Thursday, December 5, 2013
Mixed Headlines for 12-5-2013
Wednesday, December 4, 2013
Roller Coaster Day!
ADP Reports Better Jobs, ISM Reports Worse Jobs
Is it any wonder that the stock market is all over the place today?
More Good News Sends Stocks Into Red, Near Opening Prices
The Warped World of Wall St
When stocks go higher without regard for ANY news, it sounds like a classic bubble to me!
For perspective, in order to bring the economy back to the state it was in before Obama was elected president, it would require about 500,000 jobs be created every month until his presidency ends. This morning's "good" jobs report indicated that 215,000 jobs were created last month. And on THAT news, stocks leaped this morning!
Only in the Fed-warped world of Wall St!
Tuesday, December 3, 2013
Monday, December 2, 2013
John Hussman Describes What Causes Bubbles to Crash
"Keep in mind how investment bubbles work. A bubble
always starts with some real factor that takes on increasingly
exaggerated importance in the eyes of investors. The bubble expands not
on facts but on untethered imagination. People imagine that X
will result in ever-increasing prices, and assume that an endless crowd
of buyers is still behind them – dot-com stocks, technology, housing,
“tronics” stocks in the 60’s, the Nifty Fifty in the 70’s, quantitative
easing, tulip bulbs. Regardless of whether the mechanism underlying
that concept is fictional, and regardless of how tenuously it is linked
to reality, a bubble advances as long as the adherents it gains are
more eager than those it loses. What stops the bubble is not the
concept itself hitting a brick wall, but pool of new adherents being
exhausted. Once everyone is in, who’s left to buy from all those
holders with their fingers hovering over the sell button? The question,
once the moment arrives, is always the same: Sell to whom? And that’s
why markets crash." -- John Hussman, Ph.D. Dec. 2, 2013
I see bubbles!
Stocks Close Down, But Maintain Key Levels
The Dow closed down 77 points today, but barely held the key 16,000 level. The S&P 500 scarcely managed to hold onto the 1,800 level also -- for now!
Sunday, December 1, 2013
Stock Market Reality Bomb From Bob Shiller
Recent
Nobel Prize winner Bob Shiller just unloaded a reality bomb.
from Zero Hedge:
On the heels of his recent appearance pouring cold water on Jim Cramer's housing recovery exuberance,
recent Nobel Prize winner Bob Shiller unloads another round of
uncomfortable truthiness (presumably on the basis of his future-proofing
tenure guaranteed by the Nobel). "Bubbles look like this," Shiller tells Der Spiegel, adding that he is, "most worried about the boom in US stock prices." As Reuters reports,
Shiller is concerned since "the world is still very vulnerable to a
bubble," and with stock exchanges around the world at record highs
despite an economy that is "still weak," the Nobel winner proclaimed, "this could end badly."
Via Reuters,
[Bob Shiller] believes sharp rises in equity and property prices could lead to a dangerous financial bubble and may end badly, he told a German magazine.We tend to agree - bubbles do look like this...
...
"I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets," Shiller told Sunday's Der Spiegel magazine. "That could end badly," he said.
"I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable," he said, describing the financial and technology sectors as overvalued.
...
"Bubbles look like this. And the world is still very vulnerable to a bubble," he said.
Bubbles are created when investors do not recognize when rising asset prices get detached from underlying fundamentals.
...we observe a variety of other features typically associated with dangerous extremes:
- unusually rich valuations on a wide variety of metrics that actually have a reliable correlation with subsequent market returns; margin debt at the highest level in history and representing 2.2% of GDP (eclipsed only briefly at the 2000 and 2007 market extremes);
- a blistering pace of initial public offerings - back to volumes last seen at the 2000 peak - featuring “shooters” that double on the first day of issue;
- confidence in the narrative that “this time is different” (in this case, the presumption of a fail-safe speculative backstop or “put option” from the Federal Reserve); lopsided bullish sentiment as the number of bearish advisors has plunged to just 15% and bulls rush to one side of the boat;
- record issuance of covenant-lite debt in the leveraged loan market (which is now spreading to Europe);
- and a well-defined syndrome of “overvalued, overbought, overbullish, rising-yield” conditions that has appeared exclusively at speculative market peaks – including (exhaustively) 1929, 1972, 1987, 2000, 2007, 2011 (before a market loss of nearly 20% that was truncated by investor faith in a new round of monetary easing), and at three points in 2013: February, May, and today (see A Textbook Pre-Crash Bubble).
Many of us in the financial world know these to be classic features of speculative peaks,
but there is career risk in responding to them, so even those who view
the situation with revulsion can't seem to tear themselves away.
While I have no belief that markets follow
any mathematical trajectory, the log-periodic pattern is interesting
because it coincides with a kind of “signature” of increasing
speculative urgency, seen in other market bubbles across history. The
chart above spans the period from 2010 to the present. What’s equally
unsettling is that this speculative behavior is beginning to appear
“fractal” – that is, self-similar at diminishing time-scales. The chart
below spans from April 2013 to the present. On this shorter time-scale, Sornette’s “finite time singularity” pulls a bit closer – to December 2013 rather than January 2014, but the fidelity to this pattern is almost creepy. The point of this exercise is emphatically not
to lay out an explicit time path for prices, but rather to demonstrate
the pattern of increasingly urgent speculation – the willingness to
aggressively buy every dip in prices – that the Federal Reserve has
provoked.
Black Friday Sales Down 13%, Stocks Higher
According to ShopperTrak, total Black Friday traffic plunged 11% and total sales fell 13.2%, the second consecutive year of declines following last year's 1.8%.
Saturday, November 30, 2013
Lessons Lost: The Lessons of Long-Term Capital Management
By Roger Lowenstein, author of When Genius Failed: The Rise and Fall of Long-Term Capital Management
from the New York Times
A financial firm borrows billions of dollars to make big bets on
esoteric securities. Markets turn and the bets go sour. Overnight, the
firm loses most of its money, and Wall Street suddenly shuns it. Fearing
that its collapse could set off a full-scale market meltdown, the U.S.
government intervenes and encourages private interests to bail it out.
The
firm isn't Bear Stearns — it was Long-Term Capital Management, the
hedge fund based in Greenwich, Connecticut, and the rescue occurred 10
years ago this month.
The Long-Term Capital fiasco momentarily
shocked Wall Street out of its complacent trust in financial models, and
was replete with lessons, for Washington as well as for Wall Street.
But the lessons were ignored, and in this decade, the mistakes were
repeated with far more harmful consequences. Instead of learning from
the past, Wall Street has re-enacted it in larger form, in the mortgage
debacle cum credit crisis.
In the wake of Long-Term Capital's
failure, Wall Street professed to have learned that even models designed
by "geniuses" were subject to error and to the uncertainties that
inevitably afflict human forecasts. It also professed a newfound respect
for the perils of borrowing. Whether this wisdom endured may be judged
by events of the past year, when not only Bear Stearns but also scores
of banks and financial institutions have written off hundreds of
billions of dollars — a result of blithe faith in models of the housing
industry, not to mention a voracious hunger to do business on credit.
Regulators,
too, have seemed to replay the past without gaining from the
experience. What of the warning that obscure derivatives needed to be
better regulated and understood? What of the evident risk that
intervention from Washington would foster yet more speculative behavior —
and possibly lead to a string of bailouts?
Indeed, through the
lens of today's more widespread failure, the Long-Term Capital collapse
looks like a small dress rehearsal. But at the time, it sent tremors of
fear through the corridors of Wall Street, along the electronic byways
of finance and around the globe. Somehow, a geeky band of bond traders
was able to throw the financial world off kilter.
In its first
four years, Long-Term Capital achieved phenomenal profits with virtually
no downside. Thanks to its seemingly flawless computer models, as well
as its formidable arbitrageurs — including two Nobel laureates and a
former vice chairman of the U.S. Federal Reserve Board — it quadrupled
its capital without having a single losing quarter.
But in the
summer of '98, its fortunes took a frightful downturn. With terrifying
suddenness, bond markets turned skittish and all the fund's gambits ran
into trouble.
As Long-Term Capital teetered, Wall Street feared
that its unraveling could set off a systemic meltdown, and William
McDonough, president of the Federal Reserve Bank of New York, agreed. On
Sept. 22 and 23 — by which time Long-Term had lost almost $4.5 billion —
he summoned the heads of the major Wall Street firms, along with senior
bankers from Europe, to a conference at the Fed. Fearing chaos, 14
banks — Bear Stearns, ironically, was the lone naysayer — agreed to
rescue Long-Term by investing $3.65 billion. Within a few weeks, calm
returned and the crisis passed.
No firm had a closer view of
Long-Term Capital than Bear Stearns, the broker that cleared its trades.
And it was Bear that sounded the first shot in the current mortgage
crisis. In summer 2007, amid a sharp rise in delinquencies on subprime
mortgages, two hedge funds sponsored by Bear that invested in high-rated
mortgage securities imploded. As foreclosures kept rising, other
institutions suffered losses and the crisis spread.
Bear was
warned to raise more capital by selling stock, but its senior
executives, led by James Cayne, the chief executive, thought the
company's stock was cheap and refused. Cayne, who was an original
investor in Long-Term Capital, should have remembered that the hedge
fund's most obvious flaw was its excessive borrowing, or leverage.
Before its annus horribilis, Long-Term Capital had intentionally reduced
its equity to a mere 3 percent of assets. It was a fatal mistake.
This
time around, Bear gambled that it could survive with a weak balance
sheet — its equity-to-assets ratio was an identical 3 percent. By March,
worries that Bear was overleveraged prompted a run on its stock and
pushed it to the brink of bankruptcy. Again, Wall Street feared that a
chaotic collapse could jeopardize the financial system, and the Fed
orchestrated a rescue.
AS striking as the parallel is to Bear,
Long-Term Capital's echo is far more profound. Its strategy was grounded
in the notion that markets could be modeled. Thus, in August 1998, the
hedge fund calculated that its daily "value at risk" — meaning the total
it could lose — was only $35 million. Later that month, it dropped $550
million in a day.
How could the fund have been so far off? Such
"risk management" calculations were and are a central tenet of modern
finance. "Risk" is said to be a function of potential market movement,
based on historical market data. But this conceit is false, since
history is at best an imprecise guide.
Risk — say, in a card game —
can be quantified, but financial markets are subject to uncertainty,
which is far less precise. We can calculate that the odds of drawing the
queen of spades are 1 in 52, because we know that each deck offers 52
choices. But the number of historical possibilities keeps changing.
Before
1929, a computer would have calculated very slim odds of a Great
Depression; after it, considerably greater odds. Just so, before August
1998, Russia had never defaulted on its debt — or not since 1917, at any
rate. When it did, credit markets behaved in ways that Long-Term didn't
predict and wasn't prepared for.
This was the same mistake that
scores of lenders would make in the U.S. housing industry. The United
States had never suffered a nationwide contraction in housing prices;
they assumed that the pattern would hold.
Modern finance is an
antiseptic discipline; it eschews anecdotes and examples, which are
messy and possibly misleading — but nonetheless real. It favors
abstraction, which is perfect but theoretical. Rather than evaluate
financial assets case by case, financial models rely on the notion of
randomness, which has huge implications for diversification. It means
two investments are safer than one, three safer than two.
The
theory of option pricing, the Black-Scholes formula, is the cornerstone
of modern finance and was devised by two Long-Term Capital partners,
Robert Merton and Myron Scholes, along with one other scholar. It is
based on the idea that each new price is random, like a coin flip.
Long-Term
Capital's partners were shocked that their trades, spanning multiple
asset classes, crashed in unison. But markets aren't so random. In times
of stress, the correlations rise. People in a panic sell stocks — all
stocks. Lenders who are under pressure tighten credit to all.
And
Long-Term Capital's investments were far more correlated than it
realized. In different markets, it made essentially the same bet: that
risk premiums — the amount lenders charge for riskier assets — would
fall. Was it so surprising that when Russia defaulted, risk premiums
everywhere rose?
More recently, housing lenders — and the rating
agencies who put triple-A seals on mortgage securities — similarly
misjudged the correlations. The housing market of California was said to
be distinct from Florida's; Arizona's was not like Michigan's. And
though one subprime holder might default, the odds that three or six
would default were exponentially less. Randomness ensured (or so it was
believed) a diverse performance; diversity guaranteed safety.
After
Long-Term Capital's fall, many commentators blamed a lack of liquidity.
They said panic selling in thin markets pushed its assets below their
economic value. That's why leverage is dangerous; if you operate with
borrowed money, you lack the luxury of waiting until prices correct.
The
fund's partners likened their disaster to a "100-year flood"— a freak
event like Katrina or the Chicago Cubs baseball team winning the World
Series. (The Cubs last won in 1908; right on schedule, they are in
contention to repeat.) But their strategies would have lost big money
this year, too.
John Meriwether, the fund's founder, later
organized a new fund, which suffered big losses early this year,
according to press reports.
If 100-year floods visit markets every
decade or so, it is because our knowledge of the cards in history's
deck keeps expanding. When perceptions change, liquidity evaporates
quickly. Indeed, the belief that one can safely get out of a "liquid"
market is one of the great fallacies of investing.
This lesson
went unlearned. Banks like Citigroup and Merrill Lynch felt comfortable
owning mortgage securities not because they knew anything about the
underlying properties, but because the market for mortgages was
supposedly "liquid." Each firm would write down the value of its
mortgage investments by more than $40 billion.
Such stupefying
losses suggest the biggest difference between 1998 and today. In '98,
though credit markets froze and stocks plunged, they recovered quickly.
Long-Term Capital was wholly a financial episode; it left no scar on
Main Street. The current crisis has its roots in housing, a mainstay of
the economy, and with the bubble's bursting the damage has been enduring
and severe.
But Long-Term Capital's influence on regulatory
practice is anything but forgotten. Alan Greenspan conceded at the time
that the fund's rescue could lead to "moral hazard," meaning it could
tempt financial players to take excessive risk. The warning was ignored.
And the notion that a private hedge fund with but 16 partners and fewer
than 200 employees could cause lasting harm was never truly examined.
It was simply accepted.
The concept of too-big-to-fail,
exceptional in 1998, is now a staple in the regulators' playbook. Bear
Stearns and, by implication, other troubled investment banks have been
taken under Washington's protective skirts; Fannie Mae and Freddie Mac,
too. The Federal Deposit Insurance Corporation is pushing for easier
terms for millions of homeowners; auto companies are demanding loan
guarantees.
Where does it end? If individual responsibility is to
be fully excised from American capitalism, the free-market enthusiasts
who founded Long-Term Capital deserve no little credit.
The shock
of their failure was such that hedge funds have been regarded as
especially suspect ever since. This, too, is a misbegotten lesson; an
investment bank (Bear Stearns) could and did wreak similar havoc.
Long-Term Capital's woes had less to do with who was trading than with
the kind of assets they were playing with, namely that potent tinder of
modern finance: derivatives. (These are off-balance sheet agreements
whose value "derives" from that of underlying assets like stocks or
bonds.)
In traditional finance, borrowers borrow and lenders lend.
The only firms exposed to, say, home mortgages, are the banks that
issue them. Thanks to derivatives, a firm with exposure can pass it off,
and a firm with no exposure can assume it.
Markets thus have less
information about where risk lies. This results in periodic market
shocks. Put differently, derivatives, which allow individual firms to
manage risk, may accentuate risk for the group. Markets were stunned to
discover that Long-Term Capital owned outsized portions of obscure
derivatives. They dealt with that shock in typical fashion: they
panicked.
Incredibly, six months after the Long-Term Capital
affair, Greenspan called for less burdensome derivatives regulation,
arguing that banks could police themselves. In the last year, he has
been disproved to a fault.
Investors have no confidence in banks
or in their disclosures. How much will each downward tick in housing
prices hurt the bottom line? No one knows. Failing to inspire
confidence, banks cannot raise (enough) capital; thus, they do not lend.
Bear
Stearns had on its books $2.5 trillion of a derivative known as a
credit default swap. Perplexed and alarmed, investors dumped the stock.
And Bear was party to a hopelessly complex web of such derivative deals.
Rather than let its contracts fail, regulators forced it to merge.
What
we need from Washington now is not a promise of help after the next
bust, but a show of wisdom before it. Requiring full, meaningful
derivatives disclosure would be a good start. Investors, meanwhile,
could help themselves by preparing for the next 100-year flood. Rest
assured, it will arrive before then.
from About.com:
Question: What Was the Long-Term Capital Management Hedge Fund and the LTCM Crisis?
Answer: Long-Term Capital Management (LTCM) was a very large hedge fund
($126 billion in assets) that nearly collapsed in late 1998. It reached
that size thanks to the stellar reputation of its owners. The founder
was a Salomon Brothers trader, John Meriwether, and the principal
shareholders were Nobel prize-winning economists Myron Scholes and
Robert Merton. These were all experts in investing in derivatives to make above-average returns and outperform the market. Investors
paid $10 million to get into the fund. They were not allowed to take
the money out for three years, or even ask about the types of
investments LTCM used. Despite these restrictions, investors clamored to
get in, thanks to LTCM's spectacular annual returns of 42.8% in 1995
and 40.8% in 1996. This was after management took 27% off the top
in fees. LTCM successfully hedged most of the risk from the 1997 Asian
currency crisis, giving its investors a 17.1% return that year. However, by September 1998, the company's risky trades brought it close to bankruptcy. Its size meant it was too big to fail, and so the Federal Reserve took steps to bail it out. (Source: Le Monde, LTCM, a Hedge Fund Above Suspicion, November 1998)
What Caused the LTCM Crisis?
