Friday, October 29, 2010

Five could-be bubbles waiting to burst

MMM I wonder where we have heard this before. Once they start writing about it, it generally becomes a reality.

Thanks Charlotte for the contribution

Aivars Lode
Five could-be bubbles waiting to burst One of the oldest sayings of Wall Street (and one that happens to be true!) is that "there is always a bull market somewhere." No matter how bad one segment of the market may be performing, there is almost always some unrelated asset that is doing well at the same time. Taking that to its logical extreme, if there is always a bull market somewhere, there are almost always a few potential bubbles emerging. So which markets look like they have heated up to the melting point?

Rare Earth Elements

If there is a bubble in rare earth metals, China is likely to blame. Not only does China have the blessing of favourable geology (ample resources), but the country actively supported its rare earth mining operations at a time when Western miners were closing up shop. Now, though these elements are critical components of many electronics, China overwhelmingly controls the supply, and the government is curtailing exports and driving up prices. That, in turn, has created a boom time for would-be rare earth miners like Lynas Corp. Ltd. and Avalon Rare Metals Inc. (AVL-T4.550.112.48%).

Ironically, rare earth elements are actually not all that rare for the most part - they are just difficult to find in concentrated quantities on their own, and are typically the byproduct of other types of mining. At prevailing prices, miners are scrambling throughout Australia, the United States and Canada to bring old mines back into production and begin mining new resources. Simultaneously, those companies that depend upon rare earth elements are doing what companies always do when a key component gets expensive and/or scarce - they are engineering around the problem.

Although rare earth prices could stay high for a while (mines do not open overnight), new digging and new alternatives are likely to put an expiration date on this bull market.

Cloud Computing

If there is a candidate for a good old-fashioned stock bubble, the cloud computing area is as good as any. Some of the requisite hyperbole is certainly in place - namely, that cloud computing is going to revolutionize how businesses approach IT, and how it is going to permanently disrupt the software industry.

Although many of these stocks have recently retreated from their highs, the valuations are still impressive. (CRM-N116.071.070.93%) carries a trailing enterprise value-to-revenue multiple of 9.5, while VMWare (VMW-N76.46-0.11-0.14%) trades at a multiple of 12.3, Citrix Systems Inc. (CTXS-)Q at 5.9 and LogMeIn Inc. (LOGM-Q39.731.022.63%) at 8.3. While this entire sector is seeing robust revenue growth and customer demand, that was also once true for a host of networking, semiconductor and e-commerce stocks back in the late 1990s.


Amidst all of the hoopla about the performance of grains, base metals, precious metals and even cocoa, the record prices in cotton have gone almost relatively unnoticed. Nevertheless, cotton recently broke an all-time price record and prices have jumped about two-thirds from mid-summer.

Unfortunately for investors, the odds are that this cotton bull market has short legs. There is little that can be done to boost supply in the short-term, but high prices for cotton will do what they always do - stimulate more planting in cotton-growing regions. Although it is always possible that growing conditions (poor weather, etc.) could damage the next crop or crops, it is likewise possible that journalists will be talking about a bumper crop and low prices this time next year.


The ultimate "is it or is it not" bubble argument has to be over gold (GC-FT1,359.4016.901.26%). September and October have been full of reports talking about record high prices for this precious metal, and the overall trend has been up for roughly eight years now. Despite this momentum, plenty of gold-bugs will step up to remind the market that gold has yet to reach an inflation-adjusted record of about $2,200 (U.S.) per ounce.

Although gold is often hailed as an inflation hedge, the data supporting that is less than fully compelling. What gold really seems to hedge is uncertainty; when people get nervous, they like to hold gold. Relative to the trajectories seen in the tech stock and housing bubbles, gold could still have a ways to go - particularly for those who see chaos in the political and economic conditions of the U.S. and Western Europe.

There is, however, an inconvenient truth - hardly anybody outside of coin dealers has ever made lasting wealth out of trading in gold. As gold skeptics love to point out, gold produces no income, is inconvenient to use as is, and could very well be seized by governments during the very conditions that gold-bugs point to as an argument in the metal's favour. While the ubiquity of fear in the market seems to justify a lot of the enthusiasm for gold, it is hard to see how prices are not overheated - to say nothing of the fact that if economies fail and governments collapse, people will have more to worry about than their retirement savings.

U.S. Bonds

To a lot of people, the current yield on government bonds just makes no sense. These people see the U.S. federal budget deficit, the huge debt burden and the risk of a stagflation-type environment of low growth and high inflation, and cannot understand how investors could be piling into bonds. Moreover, there is a strong sense that these artificially low rates are just a prelude to a withering bout of inflation that will smack fixed income instruments hard.

For better or worse, there are other dynamics at work in the bond market. For starters, banks can make a solid "carry trade" on government bonds - banks take their ultra-low cost deposits and invest them in higher-yielding government securities.

Second, many pension funds were badly wounded in the mortgage-backed bond crunch of 2008 and 2009. Not only have many funds rewritten their mandates to take on less risk, but the supply of bonds has changed. In many cases, pension funds are buying government bonds because they need fixed income instruments and the near-collapse of the mortgage-backed securities market has eliminated that supply.

In other words, this is not so much a bubble (at least not a bubble fueled by unreasonable expectations of gain) as a supply squeeze. That is not to suggest that it could not still end badly, but the actions of many of these bond-buyers are not quite as irrational as some believe.

The Bottom Line

"Bubble" has become an overused term in the last few years, as many investors and commentators now slap that label on any market segment that has enjoyed strong appreciation and high valuations. True bubbles are supposed to involve a certain element of self-delusion and mania. For an overheated market to really be a "bubble", there needs to be a collective notion that "it's different this time" and that the only prudent move for savvy investors is to put nearly all of their money in that asset - that was the prevailing sentiment during past bubbles like the South Sea craze, Tulip Mania, the margin-fueled stock bubble of the 1920s, the Nifty Fifty and the tech bubble of the late 1990s.

Whatever terms one wishes to use, though, there is no question that there are some overheated segments of the market today. While momentum investors may be tempted to play their luck and see if they can squeeze more profits from these runs before the flag, more conservative investors may want to give them a pass altogether.

Blackstone: Buyout Business Is Overheated

Thanks Bill for the article. I sit here and wonder if the PE space is overheated the same way that the VC and Quant funds space was / is. This resulted through pension funds allocating a percentage of their funds to these asset classes because of past performance and now there is too much capital in these classes chasing the same deals and bidding them up amongst themselves.

Aivars Lode

Blackstone: Buyout Business Is Overheated
The buyout business, flat on its back two years ago, has rebounded so strongly that Blackstone Group LP has grown queasy about competing for deals against high-bidding rivals.
In comments eerily reminiscent of the late stages of the buyout boom that ended in 2007, Blackstone's President Hamilton "Tony" James pointed his finger at competitors during a conference call with journalists on Thursday.

Bloomberg News
'It has gotten pretty hard to find companies we like,' said Blackstone President Hamilton 'Tony' James, shown in September.
"We're routinely priced out of the market," Mr. James said. "We haven't been close" to the prices commanded in recent takeovers that some rivals have agreed to, he said. "It's gotten a lot harder to find things of attractive value; we just can't get to the prices required, partly driven by robust debt markets."
Whether intentional or not, Mr. James's remarks came just as Blackstone competitor Carlyle Group announced its second large deal in as many days, bringing the two-day total to $6.5 billion.
On Thursday, Carlyle agreed to buy technology- and business-solutions provider Syniverse Technologies Inc. for $2.6 billion, or $31 a share. On Wednesday, the buyout firm agreed to pay $3.9 billion to purchase telecom-equipment maker CommScope Inc.
In some ways, Syniverse and CommScope are aggressive deals for Carlyle. Both companies are growing rapidly, are leaders in their markets and have exposure in foreign markets. As such, it isn't clear what Carlyle can do to improve operations, something leveraged-buyout firms sometimes are able to do.
And the target companies' prices aren't cheap—CommScope's price is roughly 8.5 times this year's earnings before interest, taxes, depreciation and amortization, while Syniverse's price is 10 times, according to analyst estimates for this year.
For their part, Carlyle executives argue that the companies have impressive growth prospects and that Carlyle can help them expand globally.
While the number and size of buyouts are nowhere near what they were at their peak, a flood of money into high-yield, or junk, bonds and leveraged loans has jump-started the buyout business. The average yield in the junk-bond market is at its lowest level since October 2007, falling to 8.74% on Thursday. Declining yields on Treasurys have fueled the demand for corporate debt, in turn causing a sharp reduction in spreads that had ballooned during the financial crisis.
New junk-bond sales this year reached $218 billion through Oct. 21, already 31% more than for all of in 2009, according to data from Standard & Poor's Leveraged Commentary & Data. Leveraged-loan issuance, has already cleared $179 billion year to date, more than double the entire volume of $76 billion for 2009.
Examples of recent leveraged-buyout deals that LBO executives acknowledge as expensive include children's clothing store Gymboree by Bain Capital, which offered a premium of almost 60% over the children's clothing store's share price before reports of a possible deal emerged, and Carlyle's $3.8 billion deal for nutritional supplement maker NBTY, which came with a premium of more than 40% over the share price.
With investors so eager to buy the debt, even more expensive deals are likely, buyout pros say.
Blackstone on Thursday announced a 23% increase in third-quarter profit to $339.3 million, excluding costs tied to its 2007 IPO, driven mainly by a continued recovery in its real-estate funds. But taking into account such costs, it reported a third-quarter net loss of $44.4 million, or 12 cents a unit, compared with a year-earlier loss of $176.2 million.
However, its private-equity business—the foothold of the firm—paled in comparison. Revenue dropped to $214.9 million in the third quarter from $226.9 million a year earlier, hurt by a decrease in performance fees and allocations, though that was partially offset by appreciation of privately held investments and increases in the share prices of publicly held portfolio investments.
Mr. James in his comments after the report said that Blackstone likely will see better growth from its GSO hedge-fund unit than from buyouts over the next few years, even though it is about to close on a new $13.5 billion buyout fund.
That is partly because prices for companies in auctions have become more expensive, and Blackstone is choosing to stick with smaller deals in Asia, energy transactions, and purchases in which it has few competitors, Mr. James said.
Indeed, he said his firm has been outbid on various properties in recent weeks and that Blackstone is focusing on selling, not buying.
"It's a better market to exit than to buy, prices are pretty full," Mr. James said. "The current financing market is excellent, it's almost hard to believe...there's a feeding frenzy for yield," Mr. James said.
—Matt Wirz and Amy Or contributed to this article.
Write to Gregory Zuckerman at

