Stock Bubble

These days a healthy stock market doesn’t mean a healthy economy, as a glance at the high unemployment rate or the low labor-market participation rate will show. The Tea Party is right about one thing: What’s good for Wall Street isn’t necessarily good for Main Street. And the Germans aren’t buying the New York Stock Exchange for its commoditized, highly competitive and ultra-low-margin stock business, but rather for its lucrative derivatives operations.

The number of companies listed on the major domestic exchanges peaked in 1997 at more than 7,000, and it has been falling ever since. It’s now down to about 4,000 companies, and given its steep downward trend will surely continue to shrink.

Nor are the remaining stocks an obvious proxy for the health of the American economy. Innovative American companies like Apple and Google may be worth hundreds of billions of dollars, but most of them don’t pay dividends or employ many Americans, and their shares are essentially speculative investments for people making a bet on how we’re going to live in the future.

Put another way, as the number of initial public offerings steadily declines, the stock market is becoming little more than a place for speculators and algorithms to compete over who can trade his way to the most money.

What the market is not doing so well is its core public function: allocating capital efficiently. Apple, for instance, is hugely profitable and sits on an enormous pile of cash; it is thus very unlikely to use its highly rated stock to pay for any acquisitions. It hasn’t used the stock market to raise money since 1981, and there’s a good bet it never will again.

http://www.nytimes.com/2011/02/14/opinion/14Salmon.html

I'm not sure the market will tank until there's another place to put money. As soon as interest rates go up, and CD's come back, RE will tank and so will the stock market.

These bubbles are becoming more common as the investing becomes more like beanie babies. The same stupid mob mentality that said the purple elephant beanie was worth $400, is driving the market. And the same dump and run mob attitude that says beanies are worth $1 now, will happen in the market. Or commodities, or currency trades or whatever. The reason is that Wall St is populated by young, unqualified mouth-breathing brokers who have no basic investment trading, ethics or understanding. They follow the beanies, because it makes their quarter look good to their boss. Short term investing is the new norm. Short term bubbles are the new norm.

Apple and Google are the new beanie babies. Don't fight it, swarm in, just watch for the turn and sell your purple elephant while it's still $400.

I'm not sure the market will tank until there's another place to put money. As soon as interest rates go up, and CD's come back, RE will tank and so will the stock market.

Where did the money go from August 2008- Mar 2009?

There was a brief spike in Libor from Sept 08, but that ended in Oct 2008. And I don't believe people took money out of stocks and put it in the Libor market to earn 4% Besides the spike was so fast and violent it wasn't a draw of money so much as an unwillingness of anyone to invest in anything except t-bills.

Good point.

But I was locking in 5 year CD's at 5% right around there.

So where would you put your money at this point, Riversider?

Needsadvice: I have the same issues, not sure where to put retirement $. The best I can come up with is to buy munis (not muni mutual funds) that are backed by sewers, water, infrastructure, and ladder 'em so that they're all quite short-term now. Because rates WILL go back up.

Too scared to get into commodities. Or any "hot" stock, barring industry-specific knowledge.

The price action in individual stocks is crazy. Tell me the action in Cloud stocks isn't a bubble. They fall off a cliff on bad quarterly reports and then just climb back up. And they rise in the face of an unstable political situation, the unprecedented debt load, the unemployment, etc. The govt is giving everyone a free ride in the stock market. Though everyone admits it should go down after such an unprecedented run, it just refuses to waiver. Really crazy. A crazy amount of wealth is being generated -- for the wealthy. I think the upper end of Manhattan RE should stay up for a long while solely based on the action in the market over the past year.

No way stocks are in a bubble given earnings and growth.

@apt23; When you consider the sheer volume of sector funds that are "Tech" weighted, and the few stocks that are considered tech these days, it's no wonder that they go up. There are fund rules that keep them from weighing too heavily in the solid tech corps, so they have to go trolling around in the cloud companies, most of which won't be here in a year or two.

Cloud computing is the new beanie baby, in other words. Cloud computing really only benefits the software companies, who will someday be able to charge for software usage by the hour, not the purchase (and illegal copies).

I am keeping my old computers running, for when we need them to fight the robots.

Apt23, "a crazy amount of wealth is being generated -- for the wealthy". That wealth is only available to those who sell. They're not going to ring a bell when it's over for everyone to get out at the top. To quote a blogger, "there's nothing under the market except ben hot air".
That being said, this is a baffling market environment to trade or invest.

Good point.

But I was locking in 5 year CD's at 5% right around there.

G.o. munis at the state level or municpal revenue bonds from defined essential services.
Everyone pays their water and sewer bill.

I look at munis as a hedge. If States raise taxes, the bonds gain in value.
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Munis don't work for an IRA, but for those I think any asset that has exposure to oil or agriculture is where you want to be. I also would rather be an owner of corp debt credits over the equity. I like the less leveraged bet. Stocks are priced too richly.

Lornek: sure, netflix trading at a P/E of 80 is not a bubble. Earnings and growth can be compressed by huge inflation in commodity prices. let's see how stocks fare with oil over a hundred for a long while. I still think stocks will be good for a while after what surely will be a near term correction, but i will be watching the european bonds in the spring. i don't think things will be so rosy at the end of the year.

Gaongaon: You have to believe the wealthy are selling. Follow the volume. You have to be crazy not to take some profits on the road to a 100% gain. So the people who have millions in, have already taken millions out. They are still in the market and so won't get out entirely unscathed but they have probably booked so much profit already, it doesn't matter. It is the little guy in pension and mutual funds who won't fare so well. But I don 't think we need to worry about the wealthy.

needsadvice. it is crazy how apple is weighted in so many indexes. It is a great stock and company but if android reports big inroads against apple (people love their androids), or steve falls ill (G*d forbid!), a stock hiccup could take down a big part of the S&P and many other indexes. when they hit the exits out of cloud, there will be quite the trampling.

@apt23: Jobs' illness has been factored into the stock for years. There may be a blip when his illness takes a turn (poor guy), but that will mostly be small investors, IMO. The corporation has been very careful to reassure their institutional investors who are the vast majority of their shareholders.

Androids are popular because they are cheap. They have less than 1/3 of the capabilities of an iPhone. When Apple launches the $100 iPhone (within 2 years) Androids will be the big loser.

"I also would rather be an owner of corp debt credits over the equity."

Microsoft has been issuing debt at very low spreads over Treasuries. In their most recent auction, the 5-year went at a tiny 0.38% spread over Treasuries (!), and their 30-year debt (!!) went for a 0.68% spread (!!!). Last year, they issued 30-year debt with a 4-handle if I recall correctly.

Meanwhile, their 5-year historical earnings average is 6-7%. Their current earnings yield is running 9-10%. That'll likely grow from inflation over time, maybe it'll grow (or shrink) from business. Perhaps equities on the whole are not great value at the moment, but to me the equity in MSFT looks a lot more attractive than the debt.

needs: i love my iphone but the call dropping issue which has always been bad, seems to be getting worse. i am invested in the stock and it makes me nervous.

ino: msft looks good on paper but it doesn't budge. (comparatively).

oh --- and it therefore affects RE values in manhattan ( in case SE police shut this thread down)

> I look at munis as a hedge. If States raise taxes, the bonds gain in value

Of course, the extension of the bush tax cuts crushes 'em.

There is no doubt that we have an incredible bear market rally on our hands. But after a monstrous 90 per cent rally from the March 2009 lows (over such a short time frame, and the most pronounced bounce since 1955) this market has become seriously overextended.

