SOME THOUGHTS
REGARDING THE MARKETS WITH THE DOW AT 14000
July 19, 2007
“The world, one had to remember, was analog, not digital, in the way
it operated. And ‘analog’ actually meant ‘sloppy.’”
The Teeth of the Tiger, by Tom Clancy.
Stocks
rose in the second quarter after a dismal 2007 first quarter. The
debate now concerns the degree to which they have been “overbought”
and/or will these levels serve as a new launching pad.
Richard Russell’s July 6th comments are relevant:
“….we are now entering the third
speculative phase of this bull market, and selling pressure remains
low. So yes, the Dow could be part of an international bull market
third phase – and stocks around the world could run wild. We could
be entering an ‘anything goes’ phase of this bull market.
“Almost every central bank on the planet is now
boosting its money supply – nobody wants an ‘expensive’ currency.
Commodity prices in general are booming. Oil prices are surging.
Populations that never owned cars before are buying cars
hand-over-fist. Airline orders are in backlog. Defense orders are
surging. The luxury business is running wild. Housing prices the
world over are heading north.”
In
addition, the world is awash with money – often with very highly
leveraged (borrowed) money - and cheap credit that enables worldwide
Global Hedge Fund and individual stock, bond and derivative
speculation as well as weekly Private Equity buy-outs amounting to
billions upon billions of dollars. And, as mentioned above, at the
moment the urge to sell is low.
On the
other hand:
·
Interest rates here
and around the world have been rising. The Fed cannot raise rates
further, however, because of the reality that the US housing
situation is still worsening,
·
Subprime mortgages
are still a threat to their holders, many of whom have already
suffered massive losses. Portfolios holding these mortgages are
almost impossible to price in market terms as are mundane stocks and
bonds. The holders do not know their value, nor do the ratings
agencies Standard & Poor’s and Moody’s. The July 13th
issue of GRANT’S indicates the size of this market to be “$3.6
Trillion, equivalent to 84% of the marketable U.S. public debt.”
·
The dollar is
weakening, and
·
Foreigners are
diversifying out of the dollar.
·
US deficits are not
going away.
·
Oil has been
climbing to $77 a barrel.
·
While the US
economy has generally been doing well, certain large areas continue
to be weak, i. e. American automobile sales.
·
The parabolic rise
of the Chinese (Shanghai) and other stock markets will pose a
substantial problem when the bubble bursts.
We
focus on the good news; we focus on the bad news. That’s what the
symbol of the Bull and the Bear perpetually struggling with each
other is all about. It has been that way for more years than we can
count, and we don’t expect it to change.
*************************************************
From
the Financial Times
on May 3, 2007 an article titled “NY Fed warns on hedge fund risk.”
The first sentence began: “The risk hedge funds pose to the global
financial system has reached levels by some measures comparable to
those just before the Long Term Capital Management fund imploded in
1998, the Federal Reserve Bank of New York said yesterday.” “The
bank’s study is the latest contribution to a debate that has seen
regulators and analysts express concern over the risks and leverage
taken on by hedge funds, the private investment vehicles that are
increasingly influential in financial markets. The hedge fund
industry has mushroomed in recent years and now accounts for an
estimated $1,500bn ($1.5 trillion to us Americans) of
investments.”
We
will be the first to admit that we are unable to call market highs
or bottoms. Imagine the markets to be like a pendulum that when at
rest its “real” or “true” fixed point (or value in this case) is at
6 o’clock. Bull markets always overshoot to the upside, for example
to 9 or 10 o’clock and bear markets to the downside, for example to
3 or 2 o’clock.
We continue to be
both optimistic and cautious. We are not in the “gloom and doom”
business --- just the opposite. Nevertheless, the above articles and
comments are from eminently respectable sources that we take very
seriously in view of our experiences having spent our careers in the
investment business in excess of 110 years. The challenge is to
Preserve Capital as well as to Create Capital, and we have learned
over those years that one of the best ways to “make money” is to
keep from loosing it.
Yes,
the financial markets as well as the world itself are “analog.” And
Dow 14000 is just a step along the way.
