Oh, No, Not Again!

Posted On Apr 12, 2017 By Dave Gonigam

  • The problem with all the “Record-high margin debt!” warnings
  • Mainstream pundits sound the euro’s death knell again; Rickards begs to differ
  • Fed “transparency”: What’s up with Fischer’s secret speech at Brookings?
  • “Fake financial news” versus our own business model
  • UAL stock back in the woodshed… high expectations for America Uncensored… streaming news video leagues better than Wolf Blitzer… and more!

Oy… Here we go again with the dire warnings about “margin debt at all-time highs.”

“Record-High U.S. Margin Debt Provides a Global Stock Market Warning,” says TheStreet. Barron’s is a bit more circumspect: “Uh-Oh? Margin Debt Touches Record.”

The thinking goes like this: When investors borrow against the stock they own so they can buy more shares, it’s the sign of a euphoric “stocks can only go up” mentality… and a certain precursor to a crash.

Margin debt in February — the most recent figure available — totaled $528.2 billion. That’s indeed a record… and it followed a record in January too.

As Barron’s helpfully points out, “Margin debt has a history of peaking right before financial collapses like the ones in 2000 and 2007.”

Which is true… but note the use of the word “peak.” We’ll get back to that…

The problem is that certain screamers on the interwebz have been issuing dire warnings about margin debt for four of the last six years… and no crash has materialized.

Why not? Because margin debt is “a coincidental, not a leading, indicator,” wrote money manager and uber-blogger Barry Ritholtz during one of those episodes two years ago.

“Margin debt rises and falls with markets,” he went on. “The basis for making loans against equities naturally increases when the value of that portfolio goes up. Margin debt declines when the value of that underlying collateral goes down… As markets reach new highs, so too does margin debt.”

If anything, the time to start worrying is when margin debt declines from all-time highs.

“Margin debt rises in a bull market,” our own Greg Guenthner pointed out here in 2014. “But as you can see from the chart, margin debt has rolled over ahead of market corrections in the past:

And even then, it’s not necessarily the end of the world. In the post-Panic of 2008 era, there were fake-outs in 2011 and again in 2015. But the S&P 500 ended both of those years flat before continuing to march higher.

“One day, this bull market will end,” Mr. Ritholtz wrote two years ago. “History suggests that NYSE margin debt will be at all-time highs when that happens. But I strongly doubt its absolute level will give you much of a warning.”

We encourage you to tune out the incessant “top-calling” on the financial channels and the internet. A more meaningful indicator — and a very bullish one at that — is taking shape right now, in the estimation of some of our leading analysts. And the time to jump on it is this week — for reasons you’ll see when you click here.

To the markets… where yesterday’s safety trade is carrying into today.

No extreme moves to speak of, but the Dow has shed another quarter point and now sits below 20,600. The 10-year Treasury yield sits at 2.29%, threatening support that’s held since mid-November. Gold has tacked on another buck or two to its year-to-date highs, now $1,276.

United Airlines parent United Continental Holdings (UAL) is down another 1% today — despite the abject apology from CEO Oscar Muñoz for the airline siccing the cops on a bumped passenger in Chicago.

And why not? We know where Muñoz really stands from his original victim-blaming statement, complete with tried-and-true police union-approved phrases like “refused to comply” and “continued to resist.” ’Murica!

Don’t count out the euro, says Jim Rickards.

As we write this morning, the euro rests at $1.062. “It’s shown good resilience near that level,” says Jim — “it has never fallen below $1.0385 on seven dips in the past two years.”

But predictions abound that the euro will fall to “par” — meaning $1.00. And there are even more dire predictions about the demise of the euro as a single currency for 19 countries. That’s because there’s renewed trouble in some of the so-called PIIGS countries — especially the eurozone’s perpetual basket case, Greece.

Jim’s not buying any of it. “Even at the height of the Greek debt crisis in 2015,” he tells us, “polls consistently showed 60% of the Greek people favored the euro. The reason is clear. Europeans remember the bad old days of the Greek drachma, Italian lira and Spanish peseta. Those currencies were subject to continual inflation that robbed savers and retirees of their purchasing power. The euro is considered a safe haven from government efforts to steal wealth through inflation.”

But what about the rise of European nationalism — as represented by Marine Le Pen in France? “The nationalist surge in Europe is more about immigration than the euro, which remains popular,” Jim says.

Jim anticipates a strengthening euro in the months ahead as the European Central Bank tightens policy to help Angela Merkel’s re-election chances in Germany this fall. Readers of Currency Wars Alert learned only yesterday how to play it for money-doubling gains; there’s still time to get in.

What’s up with the new secrecy at the Federal Reserve?

Turns out that back on March 23, Fed vice chair Stanley Fischer — one of the three people in the Fed’s power structure who really matter — talked about Fed policy while delivering the keynote speech during a dinner at the Brookings Institution think tank in Washington.

Most Fed speeches are open to the public. Transcripts are posted. The speaking schedules of Fed pooh-bahs are posted well in advance. But not this time.

“True, Brookings is a nonprofit institution, not a bank,” writes Pedro Nicolaci da Costa at Business Insider, who broke the story. “But its donors, the ones that get to attend these type of exclusive-access diners, include Wall Street megabanks. Its board of trustees includes Carlyle Group co-founder David Rubenstein and Glen Hutchins, a co-founder of Silver Lake, two of the largest private-equity investors in the world, as well as high-level executives at Goldman Sachs, Deutsche Bank and JPMorgan.”

Worse, the secret speech came only days before Richmond Fed President Jeffrey Lacker fell on his sword for dealing in inside-Fed information — a scandal that might still be under investigation by federal prosecutors.

“What Fischer’s speech last month shows,” writes da Costa, “is that the Fed has yet to grapple with the opaque practices that lead to situations like this in the first place.”

Impunity, thy name is the Fed…

And now a brief word about “fake financial news.”

Perhaps you saw the story yesterday or the day before: “SEC Targets Fake Stock News on Financial Websites,” read a Reuters headline.

Seems a bunch of writers were getting paid under the table to write some 450 bullish articles about public companies. The articles ended up on many popular sites including Seeking Alpha, Forbes, TheStreet, Yahoo Finance, The Motley Fool, Benzinga, Minyanville, Wall Street Cheat Sheet, SmallCap Network, Investor Village and Market Playground. In some cases, the articles even had a disclaimer saying the writer wasn’t being paid… and it was flat untrue.

The SEC isn’t punishing the websites — a good thing from a First Amendment perspective. But 27 other defendants are facing charges.

“This is different from the fraud cases that you usually see us bring,” says Stephanie Avakian, acting director of the SEC enforcement division. “Here, we allege that the fraud was in presenting the analysis as impartial,” she said. “It was bought and paid for.”

Naturally, you as a consumer of financial media might wonder where we stand in all of this. Our readership is growing by the proverbial leaps and bounds… and if you’re a newer reader, you might not be hip to our business model. So here’s the deal.

Agora Financial generates the overwhelming majority of its revenue through the subscription fees of readers like you. It’s a business model that affords us much independence. We don’t take secret payments from companies to tout a stock just so we can keep the lights on. Nor do we have to look over our shoulder and wonder what outside advertisers think of our content.

So what you read from us is the unvarnished opinion of our editors. And just to make sure we keep church and state as separate as possible, we insist our editors cannot hold a position in the securities they recommend to you. (We’ve had popular editors quit on us because of that policy, but we’re not going to change it.)

Even our e-letters that are available to nonpaying readers — like The Daily Reckoning and Wall Street Daily — are subsidized by the ads for our own paid newsletters and trading services.

The downside, if that’s what you want to call it, is our aggressive marketing. We know it’s aggressive. We don’t apologize for that, because we think ours is a hell of a lot more honest way to earn a living than to, well, take payments from the investor-relations departments of public companies or kowtow to external advertisers. No conflicts of interest here. No hidden agendas. No BS.

