Well, there are two ways this can go. The market can just keep generally climbing from here, leaving last week’s lows behind forever . . . with lots of people really worried that the worst isn’t really over, but the market climbing that wall of worry (this is a market cliché: bull markets climb a wall of worry) . . . until everyone is finally convinced, months or years from now, that the bull market really is real, and it really is safe to get back in – and that will be the top. There is so much money on the sidelines right now, in money market funds and the like, there could be an explosive move up.
Or it could turn out that it’s already too late – that Citigroup’s 30% gain since we bought it last week is all we’ll get for a while, likewise the 21% on EPN, the 24% in MRK and the 16% in JNJ. I’d be surprised if these particular stocks tested their week-ago lows any time soon, but I’ve noticed that any time I start to gloat, it’s a sign of a top (or a bottom if I’m short), which I invariably ignore to my regret. The only saving grace here may be that I wasn’t smart or brave enough to buy very much of any of these, which is – let’s face it – probably the only reason the market gods allowed these stocks to go up.
And think about it. Isn’t a lot of Wall Street decision-making little more analytical than that? Hunches and feelings and superstitions and numerology? ‘Well it’s down 80%, it has to go back up!’ (Oh, yeah? Why?) One of my best picks ever had as its symbol Charles’ initials. It’s not taught in Securities Analysis, but how can you argue with success?
What I really think, of course, is that making sacrifices to the market gods or buying on a hunch is dumb. Yes, the market, and specific stocks, will go to crazy heights and depths from time to time, but always pulled back, sooner or later, toward “true value,” like one of those balls attached by a rubber cord to a paddle.
What’s true value for a stock? As always, it’s hard to say and constantly changing. But it is grounded in things like profits, dividends, assets, and potential growth. And in the relative attractiveness of alternatives, like bonds.
And the fact is, it’s a tough world out there, hard to show a profit (especially a real one); so it’s hard to justify paying huge multiples of earnings – even if those multiples are half what they were two years ago.
Then again, with the NASDAQ down nearly 75% from its high, and the S&P down 45% or so, it’s no longer crazy to buy stocks. Risky, to be sure. Premature, quite likely. Not as smart as it was last week, you must admit. But not crazy.
If you are someone who’s been putting $1,000 a month into the market for years, don’t stop! If you’re someone who’s always been meaning to do this – start!
But don’t be surprised if this turns out to be just a few day or few week or even few month bounce in what could be some really tough years for the market.
I’m not predicting that; but you should be aware that it’s possible.
The two most important determinants: Where will corporate profits go? And where will long-term interest rates go? Profits could be robust . . . but you could also make a case that they won’t be. Interest rates could stay low . . . but with big budget deficits and a weaker dollar (which inflates the cost of imported goods), they might rise. (Rising long-term interest rates hurt stocks.)
A very long way of saying: the safer the stock market begins to feel, the less safe it actually will be.
Mike Schoren: ‘Sugar is heavier than water. The CO2 in the diet causes it to float, but the sugar in the regular has more impact than the CO2 in the regular.’
☞ That’s pretty much the executive summary in answer to yesterday‘s question. But for those who want a few more:
Peter Sheldon, Associate Professor of Physics, Randolph-Macon Woman’s College: ‘This is actually a typical demonstration that is used in physics classes when we talk about Archimedes’ Principle. It is great when someone discovers it on their own!’
Randy Woolf: ‘I am but a lowly musician, but I like science, and I think I know the answer to the diet coke conundrum. There is a measure called ‘specific gravity’, which is basically density. Some liquids are denser than water, especially those with a solid dissolved in them. Regular coke has sugar, lots of it, and diet coke has aspartame / nutrasweet in its place. Apparently nutrasweet is light than sugar. So the specific gravity of diet coke is close to that of water, or less, so it floats. (Things sink because they are dense, not because they are heavy…a cruise ship is very heavy, but filled with air pockets so it isn’t very dense compared to water.) In fact, the amount of aspartame in a diet coke is really minute, because the stuff is so much sweeter than sugar. The little envelopes of aspartame one buys are mostly filler. If they gave you pure aspartame it would be such a tiny amount it would blow of your spoon. Now as to barq’s root beer (which I love, and which floats), I guess it’s not as sweet as coke, and has less sugar in it. It may also be more fizzy, with more carbon dioxide in it. I am not sure if CO2 is lighter than water, but if you fill a balloon with your breath (mostly CO2), it certainly floats. You might want to verify this with someone who actually has studied it and knows what they are talking about.’
Jim Bryson: ‘Another interesting difference, is diet Coke will freeze in your freezer (or in a car in winter) and explode leaving a big mess. The sugar in the regular Coke depresses the freezing point enough to make it very difficult to burst a can. One advantage of the diet, though (other than saving nearly 200 calories each), is that it is easier to clean up when it does burst (or spill on the carpet) – no residual sticky sugar to attract more dirt.’
Chris Petersen: ‘I typed ‘coke floats’ into my favorite search engine and found two things: 1. Hundreds of references to coke floating and diet coke not floating. From this I think we can safely assume that what you have discovered is not a manufacturing problem. 2. Sugar is heavier than the artificial sweetener. Since Coke is nearly water, the additional weight of the sugar overcomes the small air space in the can and causes it to sink. Here is a website that goes into more detail.
Bob Anderton: ‘I mentioned the topic at lunch and was told that at the plants where they fill the cans they put four 12 packs on a scale at once and can tell if one of the cans is leaky from the total weight, even though most of the liquid that may escape is still inside the box and only a little bit may have escaped the box. They then scrap the entire set of four 12 packs. This suggests that the amount dosed into each can is very well controlled and that the difference you observed is probably due to the density difference.’
Bob Fyfe: ‘The real question though is how to make a Coke float. The answer of course being to add two scoops of vanilla ice cream.’
Quote of the Day
We're not trying to outsmart the smart guys. We're trying to sell bonds to the dumb guys.~alleged remark of the head of a Wall Street mortgage-bond group
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