• Home
  • About
  • Team
  • Contacts
  • Blog

Bubble Watching

  1. Home
  2. Blog
  3. Bubble Watching

Portfolio manager’s Letter July 2001

First, the good news. This continues to be a good year for Losch Management Company. Losch Management Company’s net composite return for the last 12 months was + 36.95%. For the same period the S&P 500 was a -15.83% and the broader Wilshire 5000 Index was off 16.24%. So Losch Management Company’s average gain beat the Wilshire by 53%. Since I consider any year that we manage a gain while the market as a whole is down to be a great year. I hardly know how to deal with the above figures.

How are Mutual Funds Doing? Check out this table:

Name of Fund 1 year Net Change
Fidelity Aggressive growth -51.70%
John Hancock Large cap Growth -45.42%
John Hancock Small cap growth -30.94%
Janus Fund -27.57%
Janus 20 -44.11%
Vanguard Growth and Income -12.41%

Particularly at I time like this, I think that it important to understand that one-year is a very short span in which to judge investment results. Fortunately Losch Management Company’s long term results while not nearly so spectacular are still quite satisfying. I wish I could say that the above results would continue for a long period or that they were solely the product of our superior intellect, but I can not. On one point I can be quite definite, enjoy this while you can because the results will get worse, probably soon.

Bubble Watching

As most of you have probably already figured out I have a totally irrational addiction to speculating on the impact of FED policy and other such economic nonsense. So forgive me: I can not help myself.

After just 15 months of correction the NASDAQ has been reduced to a pile of rubble. This phenomenon has become so alarming that the FED has reacted by lowering short-term rates six times in just six months. This is the fastest ease ever.

Back in 1991 and 1992, after our last recession the economy was very slow to recover and the FED took a lot heat from people who do not like slow recoveries. Perhaps, it is this memory that has caused the FED to be so aggressive in its easing this year, or perhaps they see some economic danger threatening, that is not yet apparent to the rest of us.

I know that rapid and aggressive easing is politically popular and that a lot of the walking wounded from Wall Street are screaming “faster”, “faster”. Greenspan is famous for being the rescuer of economies, but I wonder if he has not become too fond of this role. Just as with other agents of the government, the Federal Reserve has always been capable of doing harm equal to or greater than the good they do.

It is after all the Fed that we have to thank for the depression of the thirties. Greenspan eased aggressively in 1998 and 1999, to deal with a real crisis in the emerging markets, and an imaginary one that was supposed to appear on December 31, 1999. The net effect was a flood of cash that created the Great Tech Bubble.

Yes, there is a lot of pain out there already (can anyone say Telecom?). Some degree of ease was certainly necessary. But there is still a lot of cash sloshing around in the system. The rubble at NASDAQ still has PE of about 50. Big Al won a long and valiant struggle by successfully puncturing bubble number one, but is he now pumping like crazy on start of bubble number two?

In the seventies the Fed had to deal with a runaway inflation of basic commodities. The battle took several bear markets over a period that lasted from 1966 to 1982. Each time the Fed would tighten until the pain was acute, and widespread, and then reverse course, but before the economy could get up a good head of steam, inflation would start to reappear and the Fed would have to tighten again. The result was a series of bear markets that left the Dow Jones at about the same level in 1982 that had first reached in sixteen years earlier.

So, as we come out of the current correction and the market begins to recover, is this the beginning of a prolonged recovery like the early nineties or are we just moving from one leg of the roller-coaster to the next, like in the seventies?

I assure you I do not have the answer to this riddle: (My Crystal Ball froze up last week after predicting that Anna Kurnikova would defeat Serena Williams in the finals at Wimbledon. Fortunately as I was about to call my bookie my daughter informed me that Anna was not even entered, something about being too busy negotiating a new contract with Charles Schwab).

But Warren’s 1999 Fortune article and the size of the cash pile in Omaha have me thinking about the seventies. It is time to watch for bubble number two. The appearance of speculation early in the next recovery will be a strong hint that we are back on the roller-coaster and we best find a way to enjoy the ride. If the FED has been too aggressive in lowering rates, the patterns of the past two years will start to reappear quickly.

The next bubble probably will not show up in the same spot (tech stocks) but it will have similar technical characteristics (money pouring into mutual funds, managers chasing momentum stocks, and outrageous evaluations placed on individual stocks within whatever sectors are chosen to lead the rally).

A rapid inflation of a new bubble will force a response from the fed, and quick return to monetary restraint. This is likely to keep bull markets short and prevent the averages from achieving new all time highs.

The speed of the recovery is critical, Fast is Bad, Slow is good. My guess is that things will go badly, the Fed will be too aggressive and a new bubble will appear quickly. On the other hand market action like we saw last week is encouraging because it retards bubble development, indicates a bigger economic correction and a slower recovery than the market was expecting a month or so ago.

07/01/2001



Leave a Reply Cancel Reply

Your email address will not be published.


Comment


Name

Email

Url


Blog Archive

2020

  • The Stock Market

2019

  • Behavioral Investing

2018

  • Trumped
  • Warren Buffett vs Wall Street
  • Globalism, 1982-2000 Bull Market

2017

  • Volatility Underlying Calm Market
  • What’s new with CB&I?
  • Passive Investing
  • Economic Cycles
  • Current Stock Market 2017 Comment

2016

  • Global Plastics Summit Highlights
  • Value Investing vs Index Investing
  • How to Play an Index Bubble
  • Successful Investors
  • Is the Market Overvalued?
  • Operating Earnings
  • Article by investment manager in Bay Hill Living
  • Building Foundation

2015

  • 3G Culture – Dream Big
  • Myopic Loss Aversion
  • CBI Nuclear Energy
  • St Joe Company
  • What’s in a Word? Plastics.
  • Are Bonds Safer Than Stocks?

2014

  • Chicago Bridge and Iron
  • CAMEX 2014
  • Global Economy October 2014
  • Fluor Corporation
  • Interesting Quotes from Daily Journal Annual Meeting
  • The Daily Journal Annual Meeting
  • Albemarle Corporation
  • Triumph Group
  • The American Energy Revolution
  • Singapore

2013

  • St Joe Company Update
  • Hedge Fund Managers
  • Triumph Group Inc.
  • Bitter Brew
  • An Antifragile Portfolio

2012

  • Leucadia National Corporation
  • This Time it is Different
  • Successful traders psychology
  • St Joe Company
  • Learning from Pain

2011

  • Long Cycles – Part II
  • Long Cycle
  • Nasty Month for Market
  • Make a Buck with Fortescue Metals Group
  • Berkshire Hathaway Look Through Earnings
  • St Joe Company Inc
  • Successful Investment Management
  • A Look Into Latin American Market
  • The Mother of all Quarters
  • 2010 Investment year results

2010

  • Fault Lines
  • US Market 2010
  • Berkshire Hathaway Third Quarter 2010
  • The Stock Market 2010
  • Berkshire Hathaway Second Quarter 2010
  • Berkshire Hathaway Performance
  • Long Term Greedy
  • Goldman Sachs
  • Berkadia and Leucadia
  • USG corporation
  • Berkshire Hathaway 2009 2010
  • Why Capitalism Works

2009

  • The Lords of Finance
  • The $44 Billion Dollar Train Set
  • Berkshire Hathaway 3rd Quarter 2009
  • Career Risk for Investment Manager
  • Berkshire Hathaway financial statements
  • Berkshire Hathaway Preferred Stock
  • Moral Hazard
  • Credit Default Swap
  • The Shadow Banking System
  • Learning Things the Hard Way
  • Our C-System
  • 2008 Investment results

2008

  • Investment Risk
  • Bear Markets
  • Generational Events
  • Orange sheets – Money is doing better
  • Inflation Not The Problem
  • Tipping Point
  • Long Term Capital Management
  • Financial Insurance
  • Western Refining Inc
  • Berkshire Hathaway Year To Date
  • Berkshire Hathaway Cash Flow
  • 2007 investment results

2007

  • Investment results 4th Quarter 2007
  • Greenspan on Inflation
  • Berkshire Hathaway Third Quarter 2007
  • Berkshire Hathaway Operating income 2007
  • Berkshire Hathaway Hedge Fund
  • Leveraged Buyouts
  • Stability Unstable
  • Weak Dollar
  • Berkshire Hathaway Chairman’s Letter
  • Steel Dynamics
  • Breakwater Resources
  • 2006 Investment year results

2006

  • New Investment Stocks
  • Equitas
  • Berkshire Hathaway Third Quarter 2006
  • Hurricane Synergy
  • Berkshire Hathaway Second Quarter 2006
  • Fat Pitch
  • Perfectly Obvious
  • Berkshire Hathaway Growth Rate
  • Berkshire Hathaway First Quarter 2006
  • Berkshire Hathaway Annual Report 2006
  • Inflation Is
  • 2005 Investment year results

2005

  • Exogenous Events
  • The Easy Money
  • Look-Through Earnings
  • High-Risk Mortgages
  • Unintended Consequences
  • Rydex Ursa Fund
  • Warren Buffett Premium
  • Private Equity
  • Latticework Mental Models
  • Buffett’s Lackluster Performance
  • 2004 Investment year results
  • Professor Smith’s Second Bubble

2004

  • Hedging Currency Disaster
  • Risk Assessment
  • Too Many Bears
  • The Chinese Century?
  • Patterned Irrationality
  • Timber
  • Costco’s Cash
  • Physics Envy by Charlie Munger
  • Asset Allocation Berkshire Hathaway
  • The Balance of Payments
  • 2003 Investment year results

2003

  • Hedge Funds
  • The trade deficit is not debt
  • Secular Bear Market
  • Which Index Funds?
  • A Different Drummer
  • Costco’s Float
  • The Power of Float
  • Berkshire Hathaway Annual Meeting 2003
  • Psychology of Human Misjudgment
  • Sitting on the Sidelines
  • Berkshire Hathaway intrinsic value
  • 2002 Investment year results

2002

  • Insurance company Moats
  • Bond Bubble
  • Berkshire Hathaway Cash Flow 2002
  • Behavioral Economics
  • The Bear Market 2002
  • Greenspan Put
  • Second Quarter Cash Flow at Berkshire Hathaway
  • Berkshire Hathaway Annual Meeting 2002
  • Red Wire – Green Wire
  • Stupid FED Tricks
  • The Bottom Line
  • 2001 Investment year results

2001

  • Don’t Fight the FED
  • Buy and Hold? – It all Depends
  • Ben Laden and Berkshire Hathaway
  • The Dinosaurs Dance
  • Costco Moat
  • Bubble Watching
  • Sit on your Ass investing
  • Berkshire Hathaway Annual Meeting 2001
  • Carnival Cruise Lines
  • 450000 Square Ft Furniture Store
  • Lunch Money Indicators – Annual report
  • Other People’s Money

2000

  • Bear Tracks
  • Build It and Money Will Come
  • Efficient Stock Market
  • Style Drift
  • Lunch Money Indicators – Options
  • Identifying Problems
  • Small Retail Stocks
  • Charlie Munger comments
  • Big Al and the Bubble Machine
  • Berkshire Hathaway Cheap
  • Index Funds
  • 16 rules for investment success
Make an appointment or contact us by phone: +1 (689) 246 49 49
© 1999 - 2022 Losch Management Company
Support by Global AGM