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Fire and Ice


That's alotta food for thought!


Tooth for tooth eye for an eye
Sell your soul just to buy buy buy
Beggin' a dollar stealin' a dime
Come on can't you see that I am stranded

Caught in the crossfire

(Stevie Ray Vaughan)

An interesting discussion evolved on yesterday's Buzz regarding the future path of the Minx and expectations on both sides of the ride. It was triggered by an aggressively bullish call by Snoop Tony Dwyer and, as I'm apt to do, I lobbed back my two cents. Some other Minyans chimed in and voila!, we've got some morning food for Minyan thought. Enjoy...

Buzz vibes from Snoop Tony Dwyer of FTN Midwest Securities:

"S&P 500 (SPX) performance during the past two economic cycles suggests we could see near 20% gains annually through 2007. Over the past two cycles, in the first 6 years of an economic recovery - annualized S&P 500 (SPX) EPS and SPX price growth have come within 25 basis points of matching each other. Near 20% gains would be required in the current cycle for price appreciation to catch up to EPS growth through 2007.

Interestingly, the current cycle is acting very much like the last cycle of 1992-1997. Similar to now, the first 3 years of 1992-1997, the SPX significantly underperformed EPS, while in the second 3 year period the SPX outperformed slowing earnings by a wide margin.

Is significant capital appreciation possible with all the headwinds facing investors? The 1995-1997 average annual gain of over 28% began with an almost inverted yield curve (3-month to 10 year US Treasuries), a doubling of Fed Funds from 3% to 6% by 02/95, economic slowdown to near recession levels, peak corporate profit growth, historically high operating earnings margins, significant dollar rally, multi-year rise in commodities and an increase in core CPI from historically low levels. When you go back and read the periodicals from 1995-1997, not too many folks thought a 28% gain per year was coming. Remember Alan Greenspan's "Irrational Exuberance" speech in 1996?"

Buzz Feedback from Toddo:

Tony and I have been "brothers" since we used to scribe vibe at our previous platform. Through the years, we've established a mutual respect and trust that is a rarity in this business. Perhaps it's a function of a friendship facilitated through Bill Meehan who, as many of you know, had a tendency to rub off on us.

Tony had a great quote in Ojai. "Just because the sun will one day blow up, that doesn't mean we should bet on it." The point was well taken by the room full of Minyans as it resonated on a few levels. After our panel, I pulled up with Snoop and had a heart to heart.

The fatal flaw I find with his logic is that our basis of comparison is skewed. Never before have we "unwound" from the world's largest financial bubble and, as such, basing assumptions on past cycles may very well be the trap of all traps. That doesn't mean he's wrong, obviously, it simply means that we should be aware of the caveat.

I will offer that, as a proprietor of a fledgling business, there's a large part of me that hopes he's right. I've followed his work (along with that of the Horse) for a long time and they've earned my respect. My point is that no reward comes without risk and, as Minyans, we should be uber-aware of defining that risk regardless of your stance.

Minyan Vibes in response:


I think the whole notion of trying to predict the macro over a long period of time is a very difficult, if not impossible task. I think at the extremes it is easier to identify inflection points. If you look and read the various articles written about the world's greatest investors (Buffett) you'll find a common refrain, they don't pay attention to economic stats or the macro picture they look at individual situations and buy them when they meet their criteria regardless of what is going on in the market.

Whenever I see something predicting the future trends of the market I chuckle a bit because it really is an impossible task. We may grind up for the next 10 years at very modest returns or we may go down hard in 06, nobody knows, and the future is not written yet. I actually think the more you tune out macro type calls and filter them the better you are as an investor in common stocks. Just my take.

Minyan Franklin.


I agree that prediction and market timing is a difficult and daunting task. I do believe, however, that mapping out a probability spectrum is an intelligent approach, allowing for all outcomes while preserving capital and proactively positioning for a perceived path.


The market has gone nowhere since 1998, yet earnings have almost doubled. Not only have they almost doubled, but the "quality" of the late 90's was as over-reported as the current earnings may be under-reported (thanks SarbOx). We also have cost of capital down by ~ 40%, corporate cash at all time highs, pent up CORPORATE spending, and the late innings of a Fed headwind.

Can that many years of zero performance, given improving fundamental valuation improvements really be colored as a MANIA? Aren't we just perhaps seeing poorly positioned hedgies/traders finally seeing these (under reported) positives, and fearing being left behind as the market does embrace this undervaluation? Thanks, as always, for your time.

Minyan Scott


We've virtually communicated for years and you've proven yourself to be a sharp thinker. This is more grist for the Matador Crowd and, as there's two sides to every trade, this "makes sense" going forward. The other side of the ride, of course, is the imbalances we so often speak of will tip the scale and start to wail. Does it make sense to bet on the sun blowing up? Nope-no argument there. But it doesn't hurt to take sun screen to the beach and that's the type of risk management we often discuss.


I am much more in his camp than yours, as I'm sure you know from previous notes. I believe that you are dramatically overstating the importance of the "unwind" from the biggest financial bubble of all time thesis. Yes, there was a tremendous bubble in dot com stocks that saw their market values go to ridiculous levels with no real business behind them, but that excess was long ago taken care of, as they are all out of business now.

There was no bubble in the businesses of the great majority of companies in this country. We came through the worst bear market in 70 years without any serious financial system problems developing. I know you are worried about the great growth of derivatives, but isn't it just possible that our ability to navigate the rocky shoals of the first 3 years of this decade and beyond was due to the success of derivatives, whose stated purpose is to pass risk to those most able to afford it. It appears to have worked. While the boogey man may be just around the corner, I see no reason to believe that he is, although I am always on the lookout for him.

Please forward this to Tony, as he is an old friend from my days at Prudential. Thanks. As always, I would welcome your comments.

Minyan Mark


I've thought about the "isolation" of the bubble-it's actually something that Snoop and I discuss often-but I disagree that we've successfully navigated the rocky shoals unless, of course, you predicate that thought with the simple fact that it hasn't "mattered" yet. Will it? Only time will tell, my friend, but I'll return to a theme that I discussed in Ojai. There is a substantive difference between legitimate economic growth and debt induced demand. We're up to our eyes in IOU's on the consumer, corporate and government level. Those imbalances are growing-not dissipating-with time.

I offered a thought earlier this year that the bull case may, in fact, be the elasticity of debt. In other words, just as the bubble lasted longer and expanded farther than anyone could fathom, so too can our burgeoning budgets (on all three levels). That could spawn further upside but, for what it's worth, my belief is that the longer we let the bar tab bubble, the more severe our hangover will be.

To me, saying that there aren't problems simply because prices are still lofty is an inherently flawed assertion. I've always preferred to respect the price action, not defer to it.

Thanks~ and good luck!


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