What are the signs of an overheated market?

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deanrosario

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Post Number: 1135
Registered: 11-2002

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Monday, September 25, 2006 - 12:14 pm:

This is not a doomsday thread!

Rather, each October, I think it's worthwhile to stop and reflect on "worst case scenarios" for our industry, and an article in today's Age, titled: "RBA tightens reins on risky loans" (referring specifically to the significant increase in margin lending for stockmarket investments) should hopefully stimulate some discussion and analysis.

http://www.theage.com.au/news/business/rba-tightens-reins-on-risky-loans/2006/09 /24/1159036414881.html

Maybe we can learn from the past.

Here's a brief overview of what I found after doing a Google of "1929 crash" and "1987 crash".

Can you observe any of these signs in today's economy?

- Economists and historians are still debating what caused the crash.

- Although the crash was sudden and deep, there were signs that it was coming.

- Stock prices had been volatile.

- Economic slowdowns in May and June hinted that the booming economy was heading for a recession.

- Export earnings were declining.

- Firms had healthy profits and did not expect the boom to end.

- Corporate profit expectations were inflated.

- Corporations took advantage of the bull market to issue new stock, which overheated the supply.

- Banks gave out easy and cheap credit, and let people buy stocks on margin: buyers paid only a fraction of the share price and borrowed the rest.

- Speculation was rampant: bidding drove up the value of stocks as much as 40 times the companies’ annual earnings.

- Investors seemed to pay less attention to corporate earnings than to how much their shares would appreciate in value."

"Never commit yourself to anything you can't walk away from in 30 seconds." Neil McCauley (played by Robert de Niro) in 'Heat'.

"Hope is a dangerous thing. Hope can drive a man insane." Ellis Boyd "Red" Redding, played by Morgan Freeman, in 'The Shawshank Redemption'.

hilarius

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Monday, September 25, 2006 - 12:33 pm:

Hello Dean

It can never happen again

People today are far too smart

Teenagers know everything

Pigs may fly

Hilarius

I come in peace to share my thoughts and to shine my candle light on possible long term opportunities

mezza8

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Registered: 10-2002

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Saturday, January 27, 2007 - 01:42 pm:

Hi all
Allan Kohler has written a piece this past week relating todays market to that of 1987, whilst the market is not at the same point as 1987 there are some things in common with it. The article http://www.eurekareport.com.au/ is a good read.

Cheers Mezza