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Home Picks Figures Great Investors Vault OpEd Contact c2003-06 Thomas Barnard
Otra Burbuja?
Otra Burbuja (o-tra bur-boo-ha) is Spanish for Another Bubble. With this edition of my newsletter we are going to face the facts. The facts are that the small caps are hitting the cover off the ball. The Russell 2000 is hitting all time highs. Higher than the highs hit back in 2000. Same goes for Dow Jones Transports. All time highs.
The Wall Street Journal has been reporting that the Dow Jones Industrial Average has been hitting 6 year highs, and the S&P 500 has also been hitting short term highs. Coinciding with this news, I picked up at my neighborhood bookstore The Next Great Bubble Boom by Harry S. Dent, Jr.
To explain these rather fabulous numbers, he says “each major wave up has turned into a bubble and each bubble has been steeper and more exponential than the previous one.”
Ultimately, he says when the bubble pops, it all will collapse into a depression on the order of the Great Depression, and last for 10 years or more, of course. But baby boomer purchasing demographics, the effect of discount brokerages on stock prices, and baby boomer innovations are in control, so enjoy the ride.
Me? I’m still struggling to absorb all this optimism. If it’s true, Wow! But all my heroes have been warning for bad times for some years now – John Templeton, for example. Warren Buffett has thought prices have been too high for years, and meanwhile has been building up a mountain of money to buy when stock prices plummet. So, this comes against some of the best wisdom around.
On the other hand, great companies like Microsoft, Intel and Cisco have been dead money for 10 years now. And if they start to move up, then we could see more higher highs for the Dow and the Nasdaq. Could it happen? Well, Microsoft will be coming out with its latest operating system later this year, Vista. And networking has never let up, so Cisco could see continued strength. But Intel is going through a belt-tightening phase, and that means growth is stalling.
On the downside, Dent already thought oil prices would be going down by now, and it’s hard to imagine how stocks can move to heady heights against $3 gasoline. For now, it’s earnings that are winning the day. Starting with staid old cyclicals like Alcoa coming in with 100% increases in earnings, so you have reason to be hopeful.
Dent has specific targets. As I already mentioned, he felt that oil prices would already have stalled by now; however, he concedes that demand from China and India might push it up to $100 per barrel by 2010. But afterwards, oil will decline to $40 or even $10 per barrel.
He feels the Dow should be at 12,000 by mid-2006, even as high as 14,000 or 15,000 by July or August. On the downside, he says the danger signs would be “a significant break before 9,500 on the Dow in late 2005, or 2) we see the markets fail to have a strong rally by March 2006.” Well, neither of these danger signals have come to pass.
If I really believed all this stuff, I would be 120% invested, but as it is I am 72% invested. Of course, the more strength I see, the more I am convinced Dent may well be right. Things never work out exactly as you’d like. After all the Fed manipulation, all the low interest rates stealing car sales from future years, all the borrowing consumers have done against their houses, I thought the Dow would be headed towards new 20 year lows by now. But I saw a Citicorp exec on CNBC say that judging from the financial profile their customers, the consumer has never been stronger. So, if stocks are at new highs, and you expected new lows, which I did, I think you have to sit back and reconnoiter.
So, I’m still conservative but I’m faltering. It’s scary as hell to invest when PE ratios are still historically high, when the collapse you were anticipating after 2000 decline never materialized, when consumers are basing their economic outlook on fantasy house values, but I am thinking about investing more money. It's a case of holding your breath when you take foul, smelly, noisome garbage out to the garage.
If oil stays high, I think it will generate spectacular innovation in energy generation. I would reckon that sunlight will be harnessed. I just watched an HBO documentary that said solar energy in an area 100 miles by 100 miles would take care of all our electrical needs. Add to that windpower, and I think you’re talking real power generation. So, in the end, I think persistent high oil prices will be the best thing to happen to the U.S. since coal and oil. I, for one, will be looking for the best investments of smaller companies doing innovative things. GE is into windpower, but you’re not going to make a huge amount of money with it. Well, if Mr. Dent is correct, I have to take that back. Almost anything you own will triple in the next three years, even GE, if the Dow goes to 40,000. Although I think we will get started with these things in the near term, it may not be until the crash of the next decade when the government decides to use huge public works to build these things to reinvigorate the economy even though by then the price of oil may well have collapsed below the cost of greener alternative forms of energy.
Dent feels that housing, after one of the greatest housing bubbles in history, has hit its peak, and that it will be flat until the end of the stock market bubble, and then real estate along with stocks will crash. REITs he feels have also hit their peak. When the bubble pops you want to be in low income housing. If you can sell, sell your choice real estate well before the crash, and buy what will then be ultra depressed vacation properties.
Something with gold or silver for now. More for political reasons than inflationary or economic reasons. StreetTRACKS Gold Shares (GLD) is a reasonable place. Newmont (NEM), even though it seems to have problem after problem, is the gold leader. If you want to try something speculative, there is DRDGOLD Ltd., a South African gold miner suffering greatly from a strong Rand.
I am in a quandary about oil. You might own some, but I am less inclined towards oil than I have been. For now, until oil sinks back to $10-$40 per barrel, I'd be looking for alterative technology stocks. Sorry no recommendations yet.
Technology that is as good as gold or oil, if Dent is right, that is where you really want to be. Where the growth will be stupendous. As I have said before, I think the most obvious thing is that bandwidth is the place to be. Internet telephone, internet movies, internet radio. These things eat bandwidth. Cisco, Broadcom, JDS Uniphase – these are obvious things. I have previously recommend JDS Uniphase (JDSU) for the optical cable buildout, and continue to recommend it in spite of the losses it has been generating over the past few years.
The closing remark on Dent. Wouldn’t it be perfect for a book publisher to put out a book on the stock market that predicts a near term bubble or boom, with the concomitant bust coming sometime in the indefinite future? Great for the book sales, but that isn’t to say it couldn’t happen. As Kissinger has said, even paranoids have enemies.
So stay tuned. Under Picks monitor our New Products and Services. We will only highlight them here when we really think something’s going to happen, but the list will be updated as we come across something interesting in our reading.
4/30/06