<<Do you really think we are in a bubble at this point, Cosmo?
I am thinking more in lines with the discussion that has taken place here from time to time regarding "stages" of both the "oil business cycle" and the "market emotional cycle" that comes after each phase.
In the business cycle I label these as: 1) Bust phase 2) Pre-Recovery Phase 3) Recovery Phase 4)Boom Phase.
In the "investors emotional cycle" I call these the: 1) "singing the blues" 2) Value investor Phase 3) Speculative Phase 4)Momentum "Greed" Phase 5) "Musical chairs" phase.
In the business cycle:
The Bust phase occurrs when the oil/gas supply/demand curves cross either through increased supply or reduced consumption because of a slowed economy reacting to the increased prices.
The Pre-Recovery phase is when efforts are made to shore up the price of oil through supply cuts, or where the economy heats up because of the lower cost of oil to increase demand
The Recovery stage is where producers gain enough faith in the price of oil to invest resources.
The Boom phase is when the price of oil/ng is so high due to shortages that everyone and their brother is out drilling.
The Bust phase is when the oil/gas supply/demand curves cross and overshoot in the opposite direction, either through increased supply or reduced consumption because of a slowed economy.
In the "emotional investor's cycle:
The "Singing the blues" phase occurs after the music has stopped and the last ones in find themselves holding the bag and sitting on the floor after the musical chairs music has stopped. Risk/Reward is horrible. The stock price will continue to fall as business conditions deteriorate.
The "Value investor's" phase occurs as an end to the bust in the business cycle is way off on the horizon and it is not perfectly obvious that 10 dollar bills are lying around and the management is charging a buck apiece to pick them up. Risk/Reward is incredibly good, but it looks like "dead money" for a while. The "bust" business phase and "singing the blues" emotional phase are long gone. This is the "shooting fish in a barrel" ,Warren Buffet slept here" value investor emotional phase.
The Speculative phase occurs when it is apparent that something is going on. There have been positive developments in the business environment, but they could turn back at any time. There have been significant moves in the stock price, but due to the uncertainty in the business environment, could fall back as well, or move forward. Risk/Reward is very good.
The "Momentum Greed" phase happens when it becomes obvious to the general public that "this is the place to be". Risk/Reward is marginal. Stock prices are rising rapidly. P/E ratios are becoming less an issue than the fact that "wow..look at that baby go!"
The "Musical Chairs Fear" phase occurs whenever a news event turns the music off, and the scrambling to "run for the exits" occurs, the fat lady is waddling up to the bubble with a needle in hand, and people realize its pretty stupid to pay 10 bucks for a dollar bill.
Well, with those explanations, you can see where we have been, and where we are now. Obviously, individual companies are at different points in both cycles, but I see, in the aggregate that in both cycles the very next phase is where the money will flow elsewhere from oil.
In March of '99, that early phase after the OPEC agreement was like shooting fish in a barrel, but the fear was the prices wouldn't "stick". During the Pre-Recovery phase, "true believers" and value investors made quite a run. The market swung up and down as people followed whether or not the higher oil prices would truly "stick". Later, as Recovery was obvious fund wizards bought in. Most companies are either just exiting recovery or well into the boom phase. And in the emotional cycle, we are exiting the speculative phase and entering or well into the momentum greed phase.
"Everyone knows" that oil is a "great investment" that the "greedy oil companies" are "making out like bandits". The general public is buying either stocks or "energy funds. Speculators are maxing margin and huge influxes of "artificial" money is driving up prices hard and fast.
This is the part of the cycle I think we are currently in for E&P's and some OSX stocks...the massive "why everyone knows these are great buys, cause, look, they are going up" attitude.
Unfortunately, this is where so much money can be made, but where the opposite occurs for the unfortunate players that land on their a$$ instead of a chair when the music stops. These will be the players who either enjoy a good game of chicken with other investors or DON'T HAVE A HISTORICAL PERSPECTIVE OR A GREAT GRASP ON FAIR EVALUATIONS.
Looking in a mirror, I come up lacking next to the other players who will outplay me in this phase of the game.
So, perhaps I used the term "BUBBLE" a bit loosely, but this is what I mean by it...mo-mo action that breaks free of fundamentals. And it is coming, and is here for some selected companies playing at a brokerage house near you...
BUT, Warp, you are absolutely correct in comparing to evaluations on a historical perspective.......
Perhaps the discussion should turn in this direction?
Regards,
Cosmo |
