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You Know The Market Is Frothy When...

Tyler Durden's picture


You know the market is frothy when the greatest concern among professional money managers is "Asset Bubbles." As interest rates rose in the early part of this year, the 'great rotation' – with outflows out of bonds and in to stocks was heralded by many as ammo for the next leg higher in stocks.

However, with the recent slowdown in growth and collapse in interest rates, not surprisingly the rotation is perceived to be less likely this year. In fact, now over a quarter of investors – a share that rose 100% since BofAML's previous (March) survey – believe it will never happen (only another 73% to get to reality).

Instead, there are increasing concerns about inflows leading to bubbles – mainly in high yield, where investors appear uncomfortable with flows-driven spread tightening without fundamental improvement and higher interest rates (and implicitly the linkage between equity valuations and credit bodes ill for the latter, as opposed to supportive).

In fact, asset bubbles now rank as the number one concern on investors’ minds, while a slow recovery moved up into second spot.


A full two-thirds of respondents believe credit markets to be overvalued and should we see fiduciary duty re-emerge and slowing demand (despite the inflows) into any and every 'yieldy' instrument, then just as in 2007, credit will be the first-mover (as it already appears to be) - credit anticipates, equity confirms.


So despite the best efforts of the 'marketing' arms of the big sell-side shops (so-called 'strategists'), the professional buy-side (especially credit) is not 'adding' at these highs, but becoming increasingly skeptical.


And Via Barclays,

Signs of indigestion could cause investors to question whether the demand technical is really strong enough to justify the ongoing divergence between credit valuations and corporate fundamentals.


Looking at the deals being priced recently, several hallmarks of a market top are emerging. In the high yield space, we have seen a flurry of deals from low-rated issuers, from companies looking to return cash to equity holders, and in creditor-unfriendly formats (such as PIK-toggle notes). On the high grade side, peripherals have been able to issue unsecured, and even subordinated, debt. With central banks still active we expect markets to continue to grind tighter, but there remains the risk that economic data continue to disappoint and that valuations “catch down” to the hard data.


With that in mind, we think investors should be prepared to fade a significant further rally that is not accompanied by an improvement in the macro-economic backdrop.

As the chart below indicates (based on models fitting credit spreads to macro data and forward expectations) - credit is significantly 'expensive'




Source: BofAML and Barclays

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Sat, 05/04/2013 - 16:41 | 3530442 unky
unky's picture

that 27% "never" makes sense when considering we will have ZIRP or NIRP 4 ever

Sat, 05/04/2013 - 16:47 | 3530447 Atomizer
Sat, 05/04/2013 - 16:55 | 3530468 ebworthen
ebworthen's picture

"Frothy", just like the sewage containment pond at a large-scale livestock operation.

Sat, 05/04/2013 - 17:54 | 3530564 skank
Sat, 05/04/2013 - 17:08 | 3530486 WhiteNight123129
WhiteNight123129's picture

There is a bubble of liquidity, but this liquidity is not credit but money. The liquidity will go into stuff, that means anything but itself.


Sat, 05/04/2013 - 17:12 | 3530497 Atomizer
Atomizer's picture

If a derivative falls in the woods, does it make a noise?

Sat, 05/04/2013 - 21:00 | 3530808 SunRise
SunRise's picture

No -> But it is PAINFUL!

Mon, 05/06/2013 - 01:07 | 3533474 MeelionDollerBogus
MeelionDollerBogus's picture


q: If someone defaults on a derivative in Europe does anyone hear the collapsing rotting forest in Japan or China?

What is the sound of the first incestuous counter-party with the clap?

Sat, 05/04/2013 - 18:05 | 3530574 Sudden Debt
Sudden Debt's picture

the liquidity will go into tdtf companies buying and merging with even more big companies to become All including gigantic to fail companies.

It's like in 10 years from now, we'll end up with like 20 companies controlling the world, owning 99% of all assets.

Sat, 05/04/2013 - 18:13 | 3530583 Sudden Debt
Sudden Debt's picture

Keep this link in your favorites... it will be priceless in 6 months from now :)

Sat, 05/04/2013 - 20:36 | 3530771 Mr. Magniloquent
Mr. Magniloquent's picture

Schiff was in fine form in that video, but that CNBCunt made me want to tear my eyes out. Here is a brief transcription of the end of the video:

Schiff: "Alot of companies are borrowing money cheap and buying their stock back. It's not real earnings."
CNBCunt: "That, I agree with."
Schiff: "Corporations have alot of debt, too."
CNBCunt: "Ahhh, but they've got alot of cash, too."


Sat, 05/04/2013 - 17:12 | 3530496 newworldorder
newworldorder's picture

In fact over a quarter of investors – a share that rose 100% since BofAML's previous (March) survey – believe it will never happen (only another 73% to get to reality).


OK - Who are these investors? Could they be average hard wording American who might fund a diminishing 401k or IRA? Could it be the average senior or retiree who is looking to get some extra yield from a bank CD?


Tylers - Is it possible for you when writing an original post, to stop referring to "investors" when referring to the average person on the street. They are not investors but savers. Investors are the pension funds, hedge funds and TBF Banks trading their own accounts. Can we please call them as we see them and for what they are?

Sat, 05/04/2013 - 17:17 | 3530510 Atomizer
Atomizer's picture

What tranche did you buy into, that may go tits up?

