Redstate

It's a psychological flaw in humans. As the value of something starts going up, people begin to think it will always continue going up and increase the demand. Eventually, people start to realize that they're paying FAR more than the intrinsic value of the object and the bubble bursts. One of the more famous bubbles was for tulip bulbs in 15th century Holland. From that we got such phrases as "Don't get left holding the bag."

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

If you believe stocks are undervalued now, you should be buying. The problem is that they could become even more undervalued (particularly financials and autos, which no one loves anymore).

It doesn't necessarily follow that a break in the price of commodities will improve the outlook for earnings. I believe that there would be a spillover into equities in the event of a commodity-price deflation, but there's danger that this would simply be replacing one bubble with another.

The larger and more fundamental problem, that the financial world has not found a way to solve, is the deleveraging that results from the ongoing credit crisis.

Congress is attempting (by way of a massive bank-bailout) to stabilize the market for mortgage-backed securities at a relatively high level, so as to forestall a deleveraging event. Even if they succeed, they may simply be pinning the market up at a level that isn't justified.

The quandary we find ourselves in is this: should we seek to ensure financial-market stability by implicit government guarantees?

Your average Wall Streeter would probably say: bring it on, baby! But a thoughtful, conservative observer would recognize the grave danger that this represents.

Scylla and Charybdis.

to assume that a dramatic drop in oil prices will result in a noticeable impact on corporate earnings and profitability. The price of oil percolates through virtually every industry, and impacts almost every product in one way or the other - either because the products are made using raw materials that come directly or indirectly from petrochemicals, or because the raw materials and finished product must be shipped by transportation sources that have been negatively impacted by high fuel prices.

Of course this has nothing to do with the credit market crisis or the debate about governmental intrusion in financial markets. I do think that a drastic drop in oil that flows commodity money back into equities would serve to stabilize the credit market by placing value back in the securities that those markets depend upon for profitability.

But I'm no economist, and I didn't even stay at a Holiday Inn Express last night.

I think this is a good point, some segments would see significant improvements in corporate performance with lower oil prices. The airline industry in particular comes to mind.

"If they were merely incompetent, then at least SOME of their actions would have been to the benefit of the country."

Is why oil and not other commodities? I guess corn is also sky high, but to make an old Trading Places reference, why isn't the cost of frozen orange juice through the roof?

Obviously, I'm an engineer not a financial analyst. :)

"If they were merely incompetent, then at least SOME of their actions would have been to the benefit of the country."

It's also base metals, dry-goods shipping hulls, grains, etc.

everybody and his dog here. In fact, a new store just opened selling nothing but metal detectors and mining supplies. The hardware stores have always carried some mining supplies but I don't think there's been a dedicated mining supply store here in a half century or more. The old bed of a retreating glacier is a good place to prospect. Since the Mendenhall Glacier, our local glacier, is in the Tongass National Forest, you can't placer mine, so every day you see people trooping around with metal detectors looking with some success for gold nuggets. Nuggets are considerably more valuable that ore in the usual flake or dust form. Coeur is trying to open a major gold mine a few miles north of here over the vehement opposition of the Greenies. The USSC just granted cert on the appeal of a 9th Soviet decision in which the Court decided it knew more about tailings disposal than the Corps of Engineers. Unfortunately for Coeur, who've spent about $250 Million on the mine so far, the Greenies still have lots of suits in their repetoire, so they may well miss out on today's astronomically high gold prices.

My neighbor, an off and on miner, just packed up wife, kids, and dog to spend the summer on some old patents about 80 miles from Nome. It is interesting to watch people with gold fever, yeah, it still exists. They just pack up and go just like in the Gold Rushes of the 19th and early 20th Century. Some of them are veteran, skillful miners, but lots are just ordinary people who only know what they might have read in books.

Having done a little placer mining back in the last gold boom in the '70s, I can't think of a more miserable way to make money than spending the day waist deep in water that is usually only a couple of degrees above freezing, but a a thousand dollars an ounce, lots are willing to give it a go.

In Vino Veritas

As you point out, investment dollars look for a place to land. When oil crashes, the money will land somewhere. Stocks is a better bet than any other asset class.

