Market Roundup
Dow+369.26 to 16,654.77
S&P+47.15 to 1,987.66
NASDAQ+115.17 to 4,812.71 10-YR Yield-0.004
to 2.168% Gold-$1.60 to $1,123 Oil+$3.98 to $42.58
That was some rally yesterday today, huh? And if you listen
to the average pundit on CNBC, you’d think it stemmed from a bunch of
prescient, wise, old fund managers putting all their spare cash to work. You
know: The cash they claim they raised months ago, just so they could put it to
work if we got a significant “correction.”
There’s just one problem: The data suggests these guys don’t
have any cash! They basically spent it all … and then some.
First, the amount of spare cash on the books at U.S. mutual
funds just sank to 3.2% in early August. That’s the lowest in history.
As a percentage of stock market capitalization, fund cash
levels are also hovering right around the record low set in 2000. You probably
don’t need me to remind you that’s when the Nasdaq topped out and subsequently
crashed by around 80%.
Second, big money investors haven’t just been burning
through all their spare cash to buy stocks. They’ve been borrowing gobs of
money to buy even more.
As of April – roughly where the broad markets peaked –
investors had racked up a whopping $507.2 billion in margin debt on the New
York Stock Exchange alone. That was the highest in U.S. history, and more than
two-and-a-half-times the $182 billion outstanding when the current bull market
began in March 2009.
Take a look for yourself. We’re practically off the charts
compared with the previous peaks from the dot-com and credit market bubbles:
On the margins …Not familiar with margin borrowing? Then here’s a quick
primer: It’s when you borrow against your stock and bond portfolio to buy even
more stocks, bonds, or other assets. The amount you’re allowed to borrow
depends on what kind of assets you own, and which broker you use.
The net effect is to boost your leverage. The more the
market goes up, the more money you make – much more than if you just bought
with spare cash.
But when markets tank, so does the value of the collateral
backing your margin loans. Brokers have built-in risk thresholds that require
them to issue margin calls if the value of your collateral goes down. When you
get one, you either have to put up more cash, or your broker will start selling
your assets.
See the problem here? Falling markets force margin calls,
which result in brokers selling customer assets. That puts more selling
pressure on the markets, triggering even more margin calls … and even more
selling. It’s a self-fulfilling process that helps exacerbate ugly days in the
market like we’ve just had.
How big of a problem is this? Well, as I just highlighted,
margin loans overall hit a record high this spring. And the Wall Street Journal
just reported today that big-name banks and brokers have made tens of billions
of dollars more in margin loans over the last couple of years.
Per the Journal, Morgan Stanley (MS) alone had more than $25
billion in securities loans outstanding as of June 30. That was a whopping 37%
rise in the past year. Bank of America (BAC) extended almost $39 billion of
such loans (it owns Merrill Lynch), up 14%.
Bottom line: These indicators aren’t great timing tools.
They won’t tell you what’s going to happen in the next hour or day or even
week. But they do confirm that …
Dangerous signals for the markets?
A) There’s a ton of margin debt outstanding, debt supported
solely by rising asset prices, and …
B) There isn’t a lot of cash out there, cash that could give
us a cushion during severe downturns.
So I ask you, do you want to trust that fund manager who
just went on TV saying what great buying opportunities these declines are? Or
do you think maybe, just maybe, he’s secretly panicking because he has no cash
left in his fund? Or maybe he needs stocks to bounce to avoid getting more
margin calls in his own personal portfolio?
Am I being too much of a skeptic here? Too much of a
worrywart? Or does the surge in margin borrowing and decline in cash levels
concern you too? What do you think will happen here in the markets next? A
rip-roaring rally back to new highs? A failed test of the recent lows? Something
else? Hop on over to the Money and Markets website and weigh in when you
can.
Our Readers Speak
Chaos and turmoil are the name of the game in today’s
markets, with swings of hundreds of Dow points up and down becoming the norm.
I’m doing my best to help you sort through what it all means, and what’s coming
next. And many of you also shared your opinions over at the website overnight.
Reader Carla said: “Like I said a few days ago … a tsunami.
It comes in waves, and it ain’t done yet. I’m still in agreement with you and
selling on the upswings, cautiously making very small position accumulations on
the downswings in good companies I want to know for a long time — in good times
or bad.”
