Bubble Economics,The Next Economic Bubble, Obama's Bubble, Energy Bubble, High Risk Energy Investment, MB
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each new publishing with a link to the full story.
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Mon/Tues June 1,2 2009
Today's Zinger:
It is Hard To Tell How Big It Will Get Or How High It Will Rise, But One Thing Is For Sure - A Bubble Will Burst.
The Morning Briefing:
Investment Bubble: Large amounts of money pumped into an industry unprepared to grow rapidly. From a distance it is the illusion of growth. Closer up we can see the stretch marks of growing past its capability until it bursts.
The most famous bubble was the Dutch tulip bulb bubble of 1637. The price of tulip bulbs gained 2000 percent per month and ultimately were valued at the equivalent of $76,000 per bulb. The decline was rapid (about 9 months) and left most investors impoverished. See chart below left.
The United States has lived through several financial bubbles. The great depression in 1929 is most recognized. See chart above right. In recent memory, we have lived through the internet bubble during the Clinton administration, the housing bubble during the Bush administration and we may be seeing the beginnings of the energy bubble during the Obama administration.
Let the investor be forewarned and the taxpayer beware. Bubbles come and bubbles burst. The hot air is being blown into alternative energy as we speak.
The Discussion:
The Internet:
The internet bubble was not caused by President Clinton, but it did occur on his watch. The euphoria of a game changing technology, the internet, was developed by the US military for their use and was turned over for public application in1988 under then President Reagan. In the 1990's the ubiquitous power of this technology could transform cost, time and space. Applications were being developed by many small startup companies with a vision that could harness its power. There were some early successes and the entrepreneurial spirit was fueled by visions of riches. Many rushed to California as if a new gold rush was declared and Silicon Valley became home to a new breed of company. From 1995 to 2000 incomes grew rapidly across the country and the government harvested huge tax revenues from payroll taxes as well as capital gains taxes from the resulting growth.
Based on the riches being lavished on employees of these startups, many more companies joined the party. A digital divide, the haves and the have nots, caused many investors to move their portfolio to internet companies to be a part of this tsunami. Vasts amounts of money were invested in companies being run by people with a vision, little experience, but a presentation that caused investors to leave their brains at home but with their check books in hand. A traditional company has a stock price of 10 to 18 times its future expected earnings, depending on the industry. Companies that are high performing can yield 20-30 times future expected earnings, again depending on the industry. Most internet companies had no earnings, but for those that did, the ratio of share price to earnings was in the 1000's. Investment was based on a heard mentality of get on board or get left behind, similar to the tulip bulb craze and the Dow Jones in the 20's.
Reference: Microsoft Corporation
Like almost all game changing technologies, there is a rapid rush to riches with few companies making it to long term viability. The investment gains soon turned to investment losses which showed up in 2001 and 2002. For the internet, the decline was so rapid that most investors had little time to react. The NASDAQ was trading at 4,700 at the peak of the internet bubble and quickly retreated to 1,170. Eight years later it is trading at 1,770, one-third its peak. The reality that earnings matter has replaced irrational behavior. Internet companies now have a far more difficult time attracting investment dollars.
Housing:
The housing bubble was not caused by President Bush, but it did occur on his watch. During the Clinton administration, Congress decided they wanted to extend the "American Dream" to those less fortunate. Working with the quasi governmental lending institutions of Fannie Mae and Freddie Mac, the government directed the agencies to extend credit to individuals that previously would not qualify for mortgage loans due to income or credit history. More low income families now owned homes and the policy was deemed successful. Greater pressure was applied, not only to Fannie Mae and Freddie Mac, but also to banks and other private lenders. Home ownership grew rapidly. Loans were made to people without income verification, they had no closing costs and no required money down. These loans were made on the audacity of hope that they hoped they would be repaid and the new homeowner hoped the value of their home would go up and they would make money to pay off these loans. In the meantime, the US economy had come out of a recession and was growing. Interest rates continued to decline until the US Treasury rate hit zero percent. They were giving the money away.
Investing in housing produced riches unattainable in other investments. Houses were being bought and flipped for a fast profit. Homeowners could get loans cheaper than they could rent an apartment and didn't even have to have a security deposit. Housing prices were escalating 10-20 and even 30% per year. Wall Street saw an opportunity to bundle all of these new mortgages and sell them at a profit to other investors. The house of cards was stacked high, until one day no more money was available to loan, interest rates began to rise, adjustable loans went to default and the pressure from the height of the bubble caused it to pop. Housing prices have collapsed, mortgage backed securities are in the tank and loan dollars have dried up.
