Tiny Bubbles

With the Dow breaking records as fast as it can set them, market pundits are starting to use the B-word. It's a bubble, you see. These stories usually feature words like "tulip" and historical references to the events of 1929, 1987, or 2000. Such comparisons may yet prove appropriate. We still suspect the bubble, if there is one, has ample room to grow much bigger before it pops.

At the risk of stating the obvious, the stock market consists of companies. These companies wish to make a profit. To the degree they do so, their share prices can be expected to rise. Last month we learned that the first quarter was, by and large, a very profitable one for most companies. This was a surprise to most analysts, and consequently share prices adjusted upward very quickly.

The next question is: can it continue? Can stock prices continue to rise? Yes, they can, as long as people are willing to buy. What makes people buy? Value. Investors buy stocks because they think stocks are going up. The current price is therefore considered unreasonably low. Over the weekend the King of Value Investing, Warren Buffett, spoke at the annual meeting of his holding company Berkshire Hathaway. Mr. Buffett said he would love to buy another company and is prepared to spend as much as $40-60 billion to do so. Berkshire Hathaway currently has about $46 billion in cash. This suggests Buffett thinks there is still value in stocks, even at today's bubble-like prices. The continuing stream of private-equity and merger activity supports this view.

Energy, pharmaceuticals, and utilities are still fighting for sector leadership. Utilities slipped more than the others and shows more signs of having topped out, but it could yet recover.