Williams Inference

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#1 A Speculation Flaw

Reports - Volume 23 (1996)

03 January 1996

"I belong to a generation that not only is hooked on stock investing but also grudgingly embraces speculation as the best hope against dying penniless."
Ted C. Fishman, Harper's Magazine

Enthusiasm over the stock market has produced a small but growing army of people who have quit their day jobs to trade for a living--full time from home. Some of these investors are early retirees. A large portion, however, are young men and women who have decided to give up promising careers to try full-time investing from their kitchen table.

On a broader scale, the last decade has seen a significant shift in American household assets. A hefty rise in plans such as 401(k)s and Individual Retirement Accounts has been offset by debt in the form of mortgages.

Today, it is estimated that the total equities Americans now own is above $5 trillion. The total equity that Americans have in their homes is $4.5 trillion. Simply put, stocks have now replaced homes as the primary "nest egg".

Mutual Funds

The speculation in equities has produced a bonanza for mutual funds. The year 1995 was the biggest ever for money flowing into funds investing in U.S. stocks. As of November, stock funds took in more than $102 billion. The mutual fund industry's assets have grown from under $500 billion in 1985 to over $6.2 trillion today. Since 1980, the six percent of American households that invested in mutual funds has grown to 33 percent.

Translating stock fund popularity to the price of gold--In 1980, at $850 per ounce, one ounce of gold was about equal to the Dow Jones Averages, then at 820. Fifteen years later, as speculation has switched to equities, it takes 13 ounces of gold ($390 per ounce) to equal the Dow Jones Averages.

Speculation

Interest in equities turns to speculation as more borrowed money is used. This past year the volume of brokerage margin loans is up 26 percent to $77 billion. "The margining of mutual funds is one of the best kept secrets," says a spokesman for Charles Schwab, who estimates that up to 15 percent of that firm's margin loans go to buy funds. "A lot of investors don't know they are treated just like stocks." Another source of borrowing has shown up in 401(k) plans. An amazing 34 percent of plan participants are tapping their own retirement savings.

Flaw

When stock speculation becomes the rule of prudence we are in potentially dangerous territory. Speculation is part of a boom and bust cycle. As long as equity markets rise and interest rates decline, the danger is contained temporarily. It is late in the game.

So far, so good.

Corollary: The flip side of equity excess is a quiet commodity pit. The value of commodity trading exchange seats is plunging. Seat prices on the three largest U.S. commodities and financial-futures exchanges tumbled to their lowest levels in more than a year. The five largest U.S. futures exchanges have seen the value of their seats plunge between 20 percent and 40 percent from their 1995 highs to their current levels. At the New York Mercantile Exchange, seat prices have fallen 41 percent from their peak, set in July.

FOLLOW-UP COROLLARY

Volume 23 #2 - January 10, 1996

A corollary to the speculation in equities is a quiet commodity pit. In the fringe area of commodities, however, there is renewed interest. The art auction market is healthier than it has been in many years, thanks to an injection of exceptionally strong prices in 1995 at the major auction houses

Sotheby's and Christie's both reported they had the strongest year since the peak year of 1990. Skinner Inc., New England's largest auction house, also had a good year with sales up 20 percent over 1994. Art and jewelry were strong contributors to the rising tide of prices at all three houses.

Change in power in Saudi Arabia could spark a renewed interest in the oil pits. A new speculation in petroleum might dampen current stock market enthusiasm.

ANOMALY	INFERENCE	CONSEQUENCE
Enthusiasm over rising stock market has produced a small but growing army of people who quit their day jobs to trade for a living - full-time from home.	Interest in equities turns to speculation as more borrowed money is used.	When stock speculation becomes the rule of prudence we are in potentially dangerous territory.

COMPANIES: