Sunday, May 12, 2013

Today's links

1---Uh oh, Big Picture
Investors Rediscovering Margin Debt
Source: WSJ
Category: Financial Press

2---Searching for Signs of a Market Top , Barron's

Is there "dry powder" to extend the rally? Borrowing costs are low and stocks are rallying, and investors are borrowing against their portfolios more. Margin debt now exceeds $379 billion, pushing levels seen in mid-2007. "Never before, not in 2000 or 2007, was there less cash in money-market funds relative to stocks and bonds," Ned Davis of Ned Davis Research writes. Clearly, "the Fed's determination to make cash trash" is working.

But the warning from dwindling cash is mitigated by some factors, Davis adds. Within U.S. stock funds, the level of cash holdings has ticked up even as stocks rallied recently. A lot of cash also has gone into bond funds, and continues to do so. "If there is a rotation to stocks, it's still at an early phase," Davis notes. After all, investors had pulled $900 billion from stock funds since 2006 and plowed $1.4 trillion into bond funds, according to EPFR Global.

Where's the euphoria? It helps that Dow 15,000 elicited little of the giddy fanfare that greeted Dow 10,000. Somehow, stocks' recent records feel like hollow victories handed us by government manipulation, as deserving of showy celebration as winning by default.

This isn't to say money managers haven't become more gung-ho. Barron's semiannual Big Money poll recently showed 74% of professionals who identified as bullish or very bullish, the most in the poll's two-decade history. But that zeal hasn't yet infected Main Street. Gallup's latest poll showed just 52% of Americans who said they owned stocks outright, or in mutual funds and retirement accounts -- the lowest since at least 1998, and well off 65% in 2007

3--Why bullishness is bad, motley fool

4---Who Is The Smallest Government Spender Since Eisenhower? Would You Believe It's Barack Obama?, Forbes

Check out the chart –

 So, how have the Republicans managed to persuade Americans to buy into the whole “Obama as big spender” narrative?
It might have something to do with the first year of the Obama presidency where the federal budget increased a whopping 17.9% —going from $2.98 trillion to $3.52 trillion. I’ll bet you think that this is the result of the Obama sponsored stimulus plan that is so frequently vilified by the conservatives…but you would be wrong.
The first year of any incoming president term is saddled—for better or for worse—with the budget set by the president whom immediately precedes the new occupant of the White House. Indeed, not only was the 2009 budget the property of George W. Bush—and passed by the 2008 Congress—it was in effect four months before Barack Obama took the oath of office...

So, how do the actual Obama annual budgets look?
Courtesy of Marketwatch-
  • In fiscal 2010 (the first Obama budget) spending fell 1.8% to $3.46 trillion.
  •  In fiscal 2011, spending rose 4.3% to $3.60 trillion.
  • In fiscal 2012, spending is set to rise 0.7% to $3.63 trillion, according to the Congressional Budget Office’s estimate of the budget that was agreed to last August.
  • Finally in fiscal 2013 — the final budget of Obama’s term — spending is scheduled to fall 1.3% to $3.58 trillion. Read the CBO’s latest budget outlook

6---Bernanke signals the Fed is uneasy with "reaching for yield" , sober look

As Merrill's junk bond index yield crossed the historical low of 5% on Thursday, some senior Fed officials are clearly becoming uneasy. Corporate credit markets are entering bubble territory (see discussion) and up until recently very little has been said on the topic by the US central bank. On Friday Ben Bernanke sent a signal to the markets that the Fed is watching the "reaching for yield" situation "particularly closely"....

Bernanke: In light of the current low interest rate environment, we are watching particularly closely for instances of "reaching for yield" and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals. It is worth emphasizing that looking for historically unusual patterns or relationships in asset prices can be useful even if you believe that asset markets are generally efficient in setting prices. For the purpose of safeguarding financial stability, we are less concerned about whether a given asset price is justified in some average sense than in the possibility of a sharp move. Asset prices that are far from historically normal levels would seem to be more susceptible to such destabilizing moves. The chart below must give at least some US central bankers a reason to reflect on the current pace of monetary expansion. What "unusual patterns in valuations" will another $1.5 trillion of securities purchases create? The FOMC is likely to have at least some debate on the topic at the next meeting.

7----Escaping liquidity traps: Lessons from the UK’s 1930s escape , VOX
Nicholas Crafts, 12 May 2013

Initially, short-term interest rates were cut to around 0.6% – and stayed there throughout the rest of the decade (see Table 1).
  • Second, a price-level target was announced by Chamberlain in July 1932 which aimed to end price deflation and return prices to the 1929 level.
  • Third, the Treasury adopted a policy of exchange-rate targets that entailed a large devaluation first pegging the pound against the dollar at 3.40 and then against the French franc at 77 (Howson 1980), intervening in the market through the Exchange Equalisation Account set up in the summer of 1932
8---John Hussman On Profit Margins And Un-"Reasonable Valuations", zero hedge

"The impression that stocks are “reasonably valued” relative to earnings is an illusion driven by profit margins that are 70% above their historical norm...

Excerpted from Hussman Funds - Closing Arguments: Nothing Further, Your Honor,

On profit margins

The facts that savings equal investment and that the deficits of one sector must arise as the surplus of another are not theories. They are identities that must hold true by accounting definition. It does not matter how companies are deriving their profits (domestically or internationally). It does not matter how consumers are obtaining their goods (domestically or internationally). It does not matter how the government is financing its deficits (domestically or internationally). It is true merely and strictly by identity that savings equal investment, and that the deficits of one sector must arise as the surplus of another.