As far as equities are concerned, make no mistake, we are in the throes of an intense bear market rally, which is likely at the very late stage. Bear market rallies are not the same as secular bull markets — the former are to be rented, the latter are to be owned

What we have on our hands has been an economic revival and market bounce back premised on unprecedented monetary and fiscal stimulus. How the Federal Reserve and the federal government in the future manage to redress their pregnant balance sheets without creating a major disturbance for the overall economy is a legitimate question and, sorry, does not deserve a double-digit market multiple

Just as the 2003-07 bear market rally was built on a shaky foundation of unsustainable credit growth and house price appreciation, the current bear market rally has been built on the even shakier ground of surreal public sector intervention. Many believe this intervention “saved the system” or “prevented a depression” back in the opening months of 2009. The reality, however, is that there is no such thing as a free lunch

http://www.ft.com/cms/s/0/6563dda4-3845-11e0-8257-00144feabdc0.html#axzz1Dy110gz0

Netflix is worth $11-$12 billion, not a bubble. PE is a very short-term, rear view mirror metric.

In fact, at $12 billion, it's a fraction of Apple. Even half of Priceline.

Netflix' business model is transforming the industry. I don't know how much Blockbuster was worth 8 years ago when it was trading at in the mid/high $20s, but all of that value has been wiped out in favor of Netflix and Apple and other sources.

netflix is in a very risky position. when it was about disks in the mail, no one could touch them. streaming is another story. amazon's technology is as good or better as is apple's and both have vastly more total customers than netflix. comes down to deal making with the studios and financial staying power.

"But the glory days of publicly traded companies dominating the American business landscape may be over. The number of companies listed on the major domestic exchanges peaked in 1997 at more than 7,000, and it has been falling ever since. It’s now down to about 4,000 companies, and given its steep downward trend will surely continue to shrink.

Nor are the remaining stocks an obvious proxy for the health of the American economy. Innovative American companies like Apple and Google may be worth hundreds of billions of dollars, but most of them don’t pay dividends or employ many Americans, and their shares are essentially speculative investments for people making a bet on how we’re going to live in the future.

Put another way, as the number of initial public offerings steadily declines, the stock market is becoming little more than a place for speculators and algorithms to compete over who can trade his way to the most money."

http://www.nytimes.com/2011/02/14/opinion/14Salmon.html?_r=1&src=me&ref=homepage

More money in the hands of less people and they just play a little game amongst themselves called the "stock market".

If you are a pessimist, everything is a bubble.

All you bubblers, sell equities, sell real estate, sell munis, and WHAT? Do what with the cash?

> Innovative American companies ... are essentially speculative investments for people making a bet on how we’re going to live in the future.

Seriously, what else can this guy twist to be negative? Yes, equities are an optimist bet on the future and on American innovation. The day American innovation becomes a bad thing is the day that America has lost.

Apt23, my mistake. I watch this f'n market all day everyday, and no one is selling. I am 80-90% cash, with 10% high div. long, and 10% badly losing short, ng. I got out way too soon after doubling and tripling and quadrupling at the bottom. Unscathed and profitable. But today's market is unlike any other I have seen in the last 16 years. Don't want bonds, don't want long, don't want short. one should trade what is, not what should be. I am trading so little, that I'm liable to lose my preferential trading commission. A frontal lobotomy would help. Then I could get with the agenda and go long with a super tight stop?
Almost bought a coop sponsor apt., and then bit by bit they started to want the equivalent of a board approval process. XXXX them. So why limit myself to sponsor apartments?
I'll save my mega cash for, er uh, I don't know. Maybe I'll just put it all into AAPL GOOG. Rather short GS, and IMHO, the time is coming.....BWDIK.

Bernanke threw the market a few trillion and everyone had a hell-of-a-party.

It does end.

cream cheese will kill us all.

Riversider, will we get a flash crash before QE3?

You tell me..

> and the most pronounced bounce since 1955

Well, it was also the biggest crash since...
(and it didn't come off a stock bubble)

Well we've doubled off of 666.....