Like many hedge funds, LTCM's investment strategies were based upon hedging against a fairly regular range of volatility in foreign currencies and bonds. When Russia declared it was devaluing its currency and basically defaulting on its bonds, this event was beyond the regular range that LTCM had counted on. The U.S. stock market dropped 20%, while European markets fell 35%. Investors sought refuge in Treasury bonds, causing long-term interest rates to drop by more than a full point. As a result, LTCM's highly leveraged investments started to crumble. By the end of August 1998, it lost 50% of the value of its capital investments. Since so many banks and pension funds were invested in LTCM, its problems threatened to push most of them to near bankruptcy. In September, Bear Stearns dealt the final death blow. The investment bank, which managed all of LTCM's bond and derivatives settlements, called in a $500 million payment. Bear Stearns was afraid it would lose all of its investments, which were considerable since LTCM had been out of compliance with its banking agreements for three months. (Source: The Independent, Bear Stearns Call Triggered LTCM Crisis, September 26, 1998)How Did the Federal Reserve Intervene?
To save the U.S. banking system, the Federal Reserve Bank of New York President William McDonough William J. McDonough convinced 15 banks to bail out LTCM with $3.5 billion, in return for a 90% owernship of the fund. In addition, the Fed started lowering the Fed funds rate as a reassurance to investors that the Fed would do whatever it took to support the U.S. economy. Without such direct intervention, the entire financial system was threatened with a collapse. (Source: IMF, World Economic Outlook, Interim Assessment, "Chapter III: Turbulence in Mature Financial Markets December 1998; IMF Report: International Contagion Effects from the Russian Crisis and the LTCM Near-Collapse, April 2002; European Central Bank, Financial Stability Report December, 2006.)Should the Fed Have Intervened?
A CATO Institute study says the Federal Reserve didn't need to rescue LTCM because it would not have failed. An investment group led by Warren Buffett offered to buy out the shareholders for just $250 million and kept the fund running. The shareholders and management would have been replaced.However, the Fed intervened and brokered a better deal for the LTCM shareholders and managers. This was the precedent for the Federal Reserve's bailout role with Bear Stearns, AIG, Fannie Mae and Freddie Mac during the 2008 financial crisis. Once financial firms realized that the Fed would bail them out, they were more willing to take risks.The Cleveland Federal Reserve countered by saying the Buffett deal was only for LTCM's assets, not its portfolio. The failure of the portfolio, which consisted of derivatives, would have damaged the global economy. Furthermore, the Fed didn't actually bail out LTCM, since no federal funds were used. It merely brokered a better deal than the one Buffett was offering.
As much as $100 billion worth of derivative positions throughout global financial markets could have unraveled, according to The Independent. Large banks throughout the world would have lost billions, forcing them to cut back on loans to save money to write down those losses. Small banks would have gone bankrupt. The Fed stepped in to soften the blow.
Unfortunately, economic leaders did not learn from this mistake. The LTCM crisis was just an early warning symptom of the same disease that reoccurred with an vengeance in the 2008 global financial crisis. (Source: CATO Institute,Too Big to Fail?, Kevin Dowd; Federal Reserve of Cleveland, Some Lessons on the Rescue of Long Term Capital Management, April 2007)
Friday, November 29, 2013
Stock Market Status
Another sign of a bubble is that market participants are so sure that the market will continue to rise that they BORROW more and more money to pile in. Margin debt is now in record territory.
Still another bubble characteristic is that central bankers remain in denial throughout the ordeal! Just last week, Alan Greenspan wrote an article in which he still denies any responsibility or influence that was a causational factor in the housing bubble.
Still another characteristic of a bubble is that the media become cheerleaders for it! They have no desire to see reality return to the market, so instead they beat the drums for it to go even higher.
In fact, media people often ATTACK anyone who raises alarm bells. It may even become a death knell for the careers of people who wave the red flag. They are viciously attacked as "perma-bears" and treated with opprobrium.
Perhaps one of the best descriptions I've heard lately was from an analyst on Wall St that admitted that the stock market is now a "game of musical chairs". Everyone on Wall St is playing, just hoping that when the music stops and the bubble pops, THEY will individually survive the panic when it ensues. But unlike the real game of musical chairs, in the financial markets, there are only HALF as many chairs as market participants. That's because for every person wanting to SELL in a panic, there must also be a willing BUYER of those same stock shares or futures contracts.
