Five Bubbles Still In The Blowing Phase

Rare earth elements are looking bubbly

By Stephen Simpson

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?

Bonds
To a lot of people, the current yield on government bonds just makes no sense. These people see the 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. ?Special Offer: Jim Oberweis bought Baidu at $7.90, earning readers huge profits.? Click here for more recommended stocks in the?Oberweis Report.

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.

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 favorable 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 (OTC:LYSDY)?and Avalon (TSE:AVL).

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. Salesforce.com (NYSE:CRM) carries a trailing enterprise value-to-revenue multiple of 9.5, while VMWare (NYSE:VMW) trades at a multiple of 12.3, Citrix Systems (Nasdaq:CTXS) at 5.9 and LogMeIn (Nasdaq:LOGM) 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.

Cotton
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(s), it is likewise possible that journalists will be talking about a bumper crop and low prices this time next year.

Gold
The ultimate “is it or is it not” bubble argument has to be over gold. 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 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 favor. 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 401(k)s.

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.

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Fed still blowing Bubbles?

Machine large bubbles?

The modern fed quite has a history of blowing bubbles and doing so, even when it seems to be aware of what they do.

Remember 1999 dotcom bubble and the stock market bubble in 2000?

In 1998, President of the Greenspan Fed had already warned of "irrational exuberance" on the stock market for a year or two before. But the market has continued to increase in extreme overvalued levels of historical price/earnings ratios and similar summits.

However, in the summer 1998, had to finally a correction, down more than 17% exuberance is cooled off the coast of the stock market.

Unfortunately, Asian countries had problems with their currency which hammered their problems économies.Les spread to America latine.Puis giant a hedge fund long Term Capital Management collapsed due to the large Paris on Asian currencies, causing problems also for large banks which had financed it.And the US Federal Reserve seemed to panic.Quickly, he launched two spectacular rate cuts within two weeks of the other Federal Reserve .Explication was that he did not believe the economies could handle problems if facing another stock decline in their economic problems and the United States could scope to the United States.

The result was that "irrational exuberance" resumed on the expectations that the u.s. Federal Reserve would provide additional economic stimulus via the lower interest rate.

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Even if the world's economies and the stock markets had recovered, the Fed does not reverse until June 1999-rate cuts and by then it was too late.

We know the results.The stock market had fortified until further in his balloon, then broke out and the severe 2000-2002 bear market was upon us.

Then, apparently did not realize the economy was about to enter a recession, the Fed has continued to increase the rate of interest in May 2000 and did not start cutting rates in an attempt to prevent a recession at January 3, 2001 .c ' is once again behind the courbe.à this time, the recession was upon us.

To make the economy of the recession of 2001, hampered by the terrorist organization 911 attacks, the interest rate cut fed a total of 13 times, not stopping until June 2003, well after the recovery of the economy and the 2002-2007 bull market was underway.

While the extended easy money policy has real estate bubble formation.When it broke, the recession resulting from 2007-2009 has been the worst since the great depression and the market bears 2007-2009 has been the worst since the 1930s.

And here we are, with the US Federal Reserve in another binding.

2007-2009 Recession ended last June.The stock climbed up into a new market from its low in March of last year's impressive Bull.

The Federal Reserve kept its policy of easy money in force, and yet the economic recovery blocked once than other programs of Government stimulus expired in the spring.

Reserve US Federal would probably now be able to reduce the rate of interest for re-stimulate the economy, but unfortunately has its rate of the Fed already zero, where it has been since December 2008.

So it's only remaining tool for re-stimulate the economy is to provide another series of so-called quantitative facilitate, whereby it purchases of government bonds in reducing interest rates in the long term, which are already at record low levels even lower.

Economists have concerns about how well that would help the economy .the economic problems at this stage do not appear to be the level of the rate of interest, but the lack of jobs, the dismal consumer confidence and the reluctance of banks to make loans.

However, only the anticipation of a further quantitative easing and even more low rates of long-term interest started already potentially pump until the next bubble, as investors have moved to find greater rates of retour.Argent has been flowing at a spectacular in bonds rotten high performance, basic rate risk curve and gold .and the stock market has increased by 12% from its low August when started to talk about another series of easing quantitative. Meanwhile, the dollar has been trashed on expectations the Federal Reserve American will be more money to fund a new series of quantitatif.La flexibilities "print" the dollar threat a "currency war" with other nations concerned about the adverse dollar low on their economies.

Is another difficult to spot the Fed.Exacerber new bubbles to be once again the problems on the road and garbage dollar or allow the economy to adapt with another recession deflated price assets to the level that would be self-sustaining.

This is one - self .Souffler another bubble and worry about the consequences on the road.

In his speech Friday morning the Bernanke Fed Chairman will stop everything on the quantitative easing to announce a new policy, said only that reserve US Federal plans to do more, but "take into account the costs and potential risks."

Uncertainty remains therefore a market that has probably already taken into account in an important new round of stimulus.

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