Insider Selling Volume at Highest Level Ever Tracked

Thanks the Strong's and the Strohmeyer's for the contribution.
Buyer beware.

Aivars Lode

Insider Selling Volume at Highest Level Ever Tracked
Published: Tuesday, 26 Oct 2010 | 2:26 PM ET

By: John Melloy
Executive Producer, Fast Money

Beyond the money

The overwhelming volume of sell transactions relative to buy transactions by company insiders over the last six months in key leading sectors of the market is the worst Alan Newman, editor of the Crosscurrents newsletter, has ever seen since he began tracking the data.

The strategist looked at insider trading activity amongst the top ten companies that make up the Nasdaq such as Apple [AAPL 303.4199 -1.8201 (-0.6%) ], Google [GOOG 615.00 -3.58 (-0.58%) ] and Amazon [AMZN 167.6799 0.8399 (+0.5%) ].RETAIL HLDRS TR (RTH)99.23 -0.41 (-0.41%%)AMEX

Then he analyzed the biggest members of the Retail HOLDRs ETF like Gap [GPS 19.02 -0.13 (-0.68%) ], Target [TGT 51.68 -0.68 (-1.3%) ] and Costco [COST 62.67 -0.13 (-0.21%) ], as well as the top insiders in the semiconductor industry at companies such as Altera [ALTR 30.96 0.21 (+0.68%) ], Broadcom [BRCM 40.56 -1.07 (-2.57%) ] and Sandisk [SNDK 38.01 -0.04 (-0.11%) ].

The largest companies in three of the most important leading sectors of the market have seen their executives classified as insiders sell more than 120 million shares of stock over the last six months. Top executives at these very same companies bought just 38,000 shares over that same time period, making for an eye-popping sell to buy ratio of 3,177 to one.

The grand total for the three sectors are “as awful as we have ever seen since we began doing this exercise years ago,” said Newman, who was ahead on such trends as the dangers of high-frequency trading and ETFs before the ‘Flash Crash’. “Clearly, insiders are seeing great value only in cash. Their actions speak volumes for the veracity for the current rally.”

1182.50 -1.28 (-0.11%%)

But the overall market doesn’t seem to care. The S&P 500 is up 16 percent since its 2010 low hit on July 2nd on the back of strong earnings driven by cost-cutting and the hopes for even more quantitative easing from the Federal Reserve.

The insider data “is good reason for considerable caution once the price action fades,” said Simon Baker, CEO of Baker Asset Management. Still “insiders normally buy early and sell early too. Longer term -- 12 months out -- it is more of a red flag.”

Newman isn’t alone in warning about insider selling. The latest report from Vickers Weekly Insider, a publication that makes investments based upon these transactions, shows that total insider sell transactions relative to purchases on the New York Stock Exchange are running at a ratio of more than four to one over the last eight weeks. The normal reading, because of options selling and other factors, is about 2 sales for every buy, according to Vickers.

To be sure, many investors feel the heavy insider selling is just an anomaly based on other reasons.

“These are folks that have had to dip into their stocks for the first time in years, as their salaries have been cut and their bonuses, outside Wall Street, have been significantly curtailed,” said J.J. Kinahan, chief derivatives strategist for TD Ameritrade. “ This may speak more to a cash flow problem, then a market belief.”

Still Newman, who is also a favorite commentator of Barron’s columnist Alan Abelson, sees the insider selling as just the latest reason, along with the mortgage foreclosure mess and fully invested mutual fund managers with no fresh powder to put to work, to be cautious on the market.

“At the risk of sounding like a broken record, we expect a significant correction,” said the newsletter editor.

* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.


John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team.