trotsky [ PM ]
May 18, 2007 11:20AM
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recently, former internet bubble stock CMGI has reported respectable earnings on more than respectable revenues (earning $72m., or ca. 14 cents/share on revenues of $1.14bn.). the stock has had a bit of a renaissance as well - it now trades at $2.25, up from about $1 a year ago.
of course, back when the only color of ink CMGI had ever known was a deep red, it traded at $160 share at one time.
this illustrates an important point - and imo, especially for gold investors it's a very important point - it is sentiment and herding behavior that are the main drivers of prices of stocks and other financial assets.
this also explains why stocks in China trade at almost 50 times earnings with the Shanghai index 40% above its 200-dma - it's a prime example of herding behavior, since it is clearly driven by a herd of retail investors (recently the opening of new accounts has swelled to nearly 600K per day - up from 400K/day a mere two weeks ago) who buy for a variety of reasons that range from 'how can one not win in this environment' to 'we're not afraid, the government won't let anything happen before the Olympics' (these are original quotes).
a similar mindset infests the US markets, only on a different level - in this case, it is not individuals, but institutions that are herding. as an example, mutual funds have now reached an exalted cash-to-assets ratio of 3.6% (most recent data) - which is 0.6% less than at the 2000 Nasdaq mania high. if one cuts through the bla-bla , the 'reasons' for this bullishness always boil down to the 'liquidity' argument (the wall of money from private equity, stock buybacks, money supply growing fast everywhere). only today, one analyst professed that in his opinion, the most important fact was the complete absence of any significant downside risk, due to all this liquidity waiting in the wings. funny enough, no-one has as of yet asked what 'liquidity' actually IS.
i recently told a friend it is the 'daughter of sentiment' - it is an expression of confidence, in that one of the main reason for its perceived existence are rising asset prices themselves (rising asset prices increase margin buying power, and as long as the benign environment persists, those using the most margin post the biggest returns - which encourages the use of more margin by those who have eschewed it thus far. this is more than evident when looking at how leverage has increased over time since the 2002 stock market lows).
for instance, the 'conductor' , Goldman Sachs, has increased its capital-to-assets ratio from 1:17 to 1:26 in that time period. no doubt this has provided a lot of 'liquidity' to the markets. however, the real question is, why have they done so? the decision didn't come out of the blue - it's an expression of the collective sentiment at the firm.
today, MSFT is paying a 78% premium for the shares of AQNT, the third internet advertising firm to be taken over this year (after DCLK and 24/7 media). MSFT is paying over 100 times the firms earnings as it were, and about 12 times its revenues. what could the fundamental justification be for such a vast premium? there really isn't one - it's once more the herding impulse on display ('our competition is buying i-net ad firms - we must buy one too - let's make sure our bid isn't trumped').
why is all of this especially important for gold investors? mainly for the reason that gold is if anything even more of a creature of sentiment. after all, it pays no dividend and has no yield. its main function in today's world is 'insurance' against financial calamity. more than other commodities it is driven by emotions - it is impossible to justify gold buying in terms of supply/demand fundamentals for instance (i know, almost every single 'gold analyst' out there is dragging up those supposed fundamentals, but in reality the supply of gold is sheer endless compared to annual physical demand - after all, nearly all the gold ever mined still exists).
if one considers the fundamentals that ARE actually of importance to gold (such as the speed at which competing fiat currency is created, or the real yields offered by paper money, or the uncertainties created by the indebtedness of the governments creating the fiat money), one can not explain the 1980-2000 bear market. it's impossible, since the period 1980-2000 has seen more debt creation and consequently more money supply growth than any other period before then. it follows that there was only ONE reason for gold's bear market in that time - negative sentiment. |
