Leon Black is Selling, but Speculators Aren't Seeing Things his Way

That the memories of investors are rather short was already clear in 2007.  Evidently, nothing has changed. Dispensing a bit of biblical wisdom last week, Apollo's Leon Black remarked:

 

“It's almost biblical. There is a time to reap and there's a time to sow," Leon Black, chairman and chief executive of Apollo Global Management declared to the Milken Institute's global conference in Los Angeles, alluding to that same Scriptural passage. "We are harvesting," he added pointedly.

That is, the private-equity giant is a net seller because things simply can't get much better. "We think it's a fabulous environment to be selling," he says, noting Apollo has sold about $13 billion in assets in the past 15 months. "We're selling everything that's not nailed down. And if we're not selling, we're refinancing."

That's because there has never been such a good time to borrow — which is raising warning flags for Black. "The financing market is as good as we have ever seen it. It's back to 2007 levels. There is no institutional memory," he observed, referring to the peak of the last credit bubble. That was when then-Citigroup CEO Chuck Prince famously said that as long as the music was playing, bankers had to keep dancing — which they did, with disastrous consequences when the band stopped.”

 

(emphasis added)

Admittedly, there are two major differences between 2007 and today. In 2007, money supply growth in both the US and the euro area had been in the low single digits for two years already. Both the Fed and the ECB had been raising interest rates in baby steps for three years and in the course of 2007, numerous warning shots were fired – beginning with the bankruptcies of sub prime lenders in February, and then moving on to the difficulties experienced by a Bear Stearns hedge fund invested in CDOs (collateralized debt obligations) in the summer, followed by growing convulsions in interbank markets and the first injections of emergency liquidity by the ECB in the fall. The mood was still oddly upbeat in many quarters (people like Ben Bernanke and Hank Paulson supplied us with immortal quotes like 'the sub-prime crisis is well contained' and 'the US banking system has never been healthier than today'). However, it wasn't too difficult to see that big trouble was on its way.

This time around, money supply growth remains farily brisk, rate hikes are far from everybody's mind (the ECB even ponders 'negative rates' on its deposit facility) and the nature of the echo bubble is more diffuse – there is no particular sector of the economy that is standing out as the center of the bubble and very few clear warnings are in sight.

In fact, the environment is now held to be so ideal – especially for the US stock market – that it can probably only get worse. Leaving aside for a moment that about half of the developed world is in recession and the rest isn't exactly brimming with growth, for stocks the environment has proved quite positive. On the one hand things aren't bad enough to derail corporate earnings too much (not yet, anyway), on the other hand they aren't so great as to give the central bank ideas about stopping its monetary pumping. The debt crisis in Europe looks like it has gone into prolonged hibernation. As a bonus, commodity prices haven't been going anywhere lately due to growing worries about China. This is probably a good summary of the bullish argument (we'll leave out some of the more far out ideas like 'stocks are cheap'. The assessment of valuation cannot be simplistically reduced to the current trailing or 'forward' p/e and their relation to the historical mean).

 

Perceptions, Sentiment and Positioning

It would probably be best to state that it is the current perception that this represents an ideal environment for stocks. So far the hugely one-sided bets by speculators have been rewarded quite handsomely. And contrary to Leon Black, who is selling precisely because things are seemingly going so well, speculators are setting new records in bullish positioning. Last week's commitments of traders report on stock index futures has set a stunning new record – hand in hand with a new all time high in NYSE margin debt.

Funny enough, we keep hearing from a number of sources that 'sentiment is still bearish'. Really? Do bearish traders bet record amounts of money on a continuation of the rally? For instance, Laszlo Birinyi just increased his SPX target to 1900 points, and opined that “this year's bull market most resembles the patterns etched in 1982 and 1990, suggesting another 20% of upside. In addition to the historical parallels, we still view sentiment as subdued and nowhere approaching extremes."