What makes it even worse is that there is also something called "counter-party risk" or "third party risk". That's the risk that even if you CAN find a willing (but foolish) buyer in a collapsing market, that buyer might not be able to complete the purchase if they are losing money. Even if you sell at a profit, the counter-party to that transaction might not be able to complete it! This is one reason why derivatives are so risky. They escalate the counter-party risk geometrically. It even causes risks to other people that had nothing to do with the transaction at all.
In THIS game of musical chairs, when the alarm sounds and EVERYONE is running for the chairs, there is NO ONE willing to BUY during the panic. That means that chairs become mighty scarce when that moment comes. Then the risk increases geometrically like a tidal wave through the financial markets.
Bill Gross, Marc Faber, Warn of Bubbles Everywhere
This was tweeted this morning:
Faber, editor and publisher of The Gloom, Boom & Doom Report, told CNBC on Friday he believes a "massive speculative bubble" has encroached on everything from stocks and bonds to bitcoin and farmland. He attributed the vast bubble to "symptoms of excess liquidity."
Faber said the markets, which have reached record highs, could still rise before the bubble bursts, if stimulus programs such as the Federal Reserve's massive monthly bond purchases and super-low interest rates continue.
Tuesday, November 26, 2013
Stock Market Doldrums
Monday, November 25, 2013
Stocks Turn Red
This is surprising, because near the close of the day, stocks tend to revert to the overall trend, which is higher. Stocks have already hit fresh new all-time record highs today. Today, however, stocks have sold off into the close. Even still, stocks are down only marginally, so perhaps this means very little. Is this a sign that stocks are near a peak? Only time will tell!
Building Bubbles -- One Puff At a Time
This shows the current stock market, shown in blue, overlaid by a textbook Sornett-style log-periodic bubble. They are virtually indistinguishable! This chart is from Dr. John Hussman's weekly market commentary.
Saturday, November 23, 2013
Stock Market Stratosphere
Both the S&P 500 and Dow closed in new record territory today. This looks more and more like a bubble with each day that passes.
Friday, November 22, 2013
Thursday, November 21, 2013
Bubbles Abound!
Fox Business headline today:
Stocks Leap Still More
Wednesday, November 20, 2013
Tuesday, November 19, 2013
Monday, November 18, 2013
Foreign Investors -- Running For the Exits
This chart shows the 12-month moving average of TIC (Treasury International Capital) flows. This is a troubling sign, because it suggests that foreign investors don't feel their money is safe in the United States. What writing do they see on the wall, that Wall St doesn't?
Thursday, November 14, 2013
Stocks Scream As Yellen Promises More Easing
Stocks climb still higher into the Bubble Belt on promises by the new Fed QEeen, Calamity Janet Yellen, that she will continue the Fed's debt roulette indefinitely!
Wednesday, November 13, 2013
THIS Is What a Bubble Looks Like!
Another classic manifestation of a bubble is that small investors begin to "pile on", thinking that the bubble asset class is a "sure thing", and that they "can't lose". Data now shows that this pattern is now occurring, with small "retail investors" -- Main St, not Wall St -- shoveling money into the stock market at a record pace.
Wall St insiders know that this is the time to get OUT of the market. They use this last stage of parabolic rises to sell. They "take their money and run". They have also been doing this since this past summer.
Still another classic characteristic of a bubble is that investors are so convinced that the bubble will continue to rise in perpetuity, that they go deep into debt to put the money into the market, thinking that they can't lose. But when the trigger event occurs, they ALL lose because there is no one willing to buy in a collapsing bubble market. Who wants to try to catch a falling knife? And all those highly-leveraged investors get slaughtered as the market collapses. In the past few months, margin debt has reached all-time highs, with investors borrowing record amounts of money to go "all in". They never realize that this behavior is textbook bubble behavior. It's all psychology!
Interestingly, most small investors also have a bad habit of "holding on", even as the market falls further and further, hoping beyond hope that the market will turn around and redeem them in the end. It never does. Small investors ironically tend to sell and leave the market just about the time that the market reaches its nadir and starts going UP again!
History Repeats Itself! The Similarity Is Eery!
from Zero Hedge:
While chart analogs provide optically pleasing (and often far too
shockingly correct) indications of the human herd tendencies towards
fear and greed, a glance through the headlines and reporting of prior
periods can provide just as much of a concerning 'analog' as any chart.
In this case, while these 3 pictures can paint a thousand words;
a thousand words may also paint the biggest picture of all. It seems,
socially and empirically, it is never different this time as these 1936 Wall Street Journal archives read only too well... from
devaluations lifting stocks to inflationary side-effects of money flow
and from short-covering, money-on-the-sidelines, Jobs, Europe,
low-volume ramps, BTFD, and profit-taking, to brokers advising stocks
for the long-run before a 40% decline.
Stocks look eerily similar...
Income inequality has ramped back to the same levels...
and Rates look awfully similar.... (h/t @Not_Jim_Cramer)
and that didn't end well... (War!)
But when we look at the headlines in the Wall Street Journal from mid
1936 to mid 1937 as the market topped out, dipped, was bought back
(orange oval), then collapsed 40% in 3 months, nothing ever changes...
Government Bailouts Repaid - Bullish Implications...
The Buying Is Not Speculation - Cash On The Sidelines...N.Y. Central Has Repaid All Government Loans
The Wall Street Journal, 978 words
Dec 1, 1936
WASHINGTON Numerous railroad developments here yesterday were climaxed by the announcement of RFC Chairman Jesse H. Jones that New York Central had repaid all of its government loans, totaling $16,858,950, most of which was not due until 1941.
Inflationary Side-Effects - Buy It All It's Going Up...It's Cash Bull Market With Little Inflation, Says Exchange Bulletin
The Wall Street Journal, 169 words
Dec 16, 1936
"This is eminently a cash market, and as such is relatively devoid of that major characteristic of speculative inflation, the use of borrowed money." says the December Bulletin of the N.Y. Stock Exchange.
As Goes The US So Goes The Rest Of The World...Wheat Prices Soar To 7-Year Highs On Heavy Buying Stimulated by Broad Advances in Foreign Pits
The Wall Street Journal, 1497 words
Dec 19, 1936
CHICAGO An avalanche of buying, encouraged by buoyancy in foreign markets, particularly in Winnipeg, swept wheat prices to the highest levels since December, 1929, Friday.
But... 3 days before...
The Wall Street Journal, 1027 words
Dec 16, 1936
As commodity prices continued to advance yesterday to the accompaniment of increasing public speculation in futures markets, signs of a feeling of caution appeared from widely separated centers.
Global Economy To Lift Stocks...London Trade Stimulated By Wall Street Strength; Averages at New Highs
The Wall Street Journal, 859 words
Nov 6, 1936
LONDON Overnight strength in Wall Street considerably stimulated the stock market yesterday. Dealers again arrived earlier than usual in anticipation of activity in international issues and found large buying orders in these stocks awaiting execution.
Devaluation Always A Winner... (Market Prices Prove Economy Likes It)London, New York Stock Transactions Largest in Months - British Brokers Stand in Queues to Fill Orders Activity Ascribed to World Efforts to Revive Trade
The Wall Street Journal, 956 words
Oct 8, 1936
Growing realization that the determined international effort now being made to sweep away trade barriers will be followed by improved business conditions throughout the world brought a rush of business to the security markets in New York and London yesterday such as not been seen for months.
Equity Valuations Irrelevant...Wall Street Weighs Devaluation Effects On U.S. Markets; Sees Little Likelihood of Dumping
The Wall Street Journal, 1759 words
Sep 28, 1936
Rising security and commodity markets Saturday gave ample indication of the financial district's "bullish" interpretation of the U.S. Anglo-French monetary agreement.
Markets Cheerful Over Devaluation; Morgenthau Not Afraid of Dumping
Selective Buying Here and Abroad Motors and Other Shares Held To Benefit From Improved World Trade Are Strong Commodities Less Responsive International Markets
The Wall Street Journal, 1726 words
Sep 29, 1936
A note of cautious optimism was sounded by leading stock exchanges of the world which were open for business yesterday.
Europe Ever The Optimist Even In The Face Of Dismal Reality...Earnings Yield of 15 Stocks 4.8%, Compared with 9.4% Ten Years Ago
The Wall Street Journal, 1280 words
Aug 7, 1936
Industrial earning power is valued nearly twice as highly in the current stock market as it was ten years ago.
Short Covering As Ever...France Optimistic Despite Continuing European Tension - Growing Franco-English Cooperation Inspires Confidence
The Wall Street Journal, 652 words
Dec 5, 1936
Despite the unabated international tension and sudden menace of a constitutional crisis in Great Britain, the continuance of quarrels between Right and Left wings of the Popular Front, and the persistent antagonism between employers and labor, the general feeling in France is rather optimistic than pessimistic.
Government Spending Cuts Cause Concern...Active Short Covering Sweeps Grain Prices To New High Levels - Chases Bears
The Wall Street Journal, 1345 words
Dec 2, 1936
New highs for the season were recorded in wheat, corn, rye and oats Tuesday. Spot red winter wheat advanced to the highest level since February, 1929. The sharp upturn, which boosted December corn almost 5 cents, and December wheat about 3 cents, was due principally to short covering by those made uneasy over the sale of an unusually large quantity of spot wheat out of local store, and by generous snowfall over the grain belt. Early in the session the market ruled easy on reports of rain and snow, and predictions for continued unsettled weather.
States And Taxes...Sabotaging Federal Economy
The Wall Street Journal, 412 words
Dec 5, 1936
Even the modest beginning which is attempted by WPA officials to reduce cost of government by cutting down the relief roles is encountering strong opposition. It is perhaps only natural that the workers themselves should object, although their methods of protesting through "sitdown" strikes, not to mention the violence which has manifested itself, may be open to question. But much more ...
The Foreign Money Will Save Us...Sales Tax Repeal May Unbalance Kentucky Finances
The Wall Street Journal, 1002 words
Jan 14, 1936
LOUISVILLE, Ky.--Repeal of Kentucky's 3% sales tax, effective the moment Governor Albert B. Chandler signs it, probably Wednesday will deprive the state of $3,500,000 of revenue budgeted to the expiration of the biennium ending June 30, 1936 and the counties of $1,750,000.
Money On The Sidelines...Financial Centers Expect Greater Foreign Interest in Our Securities As Congress Delays Alien Tax Boost - Foreign Interest Here
The Wall Street Journal, 765 words
Aug 6, 1937
Some resumption of foreign interest...
Jobs And Europe never far from fear...The Wall Street Journal, 590 words
Jul 1, 1937
While the Street remains in a cautious frame of mind, there are undoubtedly more possible buyers than sellers around, and it would not take a lot of encouragement to get these gentlemen aboard. Feeling in brokerage circles is that stocks are more likely to advance on any break in the unpleasant headlines these days than to decline far on a continuation of current uncertainties.
Buy The F##king Dip...The Wall Street Journal, 683 words
Jun 29, 1937
Certainly the market was more active on the downside, which surprised a lot of traders who had expected otherwise. The labor and foreign situations remain the main factors in the picture, and brokers feel that these have not changed one whit for the better thus far.
Rallies had Real Volume Then - No Low Volume Ramps...The Wall Street Journal, 508 words
Aug 24, 1937
A rather depressed feeling is extant in Wall Street as small volume and lower prices continue. Yet there are not many bears in the Street so far as the long pull is concerned. Traders still are stubborn in their theory that stocks are reactionary at the moment from lack of interest rather than any important liquidation. This is the period of the year when business takes a final breathing spell before the more active Fall and some think the stock market is doing likewise and that better days are ahead.
And At The Top... Brokers Suggest Stocks For The Long-Run (based on 'expectations')The Wall Street Journal, 564 words
Aug 16, 1937
If Saturday's volume was any indication, revived interest in the stock market is here in the opinion of the Street. Furthermore the scope of trading Friday and Saturday indicated a broadening interest which included medium priced as well as low priced issues on contrast to the extended period wherein so-called "quality" stocks held sway in a limited market with small volume.
See - it really is never different this time. It merely appears so since - as Kyle Bass so eloquently noted, the brevity of financial memory is about two years...The Wall Street Journal, 665 words
Aug 7, 1937
Profit taking for the week-end brought prices down in yesterday's market, but the undertone remained steady and brokers said there was nothing important in the character of the selling. Many houses were advising the purchase of favored issues on any further reactions. Metal shares ended the day with advances in many cases. There was impressive buying reported in the copper issues largely for long pull purposes.
The Wall Street Journal, 649 words
Aug 10, 1937
While volume left much to be desired, the expectation of stronger and more active markets continued to pervade Wall Street. Moreover, the general business picture is regarded as more pleasing than at any time since the so-called Summer "lull" came into force. Incidentally, the seasonal letdown thus far has not proved to be as extensive as many predicted and expected. Brokers say that many clients are away and that there are others who will be replacing their sold-out long positions in coming weeks.
Tuesday, November 12, 2013
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