Highest Margin Leverage Since 1929
Our old pal Alan Newman’s January 21 issue of Crosscurrents, entitled “Record Leverage, Record Insanity,” is packed with the usual juicy data and is as salient and succinct as ever. With the market stampeding higher to ever more overbought levels and sentiment readings at dangerously high levels Alan’s recent analysis and commentary is rather timely.
Though many have labeled him a “perma bear,” his bullish market calls and bearish calls have been equally accurate and prescient. You can check them out on his website (http://cross-currents.net). Here are some highlights, or lowlights depending how you look at it, from the current issue.
“Margin Leverage closed 2012 at the highest level vs. Total Stock Market Capitalization in 83 years. Is Amazon the new Apple? Strong sell recommendations have been outlawed!”
“If anything has changed yet in 2013, we certainly do not see it. Despite the early post-fiscal cliff rally, this is the same beast we rode to the 2007 highs for the Dow Industrials.
The U.S. stock market is over leveraged, overpriced and has been commandeered by mechanical forces to such an extent that all holding periods are now affected by more risk than at any time in history.”
“Leverage: margin debt rose to the 14th highest monthly reading ever in November…. ten of the excessive events were all compiled in a ten month span from May 2007 to February 2008… The other three occurred from March to May 2011…”
“As of the end of November, our featured chart of margin debt versus stock market capitalization illustrates the highest year end reading since 1929.”
The venerable Mr. Newman goes on over the next 5 pages to show how this compares to 1987 and other high points. He discusses, how valuation metrics have changed, what High Frequency Trading has done to the market, the absence of bearish sentiment, the risk in owning Amazon, among other observations and warns on the last page that:
“We believe stocks are putting in a major high. A correction of at least 20% should be expected. Worse? Quite possible.”
If you wish to read more he offers a generous 3-Month Free Trial on the website http://cross-currents.net.