!

Bottom Line:

History shows that stocks always end up being valued on earnings. Expect nothing different this time other than it might take a little longer.

I say this because the speculators have a lot of money to piss away after having so many years of easy money.

Chasing stocks like Ambac and MBIA tells you that the speculative money is desperate and cannot find any value in the market.

As the speculators run out of investment vehicles to chase, the market should get back to historical norms.

Until then, realize that there are major dislocations in the market. Stocks historically have been most vulnerable when these dislocations occur.