Energy:
Investors are looking to fix their investment portfolios from the ravages of the past few years. With the stock market 40% off its peak and housing prices off their foundation (on average -25% and even -60% in some areas), investors are looking for new opportunities with above average returns. The general stock market will not yield high returns in the near term. Government deficits will result in higher interest rates which will affect housing and and borrowing by individuals and companies. Government spending on health care, roads and infrastructure are not regenerative. Once these dollars are spent there are no seeds to grow, only work allocated and work completed. Unlike the private sector that grows a business, most government spending is immediate consumption with little future growth potential.
The Obama administration and Congress has signed the stimulus bill ($1.2 trillion dollars) and approved the budget ($1.85 trillion dollars with spending for new programs like health care) which may add jobs in the short term but little regenerative growth potential, except in one key area....energy. This is the first President in U.S. history to take a stand for a new energy future. While he has yet to develop an energy plan, he has taken a first step of allocating federal money to assist companies in the design, development and commercialization of alternative energy sources. Wind, solar, battery, biofuel, and hydrogen. The administration has made mention of more traditional alternatives but has shown less general support for compressed natural gas (CNG) and natural gas, as these too are fossil fuels. President Obama has had mixed words for nuclear as it still has both real and perceived storage and national security risks.
With the government committing billions of dollars to a small and evolving alternative energy industry, many companies will get in line for the government handout. One of the reasons the internet companies failed is that too much money flooded into companies with little or no experience in managing capital and found themselves wasting this resource. The startup energy companies will most likely find themselves in this same place. As investors look for opportunities with the potential for higher returns, and emerging energy companies appearing to grow rapidly, there may be a new wildcat rush only to be met by the realities of the technology and the potential for growth.
The United States consumes vasts amounts of energy. Even with a focused effort on alternative fuels, it will take decades for alternative fuel companies to provide sufficient power to offset the oil needed to fuel the growth in the US economy or the increased flow of oil from developing countries. This is not to say that we should not develop alternatives, but rather we must be realistic in how quickly this technology will make an impact, the yields and timing of returns that investors should expect and the risks of investing in companies with a short track record.
The New York Times recently had an article on alternative energy stocks wich looks at the rapid rise in the value of these stocks. Here is a link:
New York Times: Alternative Energy Stocks Rise On Stimulus Plan
The Conclusion:
Unlike the internet bubble which was a market driven exuberance over a new technology, the housing bubble and the energy bubble will be the result of government policy and lack of proper government controls. As investors look for new opportunities to recover from the ravages of the past few years, be warned of the the gushing opportunities in emerging energy. These are unproven technologies that have not shown an ability to be scaled but have a lot of hope for their future. A safer and more reasonable bet on energy appears to be in existing companies that are extending their reach in nuclear, natural gas and propane in the short term with a focus on building or acquiring emerging technologies. If you want to gamble, and not go to Vegas, look to the smaller companies in solar, battery or wind, but be advised you might get blown away.
Recent ZingerKing Articles:
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Retirement Crisis, Baby Boom Generation
Lessons Learned In Obama's First Four Months
Outsourcing Torture to Middle Eastern Allies
California is going to "pot" to cure its financial crisis
Nancy Pelosi's war with the CIA
Running on empty, federal deficits
Obama's management style
Islamic Fundamentalism. Stage four religious cancer
To access these articles go to www.ZingerKing.com.
Shameless Request For Support:
Have you Zinged someone lately. Please forward a link to ZingerKing to a friend, family member or neighbor. If you enjoy the Zinger please subscribe (see the subscribe box at the top of the article in the purple side band). Subscribers receive the "Morning Briefing" when published with a link to the full article. Your email address will not sold to others and will not be shared.
ZingerKing is Published on Monday, Wednesday and Friday of each week.
Mon/Tues June 1,2 2009
Today's Zinger:
It is Hard To Tell How Big It Will Get Or How High It Will Rise, But One Thing Is For Sure - A Bubble Will Burst.
The Morning Briefing:
Investment Bubble: Large amounts of money pumped into an industry unprepared to grow rapidly. From a distance it is the illusion of growth. Closer up we can see the stretch marks of growing past its capability until it bursts.
The most famous bubble was the Dutch tulip bulb bubble of 1637. The price of tulip bulbs gained 2000 percent per month and ultimately were valued at the equivalent of $76,000 per bulb. The decline was rapid (about 9 months) and left most investors impoverished. See chart below left.
The United States has lived through several financial bubbles. The great depression in 1929 is most recognized. See chart above right. In recent memory, we have lived through the internet bubble during the Clinton administration, the housing bubble during the Bush administration and we may be seeing the beginnings of the energy bubble during the Obama administration.
