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You Think It's Time To Buy Shares?

by afew Fri May 16th, 2014 at 10:21:14 AM EST

From Jamie Lowry at Pieria:

The record amount being borrowed by investors is a worrying sign for markets

Keen students of behavioural finance may not be too surprised to learn that, over time, margin debt levels have tended to be at their highest just before markets crash while, just before markets take off, investors tend to have net cash in their trading accounts. According to the New York Stock Exchange (NYSE), which publishes monthly data on the subject, net debt currently stands at record levels.

Now, in theory, investors could borrow money from their brokers and just let it sit in cash and the NYSE would still report that as a build-up of margin debt. To take this possibility out of the equation, therefore, a better way of considering the issue is to look at investors' `free credit balance', which - put simply - shows how much money they have borrowed specifically to buy shares.

See the lovely chart below the fold:


How bullish would you be?

Display:
Perhaps a better time to buy ProShares Short S&P500, but the last time I did that the S&P just kept on rising. "The market can stay irrational longer than you can stay liquid."

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 16th, 2014 at 01:09:11 PM EST
please spare my parents' retirement savings.

Point n'est besoin d'espérer pour entreprendre, ni de réussir pour persévérer. - Charles le Téméraire
by marco on Fri May 16th, 2014 at 08:15:05 PM EST
I have given up on yield and am almost all cash.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 16th, 2014 at 11:07:40 PM EST
[ Parent ]
If my retirement depended on American shares, I'd be looking at cashing in at the moment, before some big players decide it's dump time.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat May 17th, 2014 at 05:07:32 AM EST
[ Parent ]
If this is a bubble, what fuels it?

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sat May 17th, 2014 at 03:17:26 AM EST
The financial sector is in no lack of liquidity.
by afew (afew(a in a circle)eurotrib_dot_com) on Sat May 17th, 2014 at 05:00:47 AM EST
[ Parent ]
In Europe interbank liquidity is again tight, though.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 03:49:51 AM EST
[ Parent ]
Sterilisation..?

But the above chart concerns the US.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 03:55:47 AM EST
[ Parent ]
Yes, and early LTRO repayments to "signal health to the market".

And yes.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 04:07:58 AM EST
[ Parent ]
QE money has to go somewhere. And besides, bubble addicts love the game.
by das monde on Sat May 17th, 2014 at 05:01:33 AM EST
[ Parent ]
The US is in a liquidity trap. There is no shortage of capital or lending capacity, but there is a shortage of  borrowers who are both creditworthy and willing. In such a situation those with cash know that others with cash will be putting money into the stock market, so they do also. This works until it doesn't.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun May 18th, 2014 at 05:20:32 PM EST
[ Parent ]
See also: At big-ticket dinners, a blunt Bernanke sounds theme of low rates (May 17, 2014)
At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed's main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke's lifetime, one source who had spoken to the guest said.


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Sun May 18th, 2014 at 06:05:27 PM EST
[ Parent ]
So the solution is to pump money to borrowers, so to disguise but make the apartheid between Financial PeopleTM and Working/Non-Working Poor deeper?

Piketty pinpointed the core capitalism predicament better than Keynes. On one hand, the QEs are there to provide usual big financial returns without bothering with productive economy circulation. On the other hand, the Financial Power is at its peak, and governments, institutions are working hard to maintain it. Or to converting it to ages-long social domination.

Be it with generally misguided interpretations, check the topics at Zero Hedge:

World's unsold cars stockpile in thousands

Meat and seafood becoming scarce, prices are to rise

Fukushima seawater radiation rises to new all time high

College graduates with debt "worth less" than high school grads, will get worse

There is no future as we know it.

by das monde on Mon May 19th, 2014 at 02:11:10 AM EST
[ Parent ]
Jalopnik: That Zero Hedge Article On Unsold Cars Is Bullshit (May 18, 2014)
It is an admittedly appealing idea to think that automakers, unable to sell cars, are just wildly producing them and then dumping them around the world in an endless cycle of mass production hysteria. So much of the modern economy seems senseless and inexplicable, which is why an article like this seems to give some credence to the feeling many of us have inside that something is terribly wrong.

The visuals are strong, the headline is clear, and you almost don't have to read the article to viscerally understand the problem. I, more than anyone, get the appeal of this story because it seems to largely rip off an article I wrote -- including the images and headline -- more than five years ago (which itself was largely a rehash of a Guardian article).

