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View Full Version : The Next Bubble: Anomalous Stock Price Increases as an Indicator?



EJ
03-29-07, 01:54 PM
http://www.itulip.com/images/homebuilderstocks.gifOur analyst at Econotech (http://econotech.blogspot.com/) send us this 10-year weekly comparison chart of the largest (by market cap) US homebuilders, Centex, D. R. Horton, Lennar and Pulte Homes. He notes that all of them are close to tracing out a massive "head and shoulders" top, with the horizontal "neckline" around 1200 for lennar and around 600 for the other three.

Most interesting to us is the p.s. at the end of his note: "I was surprised at how well these homebuilder stocks did from early 2000 to early 2003, rising 200% (ctx, dhi, phm) and 600% (len), when the rest of the US stock market was in a deep bear market, with the S&P losing 48%, NASDAQ losing 78%, and the US economy in a brief shallow recession in 2001."

Surprising, indeed. This raises the important question, can one spot the next bubble coming by watching a certain group of stocks rise for no apparent reason in a bear market during the next economic downturn?

John Serrapere sent us another chart, to add to our housing permits recession prediction and other leading indicators of recession.


http://www.itulip.com/images/CFNAI.gif


John notes: "This shows that recession risk within the USA is high. The 3 month moving average for CFNAI has been negative for six consecutive months only 7 times prior to today, which has been a lagging, leading, and coincident indicator. There was only one false positive, in August 1993. It just gave us the same read today."

As we head into recession toward the end of 2007, and during the recession, we will have time to look around for potential target stocks that may serve as indicators of the next asset bubble. Energy related stocks are a good place to start.

Charles Mackay
03-29-07, 03:44 PM
Maybe also look at the institutional ownership. If it's JPM and GS buying a group like home builders (that should have been crashing when the Nadaq crashed) then we would have additional evidence that elites and banksters are planning a new train robbery.

bill
03-29-07, 07:00 PM
"target stocks that may serve as indicators of the next asset bubble.



What are the potential industries to take on more debt to create the next asset bubble?
The area in the economy that’s been most neglected for some time and of course plenty of room for debt expansion. The selection must have low risk and upside potential.
I have previous comment on the infrastructure potential of being a area as per described above.
Today Telecom Companies won the right to bid on orders under a government contract worth at least $20 billion, the biggest-ever federal telecommunications award.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aERyCyBycHcE&refer=home
<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o:p> </o:p>
Quest today is just under $9.00 a share,,,year 2000 bubble $64.00 per share.
<o:p> </o:p>

oddlots
03-29-07, 07:23 PM
At the risk of being laughed off of this board can I suggest nuclear power as the bubble in waiting? At least one of the white shoe banks is weighing in:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/03/13/ccnuclear13.xml

Regarding Roger' logic, I think suggesting hydrogen as a transport fuel is equivalent to putting forward lead as the ideal aeronautic material. But don't let that distract you from the main point which is that nuclear is the only viable provider of base-line electrical power that is carbon neutral.

Now of course uranium is already in a bubble by many people's reckoning. But if the above is true - and you have to believe in global warming to accept it as true - then the recent upsurge in nuclear power-related investment might look more like Titusville's early days than the internet bubble's later stages.

If you can't get past the issue of waste consider this: According to James Lovelock the entire volume of nuclear waste created in the states since the onset of nuclear power would fit onto a football field and reach about three meters in height. Apparently our yearly output of CO2 - if frozen solid - would form a mountain 12 miles in circumference and several miles high. One of these waste issues poses an existential threat to us and it ain't giving off any radiation. (Note this is from Lovelock's latest, "The Revenge of Gaia." I can't find my copy at the mo so this is as close to a quote as possible. But I did find this on the internet from Lavelock: "There is more nonsense and downright lies told about nuclear waste than any other topic. To start with, there is very little of it; it is far, far less dangerous than the carbon dioxide waste that will, if we don't take care, kill nearly all of us. Much is made of the fact that it will still be there in a thousand years; what nonsense, we are lucky that it decays at all. If it were like mercury waste, which is equally deadly, it would be there for ever. Incidentally, why are there not government commissions for the disposal of mercury or
carbon dioxide waste?")