Let the investor be forewarned and the taxpayer beware. Bubbles come and bubbles burst. The hot air is being blown into alternative energy as we speak.
The Discussion:
The Internet:
The internet bubble was not caused by President Clinton, but it did occur on his watch. The euphoria of a game changing technology, the internet, was developed by the US military for their use and was turned over for public application in1988 under then President Reagan. In the 1990's the ubiquitous power of this technology could transform cost, time and space. Applications were being developed by many small startup companies with a vision that could harness its power. There were some early successes and the entrepreneurial spirit was fueled by visions of riches. Many rushed to California as if a new gold rush was declared and Silicon Valley became home to a new breed of company. From 1995 to 2000 incomes grew rapidly across the country and the government harvested huge tax revenues from payroll taxes as well as capital gains taxes from the resulting growth.
Based on the riches being lavished on employees of these startups, many more companies joined the party. A digital divide, the haves and the have nots, caused many investors to move their portfolio to internet companies to be a part of this tsunami. Vasts amounts of money were invested in companies being run by people with a vision, little experience, but a presentation that caused investors to leave their brains at home but with their check books in hand. A traditional company has a stock price of 10 to 18 times its future expected earnings, depending on the industry. Companies that are high performing can yield 20-30 times future expected earnings, again depending on the industry. Most internet companies had no earnings, but for those that did, the ratio of share price to earnings was in the 1000's. Investment was based on a heard mentality of get on board or get left behind, similar to the tulip bulb craze and the Dow Jones in the 20's.
Reference: Microsoft Corporation
Like almost all game changing technologies, there is a rapid rush to riches with few companies making it to long term viability. The investment gains soon turned to investment losses which showed up in 2001 and 2002. For the internet, the decline was so rapid that most investors had little time to react. The NASDAQ was trading at 4,700 at the peak of the internet bubble and quickly retreated to 1,170. Eight years later it is trading at 1,770, one-third its peak. The reality that earnings matter has replaced irrational behavior. Internet companies now have a far more difficult time attracting investment dollars.
Housing:
The housing bubble was not caused by President Bush, but it did occur on his watch. During the Clinton administration, Congress decided they wanted to extend the "American Dream" to those less fortunate. Working with the quasi governmental lending institutions of Fannie Mae and Freddie Mac, the government directed the agencies to extend credit to individuals that previously would not qualify for mortgage loans due to income or credit history. More low income families now owned homes and the policy was deemed successful. Greater pressure was applied, not only to Fannie Mae and Freddie Mac, but also to banks and other private lenders. Home ownership grew rapidly. Loans were made to people without income verification, they had no closing costs and no required money down. These loans were made on the audacity of hope that they hoped they would be repaid and the new homeowner hoped the value of their home would go up and they would make money to pay off these loans. In the meantime, the US economy had come out of a recession and was growing. Interest rates continued to decline until the US Treasury rate hit zero percent. They were giving the money away.
Investing in housing produced riches unattainable in other investments. Houses were being bought and flipped for a fast profit. Homeowners could get loans cheaper than they could rent an apartment and didn't even have to have a security deposit. Housing prices were escalating 10-20 and even 30% per year. Wall Street saw an opportunity to bundle all of these new mortgages and sell them at a profit to other investors. The house of cards was stacked high, until one day no more money was available to loan, interest rates began to rise, adjustable loans went to default and the pressure from the height of the bubble caused it to pop. Housing prices have collapsed, mortgage backed securities are in the tank and loan dollars have dried up.
Investors are looking to fix their investment portfolios from the ravages of the past few years. With the stock market 40% off its peak and housing prices off their foundation (on average -25% and even -60% in some areas), investors are looking for new opportunities with above average returns. The general stock market will not yield high returns in the near term. Government deficits will result in higher interest rates which will affect housing and and borrowing by individuals and companies. Government spending on health care, roads and infrastructure are not regenerative. Once these dollars are spent there are no seeds to grow, only work allocated and work completed. Unlike the private sector that grows a business, most government spending is immediate consumption with little future growth potential.
The Obama administration and Congress has signed the stimulus bill ($1.2 trillion dollars) and approved the budget ($1.85 trillion dollars with spending for new programs like health care) which may add jobs in the short term but little regenerative growth potential, except in one key area....energy. This is the first President in U.S. history to take a stand for a new energy future. While he has yet to develop an energy plan, he has taken a first step of allocating federal money to assist companies in the design, development and commercialization of alternative energy sources. Wind, solar, battery, biofuel, and hydrogen. The administration has made mention of more traditional alternatives but has shown less general support for compressed natural gas (CNG) and natural gas, as these too are fossil fuels. President Obama has had mixed words for nuclear as it still has both real and perceived storage and national security risks.
