Tuesday, April 5, 2011
It was like the start of a bad joke...
Four men were huddled around an outside shower at the marina. One man said to the other, "Yours is really quite small."
"Well," the other man replied, "mine may not be the biggest one here, but it's certainly bigger than yours."
They were talking about their yachts.
I'm on a secluded, tropical island in the British Virgin Islands this week for spring break. My family is just one of 20 or so families hiding out on this particular piece of paradise.
We got here the hard way... three airplanes, a water taxi, and a burro. Everybody else, it seems, yachted in.
The marina is full of magnificent boats, ranging in size from large, to extra large, to "you can land a helicopter on this thing" large. Nearly all the owners are in their mid 30s to early 40s. They're all rolling in dough. And so far, pretty much everyone I've met is in the investment business – hedge funds and banking are well-represented.
"That's one gorgeous boat," I said, striking up a conversation with one of the only island guests who looked slightly older than me. "Is it yours?"
"It is for the next two weeks," he replied. "This is my last trip aboard the Bacchus I. After this vacation, she'll be in the hands of some young-money guy from New York."
He then went on to tell me the history of his boat... how he bought it in 2001 with profits he made as an investment banker during the Internet heyday.
"It was a stupid purchase," he said. "I paid top-dollar for it at the top of the market – the consequence of making too much money at too young an age. But I didn't care. I wanted a big boat and money wasn't an issue.
"I regretted it almost immediately," he continued. "My business slowed down, but the payment slips kept coming in.
"Then in 2007, this young hedge fund manager was looking to trade up. He offered me top-dollar for the Bacchus I. But I turned him down. Once again, business dropped off and I regretted holding on to the old girl."
"But you're selling her now?" I asked.
"Oh yeah," he replied. "I love this boat, and we've had some terrific adventures. But if I've learned anything in the past decade, it's that when young finance money is looking to buy, us older guys should be willing to sell."
It's a smart strategy for dealing with boats. It's also a pretty good strategy for dealing with stocks.
When the young pups on Wall Street are able to keep up with the spending habits of the old dogs, it's a caution sign that money is flowing a little too easy, and a correction is in order.
We saw it in 2001 following the internet IPO craze. We saw it in 2007 with the flood of money into hedge funds. And we're seeing it now with banking – where big-money bonuses are going to those who can best manipulate the Fed's zero interest rate policy.
Borrow money from the Fed at zero percent. Loan it back to the U.S. Treasury for 10 years and earn 3%. Use up to 30 times leverage to juice the returns even more. Then cash a giant bonus check and buy a yacht.
It's too easy.
And as any old sailor will tell you... whenever the seas are too calm, you just know a good storm is on the way.
That doesn't mean the stock market can't work even higher over the next few months. Indeed, it probably will. Keep an eye out for clouds, though. The sailing is bound to get rough.
My new friend smiled and pointed at the name on his yacht... "Bacchus" – the Roman god of wine and intoxication. "Says a lot about the times we're in, don't you think?"
Best regards and good trading,
Last Thursday, Jeff told readers about "a BIG warning sign that the recent gains in the broad stock market are too much, too soon." This warning sign let Jeff know stocks are due for a pullback. Learn more here: Before You Buy Another Stock, Read This.
And for two more ways to accurately predict the stock market's next moves, be sure to read these recent essays from Jeff: