HOME OF "PICTURES OF A STOCK MARKET MANIA" June 15, 2011
Alan M. Newman's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
Excerpts from our current issue
Rationales & Targets
We are astonished to see how many observers have passed off the recent deterioration as only a brief waypoint to higher stock prices as the economy eventually improves. While we can see all the reasons for a modest reversal for several weeks ahead, our longer term technical perspective has worsened considerably and it appears the fundamentals are getting worse by the day. With close to one-quarter of mortgages underwater and one in seven Americans on food stamps, how can professionals be so blind as to be bullish on stocks? When the correction ended in June 2010, margin debt was $263 billion and the mutual fund cash-to-assets ratio was 3.8%, the highest it had been in seven months. Margin debt is now $361 billion and fund cash is 3.4%, an all time record low. Yes, we’re close to oversold (actually not quite there yet) and we can rally for a bit but the complacency we see is astonishing. We fear things are a lot worse than they now appear. Our autumn target is Dow 11,000 if things do not totally fall apart. If they do, it’s Katy bar the door.
SPECIAL SHORT TERM OFFER
YOUR COST IF YOU RENEW FOR A YEAR = ZERO! The Real Story
A little over a month ago, a Gallup survey provided some of the best evidence that things are not anywhere near as bright as some folks would have you believe. The fact of the matter is more than half of Americans say the U.S. economy is in a recession or even a depression. Given the stats in the right hand column of page three about negative equity, is there any wonder? Clearly, those who are in stress or who perceive stress around them have incentive to spend less. Even a doubling of the Dow from the March 2008 low resulted in only a modest rebound and most of that rebound in our view was due simply to inventory rebuilding for a rebound that has not occurred.
GALLUP POLL RESULTS
April 20-23rd
29% Depression
27% Economy growing
26% Recession
16% Economy slowing down
(4% margin of error)
We have not recently shown the Weekly Initial Claims charts for unemployed workers but we can tell you they are not encouraging. In March, average claims fell to 387,500 before rebounding 14% to 440,250 and are now 424,000, still a huge distance from the average 316,500 recorded during the years 2006-2007 when all was supposedly well. Bear in mind many Americans have just given up looking for work because the jobs are no longer out there. The U6 rate, which represents those unemployed and underemployed, still stands at 15.8%, down only marginally from 16.1% a full year ago. So much for an economic rebound.
Here's The Boom: Leverage
FINRA’s release of margin debt statistics on May 25th provided another stunning eye opener. Readers may wish to review our Year Ahead January 3rd issue (www.cross-currents.net/h010311n.pdf) and in particular, the front page chart. While we were not keen on the prospects for the next year given that margin debt had surged past $300 billion, margin debt has now soared past $360 billion. The May 25th FINRA report showed the ninth highest level ever, surpassed only by eight months between May 2007 and February 2008, when banks and brokers were leveraged as much as 35 to 1 and presumably many hedge funds were leveraged to an even more lunatic extent. We can only presume a similar situation prevails at this juncture. Greenspan refused to consider raising margin requirements for two reasons; to refrain from further regulating the environment and because it has become all to easy to borrow money outside the market and use the proceeds to leverage holdings. Nowhere in this foolish analysis was there even a glint of recognition that the Federal Reserve had a duty to jawbone back leverage in any way possible, including raising the margin requirements to 100% if only to make a statement. As a result of both the industry’s and federal government’s desire to keep the markets unrestrained, the animal spirits have given us both the fallout from 2000 to 2002 and from 2007 to 2009. It is patently clear that the same prospect awaits prices now.
Margin debt levels over $350 billion have had an incredibly negative impact on prices both one year and two years out, averaging declines of approximately 25%. While our analysis is clearly focused primarily on the sole circumstance of the outcome from the margin peak in 2007 and early 2008, we hasten to remind that the run to record levels in 2000 suffered an identical outcome. Margin debt also surged into the 1987 peak as well and was followed by a crash. And then there was 1929, when stocks could be purchased on 10% down, followed by a crash and an economic depression.
Margin debt now represents 2.29% of total market capitalization, only .01% less than the insane high recorded in July 2007. The bars represent year end readings, except the black bars, which represent the highest readings for those particular years. It’s not 1929 all over again, but clearly, it is quite similar to all the more recent periods in which risk taking went to extraordinary levels. Systemic risk at this time is again overboard.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published roughly every three weeks and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/.
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