What Goes Up, Must Come _________

• If you are net long US equities and adding on dips, you are consensus, and the probability of you ending up alongside 10,000 hedge funds all trying to get out at the same time is increasing.
  

I thought I’d piggy back on Alim’s take with my own original analysis something I read by Mike Whitney over at Counterpunch. Whitney parrallels the rise of margin debt on the NYSE with the S&P 500′s performance from 1981-2014. Unsurprisingly, the two move closely with the accompanying booms and busts.

Source: Seeking Alpha

While Whitney states that “the amount of margin debt is not a reliable tool for calling a top; it’s safe to sat that the recent spike in investor leverage has moved the arrow well into the red zone.”He continues with “investors are going to cash out long before the Fed ends QE altogether, which means the selloff could persist for some time to come much like after the dot.com bubble popped and stocks drifted lower for a full year.“

Of particular note is that 2013 saw a net $142bn increase in margin debt, far surpassing the previous record annual margin debt increase of $89bn in 2007.

Whitney highlights two other reasons to tread lightly in the current environment:

1) Stock buybacks totaled $128.2bn in Q3 2013, the highest levels since Q4 2007.

• corporate managers are doing the same thing as your average margin investor. They are loading up on financial assets–not because they think they are a good value or because they expect higher earnings –but because Fed policy supports artificially-high prices.

2) High-yield “junk” bonds issued $324bn in 2013, the second highest year on record.

• Investors are only too happy to dump their money into high-risk debt believing that companies never default or that the Fed will save the day again credit tightens and the dominoes start tumbling through the debt markets.

If these indicators are forecasting a potential repeat of 07/08, we should all step back from the ledge and take a deep breath.

About Trung Phan

Trung Phan is a UBC MBA student with global interests in geopolitics, finance, economics and society. He has a diverse educational background with a BA from McGill (History) and has passed all three CFA exams. His interests led him to Asia, where he lived and worked for five years as a journalist and investment analyst.