The Greater Fool Theory

This theory is seen at work in many real asset bubbles. People overpay for an assets, such as a house or a commercial property or even an LBO, which cannot pay its debt service and is cash flow negative, but they expect to sell all or part of the assets at higher prices to a ... greater fool and reap large returns/profits on little equity.

But it's like musical chairs - don't be the last man standing. And eventually someone is left standing - that is a metaphysical certitude.

This morning's WSJ story about investors defaulting on numerous house mortgage loans that they bought to flip shows that the house market had a lot more "investors" that many think. I suspect that statement required on many mortgage loan documents pledging that one would occupy the home as a principal residence had quite a high rate of prevarication. And I suspect that many/most affected mortgage brokers were complicit in these lies.

So now a wave of bankruptcies can be expected as these greater fool theorists get chased by lenders with losses to recover. And then we can expect fraud lawsuits as lenders figure out that they were the object of lies. I wonder if the "greater fools" realize that making false statements on mortgage loan documents is a federal felony crime? I suspect not.

Oh well. Nothing is new under the sun. All this has happened before many, many times. If you have been paying attention to markets and are over 50, you can remember them.

Back to stocks:

Yesterday was hard ping pong by the beefers. Nothing was new and the earnings were good, but the bears hit the morning rip hard, drove prices down to run stops and them the real buyers picked up some cheap stocks. Some beefers are rotating groups frantically to make their numbers for the year. I'll be interested in the XLF short interest when the numbers come out soon.

The charts look OK. Yesterday's S&P reversal was on higher volume, possibly indicating a local bottom. A continuation - consolidation pattern might form. This is a logical place as it's near the old top region. The Nazz looks quite strong with a good uptrend and yesterday's move was a 1-2-3-4-5 upmove. [I'll describe that useful pattern later.] The Nazz 100 is quite strong, too.

Options expiration is Friday which is also the 20th anniversary of the Crash of 1987, so maximal nervousness is to be expected.

Nothing has changed in the bullish economic trajectory.

PS: BAC big miss earnings. Yuck! I knew I'd get punished for that add Monday. Darn. Phooey!

PPS: I didn't practice time diversification as well as I preach it. I had planned to wait until earnings to load the last slug, but got impatient. Bad mistake. But I think this will work out. The dividend is great and over time I'll make good money here. BUT I wish I had a better entry. If we get to frosty's 45, I might buy more.