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One Heckuva Bull Market
Submitted by Erico Matias Tavares via Sinclair & Co.,
The current equities bull run seems unstoppable. No amount of geopolitical concerns, Greek default fears, rate hikes, US dollar strength, crude oil price volatility, Russian sanctions or whatever else you can think of can put a dent on it.
We got a little cautious in mid-February given some pretty significant divergences with key market internals and credit indicators. For instance the advance-decline line (cumulative weekly up issues minus down issues in NYSE and NASDAQ combined) was suggesting caution, as it lagged the market in making new highs. Since then the S&P 500 advanced a paltry 0.9%, with the Dow Jones Industrial basically flat; the Russell 2000 and NASDAQ were a bit perkier, increasing 2.5% and 3.4%, respectively.
All that churning now seems to be getting resolved to the upside, particularly if we use the advance-line as (an imperfect) leading indicator once again. This is shown in the graph below.

Weekly S&P 500 Index (LHS) and Advance-Decline Line (blue, RHS):
30 May 13 – 24 Apr 15
In fact, in its latest push the NASDAQ broke to new all-time highs – the only major US equity index which had not done so – surpassing the “bubblelitious” peak of 2000. Momentum and breakout traders must all be licking their chops in anticipation of the next big move.
Perhaps we should take a step back and try to understand what is driving this strength. OK, we know that central banks continue to spike the punchbowl, but what is the actual transmission mechanism that directs all this liquidity into equities – as opposed to commodities for instance, which continue to struggle?
Margin debt is of course a prime suspect, just breaking to new all-time highs last March. This enables investors to bid up prices using other people’s money, which is quite typical in bull markets (except that margin debt levels are now higher than the Himalayas).
However, there’s one thing that really stands out: share buybacks by US corporations.
Goldman Sachs, the investment bank, estimates that a cool US$1 trillion in dividends and buybacks will be spent this year by S&P 5000 companies, 13% more than last year. To put this number in perspective, it is almost 50% higher than their combined projected capital expenditures, 4x projected R&D and 5x projected M&A – all new highs for this cycle.
Consider the following table, comparing the S&P 500 and a sub-index composed of its 100 companies with the highest buybacks ratios, from March 2009 (the last major market trough) to today:

Source: McGraw Hill Financial.
The very significant impact of buyback activity on rising equity valuations is clearly evidenced by the strong over-performance of the S&P 500 buyback index relative to the overall market. And this index cuts across all major sectors: as of March, 25% of index constituents were from Consumer Discretionary, 18% from IT, 16% from Industrials, 14% from Financials, 9% from Materials and the balance split between Energy, Healthcare and Consumer Staples.
With corporate bond yields at historically low levels (not to mention sovereign bonds with negative nominal yields), it can make sense for a company to lever up. The increase in leverage reduces its overall cost of capital, which in turn is supportive of a higher equity valuation – provided that there isn't an offsetting increase in the risk of default (an important caveat, actually).
However, despite pumping up share prices, increased buyback activity might not necessarily be a good indicator of sustainable value creation:
- Why are companies spending so much on dividends and buybacks instead of good ol' capital expenditures, R&D or M&A – all activities intended to boost growth? Most likely because managers are not seeing good opportunities to put that capital to work. This should be telling us something about future growth expectations of the market as a whole;
- One thing that is still not confirming recent equities highs is high yield spreads, which remain elevated in relation to this cycle low. While energy bonds may have something to do with it, this is not a great sign going forward, especially in integrated capital markets that are only as strong as their weakest links;
- Buying shares when they are undervalued can be hugely value accretive for existing shareholders; but the opposite applies when they are overvalued. And as we have shown, at current valuations increased buybacks might not be such a good deal after all.
But far from us wanting to spoil a good party. There is little any bear can do to counter this barrage of demand. The trend is your friend, and it kinda feels like we are gearing up to move further. Kinda.
[Note: we don’t issue any investment recommendations but if you want to play this, watch out for the powers-that-be who love to fade breakouts at the expense of less nimble investors; in equities, statistics show that waiting for a retracement rather than jumping in right at the breakout provides slightly better risk-adjusted returns.]
That said, all the churning and hesitation at these levels is something to keep an eye on, along with earnings misses, which seem to be on the rise this quarter.
What is truly interesting is the disparity in market analyst expectations, with some seeing a new bubble forming and others a crash of gigantic proportions in the horizon (what is equally interesting is that nobody really knows, so there). A bigger dispersion of outcomes by definition means higher risk – something that investors seem to be forgetting.
Or maybe not. The put-call ratio on the S&P 100 index (based on open interest, not volume, of OEX options) last week hit 2.7x, the highest level we have ever seen since we began tracking this indicator in 2002. This extreme level of downside hedging suggests investors remain very jittery.
This is one heckuva bull market for sure. And a pretty weird one too.
