bubbles as a “rapid expansion followed by a contraction.” The dot com bubble of the 90s where technology stocks with lousy fundamentals soared to the stars due to the enthusiasm surrounding the “new tech paradigm” serves as one of the most famous examples. Then at the turn of the millennium the dot com bubble burst taking the rest of the stock market along with it. Investing during a bubble period can bring great harm to a portfolio. Being mindful of bubbles can tell the investor what to stay away from and whether or not to wait for a better stock price entry point. Right now, three bubbles quietly expand.
Corn prices rose 15% during 2012 (chart below). Drought conditions in the U.S. lowered corn supplies to record lows
. According to a Farm Journal article
the corn stocks (inventory) to use ratio stands at 5.3% versus the historical average of 12% to 13%.
data by YCharts
The rise in corn prices led to a boon in domestic fertilizer demand for producers such asMosaic Co (NYSE:MOS) and Intrepid Potash (NYSE:IPI)
. Strong domestic fertilizer demand increased Mosaic’s North American potash sales 41%
. Intrepid Potash which operates mainly in the United States increased its overall sales 14%
A number of people in the farming industry rightly worry that corn prices rest at unsustainable levels. A number of farmers see gold in them there
corn stalks and want to raise
corn in the next growing season. In addition, the disappearance of the dry conditions will result in increased harvest. The boom in supply could put an end to high corn prices, upsetting the robust domestic demand in fertilizer and leading to a short term correction for Mosaic and Intrepid Potash.
The gun bubble
The political climate surrounding gun control
creates fear of decreasing access to guns. This fear of lowered access creates panic buying of guns before the perceived reduction in access goes into effect.
This panic and fear increases the sales and profitability of gun companies leading to a run up in gun stock prices. The stock price of gun companies Sturm, Ruger
and Smith & Wesson Holding Corporation (NASDAQ:SWHC)
increased 91% and 60% respectively over the past year (see chart below).
data by YCharts
Smith & Wesson sales increased 48%
in its most recent quarter driven by sales of pistols designed specifically for concealed carrying, and sporting rifles. Ruger’s sales growth in its most recent quarter included new products such as the semi-automatic Ruger 10/22 Takedown Autoloading Rifle
. If people fear in some way that they won’t be able to purchase rifles in the future then they will rush in to buy them.