Has Demand For Stocks Dried Up? Part Deux

A few weeks ago I took a look at the margin debt numbers using them to argue that overall demand for stocks could have already peaked. There are plenty of other indicators confirming what this one seems to be saying but this is just one slice of the demand picture. There’s an entirely unrelated demand factor that may be even more troublesome for the stock market.

Before we get to that, however, let’s take a look at the latest margin debt figures. From the chart below, it looks as if investors may have, indeed, run out of buying power. Total margin debt/negative credit balances peaked from all-time record levels just about a year ago and have essentially flatlined since.

NYSE-investor-credit-SPX-since-1980Chart via Doug Short

Taking a look at Rydex funds, the ratio between bullish and bearish funds is now greater than it was at the peak of the internet bubble, mainly because almost nobody sees the need for downside protection anymore (see assets in bear funds and the bottom of the chart). Even total capitulation by those invested in bearish funds would not move the needle much in terms of demand for stocks.


This is also confirmed by the total amount of money invested in equity funds in relation to money market funds. Like the Rydex indicator, the bullishness expressed here has never been higher. Of course, more money could flow from money market funds into equities but, considering how this indicator is already historically stretched, it doesn’t seem likely.

chartChart via SentimenTrader

What may be the most fascinating and underreported aspect of the demand picture, however, is the incremental demand the equity market has seen from sovereign wealth funds over the past few years. Considering these hold roughly $7 trillion in assets today, they are no small factor in the discussion.

The two largest funds in Japan and Norway now have equity allocations over 50%. This is already a fairly aggressive allocation these days for large pension-type plans so it’s not likely they will significantly increase this exposure. We certainly won’t see Japan go from a 0% allocation to equities to 50% again as we have recently.

And there is an interesting case to be made that this growing demand could be tapped out, or worse, convert to supply at some point in the near future. I’ll let Marc Faber, via Barron’s, explain:

Sovereign wealth funds rose to $6.8 trillion as of September 2014, from $3.2 trillion in 2007. Of that growth, 59% came from oil, gas, and related revenue. As oil prices fall, what will happen to the growth of sovereign wealth funds, which have been buying financial assets around the world? Their funding is going to evaporate, and they might be forced to sell.

If the price of oil doesn’t rebound relatively soon some of these funds may find their source of funding, which has grown dramatically over the past few years, has run dry hence their ability to purchase or even hold their current level of equities.

So domestic investors are already “all in” and foreign investors, via sovereign wealth funds, are essentially as well. Where then does the incremental demand come from to push the stock market higher?

Like these foreign funds, I guess if the social security trust fund could convert those IOUs it holds into dollars they could begin to allocate some of the $2.7 trillion there toward our stock market. However, considering the facts that, unlike other funds which are still growing, the social security trust fund is already facing large annual deficits and is due to run out of money altogether in about 15 years, this would be a very tough sell, especially to a congress now leaning fiscally conservative. And, sadly, these sort of proposals really never gather any steam when it’s truly an attractive time to do so.

All in all, I find it hard to imagine where the demand is going to come from to push stock prices much higher, especially when valuations are already historically stretched and fundamentals seemingly beginning to deteriorate. To me it looks like potential supply far outweighs potential demand at this point. In other words, potential risk far outweighs potential reward.


Wall Street Is #Winning In Full-Blown Charlie Sheen Fashion

We interrupt this financial blog for an important political message:

First of all, let me say I haven’t read the actual bill but I’m sure none of the folks in the house who voted for it haven’t either. What I do know is that Wall Street’s too-big-to-fail banks have basically held the federal government hostage by inserting their own provision into the latest spending bill that allows the government to avoid shut down.

The banks are essentially saying, ‘let us keep trading what Warren Buffett calls “financial weapons of mass destruction” with an explicit bailout backstop from the FDIC or else… [the government will cease to operate].’ To be clear, this is one way banks are allowed to play the heads I win (and keep all the trading profits), tails you lose game (and American taxpayers pick up the tab) in the markets.

What I find especially disgusting about this is that Citigroup lobbyists, not congress, wrote the entire provision that has been inserted into the spending bill. Then Jamie Dimon, CEO of JP Morgan, made personal calls to key players in the house to ensure the bill would pass.  What’s more, another provision in the bill allows for congresspersons to receive 10X as much money from lobbyists, like those from Citi who wrote the provision, in the future as they do already today.

Now I know this isn’t about ‘did we learn nothing from the financial crisis’? We certainly did learn something and the Dodd Frank reforms, with critical insight and input from Paul Volcker, went a long way toward rectifying the problems. No – this is more about the banks paying people off to put their interests above those of the American people.

And I, for one, am utterly ashamed of our political process at a time like this.

Full Disclosure: I have not been registered Republican or Democrat for over a decade because, in the words of Richard Jeni, it’s just too much fun to, “bitch no matter who wins.” 

Now back to your regularly scheduled market insights.

Economy, Investing, Markets

Why Ben Bernanke & Co Fear The Taper And Mr. Market Should Too

bernanke money printing

They’re printing money because they’re scared of what might happen if they don’t. -Albert Edwards

As you are probably already well aware, the Fed decided not to taper it’s $85 billion per month of bond purchases just yet. This threw most market watchers for a loop as Ben Bernanke had made it pretty clear leading up to the announcement that the Fed had every intention of beginning the process of removing this latest round of quantitative easing.

What I find interesting is that, as Stan Druckenmiller suggests, the Fed had primed the market for this tapering in bond purchases and essentially had a freebie to get it started yet they decided not to use it. Why?

Clearly, if the economy is not recovering like the Fed would hope then the $85 billion in money printing per month is just not working in the way that they hoped. The one way it has been effective is in boosting asset prices, making the rich richer but doing nothing for the unemployed. For this reason I asked on Twitter yesterday:

Minyanville’s Todd Harrison, who you can see in the new documentary about the Fed “Money For Nothing” (now in theaters), responded with a third reason and I totally agree. The Fed is now trapped. It’s printing $85 billion per month which is having very little if any positive effect on the economy yet it can’t stop without risking major repercussions.

As Stan Druckenmiller recently told Bloomberg:

If you didn’t believe before that the exit was gonna be tough, the mere hint that maybe in 3 months, if the economy’s good, we might go from 85 billion a month to buying 65 billion a month caused that kind of havoc and risk around the world how in the world does anybody think that when the actual exit actually happens prices are not gonna respond? It’s silly.

Ben Bernanke & Co. were clearly listening. Long-term interest rates nearly doubled on the mere mention of tapering while a few emerging markets saw their stock prices crash and foreign currencies went nuts. So the decision not to taper probably had less to do with the data and much to do with Fed officials fearing the ramifications of actually removing QE even to a small degree.


So we have a Fed fearful of what might happen to the markets and economy if QE is removed and, in stark contrast, investors celebrating the decision by pushing stock prices to new highs. If this isn’t the height of irony I don’t know what is.

At some point Mr. Market is going to realize that this isn’t at all bullish. In fact, the decision not to taper after laying all the groundwork may end up being an inflection point for investor confidence in the Fed. Fortune magazine ran an article earlier this week with the headline, “The Fed Has Lost All Credibility.” It concludes:

Lately it has been getting harder to believe Bernanke. He was continuing to say that the Fed won’t raise interest rates until mid-2015, yet by the Fed’s estimates and others, the unemployment rate by that point would be getting close to 6%, past where most people expect the Fed to raise interest rates. Wednesday’s taper two-step will diminish Bernanke and the Fed’s credibility further. The market went up today because it caught Bernanke in a lie. That will make it harder for Bernanke, and the Fed, to claim it really means it next time. So much for the power of communication.

I’ve been warning for months that when the Fed’s “confidence game” comes to an end it won’t be pretty for the markets. And the endgame may now be in sight.

Posts from earlier this week: