Category Archives: Stock market

Stock market rise fuelled over time by increasing levels of margin debt

This is a market feeding on itself. The chart above shows by how much US margin debt has accelerated away from norms, compared to the S&P 500 index in the past twenty years. The accelerating gap explains why the stock market began levitating away from earning growth from 2013 onwards (see second chart below on earnings). Note how the 2000 acceleration led to the immediate crash afterwards and how the 2003 acceleration was followed by the crash of 2007/8. That was before QE. Note then how in 2013, as QE began to be a worldwide programme, it accelerated again. The market now is entirely dependent on QE.

Ultimately, pumping cash into the economy by the Fed (note that gross national debt jumped $723 billion over just the past 12 weeks since Congress suspended the “debt ceiling” to $20.57 trillion, or 105% of GDP) has to go on at an accelerating rate to keep the market going. So the trap for QE is the exponential factor. If the market can’t be fuelled by debt exponentially it will reverse, and the higher it goes, the harder it will fall.

On the real side of the economy, Trump’s tax reduction plan (currently going through Congress)will not only backfire on the economy, but has scuttled the infrastructure plan (which is not going through Congress, nor will it), which was the idea that started the Trump stock market bull run in the first place.

The point about mania has always been that, from the perspective of all us mortals just standing by looking, it has the quality to last so long it draws everybody in.

The bubble and the reckoning

Benjamin A Smith writes: This is the “everything bubble,” where a broad-based collection of stocks are just plain expensive. In most cases, not eye-poppingly expensive like we saw in internet stocks two decades ago. However, it’s expensive enough that collectively, the market is the second priciest on record.

A widely-followed indicator confirms as such. The “CAPE” ratio is an acronym for “Cyclically Adjusted P/E” ratio. It compares a stock’s price performance relative to earnings over a 10-year period. It’s highly regarded because it smooths out earnings volatility and adjusts for inflation. Right now, it’s screaming “sell.”

In the history of the stock market, the CAPE ratio has only been more expensive between June 1997 to September 2001. It’s topped over 30 now, breaking even the gaga days of the 1920’s mania. Along with it, the “Panic-Euphoria Model,” which is the S&P 500 forward P/E-to-volatility ratio, is also at its second highest point in history, showing how euphoric investors are really feeling. By almost any measure, the market is historically expensive. (Source: “Probably Nothing,” Zero Hedge, June 18, 2017.)

Yet, investors seem to be sleepwalking their way into unreality. Record inflows into U.S. equities keep occurring, allowing this magic levitation ride to push forward. Sell-inducing volatility surges only last a session or two, then die off. U.S. stock have climbed the biggest wall of worry in history, and show no signs of quitting. Equity overvaluation, the threat of trade wars, tepid growth, record public debt…the list goes on. Read full article here

From 1637 to 2017: Tulipmania

Flora the Goddess of Tulips and all flowers carried by delirious admirers in an Amsterdam print of the period. At the peak of tulip mania, in March 1637, some single tulip bulbs sold for more than 10 times the annual income of the average skilled craftsman, before prices crashed.

The chart below summarises modern day delirium: it shows the gap between earnings (our real recessionary world) and the market (the world of tulips) developing since March 2014 (N.B. even the earnings are GAAP “over-inflated” earnings).

Stock Share Buybacks Now Bought Out — American Enterprise in Decline

Research from no other place than Wall Street, itself, indicates that almost all of the returns since 2009 have been due to stock share buybacks!

Liz Ann Sonders, chief investment strategist and perma-bull at Charles Schwab, recently acknowledged that “… there has not been a dollar added to the U.S. stock market since the end of the financial crisis by retail investors and pension funds….” Since every buyer has a seller (and vice versa), what group or groups had enough of a buying presence to push the S&P 500 14.2% off of the February closing lows? Corporations. (Seeking Alpha <http://seekingalpha.com/article/3968290-stock-buyback-conundrum-will-companies-keep-much-longer>)

Most people assume what has kept the market afloat this year after sinking 11% at the start of the year was a mixture of better news out of China, oil prices stabilizing, and indications that the Fed won’t raise rates as much as thought. But the real thing bouying the market could be something else: Stock buybacks…. The stock buybacks come at a time when major investors including individuals, foreign investors, and pension funds have been selling off their shares, according to a note from Goldman Sachs, amid market volatility and weak oil prices. (Fortune <http://fortune.com/2016/04/25/buybacks-stock-market/>)

Over the past five weeks, the value of shares bought back has fallen 42% (yoy). The number of scheduled buybacks has fallen off substantially this year (35% below last year’s pace). So, we can anticipate the market will lose some of the hot air that once kept it aloft. Buybacks aren’t yielding the returns they once were, and the corporations have already taken on a load of debt for past buybacks that is even threatening the credit rating of some. Earnings have declined steadily as money spent on building for the future has dropped dramatically. It looks like the golden years when companies buy themselves are winding down, and we shall all convalesce together.

With so many American corporations convalescing, it’s a good thing we have Obamacare…

read the full article at

Stock Share Buybacks Now Bought Out — American Enterprise in Decline