Friday, December 08, 2006

Speculation gets even loonier!

So says Bill Fleckenstein of Fleckenstein Capital and "Contrarian Chronicles" fame. What's eating Bill anyway? Can't he just like, "go with the flow, man", relax and enjoy the ride?

It seems that Fleckenstein recently had an opportunity to unwind and get away from all the day-to-day noise of the market, thereby granting him a little added perspecitve on the shape of things to come.

Did he come back refreshed, relaxed, and ready to get with the program? Hell, no! In fact, Fleckenstein is even more convinced that the mania mindset is firmly entrenched among the speculating public and has spread out among a number of different areas.

It is truly remarkable how reminiscent the current mindset is of the 1998-2000 stock mania, when every week would see hundreds of upward price-target revisions. Having said that, in my opinion the current psychology amongst so-called professionals is even loonier.

In the previous mania, the bulk of the madness was concentrated in technology concepts, especially Internet-oriented ideas, where a company that boasted a handful of eyeballs viewing its Web site could be worth tens of billions. Today, the insanity is spread out in various different places.

Fleckenstein goes on to cite the current LBO/private-equity deal wave and a willingness to lend large sums of money to asset-poor hedge funds as being part and parcel of the current frothy environment.

He also suspects that a greater part of the mania reveals itself in the form of newly engineered financial instruments.

The latest specimen? A leveraged-up version of the CDO (collateralized debt obligation) known as the CPDO (constant proportion debt obligation).

Without going into all the details, this new product supposedly allows for people to get their money back (plus a bit of interest), if its architects are adept at selling more and more premium in the form of credit default insurance (swaps) as the prices go against them. If you think this sounds like a drunken version of portfolio insurance, you would be right.

What's behind all this madness?

See Bill's article, "Speculation gets even loonier!", for the answer to that question.