Bubble Gum

Dear Friends:

It certainly appears at this time that another bubble has burst. Oil prices have plummeted over the past two weeks from a high price of over $150 to under $115 today. Nine to twelve months ago with oil prices around $70 per barrel we suggested that the price of crude oil might rise as high as $120 per barrel. This proved to be optimistic.

The conventional wisdom about bubbles is that:

1. They last longer than anyone expects.
2. They tend to grow beyond all reasonable proportion.
3. They tend to burst when least expected.

We definitely saw a bubble developing and could only wait patiently for it to burst.

The recent sharp declines in the price of oil coupled with the decline in other commodities leads me to believe that we have seen the bursting of another bubble.

Some examples (other than light sweet crude):

Gold hit a high of over $1000 in mid March and $980 on July 15 and has continued to fall today to $823 per ounce.

Copper prices peaked in mid July at $4.10 and have now dropped to just over $3.40.

Shares of Rio Tinto, a popular mining company that mines just about everything, have declined from a high price of $558 in mid May to today’s price of $347.


In the past decade we have seen three major bubbles; Tech Stocks, Real Estate, and Oil/Commodities. This is highly unusual. Some economists suggest we may see the boom/bust cycles more frequently in the future. I’m always leery of any suggestion that things will be wildly different in the future than they were in the past, but these prophesies of continued bubbling and bursting may prove to be accurate.

With oil prices headed lower and the dollar headed higher I think we can expect this rally to continue into the near future. I would not encourage anyone to jump in to this rally with both feet. I expect to see marked fluctuations as the summer wanes and we move into the election season.

The GOOD NEWS is that the market’s recent recovery has helped our account values immensely.

We have nibbled at a couple of stocks in some of our accounts with large cash positions, but we intend to remain guardedly optimistic in the short-term and uncertain in the mid-term.