A Bourse Diary

Thoughts on stocks, speculation and ... life

Friday, December 16, 2005

Who is the greater fool?

You have probably heard of that "Greater Fool Theory". I'd like to transform it a little bit - from an exclusively stock market view to a capital market view. Who is now the greater fool - the stock buyers or the bond buyers? Or even like this: the people holding the shares or those holding the money (cash)? Who will first loose the patience or will be forced somehow to sell (or to buy, of course - there are always two sides of a transaction)?

Stocks will not fall if there isn't exceed of supply. Where will this supply come from? Some possibilities:
- the companies need money to finance investment projects and issue new shares
- IPO sector gets more active and fuels the market with new companies (shares)
- the stock-investors get anxious and prefer to park the money in bonds
- the bonds again offer attractive interest (plus safety)

I still can not see any big investment activity that absorbs the (global) money the way companies need to issue shares. Actually the corporations are full of cash and have rather "problems" finding appropriate place/investment for it. The companies seemingly can still manage the existing demand for their products with the existing capacities. They produce still on below historical average levels (although approaching the average). What I see is still concentration on the core business (where the risks are also lower) and on saving costs. There is no substantial rush for expanding business or entering new markets. Also (or therefore?) the IPO activity is not huge. The business does not need money - IMHO - by now. And even if, it's cheaper for them to borrow (and lock in the low interest). The companies rather act as capital provider and together with the global saving activity are still mounting up money in fixed rate and hold the interest rates down.
And there we come to the attractivity of interest. I can hardly consider the interest rates of 4,5% attractive. Even if there would be no inflation (above the targeted 2-3%, who knows exactly?). And adding an even small further inflation peaking makes the investment in bonds a "zero-sum-game". The interest rates in Europe are even lower!?
And finally, how about the anxiousness? Well, it's sentiment, you never know. But beyond the normal waves of optimism and anxiousness, I guess the most investors well know about the bad news possible to come (cooling off of economy, rising inflation, rising oil etc.). But I ask myself, why should you sell now stocks performing not bad, lagging actually behind the earnings growth pace, with price earnings ratios below bond yields and solid dividends? To buy 4% fixed rate? No, thanks, I stay with stocks.


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Disclaimer: All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and are in no way intended to serve as personal investing advice and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Readers should not make any investment decision without first conducting their own thorough due diligence. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed.