"The main conclusion I took from "Stock Market Jungle" was to invest in stocks that are not overly influenced by institutions, especially the more manipulative institutions. I learned a lot from that book, which in its descriptions of actors in the market read like a contemporary update to Lefevre's "Reminiscences of a Stock Operator." Panzner also posts some interesting charts at the website for the book. One thing that stands out for me today is the extremely low interest (awareness) that non-pros have in markets. Those in my work environment are especially disillusioned about stocks, but I don't sense a general public interest either. If that's accurate, then the degree of irrationality in today's market must be largely created by pros more so than is usually the case, pros acting cynically, stupidly, and/or under narrowly scoped constraints/requirements that have nothing to do with rational economic thought. Or maybe the public is making the same portion of bad decisions as usual, but talking less."

As for me, I think Panzner's book is becoming more relevant with every passing month. At the time I first reviewed it, I said that I didn't anticipate the likelihood of any "major financial accident taking place over the next few years", as discussed as a possibility by Panzner, but that I could observe many of the changes in the market landscape he was pointing out.

Recently, however, I am getting concerned, and I agree with my associate that perhaps the public feels the same, and that none of us can say why.

In fact, as Panzner himself points out, there may be various reasons: "Although there are any number of possible circumstances driving such worries " the widespread acceptance of venturesome behavior; the complexity of instruments and portfolios that depend on significant computational analysis for valuation, monitoring and assessment; the dispersion of risk through the use of derivatives and other synthetic instruments; the speed with which markets can move and trades can be executed on all sorts of electronic exchanges; and the way that communications about potentially troubling developments can rapidly circulate around the globe " all seem to boost the odds that something may eventually go spectacularly wrong. Although there are supposedly systems and procedures in place that are meant to reduce the possibilities of a systemic reaction, it will be in investors' interests to keep a close eye out for any warning signs that may arise on this particular front."

Last September when Michael Panzner and I sat down for a meeting in a mid-town NYC pub, I was concerned that the yield curve was flattening, but I was not worried then because I could not see signs of any economic slowing in the U.S. We mostly chatted about things like blogging and book publishing, in fact.

Well that slowing in the U.S. economy is now quite evident, and the tightening policies of the Fed seem to have done nothing to arrest the alarming rise in residential real-estate prices, crude oil contracts, personal debt, falling USD, and so forth. Moreover, I am not so sure that the problem is just an American one.

I am starting to think that the fairly recent introduction of credit derivatives and hedging, for instance, is permitting the narrowing of risk spreads in all debt markets, but also providing more rope to hang ourselves with.

Reversion to the mean in years past often meant insignificant bear markets in terms of time and amplitude, but the last bear market, from March 2000 until March 2003, could be measured at 36 months, which was abnormally long given that the average bear market duration for the past 60 years has been about 16 months. And if one started right at year-end 2004, or in early March, as the case may be, what consequences may be in store for us for the balance of this year, or next, or the one after that?

I mean; I am starting to think that anything is possible.

Through the second half of 1999, I wrote in my blog ("Dow 30 Journal") that since investors could not see that a danger had built up in basically worthless Internet stocks, then there was no longer a motivation for me to be standing on my soapbox, shouting "Bubble Trouble".

I feel the same today with residential real estate. If the median price of Las Vegas housing can increase across the city by 38.7 pct Y/Y at December 2004, and people see that as "normal", and not a bubble, then there is little hope.

In fact, the increase in the second quarter of 2004 was 52.4 pct Y/Y for Las Vegas, to a median price of $269,900 and the engine kept right on chugging. The other "hot" markets in the U.S. were:

Orange County, CA +38.7% $655,300
Riverside-San Bernardino, CA +38.5% $294,500
San Diego, CA +37.5% $559,700
Los Angeles-Long Beach, CA +30.4% $438,400
Sarasota, FL +29.9% $264,800
Ocala, FL +27.0% $112,300
Sacramento, CA +27.0% $308,600
Miami-Hialeah, FL +25.9% $271,900
West Palm Beach, FL +25.9% $294,00
National Median +9.1% $183,800

That, in my view, is not normal and represents a bubble.

I have observed a similar situation in Perth Australia, Shanghai China, Barcelona Spain, and in many other cities and countries as well.

But, since I am a securities trader, and not a real-estate trader, what concerns me is that, with respect to equities, a lot of traditional Graham & Dodd investment analysis today has been thrown out the window in the same way that real estate is no longer being "analyzed".

With stocks, financial advisors are telling you that buying PE's of 100 or more are ok for companies that are 5 to 10 years old, because the earnings are growing very quickly. But so too are the risks. The barriers to entry for many of these new companies are not that great.

And the biggest problem is with mature corporations that typically trade at a four to six cash flow multiple are now trading at a 12 to 15 cash flow multiple, without any discussion of the likely impact on those multiples resulting from rising interest rates (or Fed tightening).

So in the absence of "rational economic thought", as my associate says, I think it will be imperative to heed Michael Panzner's words that "it will be in investors' interests to keep a close eye out for any warning signs (of a major financial problem and systemic reaction) that may arise on this particular front."

I don't want to turn my blog into a broken record, because if readers think I am merely "crying wolf" they'll tune out, so I'll just leave it that you go read a good book like "Stock Market Jungle", and then "Securities Analysis" by Graham & Dodd, and maybe "Technical Analysis Explained" by Martin Pring.

Then maybe you'll get to be as concerned as me.