The latest fear on Wall Street is that record levels of margin debt may end up toppling the stock market rally. NYSE margin debt recently reached its highest level since 2007 before the last major stock market peak and credit crash. Stephen Suttmeier, technical research analyst at Bank of America, noted that margin debt, rose 28% in March from a year ago to $380 billion. That figure is slightly below the July 2007 peak of $381 billion, although analysts speculate that April’s margin debt totals(which haven’t yet been released) have already surpassed this mark.
With NYSE margin debt at extremes once again, complacency at all-time highs, valuations (across equity and credit) frothy, and the cacophony of bullish consensus momentum chasers, it seems the anti-thesis of FDR’s speech appears quite appropriate…
Extreme Sentiment – check!
Extreme Leverage - check!
Extreme Complacency - check!
Extreme Valuations - check!
This week, the Wall Street Journal’s Ruth Simon reported private colleges are now offering record financial assistance to keep classrooms full.
Some schools are now seeing just 20% of the students they accepted actually enrolling, versus the usual rate of 33%.
So they have increased the “tuition discount rate”— the price after grants and scholarships — to an all-time high of 45%.
Meanwhile, the median sticker price increased just 3.9% last fall, the smallest gains in 12 years. And at public schools, the sticker price climbed just 4.8%, also a 12-year low.
For the Washington Examiner’s Michael Barone, this makes it official: the college bubble has finally burst:
Applicants are negotiating bigger discounts than they used to. Market competition has kicked in.
What has happened is that in a recessionary and sluggish economy potential customers have been figuring out that a college diploma may not be a good investment — particularly if it entails six-figure college loan debt that cannot be discharged in bankruptcy.
The Millennial Generation that voted so heavily for Barack Obama — 66 to 32 percent in 2008, 60 to 37 percent in 2012 — has had a hard time finding jobs, even with diplomas in hand. Especially if their degrees are in gender studies or similar fields beloved of academics….
“Horrible” PMI, no problem; just add it to the list of macro data that has missed significantly in recent weeks. Bloomberg’s US Macro index has utterly collapse in recent weeks – now at its worst level in 7 months but apparently if good is good, bad is better, and totally shitty is absolutely awesome. It would appear the world of nominal equity index chasers is now fully cognizant that the reality of their lemming like herding is based on one simple thing (no matter how much they kick and scream and proclaim wisdom about earnings cycles, growth, margins, transformative energy, or new AAPL products) – and that is… Central Bank promises.
And just to timestamp this, both the closing print, or right around it, and the all time nominal intraday high, coincide.
If the Fed needed any ammo for tomorrow to hint that there is a time frame longer than infinite and that there is a size of imprudence larger than infinity, then they have it… of course, there is, once gain, very weak volume on this uptick (but like everything else, that doesn’t matter either.)
It was a decent run but all good things come to an end. We know China’s growth is fading (even by their own official data) but below the surface data suggests things are a lot worse. Between this drop in growth and the rise in anti-corruption practices (that we discussed here) the imports of Swiss-made luxury watches has tubmled 24% in Q1 for the third quarter in a row of declines. “The corruption crackdown campaign is having a big effect on luxury watch sales, high-end watches are very common gifts and they are items that are quite conspicuous and associated as a sign of corruption.” This follows the firing of Communist Party official Yang “Brother Watch” Dacai who posted images of himself wearing 11 luxury watches at different times. Two major luxury watch retailers are significantly underperforming while Swatch is improving as Hong Kong (the world’s biggest importer of watches) slows dramatically. But have no fear, we are sure it will be a smooth transition.
Imports of luxury watches into China and Hong Kong slump…
Wall Street Journal reporter John Hilsenrath is so plugged in at the Federal Reserve that he has earned the nickname “Fed Wire.”
Whenever the Fed wants to start sending a new message to Wall Street, the story goes, they call up John Hilsenrath.
And then, thanks to Hilsenrath’s excellent articles, by the time the actual announcement comes out, it’s no big deal, because everyone already knows about it.
And now John Hilsenrath is reporting that the Fed has started talking about when and how to end its latest economic stimulus program:
Federal Reserve officials have mapped out a strategy for winding down an unprecedented $85 billion-a-month bond-buying program meant to spur the economy—an effort to preserve flexibility and manage highly unpredictable market expectations.
Officials say they plan to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.
“Nobody knows whether it’s a good time to buy gold or not…as I have repeatedly said, I buy gold every month and on the recent decline I bought more”
He said he feels “deeply uncomfortable” with that much allocation to equities, but also doesn’t want to shut stocks out entirely given the possibility they could still rise significantly before a correction.
“In the 40 years I’ve been working as an economist and investor, I have never seen such a disconnect between the asset market and the economic reality … Asset markets are in the sky and the economy of the ordinary people is in the dumps, where their real incomes adjusted for inflation are going down and asset markets are going up.
“Something will break very bad.”
While high-yield bond yields are at record lows, the spread (or compensation for risk) remains above all-time record lows leaving some to suggest there is room for more compression and for the circus to continue. The credit market’s disconnect from anything macro-, micro-, or cashflow-related (with CCCs now trading sub-7%) is purely a function of flow and yield-grabbing with WACC curves back at 2006 levels…
suggesting little pain for firms willing to relever to recap their shareholders. And so they pay it out… (payouts near record highs)
I expect a spike sometime in the near future in long-term Japanese interest rates. People have been saying this for years, but the time may finally be at hand.
The following headline is what tipped me off: BOJ chief expects no spike in long-term Japan interest rates.
Japanese long-term interest rates should not shoot higher as a result of money flowing out of government bonds, Bank of Japan Governor Haruhiko Kuroda said on Saturday.
Kuroda added, however, that it would be natural for long-term rates to rise over time if Japan meets its goal of pushing inflation up towards two percent….
- WARNING: Stock Market May Be Headed For A Major Shock In The Coming Months – Spain, China, India, and U.S.
- Mike Santoli: Market Partying Like It’s 1995; Marc Faber: I’ve Never Seen Such A Disconnect Between The Asset Market and The Economic Reality. Something Will Break Very Badly
- We’ve Reached Population Overshoot Which Has “Morphed” Into Both An Energy & Financial Crisis
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