Now you know…

“Heading in the right direction!” says the first in another round of reader emails about our new venture America Uncensored, with the tagline “The News ‘They’ Don’t Want You to Hear.”

Says another, “Do I need to subscribe separately to America Uncensored or is it part of my current subscription?”

The answer is that if you’re not getting it already, you will soon. Patience, please. There’s a weird science to the rollout of an e-letter. Our marketing folk understand it much better than I do, but a slower rollout ensures more people will want to read it over time, and fewer people unsubscribe.

And to the Canadian reader who wrote in: Yes, you’ll have access too. Heh…

“As described,” a reader writes, “America Uncensored sounds as if it might be a decent mashup of a wide range of my readings.

“I look at many things — Fox, CNN, NPR, Daily Wire, a number of things from Agora, other sources off the beaten track and anything else that catches my attention.

“The biggest disappointment I have with all news outlets nowadays is that they editorialize everything. One of the reasons people like Sevareid, Cronkite and their fellow news giants were trusted is that they reported the news without commentary. They trusted us to make our own decisions based on what we saw and heard, after we incorporated the information into our daily experiences.

“Now the reporting is more of a kindergarten-level presentation to those outside the media, who ‘are obviously too stupid to think and reach our own conclusions.’ You cannot watch any major news program without being lectured as though you were a 3-year-old. I tire of it.

“(Occasionally, you too veer off wildly into editorializing — but at least you admit it.)

“I very much hope that the new venture works out well, but I especially hope that it does not become a platform with which to lecture readers. Who knows: With the way the internet works, it may become a bigger news source than CNN. Now, that would be nice!”

“During this election, I started watching BBC News,” a reader writes about alternative news sources. “I figure it has to be unbiased, as it is from a different country.”

The 5: You wish.

The Beeb was as useless as most American news sources during the run-up to the Iraq war 15 years ago… and it’s nearly as useless in the present era of Western fearmongering about “Russian aggression.”

It is, however, a somewhat different perspective even from the New York-Washington axis. BBC World is the only reason my Anglophile mom hangs onto an expensive cable package…

“I also receive two TV channels on Dish that I have learned to appreciate,” writes another. “They are CGTN (Chinese) and RT (Russian).

“The Russians have a bit of an edge on their comments, but the Chinese seem to try to remain a news agency, rather than an overt propaganda outlet — almost like the news was 60-plus years ago. Both have representatives (they call them ‘residents’) around the world in all the major cities who have Central European names but speak virtually perfect American English. Plus, the female residents are generally slender and attractive 20–30-year-olds.

“You might run across them in your travels in some of the motels. They cover the things our TV media abhor and do a reasonable job providing international information you will seldom if ever find on CBS, NBC, etc. Another reason I like them is they have basically no commercials, plus excellent documentaries.”

The 5: Your editor was a shortwave radio buff back in the day; I remember listening to Radio Moscow on Christmas morning 1991 announcing the Soviet Union had ceased to exist. Kinda cool hearing it direct from the source.

In the satellite and internet age, most governments have shut down their big electricity-sucking shortwave transmitters. Both CGTN and RT have free-streaming internet feeds — along with France 24, Germany’s DW, Japan’s NHK and Iran’s PressTV. And Al-Jazeera English from Qatar is once again available after the failure of Al Jazeera America.

They all have their biases, some more obvious than others. Usually, I have two of them streaming silently on my screens at any given time while I work. Beats the hell out of Wolf Blitzer and Jim Cramer…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. As we get ready to hit “send,” your editor is off to lunch with Agora Financial executive publisher — and the founder of this e-letter — Addison Wiggin.

We’ll return to a topic we explored late in 2014 — the sometimes conflicting opinions of newsletter editors. The conflict is even more urgent on the eve of our editorial meeting here in Baltimore tomorrow. Is a “Trump moneybomb” about to shower cash on Wall Street in three more days? Or does the next crash begin next week? Stay tuned!


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