And now a few words from my favorite bear...
This allied with the Japanese who are taking their money back maybe we've been told (with reference to David Mammet's "Spanish Prisoner) "....I'm afraid you're just going to have to spend some time in your room alone"...
Will this rattle the bars of the cage here.
(C) William Fleckenstein 2.5.99
For Private Use Only
"....Banks ready to blow?... The bank stock index was heavy once again today. Now I haven't talked about this recently but it's a big focus that we discussed last year. Folks should not forget that these banks are not just interest-sensitive vehicles but they also have gargantuan amounts of derivative exposure. Therefore, they are potential ticking time bombs that may make Long Term Capital seem like small potatoes. It is staggering to note that judging by recent statistics, it's believed that our banks have about $28 trillion - over three times GDP - outstanding in derivatives in the form of swaps, futures, options, forwards, etc. About 90-95 percent of this is thought to be in the eight big banks.
It's quite possible there are more derivative problems going on. We've had many different kinds of problems around the globe, and with the exception of Long Term Capital there have been damn fewer derivative-oriented problems than you might have expected, given all the huge moves in currencies, bonds and equity markets. So I continue to think that these banks potentially are a source of real trouble. Maybe that's why the Fed panicked last fall. It was worried not only about Long Term Capital and the stock market and the banks, but also about what's going on in Japan and China and Brazil - obviously that bailout has been a disaster. I focus a lot of the Rap on tech because that's sort of the epicenter of the mania. But the black hole department is still the banks. And, of course, no one can really know what's going on because the accounting is so bogus - something we've talked about in past Raps.
and on the market in general...
Crash course... To follow up on what we talked about yesterday in terms of people potentially getting trapped in stocks, here's the psychological backdrop that helps create a crash. And I want to quote from InvesTech Research, written by Jim Stack.
"So Wall Street and the Internet mania are enjoying three big groups of participants: those who don't realize they're playing in a valuation bubble; those who don't care whether they're playing in a valuation bubble, i.e. mutual fund managers; and those who do care/recognize that it is a probable bubble, but don't believe the Fed can let it end while emerging markets are melting down. The latter group will be the first to panic, so it is important to keep an eye on the same triggers they are monitoring."
I think that's important psychological factor to know. If people understand that it's a bubble - and some clearly do and are participating - that's what can get a real meltdown started: If something happens that make people think, "Uh, oh, this is finally it."
Outsmarting the bubble... In terms of the numbers of credible people who now believe it's a bubble, we've talked about the Economist magazine addressing it, and others. None other than Ed Hyman, Wall Street's number-one- ranked economist for ages, in his morning fax, had the following headline: U.S. stock market bubble does not equal Japanese stock market bubble." He says, "Toward the end of Japan's stock market bubble the inflation and financial asset prices spread to goods and services. Interest rates rose. The U.S. stock market is in a bubble but the inflation and financial asset prices have yet to spread to goods and services. Until it does, the U.S. bubble is probably still in an 'early phase.'"
Well, that may be, but it might not be - we just don't really know. One thing we do know is there are a lot of smart people in this bubble who think they are going to get out, as typified by this response. But it doesn't have to end that way. The bubble we had in 1929 did not end that way. It didn't end in rising prices and some of the other things that happened at the end of the Japanese bubble. This sets up a potentially very destabilizing factor in that a lot of people think they can outwit the bubble.
The real big message is, nobody can. If you recognize it's a bubble and you get out, yeah, you're leaving the party early and you at least have a chance. But if you get try to get out too late, by definition it's too late and you can't do anything. And this bubble being as big as it is, and given the history of bubbles, it means most people will give up a lot of their gains, and the economic damage that comes afterward is horrific. I don't see how people can be so content to know it's a bubble. Why aren't people up in arms screaming to have some sobriety brought to the process and end this thing, because the aftermath, as we've been discussing, is horrible.
Another flash in pan?... So it was a day in the early going like we haven't seen in a while: bonds weak, stocks weak, metals firm. We'll have to see if this is a flash in the pan or the start of something. From a sentiment standpoint, it's hard to believe that things could get more lopsided. The Investors Intelligence bulls/bears ratio shows the percentage of bulls keeps climbing and the bears keep shrinking. You look at the put/call ratios and they are getting more lopsided as well. We've split every stock over $100 and we've got people loaded with paper coming out their ears.
If there ever was going to be a time for a setback, this could certainly be it. God knows the market is due for a decent decline, even if it's going to move onward and upward. It smells to me like we're going to get a little punishment in the tech sector for a while.
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