The topic of bursting asset bubbles is a touchy one. It certainly makes for great, clickable news headlines. But bubble bursts haven't occurred on a grand scale since the stock market's surge began in 2009.
Sure, we have hit what economists and strategists call "air pockets." But though suggested by many a newsletter hawker, losing 20% from the Dow and 30% from the Nasdaq in a month hasn't come to fruition, .
There were, however, two events (among many in the past few weeks that I am cataloging) on Wednesday that raise the question of whether we are in the midst of an asset bubble.
Cisco John Chambers' Comments
"Companies are getting funded way too early, and the CEOs, they know it," Chambers told The Wall Street Journal. "I do think there is a very real worry. I believe you make money as you go. I personally think that it is a mistake not focusing more on profits."
While Chambers has made mistakes at Cisco (CSCO), he is an impressive Silicon Valley veteran and tech pioneer. When he says things like this, it demands attention.
Other actions to note are Alibaba's (BABA) IPO and new rounds of financing by unprofitable eyeball-focused social media companies. There are also deals by tech companies at inflated valuations that fly under the radar. They all point to some degree of air being pumped into a balloon that was already quite inflated. Will this balloon will pop? Who knows?
Sales of new homes surged 18% to a 504,000 annualized pace in August. It was the strongest pace since May 2008. The one-month increase was the largest since January 1992. I believe this is abnormal growth that is perhaps fueled by some reckless lending that will only be realized as reckless well after the fact.
Why do I view this as abnormal growth? I think people continue to over-reach their budgets to buy a home. The reality is that strong home sales should be equating to strong sales in derivative categories in the consumer sector besides Valspar (VAL) and Home Depot (HD).
Don't new homeowners need more clothes for that larger closet? Chances are they lack the funds for those new clothes because of the new home and new car, both of which they bought on attractive credit terms.
Speaking of Valspar, the company continues to interest me. It has rising earnings estimates; it had a solid second quarter. It gives you an investment theme of industrial demand and housing demand. Hey, nobody said you shouldn't ride the bubble until just before it blows up!
Thought of the Day: Starbucks
Tea is the most widely consumed beverage in the world next to water, and can be found in almost 80% of all U.S. households. It is the only beverage commonly served hot or iced, anytime, anywhere, for any occasion.
On any given day, over 158 million Americans are drinking tea. In Japan, tea is the drink of choice; it's part of the culture. I think the Starbucks (SBUX) news about the company buying back its Japanese business was not correctly covered. The company is now on a trajectory to control its own destiny in a country, and to reinvent itself as it has done in the U.S.
Although there may be unplanned expenses in the near term that weigh on earnings from this acquisition, it is the right strategy for the long term.