Just a thought. (Full disclosure: I am invested in this sector.)

Charles Mackay
03-29-07, 07:30 PM
Well, my .02 cents is that the bubble in bonds, stocks, and houses were all based on confidence - - aka a bubble in credit. Now, cash tangibles like PMs, commodities, and energy are the new vigilantes in town. I don't think we get another credit bubble to support an unknown segment of the stock market. I think the tangibles swamp everything until the FIRE economy's credit bubble is destroyed.
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Charles Mackay
03-29-07, 07:32 PM
At the risk of being laughed off of this board can I suggest nuclear power as the bubble in waiting? At least one of the white shoe banks is weighing in:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/03/13/ccnuclear13.xml

Regarding Roger' logic, I think suggesting hydrogen as a transport fuel is equivalent to putting forward lead as the ideal aeronautic material. But don't let that distract you from the main point which is that nuclear is the only viable provider of base-line electrical power that is carbon neutral.

Now of course uranium is already in a bubble by many people's reckoning. But if the above is true - and you have to believe in global warming to accept it as true - then the recent upsurge in nuclear power-related investment might look more like Titusville's early days than the internet bubble's later stages.

If you can't get past the issue of waste consider this: According to James Lovelock the entire volume of nuclear waste created in the states since the onset of nuclear power would fit onto a football field and reach about three meters in height. Apparently our yearly output of CO2 - if frozen solid - would form a mountain 12 miles in circumference and several miles high. One of these waste issues poses an existential threat to us and it ain't giving off any radiation. (Note this is from Lovelock's latest, "The Revenge of Gaia." I can't find my copy at the mo so this is as close to a quote as possible. But I did find this on the internet from Lavelock: "There is more nonsense and downright lies told about nuclear waste than any other topic. To start with, there is very little of it; it is far, far less dangerous than the carbon dioxide waste that will, if we don't take care, kill nearly all of us. Much is made of the fact that it will still be there in a thousand years; what nonsense, we are lucky that it decays at all. If it were like mercury waste, which is equally deadly, it would be there for ever. Incidentally, why are there not government commissions for the disposal of mercury or
carbon dioxide waste?")

Just a thought. (Full disclosure: I am invested in this sector.)

Uranium is in a bubble right now. Going from $7 to $100 in a few years for the yellow stuff surely constitutes a bubble doesn't it?

qwerty
03-29-07, 08:58 PM
Blow nuclear power - you could close down half of the existing power stations if you get rid of incandescent light bulbs, get people to switch their porch lights off during the day,capture the waste heat using LHP etc etc.

There is infrastructure to be built in this country. Never mind the Shanghai maglev, Europe has been modernising. The US looks very twentieth century.

Then there is the global warming thing. Maybe there'll be no bubble at all as everyone forgets about the piddling race to keep up with the neighbors spending habits.

oddlots
03-29-07, 10:39 PM
Is gold necessarily in a bubble because it's gone from ~ 200 $ to ~ $650? If a bubble is just a highly unusual and unsustainable rise in price then yes. But the bubble tag seems more useful as a description of a self-reinforcing situation that is capable of a sudden reversal because it is fragile in the way that Ponzi schemes are fragile (thank you Herman Minsky): the price is supported only by the continued rise in prices / increase in capital entering the system etc. Once that reverses or even levels off the crash is self-perpetuating just as the rise was.

But isn't this almost tautological? Almost all market mechanisms seem to have some aspect of this. Price rises are self re-enforcing until they're not. Is every interday spike in a stock a bubble then?

Regarding uranium I would say that uranium shouldn't be this high because it shouldn't have gotten as low as ~$ 7.00. The fact that the market was flooded with post cold-war reserves forced the price below economic production. (Not to mention the flattening of demand after 3 Mile Island.) In this way the spike in price has a fundamental basis which is as close to an anti-bubble dynamic as possible: supply and demand. There has been no investment in the sector for about 20 years so there is no supply to take over as the cold war reserves run out. This at least in theory seems like the antithesis of a bubble scenario: its the re-emergance of an artifically depressed industry. Is it plausible that it could go from depression to bubble status in about five years?

On the other hand the involvement of ETFs and Hedge Funds in this space has undoubtedly magnified the supply issue. Does this make it a bubble? Are these actors taking the part of the mob buying in the traditional bubble narrative? Part of me would like to say yes since no-one has been able to explain to me what the exit strategy is for a commodity ETF. In this way they seem very similar to the mob in a bubble scenario.

Another bubble-like attribute is the sudden proliferation of exploration companies that are essentially burning matches and require the constant inflow of investment dollars to sustain themselves. (Pets.com anyone?)

Finally I suspect that the rise in all commodities is a monetary phenomenon and is therefore susceptible to deflationary collapse. In this sense uranium would be in a bubble in the exact sense that housing represents a bubble. My pleasing story of fundamentals is simply my justification of a fact - current pricing - by reference to a mechanism that could justify a 10% rise as easily as a 1000% rise. (In other words, it only looks like an explanation istead of acting as one.)

So I don't know. (FWIW in my agnosticism I have only invested in relatively high grade / low cost producers able to prosper at much lower prices than current and have invested at market caps that yield either a very favourable p / e ratio based on projected earnings or a discounted value of projected reserves.) Not much of a sales job is it! LOL

All that said, I believe the J P Morgan report is reflecting a fundamental fact : we must avail ourselves of nuclear power if we are going to attain the huge cuts in co2 that the science calls for. I don't think that this has even begun to get priced into the market because we haven't even begun to try and make these cuts.

Note: I think the original Telegraph article link no longer works. Here's another: http://www.speroforum.com/site/article.asp?id=8410

lewman
03-30-07, 01:16 AM
I enjoy reading this thread and the speculation on what would become the next bubble. I have nothing to contribute in terms of wild guesses but I think there will always be rich and smart people (and yes you can probably say the JPM, GS of the world represent them) and their smart money will flow to whatever sectors that will eventually become the next bubble (it's self fulfilling). And during the formation of the bubble there will inevitably be plenty of "fundamental" reasons, reasonable or not, cited to support that.

We can certainly perform some sort of fundamental analysis now before it happens (which is what so far people on this thread are attempting to do) then start accumulating that asset class. And if the analysis turns out correct we'll profit.

What would have worked quite well the last time around was to see what sectors were in a bear market while the rest of the world went crazy. Then when smart money went there, follow it with a vengence.

Back in 2000, while internet stocks reached heaven, housing stocks (I can't find a housing index but look at len, ctx etc) just went thru a multi-year bear market that took off over 60% of their share prices, then they broke out of their down trend (you're free to use whatever measures you feel like to determine what constitute a break ... trend line, moving averages etc) and went on to a multi-year, bubble forming up trend that eventually saw their share prices tripling/quadrapling from their 2000 levels.

Similar stories for gold stocks (HUI) and oil stocks (XOI) though they reached their bottoms later than housing stocks.

If my logic is sound, the question is: are there sectors that are / have been in a bear market / significantly underperforming as the general stock market is reaching for the sky ?

Let the treasure hunting begin !

sparki
03-30-07, 06:00 AM
here is an example of how the british builders are doing compared to the us

and this with a massive exposure to the us markets.

"....a slumping U.S. property market, which accounts for about one-third of their sales"

Builders on the block / British housebuilders are getting bigger

http://immobilienblasen.blogspot.com/2007/03/builders-on-block-uk.html

FRED
03-30-07, 10:15 AM
Excellent discussion, guys.

iTulip's editorial position on energy is summarized here:

Energy and Money Part I: Too Little Oil or Too Much Money? (http://www.itulip.com/forums/../energyandmoney.htm#PartI)

Inflation is not only determined by the supply of goods available relative to the supply of money to buy them, but also the demand for the currency in which goods are priced relative to the supply of that currency. It can be hard to tell which factor is primarily driving prices.

Energy and Money Part II: Can We Repeal the Laws of Thermodynamics? (http://www.itulip.com/forums/../energyandmoney.htm#PartII)

We have plenty of oil. But we're running out of cheap oil and there are no cheap alternatives.

We expect that the next sustained rise in energy prices in the US will be caused by political change in the middle east and a decline in the dollar, long before global supply issues impact prices. These changes, in addition to the looming entitlements crisis and general economic malaise, will result in a political shift in the US to cause energy use to be heavily taxed–both in order to raise tax revenues at a time when tax revenue sources will be in demographic decline and to create incentives for long term investment in alternatives. The first wave of energy investment will be in conservation technologies (e.g., replacement of incandescent lighting with LEDs), versus alternative production and energy carriers. Conservation is the low hanging fruit, alternative production and energy carriers comes later.

Using his background in Venture Capital, EJ will in the iTulip Select area, be developing over the next year an "Investment Thesis," as VC firms do to guide future investments.

FRED
03-30-07, 10:22 AM
Is gold necessarily in a bubble because it's gone from ~ 200 $ to ~ $650? If a bubble is just a highly unusual and unsustainable rise in price then yes. But the bubble tag seems more useful as a description of a self-reinforcing situation that is capable of a sudden reversal because it is fragile in the way that Ponzi schemes are fragile (thank you Herman Minsky): the price is supported only by the continued rise in prices / increase in capital entering the system etc. Once that reverses or even levels off the crash is self-perpetuating just as the rise was.

But isn't this almost tautological? Almost all market mechanisms seem to have some aspect of this. Price rises are self re-enforcing until they're not. Is every interday spike in a stock a bubble then?

Regarding uranium I would say that uranium shouldn't be this high because it shouldn't have gotten as low as ~$ 7.00. The fact that the market was flooded with post cold-war reserves forced the price below economic production. (Not to mention the flattening of demand after 3 Mile Island.) In this way the spike in price has a fundamental basis which is as close to an anti-bubble dynamic as possible: supply and demand. There has been no investment in the sector for about 20 years so there is no supply to take over as the cold war reserves run out. This at least in theory seems like the antithesis of a bubble scenario: its the re-emergance of an artifically depressed industry. Is it plausible that it could go from depression to bubble status in about five years?

On the other hand the involvement of ETFs and Hedge Funds in this space has undoubtedly magnified the supply issue. Does this make it a bubble? Are these actors taking the part of the mob buying in the traditional bubble narrative? Part of me would like to say yes since no-one has been able to explain to me what the exit strategy is for a commodity ETF. In this way they seem very similar to the mob in a bubble scenario.

Another bubble-like attribute is the sudden proliferation of exploration companies that are essentially burning matches and require the constant inflow of investment dollars to sustain themselves. (Pets.com anyone?)

Finally I suspect that the rise in all commodities is a monetary phenomenon and is therefore susceptible to deflationary collapse. In this sense uranium would be in a bubble in the exact sense that housing represents a bubble. My pleasing story of fundamentals is simply my justification of a fact - current pricing - by reference to a mechanism that could justify a 10% rise as easily as a 1000% rise. (In other words, it only looks like an explanation istead of acting as one.)

So I don't know. (FWIW in my agnosticism I have only invested in relatively high grade / low cost producers able to prosper at much lower prices than current and have invested at market caps that yield either a very favourable p / e ratio based on projected earnings or a discounted value of projected reserves.) Not much of a sales job is it! LOL

All that said, I believe the J P Morgan report is reflecting a fundamental fact : we must avail ourselves of nuclear power if we are going to attain the huge cuts in co2 that the science calls for. I don't think that this has even begun to get priced into the market because we haven't even begun to try and make these cuts.

Note: I think the original Telegraph article link no longer works. Here's another: http://www.speroforum.com/site/article.asp?id=8410


http://www.itulip.com/images/goldVSnas.jpg

http://www.itulip.com/images/goldReal.jpg


Agreed. See What Gold Bubble? (http://www.itulip.com/forums/showthread.php?t=507)

miju
03-30-07, 10:34 AM
If you believe the US will enter in a recession brought by the housing collapse then you must admit that the whole economy will face a deleveraging which will close the credit and debt bubble. in that case you will not see another bubble soon. (ie the 30's)
Or you accept that the Fed is able to avoid a new recession by injecting liquidity in the system which will eventually create another credit bubble. Which one ? it can only be developped by investment banks so be alert to their investment advice and commissions generation. i believe the climate theme is going to end in a bubble
miju

Charles Mackay
03-30-07, 10:55 AM
Is gold necessarily in a bubble because it's gone from ~ 200 $ to ~ $650? If a bubble is just a highly unusual and unsustainable rise in price then yes. But the bubble tag seems more useful as a description of a self-reinforcing situation that is capable of a sudden reversal because it is fragile in the way that Ponzi schemes are fragile (thank you Herman Minsky): the price is supported only by the continued rise in prices / increase in capital entering the system etc. Once that reverses or even levels off the crash is self-perpetuating just as the rise was.

But isn't this almost tautological? Almost all market mechanisms seem to have some aspect of this. Price rises are self re-enforcing until they're not. Is every interday spike in a stock a bubble then?

Regarding uranium I would say that uranium shouldn't be this high because it shouldn't have gotten as low as ~$ 7.00. The fact that the market was flooded with post cold-war reserves forced the price below economic production. (Not to mention the flattening of demand after 3 Mile Island.) In this way the spike in price has a fundamental basis which is as close to an anti-bubble dynamic as possible: supply and demand. There has been no investment in the sector for about 20 years so there is no supply to take over as the cold war reserves run out. This at least in theory seems like the antithesis of a bubble scenario: its the re-emergance of an artifically depressed industry. Is it plausible that it could go from depression to bubble status in about five years?

On the other hand the involvement of ETFs and Hedge Funds in this space has undoubtedly magnified the supply issue. Does this make it a bubble? Are these actors taking the part of the mob buying in the traditional bubble narrative? Part of me would like to say yes since no-one has been able to explain to me what the exit strategy is for a commodity ETF. In this way they seem very similar to the mob in a bubble scenario.

Another bubble-like attribute is the sudden proliferation of exploration companies that are essentially burning matches and require the constant inflow of investment dollars to sustain themselves. (Pets.com anyone?)

Finally I suspect that the rise in all commodities is a monetary phenomenon and is therefore susceptible to deflationary collapse. In this sense uranium would be in a bubble in the exact sense that housing represents a bubble. My pleasing story of fundamentals is simply my justification of a fact - current pricing - by reference to a mechanism that could justify a 10% rise as easily as a 1000% rise. (In other words, it only looks like an explanation istead of acting as one.)

So I don't know. (FWIW in my agnosticism I have only invested in relatively high grade / low cost producers able to prosper at much lower prices than current and have invested at market caps that yield either a very favourable p / e ratio based on projected earnings or a discounted value of projected reserves.) Not much of a sales job is it! LOL

All that said, I believe the J P Morgan report is reflecting a fundamental fact : we must avail ourselves of nuclear power if we are going to attain the huge cuts in co2 that the science calls for. I don't think that this has even begun to get priced into the market because we haven't even begun to try and make these cuts.