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Money running from the more dirty shirts in the laundry
Corporate cash held relative to corporate debt is at record low levels.
http://www.zerohedge.com/news/2014-04-30/heres-chart-you-wont-see-cnbc
Because debt has a higher return than cash?
it's like this: virtual money buys virtual equities. physical money buys physical assets.
and it's crazy, but even though all the money is a fraud there is still a small and limited window through which one has time-sensitive chance to turn it into real things.
in another year or two this will be a fond memory, like the nickel stamp.
Fuck this bullshit...fuck the "bounce" happening right now, and fuck the banking tribe...overdoing it once again.
The Trend is your friend.
Use common sense and math, not dogma. In the long run, Dogma bites you in the ass and then you die.
This is all driven by freshly printed money, this is the advance warning of inflation to come. This new "wealth" can continue as long as someone prints, but it can also collapse and all gains evaporate into nothing, back to where it came from originally.
Russian roulette springs to mind, except here no-one knows the number of chambers in the revolver or the number of bullets.
We are sure to find out.
Yield-seeking. Yield-seeking. Desperate, craven search for regular dollar-denominated yield at ANY PRICE - with free "money"...
Hey, any yield, if it is aquired without labor is "free money". This whole thing is a joke! Investors bitching about bankers taking free money when that is what EVERY investor is asking for. Make your money "work" for you. Sure like it has hands legs and a brain that can actually produce anything.
Give. Me. A. Break.
Yup, you got it KreditAnstallt/BBardot.
You/I would do the exact same thing, if we had access to oodles of money at ZIRP or NIRP -- where the latter is an offset for declining yields.
I almost wanna say "If you can't beat them, join them", but that's almost impossible, given the Requirements to join: Convert and give up all social conscience.
CAP IT AL FLOWS
Yes, but what does "capital flows" mean exactly, from a mechanical, nuts-and-bolts point of view?
I've been trying to figure out and I've searched the highest mountains for an explanation of how a dollar printed by the Fed makes its way into equities. This blog post is yet another dead end.
If "margin debt" is a contributing factor, then it is likely a small one. When trading equity derivatives, my leverage used to be limited by Reg. T. When "portfolio margin" was introduced, my max leverage increased but not because of the amount of capital sloshing around global markets. Similar story for the trading of underlying equities.
Granted my book is nowhere near the size of Bridgewater, Citadel et al., so my access to services and products from custodians, etc. isn't as broad and deep. But margin debt is a red herring when searching for this Holy Grail of explanations.
The "markets"have been "weird" since 2009 when they became policy tools instead of price discovery mechanisms.
The Market Indices have been a political bumper sticker, like the manipulated unemployment numbers. We are in a house of mirrors until the trap door opens.
There are no markets, just market interventions.
No question, Doc. As a Lateral Thinker, I do have to ask the question: "Who is more irrational: The one acting weird for the sake of huge profits, or the one refusing to adapt to the weird markets, on grounds of Principle?"
It reminds me of the prayer: "God give me strength to change what I can, the grace to accept the things I cannot, and the wisdom to know the difference".
I see tons of hard-nosed, stubborn people who fail this admonition/prayer, and keep persisting in irrational behavior, per Einstein's definition of Insanity.
Another image/analogy that comes to mind, is of the guy who wakes up one day, realizes that everyone is now driving on the Left side of the road. He refuses to accept this -- on Principle -- and decides to keep driving on the right side.
Kirk, Very nice. To paraphrase a pretty smart dude, "Normal is, as normal does". Who knows what is right/wrong/pricipalled/unprincipalled ... try and establish some trend parameters for ones self and follow the trend.
BUYBACKS is most of it in my mind.....
Yep, but at negative 4 percent real rate it's hard to blame them.
Why doesn't Amazon do that? Oh right. Zero earnings.
16 Jun 2014 - Which leaves us wondering where are the central bank 13Fs? While ...Central Banks around the world are buying stocks in increasing size.
Only $29t????
That's because shares in successful businesses and real assets that will survive the Monetary Reset, is the only place to park your ill-gotten gains.
Bonds and associated Derivatives will crash & burn -- whose fire will be visible with the naked eye from the moon, so to speak.
I've given up on all Austrian/ZH metrics and porn charts, save one: The Yield of key bonds -- US and German, the last two standing before the Controlled Reset.
Now... for you & I buying stocks may be risky (Up vs Down side potentials), because we cannot use Unbouncable Checks. Ours bounce, theirs do not. Caveat Emptor.
I'd look long and hard at viable assets that will endure the Reset, and I'd think for myself, rather than drink the Kool Aid from the Bull or Bear salesmen, or a charismatic "Elmer Gantry of Finance & Economics".
Well in my mind its more of a push towards anything that has litle relevance to reality (AKA profit$), whether or not its buybacks.
Commodities...well they are linked to the real physical world arent they? And that real world isnt doing too well....
There appears to be no actual reason the USA can't become a third world basket case in record time.
Vote up! 0
Vote down! 0
There appears to be no actual reason the USA can't become a third world basket case in record time.
I think you need some catching up to do.
It is NOT an aggregate like "margin debt" or "buybacks", it is OBVIOUSLY direct purchases somewhere. They probably trade them out at a loss rather than hold them all, but even there I wonder. The market is OBVIOUSLY manipulated at an individual stock level, someone is running a big spreadsheet and trading desk.
