Live and learn?

A little history lesson about outsized market moves from Jordan Kahn (more here):

The chart…shows the relationship of the current oil bubble to the last two big bubbles in tech stocks and then the housing market. Around two weeks ago, the rise in oil eclipsed the mammoth rise in tech stocks in the late 1990s…And we know what the end result of those two bubbles were, right? They both ended very badly, especially for folks who got sucked in anywhere near the top. Which brings me to the million dollar question: Where is the top?

No one knows for sure where the top is, and those who tell you that they do are simply lying. If you had bailed on tech stocks in 1998, you missed quite a move higher still. If you sold your house in 2004, you left a lot of money on the table. So my hunch is that I want to remain long oil/energy names, although I do not want to chase the recent move higher. That said, when this bubble bursts, most people won’t believe it and will continue to buy on the way down…

most observers consider it a foregone conclusion that demand has skyrocketed due to the large number of new consumers that have emerged in countries such as China and India. But the recent run-up in oil prices has far outpaced anything seen on the demand side.

Global oil consumption grew 2% in the first quarter of this year, while production increased 2.5%. So there is not an outsized amount of demand being physically consumed. That means that a large amount of demand is coming from speculators, who drive the futures prices of oil higher purely for investment reasons.

Institutional investors, battered by the bear market from 2000 to 2002, turned to a new so-called asset class in the form of commodities. Investment demand came from all sorts of institutions — from hedge funds, endowments, pension funds, sovereign wealth funds and exchange-traded funds. In the first quarter of 2008 alone, global investments in commodity indices rose $40 billion (up 28% year over year), to $185 billion, a larger gain than all of 2007…

Someday we’ll be right about oil, but until then, we’ll continue to be wrong. Ah well.

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