(Look) Back to the Future/ The Recurring Bygone Era

I recall a mid-Eighties ad in Time Magazine which pictured a (successful enough to be sitting here in my shirtsleeves at this time of day) stock broker inside a cafe reading the Journal.  The image stayed with me and reworked itself into an application to the Michigan Business School.  In October 1987 the markets crashed.  We can argue about the reasons (program trading, for instance), but in my mind the cause was simply an overvalued market.

In 1999, the dot.com revolution led to massive daily percentage gains in the stocks of companies remarkable mainly for losing money.  During that period, you could often find me in my shirtsleeves inside a cafe reading the Wall Street Journal.  There was no question the markets were overvalued, but allowing that to 'matter' was an impediment to trading.  When concerns about valuation finally flowed into prices around the Summer of 2000, the price movements were violent.

2005 was memorable for the sights encountered while driving Bay Area freeways: large numbers of new high-end coupes and SUVs aggressively navigated to and from new home developments.  Countrywide and Washington Mutual were hiring anyone with a pulse to help market loans to anyone with a pulse.  The ending to this story was best captured in an April 2007 vignette about two migrant workers in Watsonville:  http://www.sfgate.com/entertainment/article/Minorities-are-the-emerging-face-of-the-subprime-2565428.php

The housing crisis had minimal effect on broader financial markets at first.  In retrospect, this can be attributed to the amount of time it took investors to 'understand' the complex financial instruments used to market subprime mortgages, and the effect that foreclosures would have on their valuations.  As of today, I doubt much progress has been made in that area, so the 2008 Crash may have just been the pricing-in of a 'worst case scenario' by confused market participants.

Now it's Summer 2014.  Many of the same people who lost their jobs in 2008 are still looking.  Most new jobs created ask minimal qualifications.  Housing prices have recovered in many Bay Area locations, but I don't believe it's a result of economic growth.  More likely, it's due to a combination of foreign demand (cash moving in from China and India) and limited supply (lack of new home construction, current owners reluctant to give up mortgages refinanced at 40-year lows).  The S&P 500 has remained above its 200-day moving area for over 18 months, an extraordinary streak.

What's next?  It takes me back to 2005.  Traders are buying every dip, however shallow.  Anyone with a pulse is a bull, and bears are in hibernation.  2005 was not the time to buy into the American Dream.  And now is not the time to be buying into the US stock market.  As always, JMO.