Reader Charles said: “Central bank money pumping does not
put money in anyone’s pocket, except the bankers, unless you have willing
borrowers. With the standard of living falling and the levels of debt in the
economy, the Fed is now pushing on a string.
“I see a debt collapse coming – a very nasty one. Pay off
your debts and keep cash on hand. A lot of folks are already doing just that
because the velocity of money is slowing.”
Reader Jim added: “Can you imagine where our economy would
be now if the several trillion dollars of stimulus had been given to ‘We the
People’ instead of the financial institutions and Obama’s crony capitalist
pals?
“I’m amazed that China can watch what happened to us the
last six years and still want to emulate us. Keynes has failed everywhere he
has been tried, but they still don’t get it.”
Reader Daniel jumped in with these comments: “So, the Fed
has irretrievably degraded our future, and our free market system, and proven
it is feckless as it regards the economy. They shot all their arrows and
missed, and now we have to pay for their retreat to Jackson Hole?
“If we were able to retrieve all the phony money they have
created, we could send every man, woman, and child in the USA to a retreat in
Jackson Hole. My message to the Fed: ‘You’re fired!'”
Lastly, Reader Billy said: “It’s becoming clearer by the day
that the next bear market has begun and actually most likely began months ago.
The brush fire started in the commodities complex, and now thanks to many, many
other problems, is spreading to become a full blown fire very soon. ALL the
signs are staring us in the face, if we have the wisdom and intelligence to
identify and recognize them.”
Thank you for all the cogent comments. It’s hard to look at
market dislocations like we had in the past week and conclude it’s just
“business as usual.” The signs coming from commodities, credit markets, and
currencies have been problematic for a while now, and stocks are finally
sitting up and paying attention.
I got more cautious than I’ve been in several years —
vocally — before the collapse. And these wild swings don’t make me feel any
better about where markets are headed in the months ahead. So you can bet I’ll
have updated investment strategies and recommendations designed to help you
protect yourself and profit from this new market regime.
Anything else you want to add? Don’t keep it bottled up.
Share your thoughts over at the website.
Other Developments of the Day
After plunging virtually nonstop for weeks, China’s Shanghai
Composite Index jumped more than 5% in the overnight session.
But it’s pretty clear the rally was “bought and paid for” in
Beijing, given that stocks were down slightly on the day until a miraculous,
mysterious rally in the last 45 minutes of trading. Bloomberg reported that
China wanted stocks to look better because China is conducting a military
parade on September 3. No, I’m not joking.
The 1% has enjoyed most of the fruits of the current
economic expansion, even as the 99% has continued to suffer from lackluster
wage and economic growth. But maybe that’s starting to change, judging from the
latest earnings report out of Tiffany & Co. (TIF).
The upscale jeweler reported 86 cents per share in adjusted
earnings, missing analyst forecasts by five cents. Its shares fell to a
two-year low after the news.
How much money did investors lose from the market decline
earlier this week? The industry may not even know, according to the Financial
Times.
Many mutual funds and ETFs use a computer system from Bank
of New York Mellon (BK) to provide accurate pricing data. But software glitches
are resulting in inaccurate Net Asset Value calculations and other problems.
Regulators and industry representatives are desperately trying to sort the
glitches out amid some of the worst volatility we’ve seen in years.
All eyes (at least here) are on Tropical Storm Erika as she
continues to churn through the Leeward Islands and Northeastern Caribbean on
its way generally toward the U.S. Southeast. It’s too early to say exactly
where or whether the storm will hit Florida and the Bahamas, though the
official National Hurricane Center forecast puts her not far off the coast as a
Category 1 hurricane by Sunday.
What do you think about China rigging its markets just so
people watching a military parade don’t spend all the time secretly checking
their stock portfolios on their smartphones? Or the news that major fund
custodians are having big data problems? And how about Tiffany? Is this a sign
of other earnings warnings to come? Let me hear your thoughts over at the
website. Until next time, Mike Larson
Source: Money and Markets
Comments
It looks like this stock price correction took
care of the 3% devaluation by China and some of the overvaluing to the tune of
an 845 point loss. It looks like the “margin called” may have less bank
laundered Fed money to borrow to keep the bubble inflated. But, global GDP is
expected to contract, so we may see more targeted stock price reductions.
Norb Leahy, Dunwoody GA Tea Party Leader
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