< meta name="DC.Date.Valid.End" content="20050825"> Amendment Nine: Returns in this Market and Flat Club Soda

Tuesday, April 26, 2005

Returns in this Market and Flat Club Soda

I love all things carbonated. I actually dislike sugar because it takes away the carbonation effect. Club soda, mineral water, seltzer, anything that fizzes for a long time, just love it. It is the most refreshing type of drink I think.

Have you ever noticed that when youleave the cap off a bottle of carbonated drink it goes flat pretty quickly? I've invested in bottle stoppers to prolong the carbonation as much possible, but thats beside the point. When things aren't capped, the fizz goes out. Thats all you need to know to make sense of whats going on with the market these days.

The floor on yields was non-existent for awhile. Inflation approached zero and the fed, in its "wisdom", decided to move interest rates lower. Correspondingly, the price of future income went up. Investors paid more. Stocks, bonds, real estate, just about every asset class, even distressed assets (which are, in my view, a leading indicator instead of the laggard everyone seems to make of them; though obviously it depends which end of the distress you're looking at) all increased as real interest rates fell.

Problem here is that the Fed never put the cap back on. Instead, it just let things settle. Now the period of rate-falling is over. Rate-stagnating will be with us for awhile. The soda will still be carbonated, but it won't be fizzy like it used to be. Returns should generally settle at revenue growth plus inflation. Thats the generic view though.

Deep inside the flat water you'll still find opportunity to stir things up. My area of focus, distressed debt, is already under intense focus as investors chase yield. But other "special situations" of all types will remain the wild west in an otherwise orderly, egalitarian environment. Looking for these changes will be difficult, but they should be somewhat predictable and light, fast-moving hedge funds are the best to exploit these opportunities.

Product liability suits for manufacturers, natural disasters for energy suppliers, new regulatory environments in highly regulated, or highly unregulated industries. All these events, and more, will give investors ample opportunity to shake the bottle up a little and get any remaining swigs of fizz of the next 10-12 months.