Friday, January 31, 2014

Today's links

1---Real Disposable Income Plummets Most In 40 Years, zero hedge

2--- UMich Confidence Drops Most In 3 Months, zero hedge

As a gentle reminder, as we have noted previouslyUMich Confide - this move in confidence is key...

But, it's all about confidence... investors will not be willing to pay increasing multiples unless they are confident that the future streams of earnings are sustainable and forecastable... And simply put, the current levels of Consumer Sentiment need to almost double for the US equity market tp approach historical multiple valuation levels...
3---Stocks on Speed: Margin Debt Spikes, So Does Risk Of Crash , Testosterone Pit

Margin debt has a nasty, very unpalatable, and very consistent habit of peaking right around the time the stock market begins to crash:

In September 1987, margin debt peaked at $44 billion on the New York Stock Exchange, or 0.88% of GDP. In August, the stock market topped. On October 19, it crashed. Brokers made margin calls, and their clients had to sell into the crash. Forget limit orders. Sell orders were executed “at market.” It turned into a plunge on margin-call steroids. It ended in tears.

In March 2000, margin debt hit a record of $278.5 billion, or 2.66% of GDP. It was the month the dotcom bubble blew up. After 28 months of waves of forced selling, interrupted by vicious sucker rallies, the S&P ended down 45%, the Nasdaq nearly 80%!  

In July 2007, margin debt soared to $381.4 billion, or 2.60% of GDP. The market peaked in October then crashed in a breathtaking manner, spurred on by tsunamis of forced selling, including by the meanwhile ubiquitous hedge funds, that took the S&P 500 down 57%.

In December 2013, margin debt jumped $21.2 billion to $444.9 billion, the NYSE reported. A spike? In the five months from August through December it soared $62 billion, more than in the prior four years combined ($45 billion). It reached 2.65% of GDP, the highest since March 2000.

4---  "The Year of Leverage", Alhambra Investment Partners

For the year, total margin debt usage jumped by an almost incomprehensible $123 billion, while cash balances declined by $19 billion.  That $142 billion leveraged bet on stocks far surpasses any twelve month period in history. The only times that were even close to as leveraged were the year leading up to June 2007 (-$89 billion) and the twelve months preceding February and March 2000 (-$77 billion). Both of those marked significant tops in the market.".....

In the third quarter of 2013, share repurchases totaled $128.2 billion, the highest level since Q4 2007. For the twelve months ended in September 2013, aggregate share repurchases were an astounding $445.3 billion; the only twelve-month period greater than that total was the calendar year of 2007 and its $589 billion.
ABOOK Jan 2014 Margin Debt Stock Repurchases
The common argument advanced in favor of such share repurchases is that companies are using cash to recognize undervalued stocks, but that is total hogwash. If that were the case, share repurchase activity would have been overwhelming in 2009, not 2007. In Q2 2009, total share repurchases totaled just $24.2 billion. Further, it is most clear that financial “investment” far outweighs considerations for actual investment in corporate operations, a productive gap that is a leading cause of economic malaise...

So we see that corporate managers are no different than the reviled stereotypical retail investor. Both leverage themselves further and further as the market goes higher, not in recognizing undervalued stocks or companies but in full froth of chasing obscene values via rationalizations."

5---Bubble Trouble: Record Junk Bond Issuance, A Barrage Of IPOs, “Out Of Whack” Valuations, And Grim Earnings Growth , Testosterone Pit

The cost of a high-yield bond on an absolute coupon basis is as low as it’s ever been,” explained Baratta, king of Blackstone’s $53 billion in private equity assets. Even the riskiest companies are selling the riskiest bonds at low yields. The September frenzy hit the upper end too and set a new record: companies sold $145.7 billion in investment-grade bonds in the US. And Baratta complained that valuations “relative to the growth prospects are out of whack right now.”

6---NYSE Margin Debt Hits an All-Time HighDoug Short,  January 29, 2014
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The latest data puts margin debt as at an all-time high, not only in nominal terms but also in real (inflation-adjusted) dollars....
NYSE Investor Credit

Lance Roberts, General Partner & CEO of Streettalk Advisors, analyzes margin debt in the larger context that includes free cash accounts and credit balances in margin accounts. Essentially, he calculates the Credit Balance as the sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt. The chart below illustrates the mathematics of Credit Balance with an overlay of the S&P 500. Note that the chart below is based on nominal data, not adjusted for inflation
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7---Yellen Faces Test Bernanke Failed: Ease Bubbles, Bloomberg

Janet Yellen probably will confront a test during her tenure as Federal Reserve chairman that both of her predecessors flunked: defusing asset bubbles without doing damage to the economy.

The central bank’s easy money policies already have led to pockets of frothiness in corporate debt and emerging markets. The danger is that unwinding such speculative excesses will end up shaking the financial system and hurting growth.

Yellen is “going to be trying to do something that no one has ever done,” said Stephen Cecchetti, former economic adviser for the Bank for International Settlements, the Basel, Switzerland-based central bank for monetary authorities. She needs “to ensure that accommodative monetary policy doesn’t create significant financial stability risks,” he said in an interview.

8--Plagued By Indigestion, Fed Issues Asset-Bubble Warning (archive) Testosterone Pit

Now even the Fed is worried. In the minutes of the December policy meeting, hidden in the middle of an interminable paragraph on page 8 of 25 pages of wooden and convoluted prose, the Fed issued a doozie of a warning.

In its own abstruse manner, it admitted that its asset purchases had inflated asset prices to such levels that they’d become “financial vulnerabilities” that were starting to threaten “financial stability and the boarder economy.” They carefully inserted language to the effect that such risks were “moderate” – to avoid an instant panic.
And they went on (emphasis added):
In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some smallcap stocks, the increased level of equity repurchases, or the rise in margin credit. One pointed to the increase in issuance of leveraged loans this year and the apparent decline in the average quality of such loans.
9---10-year Treasury yield drops most since 2011, marketwatch

Treasury prices extended a rally Friday, closing out the month with the biggest drop in benchmark yields since August of 2011, as investors flocked to the safety of the U.S. government debt market after mixed economic data.
Market participants took a decidedly risk-averse tone Friday, bidding up Treasurys and pushing down stocks, though markets pared their movements mid-day. The Federal Reserve’s decision to withdraw its bond-buying stimulus — which was cut this week by another $10 billion to $65 billion in monthly purchases — has mixed with surging fears of a slowdown in emerging markets to spook investors.

The fear kind of feeds on itself,” said Thomas Roth, director of government trading at Mitsubishi UFJ Securities U.S.A. Inc. “You look at the outflows from emerging market stock and bond funds over the last couple weeks, and it’s pretty huge. People have to put money somewhere and they are buying Treasurys with it.”

10--The typical worker makes no more than Dad did in 1979, Rex Nutting
Opinion: Despite strong productivity, most Americans just standing still

11---PCE inflation rate lowest since 2009 - key to future Fed policy , sober look

12--Poll: Grim assessment of wars in Iraq, Afghanistan, USA Today

As two of the nation's longest wars finally end, most Americans have concluded that neither achieved its goals.

Those grim assessments in a USA TODAY/Pew Research Center poll underscore the erosion in support for the invasions of Iraq and Afghanistan and the loss of faith in the outcome of the wars, both launched in the aftermath of the Sept. 11, 2001, terror attacks. The public's soured attitudes may make it harder the next time a president tries to persuade Americans of the value of military action when it involves putting thousands of U.S. troops in harm's way.

In the survey:
• On Iraq, Americans by 52%-37% say the United States mostly failed to achieve its goals. That is a decidedly more negative view than in November 2011, when U.S. combat troops withdrew. Then, by 56%-33%, those surveyed said the U.S. had mostly succeeded.

• On Afghanistan, Americans by a nearly identical 52%-38% say the U.S. has mostly failed to achieve its goals. In 2011, a month after Osama bin Laden was killed, a majority predicted the war would succeed.

"What is especially interesting about these responses is that the public has continued to update its views on Iraq and Afghanistan despite the fact that these wars have received virtually no attention at all from our politicians over the past couple of years," said Christopher Gelpi, a political scientist at Ohio State University who has studied attitudes toward the conflicts. "This shows that the public is more attentive to costly wars than we might expect, even when politicians try to ignore the conflicts."

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