What word comes to mind when you see speculators buying company shares which are trading for pocket change -- while the company also faces bankruptcy? Gambling. Evidence of that very thing may be seen today.
We want to call this gambling mentality to your attention as a sign of what may follow -- if Wall Street history provides a clue. You remember when even dubious internet stocks were skyrocketing in the late 1990s -- right before the top? As you know, many (most?) of those dot.com names fell back to earth, and companies behind the stocks vanished. But while they were hot, warnings about potentially swift losses were brushed aside by "get rich quick" speculators. Rolling the dice on new internet companies became the "national pastime" -- snake eyes stared back.
Let's do an H.G. Wells and take the time machine briefly back to a couple of Elliott Wave International comments published during those "zany" days.
"Today's investment mania has propelled stock values in terms of dividends and asset values to nearly double what they were at the top minute in 1929."
"The bull market may be over, but the mania for stocks is still growing."
Traveling back to the present, we find the "lottery ticket" approach to Wall Street alive and well. AMBAC Financial once traded for over $96. The credit crisis knocked the bond insurer down to 35 cents at its low -- a staggering 99.6% loss. However, something interesting just happened -- a big pop in AMBAC's lowly share price, as the chart below shows.
"The daily chart shows AMBAC's share price from late March 2009 to the present. The stock closed at .64 cents yesterday and surged to an intraday high of $1.19 today, a whopping 86% rise in one day. What could account for such a huge rally? Surely the company announced a successful new product or a significant new development in the company's history. According to a Bloomberg news story this morning, the bond insurer, a company that has 'stopped paying claims and accepting [new] business', jumped on the basis of a 'tax benefit' and an 'unrealized gain on derivatives.' In other words, traders are chasing an accounting gimmick. The company itself said it has 'insufficient capital' to finance itself past the second quarter of next year and may need to file for 'bankruptcy.'"
The stock more than doubled in a single day (April 12) following the weekend that the above Short Term Update was published. The price closed at $2.25, up $1.15. Although the stock closed down on the 13th, it reached an intraday high of $3.39.
You know what happened after the wild speculation of the late '90s. "Chasing accounting gimmicks" may be a sign of what's to come. You may want to see other signs, too. Discover why we believe Wall Street may be approaching the tipping point -- just click here to get started, risk-free.