Wednesday, December 10, 2008

It Just Gets Curiouser and Curiouser

This time it's different.

That's the one phrase that I was always taught to view with great suspicion because it tends to be used to justify market bubbles when valuations and investor behavior seem to be moving to irrational extremes.

It was used by investors to justify plowing into internet stocks ten years ago even after prices had gone to the moon and the companies that were being valued at billions of dollars still had no earnings. It was also used to justify skyrocketing real estate prices and mortgage lending practices that seemed reckless and dangerous. Instead of pulling back, excited buyers came up with reasons why it was different this time than every time in the past when those bubbles popped and wealth disappeared.

At the end of the day, however, the laws of supply and demand and human nature don't seem to change much. People get too excited (greedy) when prices are going up and they get too excited (afraid) when prices are going down. At those times there are always good reasons to think that whatever trend is in motion is so powerful that it's just going to be different this time. But it never is.

Yesterday marked a real milestone that points out just how extreme the fear and panic about the future have become. The U.S. Government auctioned off $30 billion worth of one-month treasury bills with a yield of zero. An even more shocking statistic is that there was so much demand for those t-bills offering no return that almost $100 billion of additional orders went unfilled. For more details and explanation, check this article from today's New York Times:

At the same time, investors seem totally disinterested in the highest quality corporate bonds yielding 6 percent, the highest quality bank preferreds yielding more than 10 percent, natural gas pipeline stocks yielding 10 percent, and hundreds of established companies with solid cash flows, little or no debt, dividends of between 3 and 6 percent and the potential for growth.

Call me stupid but I think we are at one of those moments in time where excitement ( fear) is causing investors to overlook great opportunities. At the same time, excitement (depression and self-loathing) is causing others to remain paralyzed with their current holdings because they have lost so much already that they feel they can't afford to make a change. As I've said before, this is not a time to invest looking in the rear view mirror and obsessing about how much this or that stock is down. It's a time to be smart and upgrade. It may be that those people can't afford NOT to make a change.

There is no doubt that the economy faces daunting challenges. The wave of corporate layoffs is gaining steam and at this point in time people just aren't spending money or buying anything they don't really need. The news media has focused on the trillions of dollars in government programs as the key to getting out of this mess. But, at the end of the day, a lot of people bought more stuff than they could afford and it's going to be hard for them and hard for the people who loaned them the money to do it.

I read yesterday that in more than half of the distressed mortgages that have been renogiated by lenders, the homeowners were back in default in just a few months. Most of these people just bought way more house than they can afford and eventually the lender will end up taking it back no matter what adjustments are made to interest rates.

Kristen and I were in Las Vegas for two days over the weekend and the place was empty. I met a 23-year old kid from New York who just lost his job on Wall Street. He said he came to Vegas because he got a round trip flight and three nights at the MGM Grand for a total of $329. I ran into a lot of people like that. What I didn't see was a large group of high rollers throwing money around. We went to see Bette Midler and the theater was half full. Large sections of the casinos were shut down due to lack of customers and The Strip was lined with half-finished huge developments. I am not a Las Vegas person but my sense is that these are tough times.

There will be more bad news regarding disappointing corporate earnings and billions of dollars worth of loans that will not be paid back. But for people with a need for current income or the ability to invest with a 3 to 5 year time horizon in stocks, these will prove to have been times of great opportunity.

The riskiest times are those when people feel secure but they really aren't. Once the risks are known and are on our minds constantly {priced into the markets}, times are actually less risky. As a country, we were far more at risk prior to 9/11 than we have been since because we are now aware that those previously unimaginable risks actually exist. Ironically, once we are aware of the threats, we feel more vulnerable but actually we are safer.

Investors have lost a lot of money and are more aware of the risks in the market than they have ever been before. That awareness makes them safer and yet they feel more worried. Even with the challenges that remain, we are less at risk from these price levels than we were a year ago when no one was losing any sleep over their investments.

People ask me if it's time to be bullish or bearish. I say that it's a time to be smart. Three years ago, people were lined up to buy houses in Las Vegas and Aspen that had already tripled in price. That was the sign of an irrational environment that couldn't keep going. Today they are lined up to buy treasury bills that guarantee them zero return. Enough said.

It just gets curiouser and curiouser.


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