Never mind that the current market has precisely nothing in common with 1982 or 1990 (the fact that rates are at zero and the Fed is printing $85 billion every month seems to be a decisive difference).  1982 was a year following on the heels of a major liquidation of malinvested capital in the US economy. Interest rates were very high at the time, and the Fed decided to finally begin lowering them in August of 1982. Sound fundamentals and extremely low market valuations  met with a beginning downtrend of very high administered interest rates. This is so unlike today's situation that it is really difficult to see on what basis anyone would feel compelled to assert that the two time periods are in any way similar.

In addition to that, we are really wondering what exactly Birinyi (and several others) would regard as 'sentiment extremes'. If margin debt sitting at a record high is not an expression of extreme bullish sentiment, then what is it? If a near record low in mutual fund cash relative to assets is not an expression of extreme bullish sentiment among fund managers, then what does it signify? Record high inflows into stock mutual funds are telling us what?  That investors are bearish? A record high in the Barron's big money poll's bullish consensus on equities, with a full 96% of the money managers surveyed declaring themselves 'bullish on stocks for the next five years' is not an 'extreme'? 

Take a look at the net commercial hedger position in all stock index futures combined (which is the obverse of the net speculative position):

 


 

All Index CoT


The net commercial hedger position in all stock index futures combined (inversely plotted) is now at a record dollar value of $55 billion net short. In other words, speculators hold a record net long position valued at $55 billion. Nothing can possibly go wrong.

 


 

A few things have to be said about that. Speculators buying index futures are obviously trend followers, and since the trend remains their friend, they will be right until they aren't anymore. By definition, a market top can only happen once, and the market's price action – apart from a number of momentum divergences (price/RSI, price/MACD) – isn't yet doing anything that says that that the trend may have ended. These momentum divergences are illustrated below:

 


 

Momentum divergences, SPX


The SPX vs. RSI and MACD – so far a string of divergences has not stopped the advance – but the divergences continue to persist.

 


 

Moreover, what usually happens is that indicators of positioning and sentiment also diverge from prices in the vicinity of major tops (one might e.g. see a lower price peak accompanied by an even bigger speculative net long position, or vice versa, a higher price peak accompanied by a lower high in the total net long position). Therefore timing a reversal remains a tricky proposition. Joining the herd is however just as tricky and definitely entails major risk.

Also, we have seen in the past several years that sentiment and positioning extremes have become far more frequent and far larger than anything that has been seen before in stock market history – to apparently no ill effect. So far, that is. As an example consider the chart of the Hulbert Nasdaq sentiment indicator, which has already bested its record high from March 2000 twice in a row this year – and yet, prices have continued to advance (as an aside, this sentiment index does currently diverge from prices):

 


 

Hulbert NAZ sentiment


By almost reaching the 100 level, the Hulbert index of Nasdaq advisor sentiment has produced two new all time record highs in net bullishness this year already.

 


 

We could provide a great many more charts of this sort. By our count, at least 20 different sentiment and positioning indicators have either produced new record highs in the bullish consensus or have risen to withing a hair's breadth of their previous record highs over the past 12 months (they haven't all reached peaks at the same time). Whatever else one might say about this market, it is simply impossible to assert that there is 'skepticism' or that “sentiment is subdued and nowhere approaching extremes”. That is just complete nonsense. What can be argued about is only “when will it matter”, and “what will happen when it finally does”.

 

The Major Weakness in the Consensus Case

There is a major error on which the consensus is based. It is no doubt true that the central bank can blow bubbles of increasing magnitude, which are invariably followed by ever more severe busts. The error is in the belief that central bank intervention can actually restore economic growth. It can do no such thing. It can, for a time, goose 'economic activity' as measured by various aggregation type statistics. This is not the equivalent to genuine wealth accumulation or a genuinely progressing economy.

While creating 'activity', the policy concurrently distorts the entire price structure, and thereby falsifies economic calculation. The profits reported by corporations are largely an inflationary illusion – in reality, they tend to mask a great deal of capital consumption. We know this must be the case even if we don't delve into the details (as we have frequently done in these pages). It is an inevitable outcome of an inflationary policy and the suppression of interest rates below the natural rate dictated by time preferences. Sooner or later a crisis must result, even if we can at this point not yet forecast the precise timing or precise shape of the crisis.

