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Several points:
1) Human nature hasn't changed, and the psychology of mass greed will turn
to mass fear when folks realize that stocks don't just go up.
2) Most 'investors' mutual funds are directed by money managers who have
never witnessed a substantial bear market. These managers will make for
exits, the owners of the fund will know nothing about it until after it is
over.
3) Derivatives are widespread, and as we have seen by LTCM, the risks of
their default are real, and the losses staggering. LTCM leverages a few
billion to control approx $100 billion; approx 90+% leverage. I believe the
likelihood of mass derivative failure is high.
4) The nonsense you hear daily on 'buy and hold for the longterm', and that
'stocks always go up over long periods of time' will change when these
gamblers see a 30% drop in prices. Folks have been rewarded for buying the
dips, especially in the big name index darlings. This mentality will die
hard, and cause folks to throw good money after bad as they start to
decline and never look back. The smart money will love it, as they sell
their shares to the unsophistocated new era believers.
5) The business cycle has not been repealed due to the advent of the internet.
If anything, it has weakened the profit potential of brick and mortar
business' sales, since internet companies are cutting prices to the bone,
consumers can comparison shop for the best price on-line. Not to mention
the present favorable sales tax advantages internet companies enjoy. Just
look at the net revenue figure for the e-tailers -- most are losing tens of
millions each quarter with no end in sight.
6) Certainly the man most singly responsible for this massive asset bubble,
Mr. irresponsible himself, Alan Greenspan, will do everything in his power
to keep the drunken party going -- by cutting rates to zero, manipulating
the markets. The US administration will offer tax cuts and incentive
packages as Japan has (with no help).
This fiscal mismanagement ($5.6 trillion debt + $8+ trillion in squandered
social security trust fund money) will come home to roost, as all extreme
debtors have to face the music.
My bet is that there will be tens of millions of very disappointed
'boomers', and blind-sided retirees when this massive bubble (and
government perpetrated fiscal & monetary mismanagement) comes to its
destined end.
I expect that the drive-thru windows of America will be staffed with very
old, and very bitter people trying to survive/make ends meet, and in the end,
the fascination with stocks by bag-boys, grandmothers, and cab drivers will
end.
Excerpt from today's Contrarian, at siliconinvestor.com:
Signs of the times... I want to share three emails I received yesterday
from readers about some of the kooky things that different folks have
observed.
Here's the first one: "A friend of mine told me that
his son, who loads bags for a certain airline at a certain airport (names
withheld to protect the
innocent), and who previously had no money or interest
in the stock market, has just borrowed all the money in his 401K plan and
put it in the
Janus Internet fund. He had been hearing stories from
some co-workers who have told him stories of vast returns in high tech, as
opposed to
the S&P 500 index fund that they are offered in the
401K plan. He cannot be convinced that he may not make as much as thinks. I
wonder how
many other people around the country are using this
strategy too well."
In the second email, a reader said: "I was in a long
line in a Palo Alto grocery store and I overhead a clerk giving stock
advice to a customer in
the check-out line."
The final email described an article in the Palm Beach
Post. Reporter Jeff Ostrowski said that the House of Kahn Jewelers in Palm
Beach had
purchased $100,000 in jewelry in the past few weeks
from customers who "didn't want to miss out on the technology-driven bull
market" since
the owners only wear this beautiful works of art a few
times a year. "What else could you do with the money?"
So, there you have it, just a few anecdotes to go with
the pawn shop story we had and Dennis Gartman's story from the banks. When one
looks at the consumer debt figures and other debt
figures, we know there is a massive amount of leverage being employed to
buy speculative
stocks at absurd prices. We don't know when this will
end, but we can say with certainty it will end very badly.
>>> That's my optimistic view for the end of this mania. You don't want to
hear the pessimistic one.
James
TechTrading.com
-----------------
At 10:38 PM 1/11/00 -0600, you wrote:
>I wasn't there in 1929 and students of 1929 all have very differing views.
1987
>was VERY MUCH a derivative related event and accordingly was very short
lived.
>It also occurred just after an expiration and the rolling of hedges wasn't a
>very common factor back then. In 1987 most of the "insurance' was
underwritten
>by individual investors with very low margin requirements and this
resulted in a
>market "in temporary distress" which again didn't last long.
>
>The good news today is that risk management is better ...... this
doesn't mean
>a market can't go down ... but it does mean that a massive repricing
may be
>less likely. NDX trades over a 30% vol. which means daily moves of
almost 2%
>are to be expected and in fact should be commonplace ..... sometimes it
trades
>40 - 50 vol. which magnifies the issue.
>
>The other big issue in the US marketplace is that, for domestic investors,
there
>are choices. I can trade Yahoo for Disney ... which happened in the last few
>days. I can trade eBay for 10 year notes. If you buy the demographics
argument
>(Dent, etc.) ... great demographics exist until about 2007 or 2008. Look
>around you ... everyone is working .. in my industry Wall Street can't fill
>all the derivative jobs ... just look at the listing son Bloomberg.
>Additionally the world economy... which was on the brink last year... has
had a
>pretty impressive comeback.
>
>Things that would worry me .... obviously very large changes in interest
rates.
>A dramatic change is implied volatiltiy....but again I'm a derivatives person
>and I think volatility tells 90% of the story. The economy drops dead ....
>again probably not an overnight occurrence.
>
>the big unforeseen news event.... even this would need to knock the
economy out
>of growth mode.
>
>Gitanshu Buch wrote:
>
>> Thank you, doctor, for the excellent Japan perspective, it brings out the
>> core systemic differences between 1989 there and 1999 here.
>>
>> >From the institutional standpoint, one thought keeps striking me, courtesy
>> the exisitence of the relatively smooth big-picture risk transfer mechanism
>> here in the US...
>>
>> How much sudden damage (as in 1987, 1929) can be done in the US market
>> anyway?
>>
>> Even in 1987, the market fell 15% from its peak over a 2 week period before
>> Black Monday... that, for a market used to growing 15% per year must have
>> set off alarms somewhere before the Monday happened.
>>
>> Since then, everybody macro level is presumably hedged, or can get hedged
>> with lightning speed.
>>
>> Everybody that is not hedged, loses money and has their investment assets
>> taken away.
>>
>> If everyone flows from protection to protection - the way the risk transfer
>> mechanism works between the mechanism's intermediaries, seems to me it
>> creates its own natural checks and balances re velocity of one way moves
and
>> the extent that they can impact the market adversely at a macro level.
>>
>> If anything changes the fundamental premise of a long term directional
move,
>> the whole institutional investing world recognizes it, and adapts.
>>
>> Like you say, money has to find a home somewhere.
>>
>> Conceptually, this tendency ot checks and balances would seem to explain
the
>> stairstep market we've been seeing for the past 4-5 years - where economics
>> and demographics set aside, the risk transfer mechanism played a major role
>> in containment.
>>
>> The fat tails of recent years came from individual trades gone wrong and
>> herd mentality riding that entity's misfortune, not systemic problems as
>> evidenced in Japan.
>>
>> 1994 was a mass exodus due to fixed income - but the party was over in a
>> brief couple of months.
>> 1996 was a mass exodus due to tech rotation - but that party was over in a
>> month.
>> 1997 was a piggy back on Mr Neiderhoffer, and that was over in 2 months.
>> 1998 - ditto LTCM, again over in 3 months.
>> 1999 - whatever the reason (I honestly forget) but it was a smooth down
>> move, some cages rattled, and game over.
>>
>> The point of the above data - is that the velocity was contained, and the
>> extent of damage was contained.
>>
>> Big-picture trends (eg investor preferences into Europe-Asia over USA, into
>> tech out of fixed income, of demographic investment trends etc)
>> notwithstanding - can 1987 happen??
>>
>> Sure, chinks develop in the system every now and then - where volatility
>> goes north of 100% and the Specialist Function ceases to exist as a stopper
>> in the velocity of one way moves or the occasional rogue trade gets done
>> that has market-wide impact.
>>
>> Seems to me these sharp narrow "small time" 10%-20% "corrections" would get
>> more prevalent, as opposed to any sustained bear market - since the system
>> gets too expensive for anything more to happen, and the world leans on the
>> wrong side too much, and we over-correct in the opposite direction,
swiftly.
>>
>> Opinions, Doctor?
>>
>> Gitanshu
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