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 ( aka fear) is causing investors to overlook great opportunities. At the same time, excitement (aka 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 renegotiated 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 20-something 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.

Comments

[Sundialsvc4]

I am sitting here in the heart of what is STILL one of the richest and mightiest nations on this planet, and as I look out of my office window (past the Rosie the Riveter poster), I see ... mothballed ... factories and rail lines galore.

I see opportunity. I see REAL MONEY to be made.

I see the ability to bring the phalanx of factories that once supplied other factories right back to within 30 miles (not 10,000) of the factories they supply. And every single one of them pays wages.

I see the ability to demonstrate to the world what "production, American style," can be. Where we don't have to shut down our cities when the Olympics come to town. And where we don't slice-off the tops of our mountains "to save money."

I see the utter folly of "we sell for less." The foolishness of seeds planted in shallow soil, in favor of the deeper soil where "production is lower and prices are higher" but the roots run deep and good.

Yes, Larry, while the chickens are running around all a'flutter, there's money to be made just about everywhere. And it has only barely begun.

[KillTheMessenger]

Well, if YOU see opportunity, YOU need to invest YOUR money.

:-)

[lgellman]

There IS money to be made--but not in everything. A lot of companies will not survive this mess and others will emerge stronger. It's not time to be pessimistic or optimistic--it's time to be smart.

[Sustane]

"I met a 2 -year old kid from New York who just lost his job on Wall Street."

Ah ha! that clearly explains what happened on Wall Street. Gosh and I thought people who worked in IT were young.

[Hefner]

Larry Gellman, you old dog...the readers you're addressing really don't have a clue about money,
sex, parenting, morality...you're terrific article say it all and easily falls somewhere between
"casting pearls to swine" and "why waste your breadth"...a terrific opinion piece...

[lgellman]

Thanks for your note. It seems pretty clear that a lot of the people who are supposed to know a great deal about money don't know all that much either. Over the last year, the smartest people I know have lost the most money. I just gets curiouser.

[lkgellpell]

hmm I can relate to that......­..........­.why do you think that is?