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Bruce,
This discussion was not supposed to
be on the Omega list. It came from the Scilink list. I hit
the wrong button and posted my answer yesterday to the Omega-list
by accident - sorry.
I will post this comprehensive answer on the scilink list - hopefully I
will get some exemption for doing unlawful cross-postings - Bob.
> Just out of curiosity, how many of you out there that think the
> market is overvalued are currently writing OEX call options long
> term? Not too many, I bet.
Yes, it is expensive to bet WITH the trend near the top of
"stupidity" but you don't want to bet AGAINST the "stupidity" trend
either because "stupidity" seems to be plentiful. As I said I have
been extremely bearish for over a year. The longer the bull market
takes the more bearish I get - you might say I am an idiot. The point
however is that the perception of the masses of what is right and
what is wrong doesn't change gradually it changes from one second to
the next. To predict this is foolish because there are too many
variables. The stock-market is especially dangerous because the
general public is directly or indirectly invested in this market.
My answer to your theory that there are not enough stocks but too
many baby-bomers around is the following:
There have always been times when some things were very scarce and
plenty of potential buyers were around. There was even a time when
there was a major shortage of tulips.
Basically it doesn't matter whether something is scarce or not or
whether there are many potential buyers or not. I know some very
scarce and even rare art objects which can be cheaply bought for a
few dollars. The funny thing is that although they are scarce no one
wants to have them. And why should baby-boomers invest in a falling
market if the market should ever fall ? They can happily keep their
money in tripple AAA investments. Inflation is low - they even make
money. They don't need to invest in stocks - it is just fashionable
to do so.
I was very lucky that I experienced the crash very early in my
business life. I had started fresh as a stock-broker and had worked
for half a year. I knew everything - as I thought. Several guys in
the office were millionairs (paper). Our chief analyst had made
millions - he called us every day with his mobile phone from his
boat to keep us informed. And then the crash happened. We were
looking at the screen in disbelief. We couldn't trade because our
market was in another time-zone. The next day most of our favourite
stocks had more than halved. Most of them never recovered. The
companies went just bankrupt. And the funny thing was that no one in
the office had sold - it was pointless. There was extremely little
volume in the stocks. Simply because the buying dried up.
So here comes the theory that I developed on top of that memorable
experience:
It is the "suckers-game" like Soros was describing it in kinder
words. Basically you hope that there exists a bigger fool than you
who will be around when you try to sell. In this game it doesn't
matter whether people "invest for life" or just speculate. If the
majority gets the impression that they could be the biggest fool
they will sell whatever their reason for investing was in the first
place.
We could even have a crash when the market is cheap according to P/E
ratios. If there are enough people who want to lock in profits or
want to avoid further losses they will sell whatever the
circumstances are. And the higher the market gets the more people are
sitting on a profit that they want to keep.
Just another example: Is the Indonesian Rupee cheap at 8000
or 10000 or perhaps 20000 IDR/USD ? I couldn't even see the figure
properly on my screen today because the currency has got so many
digits recently.
Has this anything to do with rational thinking ? One year ago the
investment bankers were piling up in Indonesia to give them fresh
loans (in dollars). Why don't the want to put their money there
anymore ? The country is still there, the people are still there -
what is the difference. I tell you what it is:
They want to see some other "fools" going there first again.
Gerrit
> From: bruceb@xxxxxxxxxxxxx
> Jim, Gerrit, and Tom, I think you better take a look at the other
> side of the coin. If you want to know why the market has kept going
> up and will continue to do so, you can start with the most basic
> principle of economics- supply and demand.
>
> The supply in this case is the amount of shares of stock available
> to the public to be purchased. Despite all the IPOs you hear about
> on a daily basis, the amount of shares available in US stock markets
> has only marginally increased over the past ten years. Why? Because
> while some companies have been selling shares, many others have been
> buying their own shares back (or eliminating shares because of
> mergers). GM recently announced it was buying back 5 billion
> dollars worth of shares. That's 5 billion dollars that will now go
> chasing other shares of stock that are still available. That one
> buyback alone will more than offset all the Yahoo and Excite IPOs of
> this world.
>
> The demand side of the equation is a little more interesting. Many
> people like to compare this market to the one just before the 1929
> crash, but they're overlooking one very important point. Back then,
> investors were only required to put down as little as 10% of the
> face value of the stock in order to buy it. I don't know what the
> exact figure was, but I do know that just before the crash an
> enormous amount of that market value was built on "paper" profits
> that investors just kept "pyramiding" back into the market. People
> truly were speculating with money they didn't have. That simply
> isn't the case today.
>
> The vast majority of stock now owned in this country was purchased
> with "real" money, not paper profits. I again don't know what the
> exact figures are, but I do know that the dollar value of
> outstanding shares that were bought on margin as a percentage of the
> whole market is not only low, but has actually DECREASED over the
> past few years. Who was it that panicked last October and sold
> during the Asian crisis? It was primarily hedge funds, who did have
> highly leveraged positions. Individual investors actually BOUGHT
> during the sell-off.