If you have a prediction regarding another asset class, please let us know.

Of course, that could result in a stock bubble.

Is there any credence to the theory that there is simply too much money seeking to few investment opportunities?

I owe my previous post a further comment, per the discussion on "sell low, buy high" that ties into the bi-modal/multi-modal thoughts.

A particularly interesting aspect of the market is that it tends to follow many of the financial rules of those that are currently participating in it to the greatest extent. In this respect, it's highly modal. Following the dot-com bust and 9/11, the market became quite a low-volatility, tame place that really appeared to follow fundamentals. Then again, most of those influencing daily buy/sell decisions during that period were financial analysts at institutional investors who believed in all that efficient market stuff we're all taught in finance school.

During dot-com, the market was mostly driven by capital appreciation believers, and at later stages, by technical analysis types (and even an unusually large component of completely unqualified investors dumping money they couldn't afford to lose into "sure things" - aka complete fools with no business in the market. If you want a sign you've overstayed the party, their presence is it.). What's interesting is if you evaluate the market's behavior through this modality approach, you'll see that it indeed behaves much according to the "religion" of those who are doing the majority of the activity at a given period. There are some good clues to help you identify the mode, and volatility/velocity are some of my favorite indicators.

Right now with oil, we appear to have a large international contingent that is exceptionally over-confident and greedy. They're convinced $130 is nothing; $200 might be the next stopping point. They're nearly arrogant in their expectations and have lost their reference point, especially given drops in US demand and numerous indications of industrial demand declines. This is a serious alarm bell, but they're just too eager for even bigger takings to get out.

Once it starts to drop though, liquidity will be a serious problem. There's extreme amounts of leverage and probably a LTCM or two in the makings when oil moves the other direction - do you really know who's on the other end of your contract, and will they have the money to pay when everyone else is running for the door?

Liquidity is going to be a real interesting story shortly; we should have had more pain and punishment in the mortgage bubble collapse, but instead of forcing lenders to take their lumps and let a few excessive risk takers die, the Fed transferred that risk into another bubble. We saw this with the Thai baht collapse ~1997. It'll be as if the game of cakewalk has 20 participants and only 3 seats. For black swan collectors, we're in for a real treat rather shortly. That said, I've already shifted my portfolio to ride out what may make for a hell of a storm.

n/t

In my humble opinion, that is why PE firms, activist hedge funds, and VC firms are such a blessing. Rather than just throwing capital around into various asset classes and following the next bubble, these guys use combine monetary capital with human capital to create more efficiencies and direct money where it is most useful. Technology has made capital markets lightyears more efficient from where it was decades ago, but with speed comes the danger of relying purely on quant models to drive returns. Quants have made our system remarkably more efficient, eliminating nearly every technical arb opportunity. Quants do not, however, make their individual holding companies more efficient and productive, and that is where the main profits lie today. I focus more on the credit markets than the equities, and one nice side effect of the credit crunch is that investors are finally looking at individual credits again and the strength of their business model. Don't be surprised to see PE firms, activist hedge funds, and VC funds continue to grow for this very reason, despite higher cost of capital. Though the liberals and media claim otherwise, PE firms are able to have a longer-term view. This quarter's earnings announcement is no longer of consequence, and there are no analyst expectations to beat. Instead, they focus on making the company as efficient as possible to meet their target IRR, and these companies come out stronger, leaner, and more efficient on the other side.

I hang around plenty of PE and VC guys and I'm not as willing to call them a blessing as you are.

There's a very great deal that's right about what you're saying, of course. I'm tempted to condense your point into the phrase "making money the old fashioned way."

Sometime late in 2006 and early in 2007, we shifted from a world in which risk was systematically undervalued across nearly every asset class, to today's world in which everyone is avoiding nearly every trade with a counterparty that isn't the government or guaranteed by the government.

The PE world is in the throes of revising their business model to deal with the loss of leverage and the loss of exits. The latter will heal when the recession ends but the former is (or should be) systemic.

To me, big-time VC looks like an unleveraged version of PE. I think they have so much money to put to work these days that the top American VCs have lost their way. I think there's a good possibility that the nascent VC industry in India could give Sand Hill Road some real competition.