Interesting article Les,
Anecdotal evidence also suggests that many day traders and online investors have been using home equity loans and credit cards to increase their exposure to the market. There is no way of knowing how great that exposure is, but it is some measure of the $1.32 trillion in consumer debt and nearly $6 trillion in mortgage debt (both in addition to margin loans).
The sublime and the ridiculous are often so nearly related, that it is difficult to class them separately. One step above the sublime makes the ridiculous, and one step above the ridiculous makes the sublime again.
Thomas Paine
Something from last week...
Market Observations - 6/24
Caught between a stock and a hard place...Don't know if you caught this one, but yesterday's 2yr. government bond auction registered some of the lowest demand in close to 17 years. Bid-to-cover (conventional measure of bond demand) was 1.71, the worst for a 2 yr. auction since July 1982. The yield came at 5.75%. Remember when this was the yield on 30 yr. paper in late April? Last November, bond managers would have gotten down on their hands and knees for a 5.75% 30 yr. yield. (The only ones on their collective hands and knees today are the leveraged bond speculators caught on the wrong side of this rate move.) It always amazes us how quickly sentiment can change among greater market participants. By example, human nature is really a fickle animal. With foreign markets (particularly Asian) moving upward at a significant pace and domestic economic indicators such as today's durable goods number continuing to reflect strength, the Street is all aflutter with the question of how many rate hikes it will ultimately take to modestly blunt economic growth and soothe the (newly reformed?) Greenspan Fed. What is almost laughably ironic is that "the Street" pins the problem solely on real (and potential) economic growth while completely ignoring underlying past credit expansion as a possible accomplice in the crime. In our opinion, Greenspan just isn't getting the "credit" he deserves for having had a strong hand in creating this situation in the first place.
Forget the trees. Let's take a look at the forest for a second. From the lows of late last year, 2yr. to 30 yr. Treasury yields have increased at least 150 basis points, prior to the reality of actual tightening action. We may be slipping, but we cannot remember/find any other period where bond yields backed up this much prior to the first Fed action. Market Vane bulls on bonds now stand at a rather low 22%. Late last year this number was 90%. We're not saying bonds are a raving buy, but rather that bond sentiment seems awfully pessimistic right here. (In a "normal" market environment, these sentiment numbers would be extremely bullish.) Our question is "If bonds are a horrible place to be, then how can stocks be a wonderful place to be?". (Please, no "new era" email answers. This is a rhetorical question.) Fearless forecast of the week: The Fed will increase rates 25 basis points next week and move to a neutral bias. (This is not just our feeling. Ned Davis and a number of "informed" Fed watchers have already voiced this as a strong possibility.) Although the Fed would love to see the stock market back-off a bit, it will not (at least they think) allow a crash. Greenspan may show us the "valley below", but he'll never push us off the ledge on purpose. Given the dependence of the current "new era" economy on stock gains/stability, Mr. Greenspan is quite simply caught between a stock and a hard place.
We believe tightening by 25 basis points and returning to a neutral bias will allow Greenspan to deliver sugar-coated medicine. He is a gradualist by nature. Possibly, under this scenario, he'll just hope to God that higher oil prices and higher mortgage rates take their toll on consumer spending as we move through summer. Money supply figures have backed off their wild growth rates of late last year, but unfortunately the damage is already done. We have to believe we are getting to a critical juncture for stock market participants. We find it extremely hard to believe that stocks would easily tolerate a 6.25% or higher long bond coupled with the thought that more short rate hikes were on the way. (As you know, nothing really amazes us anymore when it comes to the stock market.) Having said all of this, the unwinding of leveraged bond positions is a complete wildcard in terms of the ebb and flow of bond prices. It seems Mr. Greenspan has a problem. Foreigners are clearly repatriating capital, as witnessed by the weekly Federal Reserve Data, it appears that leveraged bond participants are being forced to sell (or hedge which causes more selling by a counterparty), and the supply overhang in corporate bondland is big. Today, Ford Motor Credit backed away from the mega-deal we mentioned on Tuesday, but "they're still out there". We will be most interested to see the actions of the bond market and the "Greenspin" that takes place after the FOMC tension is behind us. Then we should get a glimpse of the "real" bond market.
Dear Blabby (continued)...Now that the Bob Rubin waiting period is officially over, Abby has reappeared to reassure investors that all is well. "Our expectation is that corporate profits will grow for the remainder of 1999 and 2000. It would be very unusual for that to happen without stock prices moving higher", Abby said today. In fact, she was sooooo bullish she reiterated her year-end S&P target of 1325 and raised her 12 month target to 1385. We'll do the math for you. Her forecast is .68% appreciation to year-end and a 5.2% 12 month increase. Pardon us, but it appears one would be much better off in T-bills under this scenario. Isn't the job of an equity/investment strategist to assess potential risk and reward? If Abby really believes what she says, she should be advocating a massive reduction in equity exposure for the next twelve months with her modest 5% upside target. Oh well, we're just stuck in "old era" thinking. Don't mind us.
It would not surprise us a bit to see a bond and stock (primarily stock) rally post the FOMC meeting. The tension is about as thick as it gets in bondland. Quarter end is upon us and it's time to dress some windows. Earnings preannouncements have been largely contained to the PC box makers and their immediate "friends" such as MU and AMD. The bull chant has already started on how S&P corporate earnings are really shaping up for 2Q, offsetting interest rate increase fears. Greenspan cannot afford to be punitive. Anything can happen over the short term. We still believe the overall negative market characteristics/forces we discussed in our Tuesday piece are irrevocably mounting and mounting. Tick, tick, tick, tick... |