...

There's even an update in the post where either the author, Vincent Lewis, or Tyler Durden -- ZH's mysterious author -- realized there was a fault in their knowledge and they say this:

UPDATE: Currently May 16th, 2014, all of these cars at the Nissan Sunderland test track have disappeared? Now I don't believe they have all suddenly been sold. I would guess they may have been taken away and recycled to make room for the next vast production run.
Well, if you don't want to believe that in five years they couldn't sell a few hundred cars at a price above the recycle rate then I can't help you, because you must be so paranoid you think that Fudgie The Whale is the secret symbol of the illuminati.


A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 03:38:22 AM EST
[ Parent ]
That Zero Hedge Article On Unsold Cars Is Bullshit
Bottom line: This is paranoid nonsense that has the tiniest bits of reality inside of it, like a giant turd sprinkled with truffles. My advice? Don't swallow it.

Very often the case with Zero Hedge.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 03:53:59 AM EST
[ Parent ]
(h/t Drew, BTW)

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 04:08:58 AM EST
[ Parent ]
With the Fed buying what are probably CDOs and buying them at face value, or par, they are effectively trading new high powered money for trash at 50 cents on the dollar. So the TBTF entity gets cash for its illiquid asset. If, as likely, the operation is a repo the Fed, in theory, could demand that the recipient buy the 'asset' back. This probably doesn't constrain the recipient of QE because the exercise of that right by the Fed on any significant scale could bankrupt the bank, and, in any case, the whole point of the exercise was to help the financial sector.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 19th, 2014 at 12:33:14 PM EST
[ Parent ]
Private lending isn't going into housing, in any case:

U.S. private lenders not ready to replace Fannie, Freddie: regulator | Reuters

(Reuters) - The regulator of government-controlled mortgage finance firms Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) said on Sunday he would not oppose them having a smaller presence in the market but private capital had to be ready to take over first.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 02:30:21 AM EST
[ Parent ]
Part of the free capital is creating a start-up bubble.  Such as this:

San Francisco-startup and bane of taxi drivers Uber is in talks for funding that would value the startup at an astronomical $10bn.

Uber's Business Plan is not only, frankly, insane it is illegal.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon May 19th, 2014 at 01:19:34 PM EST
[ Parent ]
When the regulators turn a blind eye to the activities of the rich, only scams that are not big enough is illegal.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Mon May 19th, 2014 at 03:06:18 PM EST
[ Parent ]
...They're a cab company with an app. That is a viable business model. It's not a billion dollar one.
by Thomas on Wed May 28th, 2014 at 01:43:42 AM EST
[ Parent ]
It's right there in the blockquote: investorsspeculators are buying shares on broker credit.

So no, obviously it's not QE money.

Bubbles are self-fuelled because the expectation of returns encourages speculators to buy shares on credit, and it encourages the brokers to lend for share purchases. After all, if share prices will go up, the loan pays itself, doesn't it? And the credit purchases are share purchases, so they increase share prices and so the positive feedback loop.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 04:07:15 AM EST
[ Parent ]
What reserves (if any) must brokers have to lend on?
by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 04:27:16 AM EST
[ Parent ]
I'm not sure, that's probably an SEC regulation unless the broker is a bank.

But I'm guessing not much. And brokerage margin lending is probably a big contributor to the "shadow banking system".

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 04:46:10 AM EST
[ Parent ]
I do not recall that this question was dealt with in my Money and Banking course. From an SEC PDF: SEC Financial Responsibility Rules

SEC amended the net capital rule (Rule 15c3-1) in 1975 to establish uniform net capital standards for brokers and dealers' registered with SEC under Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act). With few exceptions, all broker-dealers registered with SEC must comply with this liquidity standard.' The primary purpose of this rule is to ensure that registered broker-dealers maintain at all times sufficient liquid assets to (1) promptly satisfy their liabilities-the claims of customers, creditors, and other broker-dealers; and (2) to provide a cushion of liquid assets in excess of liabilities to cover potential market, credit, and other risks if they should be required to liquidate. The rule achieves its purpose by prescribing a liquidity test that requires a broker-dealer to maintain the greater of a specified minimum dollar amount or specified percentage of net capital in relation to either aggregate indebtedness (generally all liabilities of the broker-dealer) or customer-related receivables (money owed to the broker-dealer by customers) as computed by the reserve requirements of Rule 15c3-3. The net capital rule thus enhances investor/customer& confidence in the financial integrity of broker-dealers and the securities market. The net capital rule applies only to the registered broker-dealer and does not apply to the broker-dealer's holding company or unregulated subsidiaries or affiliates.'

