Friday, May 04, 2007

Bubble Markets Abound

Let’s see we have a housing bubble, a credit card bubble, and now I suggest a stock market bubble. Notice that I am not whipping out a bunch of charts to prove my points, just some thinking that suggests that there are discrepancies in the widely held mind set.

If you were in the market back in the 1970’s, it didn’t matter what you bought, it didn’t go up or down. It was like watching paint dry. Now the dividend was another story. This was where the money was made.

Let’s fast forward to today. If you bring to market a stock for "Cosmetic Dentistry for Dogs," a lot of investors’ will buy it. There is no concern as to the dividend rate; “Hell that’s taxable, give me growth!”

If you go back to the housing bubble there was a similar situation. The cost of ownership became financially impractical when considering the cost of renting the same property. This same problem occurs with stocks. If they go up forever, there is no problem. But if they stop appreciating, then the only thing that sets them apart from an interest bearing bank account is the dividend.

Using Big Blue as an example, IBM is at $102 and paying $1.60 per share. Let’s figure over a 10 year period it doesn’t budge in price. In this scenario, the return from a saving’s account would return three times more than the IBM investment. Looking back to 1984, IBM was at 124 and paid $4.20 in dividends.

Notice how the logic of the last paragraph falls apart, if stocks take off and go up another gazillion points. Notice also, the mind set of the investors that bought into the real estate market. “Real estate always goes up.” We know where that thinking could lead in the end.

The stock market has been going up since 1982 and has not had a 5,10 or 20 year bear market in the interim. Very few people can remember back to when the market was a cruel master.

You could argue that the market is fairly priced, (if you figure for inflation) and I would have no argument with that. But, if you consider the lack of reasonable dividends to support the present prices, and the absurd prices for stocks that have no dividend or earnings, you have to realize the market is not functioning on a rational level.

The baby boomers are not going to be interested in growth when they retire, only interest and dividends. They will be trying to preserve their principle and live off of the interest.

Something is wrong. Everyone seems to be a professional trader. It defies logic, that every household using a discount broker, knows what they are doing. People are placing bets and making money. They must be doing something right. This has no grasp on reality, if you compare it to the investment environment of the 1970’s.

The contraction of the money supply has started. Housing foreclosures nation wide are a good indication of that. Marking all of this housing to market, is enough to give the note holders spasms of the lower colon.

The housing bubble is obvious, the credit card bubble is a little hidden, and the stock market bubble—who knows. If gas goes to $40 per gallon, then we know that there is no bubble, just your ordinary hyperinflation. That concept is the one I don't want to entertain.


Anonymous said...

The baby boomers are holding a lot of the paper in our hyperinflated economy--at least 60% I'd say. When they want to reap what they've sown there is going to be a big problem--it will destroy a generation's economic health, and they'll be too old to do anything about it. Gen X can't do anything about it, and neither can the echo-boom. There isn't a demographic out there that can absorb all of the stock and real estate holdings of the boomers when they want to cash out.
The easy prosperity of the baby-boomers used to fill me with resentment. From the get go they've had the best of everything. But at least when what happens happens, I'll still be young and productive enough to adjust to whatever comes before I get old. The boomers are about to pay the piper--I really feel bad for them...

Anonymous said...

what you say is true, however, you have missed on a lot of money making opportunities in the past 20 years.
Betting the market will only go down and that it is overvalued has done nothing except lose you money.
You can't have tunnel vision in this economy, stocks go up and down, you have to play both sides.
So, what has your strategy yielded you in the past 10 years compared to being long s&p? or are there no opportunities to make money anywhere!?

you worry too much, yeah everything could be a pipe dream, however, the American economy has shown its resilience more than once!

Jim in San Marcos said...

Hi Anon II

The stock market is too small for me. It's like horse racing, you only hear about the winners (ie Google). 20k invested in the bond market at %8 doubles with the interest rate drop to 4%. Rental Property if purchased at a good price have always been and excellent money maker. How many times do you buy a 100 shares of stock and it doubles? I've still got some old K-Mart and Florsheim certificates floating around here somewhere.

I buy what everyone else is selling. So right now, real estate in Greeley Colorado is starting to look tempting.

What I am trying to point out indirectly, is that cash is going to be king and that you should be able to pick up real estate that will cash flow positive even with very low rents.

If interest rates jump to 20% because of a liquidity crisis, a drop to 10% would double your money if you bought bonds at 20%.

The biggest problem people have, is that they are fully invested and cannot take advantage of any deals that come up.

The thing that is almost invisible is the number of people living from paycheck to paycheck. A very small disturbance in that sector could have a very drastic effect on the rest of the economy.

I don't know if worry is the right word for me, I am more of a pessimist, and that is defined as an "Optimist with Experience."

As I have said previously, we each have a mindset and tend to see what we want to see, and I surely could be accused of that. That's part of being human. But it's the interaction with others that helps us to challenge that shortcoming of ours.

Take care and thank you for your post.

Jim in San Marcos said...

Hi Anon I

I think you are right. Selling could be the problem of the day.

My suggestion to you is to get some coin together. A $20,000 investment in housing in the coming fracas, could be a very good long term investment. I'm talking 3bed 2bath for 100k. What it will pay at retirement age is about the same as Social Security and that will be adjusted for inflation. Look for the repos with a cracked slab. They go real cheap. You are not interested in resale, take the payments to the bank.

The other reason I recommend real estate is because you are young. Inflation is something you have not experienced. This is the real hedge against what your Congress can do to you without your permission.

Anonymous said...

Get your math right. IBM had two splits in '97 and '99 so the stock price in '84 by todays value isn't 124 but 1/4 of that.

Jim in San Marcos said...


What I was trying to show was the difference in dividends paid in relations to the stock price. Back then people were paying $100 and getting a 4% return. Now people are paying $100 for a less than 2% return

Anonymous said...

Finally someone who makes some sense! I am young man who has experiemted with investing in various asset classes.

The one thing I could never figure out is why I would want to own Google or Microsoft when they pay no dividends? I would ask friends, family, co-workers and the answer was always the same; "because it goes up".

But I still don't get it? When I buy an investment property I don't buy it to speculate on appreciation I buy it for the income - rent - cash flow.

Dividends in stocks would seem to be analogious to rental income in real estate.

For this reason I do invest in growth stocks even though they have increased in value over the years. I just don't get it and I believe one should never invest in what they don't understand.

Anonymous said...

Ugh. I should proof read. I DON'T invest in growth stocks.

Jim in San Marcos said...

Hi Anon

I agree, what ever the investment, the return on it in the form of dividends or rent should gives you a pretty good idea of what you are getting into. As the rent or dividend increases/decreases, so does your asset's value.