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Written by José D. Roncal
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Wednesday, 15 June 2011 02:31 |
LinkedIn—one of the very first online social networking systems that lets you link up with business colleagues and friends—recently rolled out an IPO offering. Guess what happened. The share price more than doubled on the first day of trading, which immediately revived memories of the dotcom bubble of the late 1990s.
After a long period of languishing in the doldrums, the market for Internet IPOs is suddenly reinvigorated. And with it, debates about a new tech bubble.
Bubbles are nothing new of course, they’ve been inflating and collapsing ever since the Tulip Mania, South Sea Company, Mississippi Company, and most recently the housing bubble and the dotcom bubble, all of which we told you about in our book,The Big Gamble: Are You Investing or Speculating?
Maybe we should revisit the meaning of an asset bubble. Warren Buffet described it best with his recent comment regarding the housing bubble:
"The only way you get a bubble is when a very high percentage of the population buys into some originally sound premise…that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action…People overwhelmingly came to believe that house prices could not fall significantly. And since [property] was the biggest asset class in the country and it was the easiest class to borrow against it created, you know, probably the biggest bubble in our history."
If there is a new tech bubble on the horizon, it seems to be forming pretty much like every other bubble in history. We like how Dr Jean-Paul Rodrigue; Department of Global Studies & Geography at Hofstra University breaks down the formation of a bubble into four phases: stealth, awareness, mania, and blow-off.
Stealth phase: intuitive speculators and Venture Capitalists start buying up stocks in a market segment that nobody else is paying attention to.
Awareness phase: others become aware of this new momentum, jump in, and the added demand pushes the prices higher.
Mania phase: with LinkedIn valued at $8.9 billion after just one day of trading, we may have officially entered the dawning of the mania phase. Already Silicon Valley startups are rushing to file their IPO papers.
Blow-off phase: Just stand by and observe.
Shortly after LinkedIn went public, The Wall Street Journal posted an online yes/no vote asking whether this successful IPO signaled a new tech-bubble. Within a few days 66% of the respondents had voted “Yes." Naturally there is nothing scientific about this kind of game, but it’s interesting to note that a bubble forms only when everyone firmly believes that “this time it’s going to be different."
The bottom line is this. Ignore advice about whether or not something is a bubble. If you’re smart, it won’t matter either way because the only advice you should be following is the kind we layout in our book: Do your homework and only buy into companies that you deem to be fundamentally sound. Doing your own research should also include reading our bookThe Big Gamble: Are You Investing or Speculating?
We can’t make any promises, but reading it just might lead you down the path to success. What we can promise is this: wearing blinders while getting pulled along by herd mentality will most likely lead you on the path to failure. |
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Written by José D. Roncal
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Wednesday, 01 June 2011 02:57 |
Seems no one can agree on who is responsible for the high cost of oil. Is it because the prices have been moving so erratically and quickly that no one can act fast enough to pin down the culprit?
In the last few years we’ve seen the market fluctuate all over the board, with wild price spikes and unpredictable volatility. In early 2007, oil prices were around $55 per barrel. By summer of 2008, they were up to $147 a barrel, six months later they fell to $35, and two months ago, prices were hovering around $120.
What or who is behind it all? The answer isn’t cut and dried. Some say it’s market fundamentals—pure and simple. They weigh the demand for oil, especially the growing demand coming from China, India, and other emerging nation. They also factor in the “peak oil” theory, the claim that we are, in essence, “scraping the bottom of the barrel,” that we’re running out of the stuff, and that looming scarcity always triggers high prices.
In the opposite corner you have those who come out swinging with both fists at the speculators. “It’s those guys that dabble in derivatives,” they say. “It’s the oil futures and oil options market, those obscure trades that take place on the New York Mercantile Exchange (NYMEX.)”
This derivative activity is referred to as trading the “paper barrel.” There are no actual barrels of oil getting passed around—just pieces of paper, the contracts of exchange. It’s reported that future markets for crude oil is about one billion barrels a day and it’s not just the oil companies that are involved—it’s also high-rolling high-risk taking individuals and huge financial institutions.
On May 24, the Commodity Futures Trading Commission filed a federal lawsuit charging two traders from a Swiss firm with hoarding and dumping millions of barrels of oil in order to reap more than $50 million on derivatives contracts. Just three weeks earlier, President Obama had requested an investigation into oil price manipulation, and the House oversight committee reported that excessive oil speculation could be inflating prices by up to 30%.
So do we blame the speculators for our pain at the pump, or is it the worldwide thirst for oil? Before you jump to conclusions, remember that speculation, a normal function of markets, is not the same as illegal price manipulation. As we’ve previously stated in this blog, and certainly have covered extensively in our book,The Big Gamble: Are You Investing or Speculating? speculators have an important role to play in keeping markets healthy by taking on risks and keeping prices fluid.
The most familiar hue and cry coming from frustrated consumers watching the price wheel spinning at the gas pump is that speculators are driving prices higher. But a little investigation beyond the obvious would reveal that speculators just as often bring fluctuating prices back into line. Speculators may sometimes contribute to stabilizing prices or bringing them closer to what they should be just by taking on risks that others don't want.
Unanswered questions about where to lay the blame have been bandied around for years. Yet the two most fundamental questions that still remain are: How do we address the issue of oil prices and what does the future hold?
As oil is a global commodity, global solutions should apply—measures like energy saving technologies could help establish an oil balance. But without a major technological break-through, global demands for oil and energy will continue to fan the fires of speculation and re-enforce price increases.
Some tighter regulations that enforce rules against illegal trading practices could ensure that speculators gamble mostly with their own money. But regulations are best when they work to keep markets fair, not when they attempt to control speculators.
As we’ve said repeatedly, speculation is an important aspect of how economies function. You can read about how some of the most illustrious speculators have contributed to economies when you pick up a copy of our bookThe Big Gamble: Are You Investing or Speculating? It just might change your whole perspective on the topic. |
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