The exact way that this comes about is up for grabs, but the end result is not. It is also true empirically in decades of data since the 1940’s that the following aspect of that relationship holds quite robustly: variations in profit margins are essentially a mirror-image of the combined deficit of households and government. This is true not only of levels, but of point-to-point changes.

Corporate profit margins will contract as the combined deficit of households and government retreats (even moderately) from the record levels of recent years. The impression that stocks are “reasonably valued” relative to earnings is an illusion driven by profit margins that are 70% above their historical norm.
9---Stability through instability, economist

 Easy monetary policy, and especially unconventional policy that lowers rates all along the yield curve, generates a sort of unnatural pressure for financial risk-taking. Regulatory tools may be able to rein in some of that excess, but the only way to make sure you've gotten all the bubbles that might be hiding in the cracks is to raise interest rates. Tighter monetary policy might have a cost, but if it prevents financial excess it may avoid even greater costs.

10--Reinhart-Rogoff One More Time: Why the 90 Percent Never Should Have Been Taken Seriously, CEPR

11---The Reprehensible Meddling of the AFL-CIO’s Solidarity Center--Big Labor’s Tool of Empire, counterpunch

The Venezuelan people, with the significant help of organized labor in Venezuela, have just elected a former union bus driver to the Presidency.   The U.S. labor movement should be supporting this new President, and indeed rejoicing in his election.   Instead, the foreign policy wing of U.S. labor is engaged in conduct which is objectively undermining that President and the movement which brought him to power.   This conduct must end.

The only redemption for the AFL-CIO, and its Solidarity Center, is to cease all activities in Venezuela immediately and refuse all funding for any of its program from U.S. foreign policy concerns.   In addition, the Solidarity Center must make a public accounting of all of its crimes against Third World liberation movements and governments, as well as that of its predecessor AIFLD; apologize for those crimes; and make amends, through monetary compensation, to the literally hundreds of thousands of people in the Global South it has injured, and even killed, through its complicity with U.S. imperialism.   This is the only way the AFL-CIO can hope to save its own soul.

12---Liberal Apologetics for Obama’s Criminality, counterpunch

Guantanamo and drones are the forward edge to America’s slide into authoritarianism under Obama (I try to speak in moderation and will avoid the f-word–fascism–for the present), because of the amoral barbarism which has brought them into existence, and because the American people sit passively by, if not in an attitude of complicity and/or condonation, at their very existence and continuation.

13---Congress: Still Corporate. Still Criminal. Still Captured., Kevin Zeese

Today, nine deregulatory bills were considered, and nine were passed. The most egregious, HR 992, which we wrote about on Monday, passed 53-6. This bill is named "Swaps Regulatory Improvement Act", but it should be called, "If Banks Get Bailed Out, We'll Get Sold Out. Again." This is the bill that makes the cost of doing business for Wall Street lower by exploiting the implicit backing of the Federal Government. It allows banks to hold risky derivatives in the insured depository--that part of the bank that is insured by the FDIC. As we wrote yesterday, this is dangerous because derivatives are senior in bankruptcy--derivatives counterparties get paid out first....

The banks have laundered money for drug cartels. They have deliberately lied to regulators. They have lied to Congress. They have illegally foreclosed on homes and then had their captured regulator give wronged parties a slap-in-the-face settlement of $300. They have manipulated global interest rates. They have sold predatory loans disproportionately to people of color . They have been bailed out. And they will not lay low.

Fifty-three members of the Financial Services Committee today decided that all this malfeasance, corruption and criminal activity is not only fine, but it should be rewarded. We should make life even easier for them.

14---Wells Fargo To Pay $175 Mil. To Settle Racial Discrimination Accusations, TP

15---Margin Debt and the Next Stock Market Crash, financial sense

Suttmeier told The Wall Street Journal that the currently high margin debt levels are “contrarian bearish.” While high margin levels have coincided with major market tops of the past, there’s an important twist to this particular indicator. In order to confirm that a top has been made, margin debt levels normally turn down before major indices like the S&P 500 peak. See the following graph, courtesy BoA Merrill Lynch.
margin debt 2
“It’s no surprise people have been taking on more risk as the market has moved to record highs,” writes Steven Russolillo in The Wall Street Journal. “But the question is what happens when the easy ride higher turns south and some of that margin debt turns into margin calls?” The article goes on to warn of a potential selling wave if stock prices reverse and margin calls lead to mass liquidation. “A wave of margin calls can worsen selling pressure on stocks and was seen as partly to blame for the market’s woes during the financial crisis,” writes Russolillo.

While it’s true that rising margin debt levels should be viewed as a potential yellow flag for the stock market, other indicators don’t yet suggest the rally has reached bubble proportions. As economist Ed Yardeni pointed out in a recent blog (, “Valuation multiples aren’t flashing irrational exuberance yet, but that could change quickly in a debt-financed melt-up of stock prices.”

Yardeni suggests that while NYSE margin requirements have been unchanged since January 1974, Fed Chairman Bernanke could boost the requirement later this year in response to charges that the Fed’s stimulus program is leading to a stock market bubble

No comments:

Post a Comment