The first big
‘bubble’ market everyone remembers occurred
in 2000 and 2001, as we remember when the ‘bubble
popped’. Why did the Market and all these bubble
stocks get that far overvalued? Why did they run up
that high?
A new and exploding
technology was launched and traded on the Market known
as ‘The Internet’. This amazing new shiny
toy was going to change our lives, give everyone access
to everything and cure all woes from overpriced broker
fees to information about the cure to all our problems!
The new digital saviour was here!
E-Trade, Schwab,
Ameritrade and more were now going to give Joe Stock-picker
the ability to trade from home, at $30 a trade and
without any over priced ‘extra services’.
For those being charged $200 to $400 a trade this
was trading heaven. Now you could buy and sell, sell
and buy – you could take smaller move profits
and life was better, more fair and the regular investor
was on equal footing with the big shots.
Well, a funny
thing happened on the way to the bank…
Now millions and
millions of everyday Americans were flying blind.
With no 'overcharging, annoying, pessimistic broker'
to tell you that your stock pick which had a fantastic
'story' and negative earnings, should not be bought
at $110 a share. The momentum and stock story investors
started playing ‘last one out is a rotten egg’
and ‘chicken’ with way overpriced companies.
Wall Street turned into Las Vegas and the game was
wide open!
Neighbors and
buddies at the supermarket were talking about how
they made 400% in their portfolio. Cab drivers were
giving stock tips to passengers that they had overheard
other passengers talking about. Trading your own stocks
was all the rage - it was what the 'cool kids' were
doing. Everyone was talking about how much they were
making, which caused those that were not in to jump
in with both feet to get their fair share of the ‘free’
money – or the commission 'free' trades that
were being given away.
Wall Street professionals
and market veterans were getting their faces ripped
off shorting these way overpriced stocks until they
just stopped shorting them. Everything with a .com
at the end was on fire! And then reality set in…
The ‘tech
bubble’ popped, stocks collapsed and investors
got smoked as after all they were playing with fire.
A lot of people made a lot of money and then lost
a lot more money. A whole new technology was born
and companies, through the Wall Street funnel, were
provided with a lot of money to further develop the
technologies which the common person gets to use better
versions of today. Some of that money lost during
the 'bubble' did find its way back to the public through
the better uses found as a result of more research
into the internet as financed by the bubble itself!
So, given a penchant
for gambling and bubble, what did Joe and Jane Public
do next? They started flipping condos, buying second
homes and saying ‘well, they aren’t making
any more land are they?’ (which, by the way,
is a fanstastic investment strategy if you have a
200 year or so investing time horizon - but tell yourself
what you have to) The mortgage bankers lowered the
‘commissions’ and the light for the next
‘bubble game’ was set to the lit ‘on’
position.
Think about it…
What real estate markets are the most overvalued and
in trouble right now? Las Vegas, Nevada. Anywhere
near a beach, Florida? Would these areas be where
there was a massive building and overbuilding of ‘flip’
condominiums and vacation spots where all the housing
demand was perceived to be spiking? The addition of
all these extra housing units, in those areas make
up, on the margin, a large percentage of the vacant
available housing supply on the market. This effect
spread across other areas of the United States as
the guy living in New Jersey who refinanced the home
he was living in to buy a second home, a vacation
condo or just a condo to flip somewhere else, now
finds the newly purchased property under water as
far as the home equity goes, is paying two mortgages
and a lot more willing to sell either home at a lower
price to just get out of a lousy ‘trade’.
This willingness to sell lower not only brings the
price of both those homes down, but it brings down
the prices of all the other homes in both neighborhoods.
See how this can spread quickly and geographically
and even geometrically?
This is not to
blame 100% of the current housing mess on the ‘flippers’
and speculators, but just as the Joe who bought the
last 1000 shares of AOL at $130 and the last Jane
that signed on the dotted line for that 2 bedroom
condo in Ft. Lauderdale got smoked, they were public
buyers and public greed.
You want to blame
it all on Wall Street? You want to blame it all on
the mortgage brokers? All they did was give you a
cheap way to play the game – they did not twist
your arm or make you play.
Want to blame
‘bubbles’ on someone? Find a mirror Jane
and Joe Public and take a look as you certainly helped.
~Robert Perrego
3/5/2008 2:22
PM
Buy
Now
