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Tales From The Future
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I look at value and contrarian ideas as well as emerging technologies worldwide, both on the long and short side. I also like to discuss the influence of monetary policy on stock markets. I usually do not engage in short-term trading and myopic analysis (quarter by quarter, without looking at... More
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  • Another Canary In The Coalmine: Leveraged Loans Soar 4 comments
    Mar 14, 2014 1:22 PM | about stocks: SPY

    Following up to my previous entry on noted investor warnings about the current state of US stock market (namely messieurs Hussman and Klarman) I will keep this one short.

    Below is the issuance of loans to companies with mediocre credit status (left scale) and the S&P 500 (right scale):

    (click to enlarge)

    This is a chart to make even hardened bubble-heads dizzy. It is especially noteworthy how the current surge compares to the surge in 2007, shortly before the last bubble peaked. Nothing remotely comparable has ever been seen before. It is a mirror image of record junk bond issuance and the mania for high yielding debt in general (whereby 'high yielding' these days actually means 'not yielding very much').


    Leveraged loans of course carry a higher probability risk of default and are often required to be secured with assets of the company or individual taking out such loans.

    That being said and keeping my previous blog entries in mind: Never use a single indicator or chart such as the above to make decisions.

    But in my opinion the evidence is rising that many Western stock markets may be near a top in the coming months (2014 to 2015) or are already there.

    PS: Leveraged loans are not a lone indicator. There are other indicators I discussed before, as a summary:

    • Margin Debt Rising (highs back in the year 2000, then in 2007 and now again in 2014*)
    • Number of IPOs with no Positive Net Income or even EBITDA Rising
    • Variable and Bonus Pay on Wall Street Rising (again, 2008 bailouts and public mea culpas quickly forgotten)
    • Bullish Sentiment Rising (even after negative news such as international conflicts or huge credit challenges in China...)
    • Mini Bubbles and Bubbles in various sectors Rising (especially Alt Energy, Internet/Social Media...)

    And I didn't even get started about the FED and money printing since 2008. Let me finish off with a classic chart to include that part of the equation:

    (Source: )

    This isn't Hollywood. We are all Truman Burbanks in this economy.


    * See a chart here:

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Comments (4)
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  • tuliptown
    , contributor
    Comments (775) | Send Message
    I don't understand how to interpret the last graph. What does that mean
    15 Mar, 07:40 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (4080) | Send Message
    Author’s reply » About the last graph. Skeptics can argue for the relation between QE and the S&P500 index: "correlation does not imply causality".


    There's a critical discussion here:



    In his view, the growing profits are the main cause for the rally (unfortunately that chart ends in mid-2013 at the moment):

    17 Mar, 09:08 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (4080) | Send Message
    Author’s reply » But I maintain my view: Without the different QE programs and near-zero interest rates (ZIRP) stock markets wouldn't have rsen so quickly and so long after 2009.


    Especially the final extensions in 2013 were due to multiple expansion and not better earnings or better earnings outlook.


    Even Bernanke hinted at these QE goals himself:


    “For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
    - Ben S. Bernanke




    Also see:

    17 Mar, 03:41 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (4080) | Send Message
    Author’s reply » A more optimistic view here concerning debt/equity and profits:


    The Most Important Difference Between 2007 and 2014:


    Sort of a devil's advocate link for a more bullish view.
    9 Apr, 01:00 PM Reply Like
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