Monday, March 31, 2008

It still walks like a duck

I made an observation this morning that we usually can make in bear markets. Today, the government (over)stepped in with sweeping reforms and more meddling, er, regulation to stabilize the financial markets. Nothing today is structurally different than it was a year ago but now that the poo has hit the fan and people are losing money WE HAVE TO FIX IT!

Nobody in Washington was hot to trot out reforms when everyone was making money. Hmm, sounds like Enron to me. When that failed company was printing money had over fist everyone was quite willing to overlook certain excesses. The same went for the tech bubble when the market valued Priceline.com - a travel agent - more highly than all the airlines put together. That may be an exaggeration but not by much (if at all).

Who in their right mind would buy stock in a company today that had no earnings, no revenue and no assets other than a good idea? Sounds like 1999! Back then, they were evaluating stocks not on price to earnings ratios - since there were no earnings yet in the new economy- but on price to advertising. After all, the more aggressive they were to get customers, the more revenue they should eventually have.

Then came the bear market and all that poo was flushed down the porcelain idol. All the excesses that built up during the greatest bull market most of us have ever seen were exposed and eliminated. Today, all the shady dealings in the mortgage market, all the over-leveraged hedge fund tricks and all the carry trade shenanigans have come back to bite everyone in the collective backside. Thank goodness the government is doing something (kidding!). Why don't they do something before the mess begins?

This market is walking like a duck, talking like a duck and getting everyone quacking. Substitute bear for duck because everything that is happening today happens in bear markets.

Time to ride the slippery slope of hope (the inverse of the wall of worry). If your are not being fooled by the idea that inflation is contained and a death spiral in the dollar is good for the economy then break out the cherry sauce and let's eat this duck together.

3 comments:

Anonymous said...

I testified against the IRS in a valuation case involving a company that lost money five succeeding years, had no equity capital,used employee wages (legally) to fund working capital and, by law, was not allowed to make a profit under the goverenment's Medicare system. It took 8 years of taxpayer dollars before the high court finally saw the absurdity of the situation and told the IRS this business isn't worth a good squat! Everybody gets to rant and rave? From that experience I learned the government is going to do what it is going to do. It happened in my little world, it happened in the real world (IRAQ) and it's happening on Wall Street right now. I'm afraid it is what it is and there's little we can do about it.

Sorry, I had a nice experience on a recent trip with the NTSB. On a professional note, you wrote in your blog: "substitute bear for duck because everything that is happening today happens in bear markets"

Could you recommend the best source/document you've come across on the characteristics of bear markets? Hopefully, one in plain English so I don't feel like I'm back at U of C?

Quick Takes Pro said...

What we can do about it is trade it properly.

I don't have any specific source that sums up what happens in bear markets other than experience doing this stuff for 25 years. My advice is to read everything you can find in the media that does not push any investment agenda (bull or bear). Websites are abundant.

Anonymous said...

And you do it well. Just curious given your breadth of knowledge. Thanks for the response.