Monetary pumping cannot create wealth – it can only redistribute resources, as a rule away from true wealth generating activities into what one could term 'bubble activities' – investment lines that will ultimately turn out to represent capital misallocations, the very existence of which crucially depends on a continuation and constant acceleration of the inflationary policy.

However, this should not be taken to mean that there is no limit if the central bank simply continues to inflate ever faster 'forever'. The limit is given by the fact that the real savings that are required to fund this diversion of resources into bubble activities are not large enough to support all or even most of them forever; in addition, this pool of savings is continually damaged further by the overconsumption phenomenon that invariably accompanies the boom period. Many people wrongly assume that the central problem of the boom is 'too much' investment (the term 'overinvestment' is usually employed to describe this process). However, this is a logical impossibility, due to the limitations imposed by the pool of real savings. Rather, it is malinvestment, i.e., investment in the wrong lines, that is the problem. Reality can be 'papered over' for a long time, especially in a rich, developed economy. But it cannot be held at bay indefinitely.

 

Conclusion:

It is obvious that the effects of the inflationary policy on prices is currently expressing itself mainly in stocks and other 'risk assets', such as high yield bonds. At the same time, the economy is structurally weakening underneath the distorted picture painted by aggregate economic statistics and reported corporate profits, all of which are goosed artificially by a massive inflation of the money supply. Ultimately these profits will turn out to have been illusions. Moreover, we have evidence that speculators in the stock market are for the most part sitting on the same side of the boat and have done so for a good while already.

Although it is unknowable when the turning point will arrive, this is a situation that becomes ever more dangerous the longer it continues. Once perceptions change, a great many people will try to to leave the party all at once through what will then appear to be a very small exit.

Thereafter we will be told that “no-one could have seen it coming”.

 

Charts by: Sentimentrader, StockCharts


 

2 Responses to “US Stocks – Another Ominous Record Falls”

  • Andrew Judd:

    >>Never mind that the current market has precisely nothing in common with 1982 or 1990 (the fact that rates are at zero and the Fed is printing $85 billion every month seems to be a decisive difference

    Once you recognise that the Fed is also *withdrawing* $85 Billion of wealth every month the picture looks a bit different. The feds actions are fairly subtle. Deficit spending is more significant.

  • hettygreen:

    I recently read The Great Crash 1929 by J.K. Galbraith and have to say the current environment seems highly reminiscent of his description of that year (so far). Then as now the public perception was nothing could go wrong. Meanwhile the powers that be managed through their ‘pompous prognostications’ to paint themselves into a corner where any hint of policy change was going to be devastating…so they did nothing and the market rose inexorably into the ‘Babson break’ in early September.