>
> This raises an interesting question- where exactly is all this
> "real" money coming from? The answer: the baby boom generation.
> The BB generation has just begun to enter the phase of their
> professional careers where their earnings are greatest. These
> earnings, combined with the fact that their children are now out on
> their own and their parents are covered by government programs,
> means these boomers have LARGE amounts of disposable income. In
> other words, they are not only in their peak earning years, they're
> also in their peak SPENDING and SAVINGS years. Their savings
> directly fuel the market by increasing demand and therefore the
> price of stocks, and their spending indirectly fuels the market by
> keeping the economy humming (just look at the sales of RVs!).
>
> Anyone who doubts the effect the BB generation is having on the
> stock market should draw a line chart of the number of births per
> year in this country starting in 1940, and shift those numbers
> forward about 48 years. Thus, the number of people born in 1950
> would appear on the chart above the year 1998. On top of this draw a
> line of what the S&P 500 has done over the last 50 years and guess
> what you find? That's right, they're absolutely identical. There
> are plenty of bumps along the way, but they both slowly inch their
> way upward and then begin to take off almost exponentially in
> lockstep. A picture of this chart appeared in TASC about a year ago
> (maybe John can post it to the list for us...)
>
> Of course, a cynic will say "this huge pool of savings may exist and
> continue to grow, but who says people will continue to buy US stocks
> with it?" My answer would simply be "where else are they going to
> put the money?" People could suddenly decide to buy a lot more
> bonds, but we all know there's a direct relationship between stock
> prices and bond yields. If bond yields get cut in half because of a
> massive influx of money, what do you think will happen to housing
> and auto sales? What will then happen to the stocks in the auto,
> housing, steel, rubber, lumber, plastic, glass, and copper
> industries. You get the picture. I guess a lot of people could
> suddenly decide to invest overseas, but I think the recent Asian
> meltdown has removed that temptation for the next ten years or so.
>
> This is why all the talk about the stock market being "overvalued"
> is, with all due respect, meaningless. Overvalued compared to what?
> The past? That kind of thinking doesn't take into account the
> massive growth in the pool of savings over the past 15 years.
> You're comparing apples to oranges. As long as large amounts of
> savings continue to be generated, people need to put the money
> somewhere. It doesn't matter if the average dividend falls to .001%
> (that's still a better return what you get if you stick the money
> under a mattress), people are still going pump their savings into
> the stock market.
>
> Just out of curiosity, how many of you out there that think the
> market is overvalued are currently writing OEX call options long
> term? Not too many, I bet.
>
> By the way, in case you're wondering where the baby boomer / S&P
> chart says the stock market will end its hyper-up move and begin to
> fall... around the year 2007.
>
> From: "Tom" <planeacres@xxxxxxxxxxxxxxxx>
>
> Jim and Gerrit,
> Thanks for the common sense views. I must say that I have held
> similar ones for the last 3 years, not understanding why the
> populace continues it's "irrational exuberance" of participation.
> Jim, Thank you for this one selected Soros' statement.
>
> "Economic history is a never-ending series of episodes based on
> falsehoods and lies, not truths. It represents the path to big
> money. The object is to recognize the trend whose premise is false,
> ride that trend, and step off before it is discredited."
>
> It is the sence that makes the picture correct in my mind regarding
> any source that involves the mass populace in their collective
> belief of or in anything. That not only applies to mania markets but
> "beetle mania" or a government mania like Germany had experienced.
> The masses believed in a series of falsehoods and lies. Very
> difficult for a majority held belief to be demonstrated to that
> population as wrong. History is full of these examples from
> believing the world round to understanding the existence of the
> human circulatory system. This statement aligned that for me and
> gives me the understanding of what is going on in these markets. See
> U Tom planeacres@xxxxxxxxxxxxxxxx
>
> -----Original Message-----
> From: James Rehler <jrehler@xxxxxxxxx>
>
>
> >Gerrit Jacobsen wrote:
> >>
> >> This is exactly the reason why the market will fall. The market
> >> is designed in such a way to weed out stupidity. A market that
> >> is continously rising attracts invariably many stupid people who
> >> think it will continue this way.
> >>
>
> >I've been thinking that this market will collapse when an event
> >comes along that causes the general public to drastically slow
> >investment in mutual funds and equities. A good hard downturn in
> >the ecomony should do it. People need the cash now, maybe withdraw
> >some funds from the market to meet immediate needs, etc. The
> >values that have been jacked up due to demand start falling, then
> >falling some more, resolve waivers, investors pull more funds, then
> >panic sets in and ka boom, BIG CRASH.
> >
> >I think we should remember Soros' quote:
> >
> >"Economic history is a never-ending series of episodes based on
> >falsehoods and lies, not truths. It represents the path to big
> >money. The object is to recognize the trend whose premise is false,
> >ride that trend, and step off before it is discredited."
> >
> >So, lets ride this trend with one foot out the door, ever ready to
> >bail at the first sign of real trouble. Hell, isn't that what
> >trading is all about anyway.
> >
>
>
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