Note: I think the original Telegraph article link no longer works. Here's another: http://www.speroforum.com/site/article.asp?id=8410
Many cautious gold bulls are citing the 70's model/analogy where gold had a 50% correction after it's first leg up into '74. I don't think that holds water because that leg was a 6x multiple of the low. This leg up in gold is nowhere near that speculative and has been corrected nicely all the way up. Uranium and energy on the other hand might follow a 70's analogy because it has already achieved a 6x - 10x multiple. Gold is still very underpriced in terms of crude oil. The sept. '05 low of 1 oz of gold buying 6 barrels of oil was an all time low on my monthly avg. chart. It is currently around 10 barrel gold. Overpriced gold is 34 barrels which the ratio has achieved 5 times since the early 70's.

oddlots
03-30-07, 11:21 AM
Haven't had the time to read the energy posts cited directly above but wanted to quickly share something I watched last night:

http://video.google.com/videoplay?docid=4569577556800822039&q=Amory+Lovins

Amory Lovins is the founder of the Rock Mountain Institute, an alternative energy think tank. He was profiled by Elizabeth Kolbert in the New Yorker last fall I believe. (Unfortunately New Yorker articles are not available on the web but is is discussed here: http://slowisbeautifulcecile.blogspot.com/2007/01/amory-lovins-eco-genius-is-mr-green-and.html)

He is an inspiring figure and listening to him is a good antidote to the gloom that descends as one looks rationally at the challenges facing us. (He is adamantly anti-nuclear by the way.)

In terms of this thread his thinking undoubtedly will lead to some very profitable and very positive commercial enterprises. He might be worth watching for this reason alone.

jk
03-30-07, 12:40 PM
why assume a new bubble will be domestic when capital has been set free in a globalized world? so, given that energy is global, you have to ask whether it will rise only in dollar terms or will rise for everyone, everywhere. the same question arises for other asset classes.

as i say at the thread:
http://www.itulip.com/forums/showthread.php?t=1144


my nomination [for a new bubble]: the dollar carry trade. as short rates drop, we can expect a resumption, or even acceleration, of the sell-off in the dollar, depending on how far and fast the fed eases. as short rates drop it becomes, by definition, cheaper to borrow dollars. as the dollar declines it becomes attractive to borrow dollars with the hope of paying back cheaper dollars. the dollar will become "the new yen" - a source of cheap capital for investment in higher yielding instruments and higher potential-return risk vehicles [e.g. equities] all around the world. the more foreign instruments rise, the more attractive it becomes to invest abroad = self-reinforcing feedback loop.

the question this leads to: what kinds of foreign assets will most benefit?
mutual funds fund flows in this country have increasingly gone to international funds. the energy theme is a global theme. why assume that new bubble liquidity is going to stay home?

in this scenario, the fed produces a hybrid japanese/argentine scenario: high domestic inflation [argentine] with the flight of capital [argentine] with low rates [japanese] "pushing on a string" in terms of the domestic economy [japanese].

oddlots
03-30-07, 01:28 PM
That makes perfect sense to me. My only question is how does the reserve status of the dollar effect this equation (if at all.) Those who wish to remain competitive in selling to the US must buy dollar assets to maintain a relatively week, export-friendly rate. They wouldn't welcome a trend to shorting the dollar via a carry trade. Could they do anything about it?

jk
03-30-07, 06:39 PM
exporters might wish to keep their currencies from appreciating too much against the dollar, but if the u.s. economy is slowed/in recession, and u.s. consumers are paying higher rents, higher heating, higher transportation, higher food costs, there will not be as much of a u.s. import market to care about. the big question for foreign economies will be how well europe and asia decouple from the u.s.

lewman
04-01-07, 09:31 PM
Many cautious gold bulls are citing the 70's model/analogy where gold had a 50% correction after it's first leg up into '74. I don't think that holds water because that leg was a 6x multiple of the low. This leg up in gold is nowhere near that speculative and has been corrected nicely all the way up. .

Just posting a link showing difference in gold price trends between the 1970s and early 2000s. Indeed the gold bull in early 1970s was a lot crazier (faster and higher) than what we've got so far. See http://www.zealllc.com/2006/rgold2.htm then scroll down to the charts.