Or worse. The above would be the best case. The worst case is Fed fingers in the actual market mechanisms, and no money is employed at all.* Could they possibly do that and keep the secret this long? Well, WHATEVER they're doing they've kept the secret this long.
*Well, other than bribery. "Fed not employing money", funny idea, huh?
Bullsh*t
In a market where liquidity is 100% guaranteed and those who make markets are 100% guaranteed a profit, there is only one direction that can satisfy both conditions... up.
Price is 100% controlled so that both conditions can be met. Stick all of your after-the-fact rationalizations for someone who can be bullsh*tted. Price is simply controlled. No rationalization is required.
Margin debt is simply the way that the Ponzi is played by those who realize the scam for what it is.
You're a fucking idiot.
Ooops... Correction
You're ANOTHER fucking idiot!
Have you met Pool Boy??
Are you a harassment drone or a real person?
There are no markets. Price is controlled.
Buybacks do not add to liquidity. They only serve to suck money out of companies and into the private accounts of insiders and market controllers.
More like "Bullshit".
http://china.secretsofthefed.com/china-poised-demand-u-s-land-payment-u-s-debt/
Could real estate on American soil owned by China be set up as “development zones” in which the communist nation could establish Chinese-owned businesses and bring in its citizens to the U.S. to work?
That’s part of an evolving proposal Beijing has been developing quietly since 2009 to convert more than $1 trillion of U.S debt it owns into equity.
Under the plan, China would own U.S. businesses, U.S. infrastructure and U.S. high-value land, all with a U.S. government guarantee against loss.
This is all fine and dandy of course, now about that $1 trillion China owes Americans..
http://juneauempire.com/opinion/2012-05-23/chinas-secret-it-owes-americans-nearly-1-trillion
Or we can just give them aapl. Fair deal.
It is the yield... Central banks kill all yield, so money is pushed hard into the markets seeking yield (dividend yields and FCF/ other metrics for other issues that do not pay a div). Not the way I play the game but... I like direction neutral because I'm psycologically very "tinfoil hattish." :)
retail investor
2009: NFW i'm getting back into stocks
2011: I'm back in
2013: Still in ... with leverage
2015: NFW will i get out
Lemmings. Mad, delusional, herd mentality.
Don't be left behind or out in the open when the pack suddenly shifts direction.
Does this straight-line march ever upwards in equity indexes have anyone else just a bit nervous? Maybe it's just me.
the tangelo orangezilo method of jawboning and timing stock buybacks to coincide with insider selling is certainly in full operation but it is definitely NOT long term bullish.
As well as what has been mentioned, it's people seeking income as most other vehicles pay nothing
And......IT'S GONE....
You know we all saw housing do this in 2004- 2007... with the same rhetoric...
And we all know how much fraud was in that bubble...
Q: what is the transmission mechanism?
A: in steps:
1. type up whatever amount of dollars you want on a computer
2. use that computer account of dollars to buy stocks, again using computers
any questions?
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1) first there was a massive property bubble
2) when that bubble burst there was no clearout of the banks' toxic assets because they would have all become bankrupt, instead the banking mafia bribed themselves a bail out leaving the banks technically afloat but with trillions in hidden toxic assets
3) the banking mafia's solution was for the bought political class to begin the slow process of transferring the banks' toxic assets to the public in exhcange for public money
4) the depression largely caused by the failure to clear the first asset bubble means there is nothing worthwhile for the banks to invest all this free money in so instead it flowed into creating a second asset bubble - this time stocks
So, the banking mafia's stock market bubble is a product of the failure to clear the banking mafia's property bubble.
#
When it bursts it's gonna take out all the pensions and crash the housing market and a lot of people will become homeless and penniless.
By then the banks will have off-loaded most of their toxic assets so they'll have a ton of money they can use to buy all those houses cheap.
Just like Weimar.
The markets preceed the economy by 6 months.
BTFD until the DHS starts shooting.
Buy the Fed.
Or fight it.
To answer the question, at this point it's not that liquidity is being directed into equities. All one has to do is look at volume on up days versus volume on down days to debunk that myth. The answer is quite simply that no one is doing anything except for the HFTs that front run the minimal retail flow and program orders which either balance portfolios or hedge delta. Traders won't dare add risk to short side trades because they've been hammered for the last 6 years via intervention, and no one is adding long risk now because they know the market is overvalued and has no fundamental basis being where it is. The bottom line is the fed has been talking about raising rates for a year which is keeping a lid on prices. On the other hand, they have yet to raise and regularly extend the timeframe for a raise, which means that we should stay cautiously bullish and BTFD. It's the same story until the fed actually does raise rates.
so long as Governemnts can continue to buy financial assets with "tax revenues from the future" - everything is going to be okay.
The bully market is really weird when compared to past performances, but given the present circumstances, i.e. the Fed is scared poopless that the stock market will crash and will provide any amount of fiat money to prop it up. It's understandable.