The Weekly View (7/31/17)

What’s On Our Minds:

Market bubbles, like the tech bubble of the 1990’s, have formed for as long as there is record of exchange, and all follow a similar pattern of speculation.

In the early 17th century, the Dutch became enraptured by tulips, and created the first chronicled speculative bubble in history. As recorded in Charles Mackay’s Madness of Crowds, tulips began to grow rapidly in popularity all around Europe, and therefore tulip prices rose sharply. Many deft merchants identified this trend and made a large profit in trading tulips. Other merchants and the nobility, seeing these extraordinary profits, jumped into the tulip market. As a result, prices for tulips kept rising and rising, backed by nothing but speculation. Soon enough, nobles, farmers, seamen, chimney sweepers, and maidservants alike were all dabbling in tulips. Below is a chart of what one individual paid for a single tulip bulb!

(Source: The Tulipmania: Fact or Artifact?)

Eventually, the tulip market ran out of new money to keep bidding up prices. As reality sat in, speculators all ran for the exit and prices plummeted. Many speculators lost all their savings as contracts they purchased were ten times the price that tulips were then trading.

This is an important lesson for us in 2017. As Benjamin Graham poignantly argues, “an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Graham would certainly have chuckled at otherwise serious individuals who lost a whole year’s salary on buying tulips.

Buying something, be it tulips, Bitcoin, or the hot stock of the day, as an investment because everyone else is doing it, or because of tremendous recent returns is not investing, but speculating. It may work in the short term, but it always has devastating effects in the long term.

The lessons of manias past are always important to keep in mind in an ever changing market. This isn’t to compare any particular asset to the tulip bulb craze, but it is always smart to study history in an attempt to understand the present. Many people will make bold claims about “X being in a bubble” or “Y will never go down.” A prudent investor, not speculator, will not be swayed by the opinions of crowds and will continue to drown out the noise and invest in quality assets at good prices.

Tulip Price

(Source: The Tulipmania: Fact or Artifact?)


Bitcoin Price


Last Week’s Highlights:

The Dow Jones Industrial Average climbed to a record 21,830.31, up 1.2% the past week, backed by strong earnings. Big names like Verizon, Google, McDonald’s, and Boeing all surpassed expectations for the second quarter and gave an optimistic forecast for the future. Oil rose 8.6% last week after Saudi Arabia cut its oil exports and OPEC said they might discipline member nations who do not follow OPEC’s production limits.

The Federal Reserve left interest rates unchanged after their meeting Wednesday. They hinted that the tapering of its $4.5 trillion balance sheet will begin “relatively soon.” GDP rose 2.6% in the second quarter, which was slightly less than the estimated 2.7%. The growth was driven by increased consumer spending and increased business investment, both positive signs for the macroeconomic health of the US economy.

In Washington, the GOP’s repeal and replace effort to end ObamaCare has concluded for now. In a vote for “skinny repeal,” John McCain shocked the nation by casting the decisive “no” vote, resulting in a 49-51 vote. The market has been indifferent to the chaos in Washington as the major indices continue to climb, despite a recent legislative defeat (TrumpCare), high profile firings (Chief of Staff Reince Preibus), and swirling allegations surrounding the current administration. The next major agenda item is tax reform, which is very important to corporate America, and has been a major reason for the so-called Trump Bump.


Looking Ahead:

There will be a slew of economic data released this week. On Monday, the Chicago Purchasing Managers Index will be announced. Personal income and spending data, and the ISM Manufacturing Index will be reported on Tuesday, and nonfarm payrolls will be released Friday. The Bank of England also will issue a rate decision on Thursday.

In large cap earnings this week, Apple, Under Armour, Sprint, Time Warner, Kraft Heinz, and Pfizer are all set to report. Oil earnings are in full swing with BP, EOG, Devon, Chesapeake, and EPD reporting throughout the week. At General Electric, John Flannery will be replacing Jeff Immelt on Tuesday and investors will be waiting for any news about the direction of the company.

In political news, there are hopes that Republicans will abandon Healthcare reform for the time being and begin to focus on tax reform. Mike Pence will visit Eastern Europe.