With the government committing billions of dollars to a small and evolving alternative energy industry, many companies will get in line for the government handout. One of the reasons the internet companies failed is that too much money flooded into companies with little or no experience in managing capital and found themselves wasting this resource. The startup energy companies will most likely find themselves in this same place. As investors look for opportunities with the potential for higher returns, and emerging energy companies appearing to grow rapidly, there may be a new wildcat rush only to be met by the realities of the technology and the potential for growth.
The United States consumes vasts amounts of energy. Even with a focused effort on alternative fuels, it will take decades for alternative fuel companies to provide sufficient power to offset the oil needed to fuel the growth in the US economy or the increased flow of oil from developing countries. This is not to say that we should not develop alternatives, but rather we must be realistic in how quickly this technology will make an impact, the yields and timing of returns that investors should expect and the risks of investing in companies with a short track record.
The New York Times recently had an article on alternative energy stocks wich looks at the rapid rise in the value of these stocks. Here is a link:
New York Times: Alternative Energy Stocks Rise On Stimulus Plan
The Conclusion:
Unlike the internet bubble which was a market driven exuberance over a new technology, the housing bubble and the energy bubble will be the result of government policy and lack of proper government controls. As investors look for new opportunities to recover from the ravages of the past few years, be warned of the the gushing opportunities in emerging energy. These are unproven technologies that have not shown an ability to be scaled but have a lot of hope for their future. A safer and more reasonable bet on energy appears to be in existing companies that are extending their reach in nuclear, natural gas and propane in the short term with a focus on building or acquiring emerging technologies. If you want to gamble, and not go to Vegas, look to the smaller companies in solar, battery or wind, but be advised you might get blown away.
Recent ZingerKing Articles:
Retirement Crisis, Baby Boom Generation
Lessons Learned In Obama's First Four Months
Outsourcing Torture to Middle Eastern Allies
California is going to "pot" to cure its financial crisis
Nancy Pelosi's war with the CIA
Running on empty, federal deficits
Obama's management style
Islamic Fundamentalism. Stage four religious cancer
To access these articles go to www.ZingerKing.com.
Shameless Request For Support:
Have you Zinged someone lately. Please forward a link to ZingerKing to a friend, family member or neighbor. If you enjoy the Zinger please subscribe (see the subscribe box at the top of the article in the purple side band). Subscribers receive the "Morning Briefing" when published with a link to the full article. Your email address will not sold to others and will not be shared.
Posted by ZK at 5/31/2009 9:19 AM 
Categories: Obama Administration, Business, WALL STREET, Economics
Categories: Obama Administration, Business, WALL STREET, Economics
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6/4/2009 9:35 PM
ZingerKing wrote:
To subscribe to ZingerKing enter your email address in the Subscribe box located towards the top of the purple sidebar on the website. Subscribers receive “The Morning Briefing” at each new publishing with a link to the full story. ZingerKing is Published on Monday, Wednesday and Friday of each week.Friday June 5, 2009The Weekend EditionToday’s Zinger:The words “country” and “we” is not about “I” and “me”.The Morning Briefing:The long anticipated speech has been delivered. Israel, Egypt, Palestine, Iran, Iraq, Afghanistan, Europe and America all listened intently. The world was listening. It was billed as the ... -
6/5/2009 7:40 AM
ZingerKing wrote:
To subscribe to ZingerKing enter your email address in the Subscribe box located towards the top of the purple sidebar on the website. Subscribers receive “The Morning Briefing” at each new publishing with a link to the full story. ZingerKing is Published on Monday, Wednesday and Friday of each week.Friday June 5, 2009The Weekend EditionToday’s Zinger:The words “country” and “we” is not about “I” and “me”.The Morning Briefing:The long anticipated speech has been delivered. Israel, Egypt, Palestine, Iran, Iraq, Afghanistan, Europe and America all listened intently. The world was listening. It was billed as the ... -
6/5/2009 7:48 AM
ZingerKing wrote:
To subscribe to ZingerKing enter your email address in the Subscribe box located towards the top of the purple sidebar on the website. Subscribers receive “The Morning Briefing” at each new publishing with a link to the full story. ZingerKing is Published on Monday, Wednesday and Friday of each week.Friday June 5, 2009The Weekend EditionToday’s Zinger:The Words “Country” and “We” is not about “I” and “Me”, But About US, In This Case the United States.The Morning Briefing:The long anticipated speech has been delivered. Israel, Egypt, Palestine, Iran, Iraq, Afghanistan, Europe and America all listened intently. The ...
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