Beautiful People (Do they Affect the Market?)

I'm sitting in a cafe in Silverlake, CA, a neighborhood in Los Angeles you could probably compare to Williamsburg, NY. I'm reading some financial news but I can't help but be distracted by the beautiful people buzzing around me. I'm not quite sure if it is their looks, their style or just the way they carry themselves, but I can't help but be impressed by what I am observing. I spend time here a good part of the year, so I am not just awe struck by being in LA. Today just feels different, the people they are glowing. Do people glow in times of financial hardship? Did I mention some of the coffees on the menu cost $7? Did I mention the line is 15 people deep and out the door? Does this happen in times of economic distress? I would say no. Bottom line is that business is booming. Sitting here may not provide a clear representation of the national demographic, but it does show me that some people are spending money and having a good time.

Since we are on the subject of coffee, its funny to remember that everybody bet against coffee when the markets collapsed at the end of last year. Diedrich Coffee (DDRX), for example, lost 90% in 2008. If I could have been sitting here this time last year, maybe I would have bought some shares of Diedrich Coffee. Not too often do you see returns of 11000% in one year. Yes its true, had you invested $1000 in Diedrich's last March, it would have turned into $110,000 today. Hard to beat that 9 month return.

What else have I observed to help influence my thoughts about the market? Well, I do have to say people have been soliciting my advice lately, telling me they think it is a good time to get into the market, asking me what funds or securities I could recommend. It is exactly this mentality that can offer some explanation as to why the market continues to go up. It also helps cement my beliefs that we will soon be seeing a significant correction. As the market forms new highs into 2010, I would expect even more retail investors to buy into the market, falling into the trap of chasing the up-trend, buying the top and ultimately asking themselves how and why the market could turn against them.