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What Bubble?


Keep in mind that the market kept on rocking in 1999 all the way to March 2000. So the rally may have some more steam. It is the aftermath that should bug you.

I recall a day in the summer of 1999. As usual, my family and I were spending some time in Glacier National Park in Northwest Montana. There is a cool little cafe outside of Many Glacier in Babb, Montana called the 'Two Sisters Cafe.' If you are ever around there, be sure to stop in as they have the best home-made pies known to man!

Why do I bring this up? I bought the local newspaper (all 10 pages of it) and on the front page were stories of regular Montana folk quitting their jobs to become 'day traders.' I turned to my wife and said 'uh oh.'

Fast forward to 2007.

I would note two items. First, when reading the Wall Street Journal yesterday, I saw a picture of Chinese traders huddled over a slew of stock market monitors with huge smiles on their faces. Why are they smiling? Well see the chart below. If you sold all of your worldly belongings (many are supposedly doing so) and owned this (see the chart), wouldn't you be smiling? They are reportedly so giddy that all of these brokerage offices are actually being forced to put more quote machines in their offices to satisfy their growing audience. This is classic manic bubble behavior.

How long can it last? Who knows. As Keynes said 'markets can stay irrational longer than you can remain solvent.' Just ask anyone that shorted JDS Uniphase on its way from 80 to 130 only to see it fall to 3.

But see the chart below. Does it remind you of anything? This is the NASDAQ Index from back in the bubble days of when I was in Babb, MT. And yes, they usually end poorly.

On a final note, on my way into the office today, I heard that the US market was the 'least over valued market in the world.' I usually try to listen to comedy or jazz on the way to work but somehow got stuck listening to business news. I heard that liquidity will continue to drive all of the markets and hey, you may as well buy the cheapest (least over valued) market. The US.

I hate to break the news to everyone, but with the median stock trading at 19.5x EPS and a 1.1% dividend yield, bonds over valued due to excess liquidity, and US 2-year treasuries (4.72%) 'cheap' because they trade higher than Peruvian Treasuries (3.84%), I keep thinking back to that day in Babb.

Keep in mind that the market kept on rocking in 1999 all the way to March 2000. So the rally may have some more steam. I can indeed see that happening.

It is the aftermath that bugs me.
No positions in stocks mentioned.

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