Carl,
Only today did I make the time to read your previous post.
It's the kind of stuff I hoped to get on this thread.
Some comments on the subjects you invoked in your posts-
1. `90s and `20 parallels - Agreed. Here's a broadening of the subject.
The `20 were the times when the industrial revolution's outcomes took a firm grip on the human environment. It was a new era. An era which started in the 1880s with railroads, internal combustion engines, and the car and the airplane in the 1890s. 40 years later the changes that were introduced to human existence and daily lives were so apparent that the public noticed them and new era hype + goldilocks economy drove stock prices sky-high. Elvin Toffler described in detail the changes in human lives caused by the industrial revolution in the opening chapters of his book "The Third Wave" which I recommend. Toffler speaks of the third wave, which started in the mid `50s and has an impact of the same magnitude over human environment as the industrial revolution had. 40 years later we're at the peak of the third wave, with goldilocks economy and new era hype, and stock prices
express the mistaken public's expectation that things can get better, when actually they're at their best.
2. The demise of the archenemy -
Years after it's demise, the generals are still fighting the beaten down inflation. Any sign, however minuscule, of a possible inflationary process, is met with heavy artillery. Inflation is dead, and nobody
seems to notice, they're still poking the rotten body to see if it moves. After a market collapse, depression will bring deflation, when too many goods will chase too little money. Interest rates will drop, but real interest will be moderate. Supply of loans, however, will be tight, because financial institutes will be very careful after much of the abundant credit of today will turn bad.
3. The behavior of investors and the stock market -
I agree with your description of "what makes the markets move", and just loved your explanation why mutual funds fail to meet the indexes performance, which had the ring of truth to it. I am convinced that the market is not random walking and that Harry Seldon will develop the math that would anticipate it's larger moves. The fractal wave within a wave nature of the market is self evident, and I found on numerous occasions Elliott's wave theory to be accurate. What I would like to add is the sawtooth nature of big moves. Once a long term up trend is established in the traders' and later public's mind, it will accentuate. The last leg of a bull market is usually the steeper one. On the hidden assumption that a trend could last forever the public is easily tricked into paying ludicrous prices for the accelerating stocks. No trend lasts forever, and when the wind changes direction, the decline is much faster then the rise. After the market is being cleared from all scrapes of the fall, in a long incubating period when nobody wants to hear about stocks. In a crash, do not be tempted to bottom fish before the incubating period begins. You'll have plenty of time for it. Look at the chart of the `29 crash at lowrisk.com and see for yourself.
4. The human nature and the change of trend.
I was told a person can lose a strong habit, like smoking, after three weeks of refraining from it. IMO it takes at least that long before the public notices a change of trend. So I believe the time for a panic exit is between three weeks and two months after a top has been established. Working with scenario A (no new highs) with top in on 8/6, BK time is between 8/27 and the end of September. It's less then two months cause IMO the change of trend is very clear this time.
5. Derivatives vs. margin
I agree derivatives are the equal to 1920s margin, but with one crucial difference: The options game is a zero sum game (minus sum when you deduct commissions), while, as you mentioned, in the long run stocks do give substantial return. There is the cost of margin, but I believe that as a whole, the cost of option play is higher.
6. Pricing of stocks
I'm mostly T.A. oriented, not a fundamental investor, but as I see it, in the pricing of a stock one should look also at dividends. Those will not be reflected in future book value cause the company already gave them away. You cannot escape incorporating future earnings in the assessment of what a company is worth, one way or the other. Price to book is in my mind one of the best indicators to estimate how high is the market, since earnings do fluctuate a lot, but should not be so heavily counted on when trying to figure which stock to buy. I would want to buy stocks that I believe others will want to buy tomorrow, and the smarter you are, the longer it takes.
ATG |