To me it is difficult to see which of the SEC and Federal Reserve is worst at prudential regulation.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 19th, 2014 at 11:02:13 AM EST
[ Parent ]
ensure that registered broker-dealers maintain at all times sufficient liquid assets to (1) promptly satisfy their liabilities-the claims of customers, creditors, and other broker-dealers; and (2) to provide a cushion of liquid assets in excess of liabilities to cover potential market, credit, and other risks if they should be required to liquidate
If this is really "in excess of liabilities" then the bigger the margin lending bubble the bigger the drain in liquidity in the system at large.

IMHO, and somewhat counterintuitively, insisting on liquidity buffers actually decreases systemic liquidity, as it ties down a large fraction of the available liquidity.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 11:43:48 AM EST
[ Parent ]
Well, my 'intuition' was completely useless trying to imagine the effects of that statement.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 19th, 2014 at 12:37:17 PM EST
[ Parent ]
investorsspeculators are buying shares on broker credit

Is this something new, like the result of some deregulation?

What I mean is that there was the dot-com bubble when worthless stocks were sold with "knowledge economy" mumbo-jumbo; then there was the subprime mortgage/derivates bubble when mortgages with little hope of repayment were re-packaged to be sold as the safest investment around; what's the biggest Ponzi scheme this time?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon May 19th, 2014 at 01:19:12 PM EST
[ Parent ]
Is this something new ...

Not really.  Mr. Market has once again decided This Time It's Different©.  In my view because corporations, etc., are sitting on whacking great Piles O' Cash and haven't a clue what to do with it.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon May 19th, 2014 at 01:23:38 PM EST
[ Parent ]
Mr. Market has once again decided This Time It's Different©

But if it's not broker credit, then what's the trick this time? What new story they tell investors to convince them that This Time It's Different? What's the biggest latest "financial innovation"?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon May 19th, 2014 at 02:21:15 PM EST
[ Parent ]
I can't believe anyone thinks It's Different This Time. What they think is that there's a heap of money to be made in this bull run, and they're smart enough to get out in time.

by afew (afew(a in a circle)eurotrib_dot_com) on Mon May 19th, 2014 at 02:38:38 PM EST
[ Parent ]
speculators are buying shares on broker credit

Is this something new, like the result of some deregulation?

You should really read John K. Galbraith's The Great Crash, 1929. It's a short little book.

I mean, blowing bubbles is what "market participants" do...

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman

by Migeru (migeru at eurotrib dot com) on Mon May 19th, 2014 at 06:38:10 PM EST
[ Parent ]
From the chapter The Twilight of Illusion in The Great Crash:

(Sorry about the readability, there still seems to be a 600px limit on image height...)

by afew (afew(a in a circle)eurotrib_dot_com) on Tue May 20th, 2014 at 02:17:56 AM EST
[ Parent ]
No need to posit financial innovation or new Ponzi schemes in order to explain a margin-loan-fuelled bubble.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Tue May 20th, 2014 at 06:08:28 AM EST
[ Parent ]
Reminds me of thhis from a few days ago:

The Dow Jones Industrial Average is a Hoax | naked capitalism

On the other hand, companies in the take-off or acceleration phase are added to the index. This greatly increases the chances that the index will always continue to advance rather than decline. In fact, the manner in which the Dow index is maintained actually creates a kind of pyramid scheme! All goes well as long as companies are added that are in their take-off or acceleration phase in place of companies in their stabilization or degeneration phase.

by generic on Sat May 17th, 2014 at 06:27:52 AM EST
It is a scam by definition.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon May 19th, 2014 at 12:18:52 PM EST
[ Parent ]
I have a retirement nest egg invested in a variety of sectors in mostly Irish and UK shares in companies I regard as being generally well managed.  I rarely trade as the objective is to preserve long term value for my children and grandchildren - the first of which is due this July.  My view is that my children and grandchildren are unlikely to be able to live as well, financially, as I can now, and therefor the least I can do is facilitate some inter-generational transfers.

Occasionally if a house deposit, educational fees, or a car is needed, I might sell some to fund same.  Anything to avoid my children having to pay rip-off interest on much needed goods and services. Overall the strategy has worked very well, the Irish stock market crash of 2008 (-40%) having been largely recovered in 2009. I did hedge against a Euro break-up, but that investment has turned out to be largely earnings neutral in any case. In general I found my own instincts to be at least as good as stockbroker advice.

What I have noticed, however, is an increasing volatility in the market as Irish stocks, in particular, are bounced around by international investor sentiment towards "emerging" markets.  There seem to be huge volumes of cash sluicing around the international financial system looking for returns in ways no fundamentals could ever justify. Investing directly in shares is not for the faint hearted, but I prefer it to paying huge commissions to the "financial industry" for negligible returns especially when compared to the risks.

Being very much a long-term investor, I can afford to take a sanguine view of short-term developments. I foresaw the 2008 crash (thanks in part to you folks here), but not quite it's short term severity. I also foresaw the recovery, perhaps ahead of some here, but am unsure of how sustainable it is. So at the moment I am agnostic about future directions, and am open to being educated. I am more exposed to some shares (that have done particularly well) than I would like, but cannot think of any place better to put the money at the moment. I like to be as counter-cyclical and counter-prevailing wisdom as possible, but also have no reason to be greedy. The objective is inter-generational solidarity, not empire building.

None of this sits particularly well with me from an ideological point of view, but in the absence of good public pensions and healthcare provision for the retired (and the young) I can see no pragmatic alternative. My primary responsibility is to my children's families; I can't take the world's problems on my shoulders.

That said, I support progressive state policies where they harm my self interest, and am continually amazed at how little my generation and those better off are asked to contribute.  This last recession has primarily been an attack on the young and on future generations at the behest of the old and wealthy - those with least to contribute into the future - and who are mistakenly seen as the wealth creators rather than the rentiers they truly are.

Age and treachery will always triumph over youth and enthusiasm. plus ça change etc.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon May 19th, 2014 at 01:20:55 PM EST
PS - The Irish Stock Exchange (ISEQ) general index reached a peak of 10,000 points briefly in April 2007 and fell to 1,987 points, a 14-year low, by 24 February 2009 - it was my total portfolio which crashed 40% between calendar years 2008 and 2009

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon May 19th, 2014 at 01:25:11 PM EST
[ Parent ]
correction - between 2007 and 2008

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon May 19th, 2014 at 01:30:24 PM EST
[ Parent ]
I am more exposed to some shares (that have done particularly well) than I would like, but cannot think of any place better to put the money at the moment.

Simply cashing out of stocks one feels over-exposed to and sitting on the cash (until one is more confident in the long-term sustainability of share prices) is a valid option that most people tend to forget exists.

(Usual disclaimer: This is not investment advice, and frankly if you're taking investment advice from some dude on the Internet then you're asking to get ripped off.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 19th, 2014 at 03:06:07 PM EST
[ Parent ]
You're NOT some dude on the internet... and yes, cashing out is an option I have, on rare occasions, exercised. If I thought we were on the cusp of a bubble now, I would do so, but that is not where I think we currently are. More likely, prolonged stagnation, low growth, periodic "corrections", occasional panics, and hard to fathom or predict rallies.  All dependent on the capricious actions of mega investment funds, not necessarily economic or business fundamentals.

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon May 19th, 2014 at 05:06:56 PM EST
[ Parent ]
Doesn't have to be all-or-nothing. If you bought 100 each of A, B and C at 100, and A is now 110, B is 120 and C is 150, and you think C is overvalued by 30, then you can sell 20 C and keep the 3,000 cash, if you are not confident that A and B are not overvalued (but also are not confident enough that they are overvalued to want to cash out completely).

Anyway, usual disclaimer about not giving investment advice, etc.

Personally, I'm all-cash right now, but that's because I have basically no wealth and expect to need the liquidity soon.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 19th, 2014 at 05:34:05 PM EST
[ Parent ]
The way stock market valuations is calculated is absurd.  Take a company with 1,000,000 outstanding shares, trading at $10/share, and is thus worth $10,000,000.  One nut buys one share at $20 and - ta-DAH! - the company's stock market valuation is $20,000,000.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Mon May 19th, 2014 at 01:32:32 PM EST


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