Tsunami Effect

On the morning of December 26, 2004, 10-year-old Tilly Smith was in Thailand on vacation with her family when they went for a long walk on the beach. Tilly noticed something with the ocean that reminded her of a lesson on tsunamis she'd had at school just a few weeks before. At first, she tried in vain to warn her parents, but when they started walking back to their hotel, the water suddenly surged. They barely made it to the second floor and watched people and property wash away.


What the market experienced in the last 6 days could be just a taste of what might be coming our way. The DOW moved up by 1,000 points or 15% within 5 days. This is proof again that the market is driven by irrational emotions. Something is definitely out of whack when you have companies like Deluxe (DLX) at a P/E Ratio of 3 and trading at below $6 a share, or when you see LifeTime Fitness (LTM) at a P/E Ratio of 5 and trading at below $10 a share.

The perception is that this is an extremely bad economy. The reality is that many businesses are still doing well. I just heard from three different placement firms that this is their best year thus far! Many large businesses have been laying people off just because they can do it in this environment with no repercussions. These same businesses are turning to placement firms to fill-in the gap. Businesses that are doing well are not incented to declare it in public and, in some cases, they are ashamed of acknowledging it. The reasons include reluctance to brag, fear of going against the crowd, or even concerns of bad omen.

Back to my inverted bubble theory, the current market frenzy could reverse very quickly and we could have a Tsunami Effect. Money is being held back and at the first sign of recovery, the market will be flooded by investors which in turn will drive values up faster than expected. The credit crunch was a major rupture at a fault line and resulted in the water receding dramatically, exposing areas that are normally always submerged. This should serve as an advance warning of the approaching tsunami which will rush in faster than it is possible to run. All the signs of a Tsunami are here: Extreme pullback of funds, blue skies in the public safety arena and a decent ocean of money still waiting for the right opportunity to come back.