    Another thing…I’m starting to wonder if the Panic of 2007, which to my understanding was brought on by a housing bubble, was not somewhat analogous to the Florida land bust of 1926. Perhaps our ‘1929’ still lies ahead of us.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Pushing Past the Breaking Point
      Schemes and Shams Man’s willful determination to resist the natural order are in vain.  Still, he pushes onward, always grasping for the big breakthrough. The allure of something for nothing is too enticing to pass up.   From the “displays of disbelief, revealing touching old-fashioned notions” file... [PT]   Systems of elaborate folly have been erected with the most impossible of promises.  That prosperity can be attained without labor.  That benefits...
  • The Myth of Capitalism - A Book by Jonathan Tepper
      Crony Capitalism vs. Free Markets Many of our readers are probably aware of the excellent work our friend Jonathan Tepper does for Variant Perception (VP)*****, a financial research boutique that really does bring a unique perspective to the table*. Jonathan (with co-author Denise Hearn) has just added a new book to his résumé, which is going to be released on 12 November: The Myth of Capitalism (MoC) – Monopolies and the Death of Competition** (a link to the official site is at the...
  • Three Cheers for James Riley!
      Going All In All people, of both good and questionable character, share a singular talent.  They excel at taking something that’s tolerable in moderation, and then pushing it to the outer limits of absurdity.  Why live with restraint when you can get radical?   A fairly famous stretch of LA riverbed graffiti... [PT] Photo credit: saber   Public and private debt levels, NASDAQ stock valuations, the federal register, face tattoos, canned energy drinks.  You name...
  • Crumbling Piles of Sand
      Just a Little Avalanche or an Implosion? A few years ago, we briefly discussed the dynamics of sand piles in these pages, which are a special field of study in mathematics and physics (mathematically inclined readers can take a look at two papers on the subject here:”Driving Sandpiles to Criticality and Beyond “ (PDF) and  'Games on Line Graphs and Sand Piles “(PDF) – unfortunately two other studies that used to be available have in the meantime disappeared from the...
  • When Fake Money Becomes Scarce
      Remaining Focused A rousing display of diversions this week assured the American populace was looking every which way but right under its collective nose.  Midterm elections.  White House spats with purveyors of fake news.  The forced resignation of Attorney General Sessions...   Old drug warrior (otherwise recused) on his way home to Alabama...   Sideshows like these, and many more, offered near limitless opportunities to focus on matters of insignificance.  Why...
  • Fun and Profit - Precious Metals Supply and Demand
      While Not Saving The Planet, Let Us At Least Have A Good Time The price of gold went up seven bucks, and that of silver rose eight pennies. For many people, the attraction to gold and silver began with a desire to protect themselves from the monetary train wreck of 2008. That often grew into a sense that gold is the solution to that problem.   The post 2008 GFC monetary train wreck: US true broad money supply is expanded by more than 153% in a mere decade, as the Fed takes...
  • Wizard’s First Rule – Precious Metals Supply and Demand
      The Last to Go Terry Goodkind wrote an epic fantasy series. The first book in the series is entitled Wizard’s First Rule. We recommend the book highly, if you’re into that sort of thing.   An image from the title page of Terry Goodkind's best-selling fantasy epic “Wizard's First Rule”. We'd be at bit wary of standing around on that stone-slab bridge to be honest. [PT]   However, for purposes of this essay, the important part is the rule...
  • US Stock Market - Re-Coupling with a Panic Cycle?
      The Mighty Gartman Investment newsletter writer Dennis Gartman (a.k.a. “the Commodities King”) has been a target of ridicule at Zerohedge for a long time. His pompous style of writing and his uncanny ability to frequently make perfectly mistimed short term market calls have made him an easy target.* It would be quite ironic if a so far quite good recommendation he made last week were to turn into the call of a lifetime (see ZH: “Gartman: 'We Are Officially Recommending Shorting...
  • Roger Barris for Congress!
      Economic Man Threatens to Leave You Alone if Elected This one is mainly for readers residing in that glorious water source for California commonly known as Colorado. In case you are not aware of it yet, Roger “Economic Man” Barris, an occasional contributor to this site, is running for Congress in Colorado on a Libertarian Party ticket. We will briefly explain why you should vote for Roger, but first two pictures:   Roger Barris, Libertarian Party candidate for the House...
  • Revisiting the Halloween Effect
      From Crash Danger to End-of-the-Year Ramp   [Ed note by PT: we are unfortunately a week late in posting this issue of SI, which didn't reach us in time due to a technical problem. We decided to post it belatedly anyway: for one thing, the effect under discussion is normally in effect until the end of the year; for another, the statistical validity of this information goes beyond the current year, as it is a recurring phenomenon. Lastly we would note that we have a strong...
  • It's Not That Day Just Yet - Precious Metals Supply and Demand
      Degrees of Urgency Monday was Veterans Day, a bank holiday in the US. The prices of gold and silver dropped $23 and $0.61 respectively. “But isn’t gold supposed to go up when...?”   Warren Buffet and Aragorn discuss what to do with the gold. Aragorn wants it, because he knows that even if it's not today, “that day” will come. [PT]   Why? Because everyone else will bid it up. Why? Because they expect someone else to bid it up. Why? Warren Buffet is...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!