Sat, 05/04/2013 - 17:25 | 3530523 WillBest
WillBest's picture

I thought the term used for what you are calling "saver" here on ZH is "greatest fool"

Sat, 05/04/2013 - 19:25 | 3530661 Pure Evil
Pure Evil's picture

I think if you go back and look at the original post you'll see that what your quoting about investors came from an article in Barclays.

It looks something like this:


And Via Barclays,


So, are you expecting Tyler to change the original thesis to make you happy?

Maybe Tyler should have highlighted it and printed it in bigger font, so that you'd actually see that it was a snippit from someone else's work.

Sat, 05/04/2013 - 17:14 | 3530502 q99x2
q99x2's picture

Rational minds abound and speculation prevalent. I believe the author believes but truth is dead.

Stocks will come down the day after I sell and not a day sooner.

Sat, 05/04/2013 - 17:23 | 3530519 WhoMe
WhoMe's picture

The stock market is hitting all time highs while the economy is barely off it's lows and world economies once strong are now grinding down. This is happening after a period of unprecedented monetary stimulus that would have in the past normally sent the economy to the moon. So, the market has hit a new high after a long run and inevitably will be running out of steam because this mostly Central Bank "encouraged" move cannot go on forever while the stimulus hits become less and less effective. At the same time Interest rates are in the basement and heading nowhere. How will pension funds, fixed income people or anyone for that matter be able to make any sort of returns on their investments going forward?? 

Sat, 05/04/2013 - 19:13 | 3530652 Solarman
Solarman's picture

I wish people stop using unprecedented stimulus.  The CB's only gave the banks a massive zero interest loan so they can suck up assets at a 10-1 leverage basis that generate a yield spread that generates a revenue stream tha allows them to remain nominally solvent on a cashflow basis.


The fact that a few rich people benefit and the government collects capital gain taxes is peripheral.


Stimulus is when they bypass the banks and the government and create high energy money and mainline it straight into the masses.  That is the Hail Mary Pass.

Sat, 05/04/2013 - 17:42 | 3530541 lolmao500
lolmao500's picture

Funny most of these tards believe there's a recovery.

Sat, 05/04/2013 - 18:11 | 3530578 Sudden Debt
Sudden Debt's picture

and when you try to explain them it's not, they look at you with those eyes like YOU LIE!! LIE!!! I AM NOT LISTING ANYMORE TO YOU LALALALALALALALALA....
I don't even try anymore.... I always say: "you go tiger! invest your life savings!"

Sat, 05/04/2013 - 18:28 | 3530595 lolmao500
lolmao500's picture

LALALALALA the stock market is at all time high!! = recovery! LALALALALA!!

/sadly, a few guys with PHDs in economics told me just that... I wanted to slap them in the face real bad... I just decided to not talk to them anymore...

Sun, 05/05/2013 - 00:18 | 3531284 AGuy
AGuy's picture

 PHDs in economics is worse then being a lawyer. When you can't make it as a lawyer your go for the PHD in economics!


That said, if a PHD tells you where to invest, just laugh and walk away. I am sure they invest what they preach.


Sat, 05/04/2013 - 17:44 | 3530549 debtor of last ...
debtor of last resort's picture

Frothy when a child in Greece is looking for food on a garbage dump, slicing her finger on broken fucking OMT never heard of hopium glass.

Sat, 05/04/2013 - 17:47 | 3530552 No More Bubbles
No More Bubbles's picture

How can something that is A BLATANT FACT just be a "concern"?

Sat, 05/04/2013 - 17:57 | 3530567 Atomizer
Atomizer's picture



meka leka hi meka hiney ho!


Lagarde: Vous pouvez renifler mes fesses et regarder sous ma jupe pour ne voir que les toiles d'araignée. Je peux vous assurer que collectivement de nouvelles voies ferroviaires rapides vont construire de nouvelles extensions pour dominique salle d'orgie hôtel Strauss-Kahn. Ne pas laisser de perles anales derrière ..



Sat, 05/04/2013 - 18:09 | 3530575 Sudden Debt
Sudden Debt's picture

when you're spending somebody else his money and not your own.

Sat, 05/04/2013 - 18:31 | 3530603 devo
devo's picture

Which investors are worried about anything? Name names. I don't think algos have emotions, but then again, I think fish do.

Sat, 05/04/2013 - 18:56 | 3530631 Mr. Hudson
Mr. Hudson's picture

Jews. It all revolves around Jews. My research always points to Jews. Does anybody have anything that can contradict my excellent research?

Sat, 05/04/2013 - 20:59 | 3530804 icanhasbailout
icanhasbailout's picture

the discoverers of the Higgs jewson will be here any moment to answer your questions

Sun, 05/05/2013 - 00:23 | 3531294 AGuy
AGuy's picture

Yeah. Obama.. is not a Jew. Neither was Hitler, Stalin, Pol Pot, Mao, etc.

Sat, 05/04/2013 - 20:57 | 3530800 icanhasbailout
icanhasbailout's picture

That popping sound is just the champagne we brought out in honor of doing business with you.

Sat, 05/04/2013 - 21:45 | 3530917 HowardBeale
HowardBeale's picture

In The Great End: Whose computer will be faster at high noon? Reality's or The Fed's? (And the survivors will look back and say: "How did they not understand that Bernanke was insane...")

Sun, 05/05/2013 - 03:52 | 3531529 Dre4dwolf
Dre4dwolf's picture


I dont get why they consider these things high yield, most of them are negative yield.

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