Last month, I was having a conversation with one of our portfolio managers, and on the subject of a higher interest rate environment, he mentioned why stocks just didn't seem to be adjusting as one would expect with present-value based valuation models: people just don't seem to care about having interest rates go up to 7 or 8 percent if they can get rocket returns like 50 to 100% from the market.
Then this week, I went to the local book store and found a book called Once in Golconda: A True Drama of Wall Street from 1920 - 1938.
Hmm. Fortuitous timing.
Turning to the section that surrounded the period before the great crash, I read:
"...But how could an interest rate of 8 or 12 percent a year deter a man, or a woman, who fully expected to use the money to make a profit of 100% in a month or even a week? Traditional monetary restraints were useless because they had come too late. The speculative virus was past being checked by that medicine..."
That sure sounded familiar. And here's another passage that might sound familiar, based on my previous post:
"...The market didn't crash at once. Large segments of it had already been depressed a year or more. The 1929 boom was, in fact, quite a narrow and selective one (the index heights reflected the high-flying stocks that were included as part of the index calculation).
...As a matter of fact, a good part of the stock market had been more or less depressed all through 1929 (most stocks in September 1929 were already off 20-50% before the break occurred)..."
Some other randomly placed observations:
- Margin levels continued to rise through October, though a a somewhat pessimistic atmosphere surrounded the market. Despite these higher levels, why wasn't the market at higher levels?
...and to appear in tomorrow's Wall Street Journal:
"...The amount of debt that investors took on to buy stocks in January shot up to another record even as the value of stocks fell, raising fresh concerns about speculative activity on Wall Street..."
January ended down, yet margin levels are rising. Oil also hit $30 a barrel today. And another passage from the article:
"...Margin debt now equals 1.57% of market value, equal to its peak in the fall of 1987 ahead of the October 1987 stock-market crash, according to Bianco Research..."
All right, all right. Enough bear talk. Just some things to consider when you think about getting extended at these market levels. You might want to do the prudent thing and at least hedge your longs.
Rainier |
