Monday, May 4, 2009

USA's Obsession with Speculation Continues


Another day another bullfest!

Stocks roared higher today as the high octane stock market continued to climb a massive wall of worry. Many of us have been wondering where the next bubble might form. I think we are seeing it right now in plain old equities.

Lets state the obvious here. We all know none of this move higher makes sense given the news. When you think about it over the past few years: When has the market ever made sense? The two biggest rallies(Bear Stearns and the current March rally) have hit at a time when the news was most dire. The one conclusion I can make here is investors continue to be play follow the money and speculate.

The speculative nature of investors in America continues to amaze me because the bubbles that are created as a result of their speculation always collapse. Yet, despite pounding after pounding, they continue to come back for more. It kind of reminds me of an abused wife that constantly continues to reconcile with their ex believing that "He has changed this time!".

Lets take a quick look at some of the bubbles of recent history and see how they all worked out:

- The tech bubble. Need I explain more...NASDAQ 5000 down to 1500
- The housing bubble. Again....No explanation needed. Prices down 30%-50% from the highs.
- The OIL run from $50/barrel up to $147 and then back to $50.
- The speculative explosion in commodities like copper which tripled in price before collapsing.
- The natural gas run up to $21. Today's price? $3 and change.

I could go on and on but you get the point. The one common result here is obvious: Speculation ends in tears!

Welcome to the new world of investing folks. Investors now prefer a "speculate and gamble" investment strategy as opposed to the old school version of "buy and hold" investing.

Speculative investing of course is the fastest way to the poor house because there are no basis or fundamentals that support what or why you are buying. Speculators simply become one of the herd and jump into whatever bubble that is blowing up. They then pray that they aren't the last sucker in who proceeds to get pummeled with an 80% loss as the first ones in begin to sell.

The examples I gave you above all collapsed because of one simple fact: THE FUNDAMENTALS ALWAYS MATTER! The prices were unsustainable because the valuations did not justify the prices. Valuations are completely ignored when bubbles start to form because the investor is too infatuated with the millions he/she is going to make on his/her investment.

Remember Amazon at $300 a share in 1999? $150 oil? How about that one bedroom house in the ghetto that sold for $350,000 back in 2005? You look back today and think about how insane people were for paying such prices. This is the effect that bubbles and greed have on investors. They can make the sane go insane!

I see a lot of similarities when I look at the current 30+% bounce in equities. The fundamentals continue to deteriorate and yet we continue to see the same trend: The bad news continues to get ignored while the good news is amplified.

S&P downgraded many of the banks today and equities didn't even blink following the news.

Bottom Line:

We are seeing a full blown speculative feeding frenzy in the S&P right now. Trying to get in front of this freight train and shorting this move is not a very good idea in my view. The close was pretty bullish. I will be placing a few small short plays if we move into the 950-1000 area.

Cash is still my number one recommendation. Bubbles never end well and they seem to be almost impossible to avoid at this point if you are in the market. Treasuries even look like a bubble today as we try to sell $2.5 trillion worth of them this year to the rest of the world.

Its a pretty sad day when it appears that no investment option is safe.

I am starting to think that the mattress may be the only place left to protect yourself from losses.



Tom Cole said...

Due to soon-to-come inflation, even the venerable mattress will be a money-losing investment.

Anonymous said...

Hi Jeff.
Got a flyer today at work listing over 50 commercial properties for sale, first time ever that's arrived in the mail. Along with that came the Monday Bancruptcy Auction listings with five manufacturing facilities closing up either in the plastics / tool and die / or mold making industries. In my one industry we were put on hold on some prototype mold we're building for a Chrysler product. Now that's the reality side of the equation. The bullshit side of the equation is the crap going on in the markets. From
"IMF sees a long and severe slowdown, as of April 14, and warned of 'worrisome parallels' between the current crisis and the Great Depression, despite the drastic measures already taken by central bankers and global leaders. This nefarious organizartion, responsible for the misery in the developing world, figured out that US taxpayers would have to face bill of $1,900bn or $6,200 per person, children included, to stabilize the world economy. In other words keeping the bubbles inflated no matter what. World citizens are slowly being siphoned by the mother of all financial vacuums while the system has clearly become predatory. Zombie Banks feed off on bailout money and ultimately whatever stimulus injections. As if that weren't enough, U.S. 2008 household wealth fell $11.2TN from a year ago and 50% of them are two paychecks away from losing everything. What is going to happen once they realize that they fell for a game called ' The equity illusion'? With the system we have, massive liquidations are unavoidable, they are bound to occur since every banknote in circulation is a debt (IOU) that must be paid pack. Real money doesn't exist because if we paid all our debts, there wouldn't be any money left in circulation. Period. So it isn't by mistake that the clock ticks towards a Financial Judgement Day."
I can only think of one last thing to quote.

"This is your last chance. After this, there is no turning back. You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland and I show you how deep the rabbit-hole goes."

It's to bad we all chose to take the Blue Pill.


Jeff said...


I agree.

I will be in a big chunk of TIPS down the road as long as the treasury market holds together.

The deflationary short term risks have kept me away from them todate.

The inflation numbers in the GDP number are making me think it may be time to jump into some right now.

Jeff said...


I hear ya!

Thanks for the heads up around the liquidation and commercial data. I am not surprised. It appears GM is headed down the same path of Chysler.

Regarding the government:

These IOU's are a joke! IOU's don't pay the bills like you said.

God help us if they try to print out of this mess.

I think Wall St is hoping they can stock rally there way out of a lot of their problems.

They can to a point but the problem is way too large for this to be successful.

Once companies start going tits up confidence will crumble once again.

For now they have been pretty successful in terms of holding this bubble together with their trillion dollar guarantees.

The problem is money is getting low in the TARP and treasuries are selling off. This will not bode well for equities down the road.

Jeff said...

Nice read here boys and girls:


b said...

I don't know #rap about stocks but I have been watching the DOW climb over the past several weeks and I wonder if Tamiflu has anything to do with it??

Jeff said...


I think the fact that the swine flu is potentially sind down may have as had a bigger effect on stocks.

I see this climb as just another bear market rally for the most part.

Jeff said...

oops...winding down above...typo!

Anonymous said...

Two Good Reads;

April 24 (Bloomberg) -- Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market.

... While the Standard & Poor’s 500 Index climbed 26 percent from a 12-year low on March 9, CEOs, directors and senior officers at U.S. companies sold $353 million of equities this month, or 8.3 times more than they bought, data compiled by Washington Service, a Bethesda, Maryland-based research firm, show. That’s a warning sign because insiders usually have more information about their companies’ prospects than anyone else, according to William Stone at PNC Financial Services Group Inc."

“They should know more than outsiders would, so you could take it as a signal that there is something wrong if they’re selling,” said Stone, chief investment strategist at PNC’s wealth management unit, which oversees $110 billion in Philadelphia. “Whether it’s a sustainable rebound is still in question. I’d prefer they were buying.”
Followed By;


Jeff said...


Nice catch. I like Jesse. Thats a good read.

I found it interesting that treasuries sold like hotcakes today.

If stocks are such a buy why was there such a strong bid in the credit markets?

Post up between 6:30 and 7!

Minton Mckarkquey said...

It's really getting frightening out there - I'm with you on the cash call. There's simply zero good news out there supporting this current bounce in the stock market, and with spiraling unemployment and inflation around the corner, it's all about to get worse. A lot, lot worse.

John Maynes said...

Jeff, we are waiting...


Jeff said...