our 58th report on the ongoing mania since we first published this website
on January 15, 1999.
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Our last report was titled "A Record
Setting Stock Market." One can only wonder what the stock market
might have done for an encore during the last three months? Well,
wonder no longer. How about new records, just about everywhere we
turn? To say nothing has changed would be quite misleading.
Not only have things changed, they have changed appreciably....and
in all the wrong directions.
....Read on to view some very eye opening
Since this web site was first published on January
15, 1999, we have focused on total Dollar Trading Volume to measure potential
excesses in the U.S. stock market. By comparing how swiftly money
passes through stocks in relation to both gross domestic product (GDP)
and total stock market capitalization, we can see how the relative importance
of the stock market rises and falls over the course of the last 80 years.
Quite obviously, in 1929, nothing was more important than stocks and when
the corresponding mania peaked, trading was 133% of gross domestic product
stock market and 228% of total stock market capitalization. In 2000,
trading was 328% of gross domestic product and 203% of total stock market
capitalization, a mania fully equivalent to the madness of the "Roaring
Today, trading is 326% of gross domestic product
and 237% of total stock market capitalization. For all intents and
purposes, the current environment represents the greatest velocity of trading
ever seen. However, by the end of the year, we expect that the current
stats will be far more extreme, a bizarre circumstance that lends itself
to only one description - a continuing stock market mania, the greatest
mania of all time.
From July to August, in the span of just
one month, the New York Stock Exchange reported that the monthly
total for dollar trading volume had risen 21.7%. Share volume surged
29.7%. The number of trades soared 39.6%. The sheer speed
at which our capital markets are evolving and metamorphosing is frightening.
The theme of investment is
for all intents and purposes, dead.
As you see below, the U.S. stock market is now
all about trading. Nothing else matters. There
was only one time in history when the average holding period for stocks
was shorter than now and the difference between now and then is inconsequential.
On nearly every aspect, we see shocking parallels with 1929. Clearly,
as shown below, the current focus on stocks can only be compared to the
two prior peaks in 1929 and 2000.
The period of "'normal' times" as labeled above extends
from 1934 to 1982, a 49 year stretch in which DTV did not exceed 25% of
GDP. Both the Roaring Twenties and the 26 year period from 1982 would
argue that we are wrong, that "normal" is a lot higher than we imply.
Using the entire time frame of 1926-2007 captured by our chart, DTV has
been less than 50% of GDP, still far, far lower than today's 325%.
If we suppose the entire 82 year average is "normal," then "normal" transactional
velocity over the course of time has been roughly 15% of what it is today!
Then, when comparing dollar trading volume versus
total market capitalization, we see an even more bizarre and pronounced
focus. We have finally achieved a brand new record, an outcome
even we never believed would actually occur.
There is absolutely no way
to ignore the obvious.
2007 parallels both 1929 and
The following article is reprinted
from the June 4th issue of Crosscurrents.
There can be no question that demand for stocks
is extremely robust. The many new all time index highs attest to
a fervent accumulation. Despite the lip service paid by some observers
to the obvious requirement that prices cannot go up without interruption,
that is precisely what they are doing and they have been doing it for the
second longest stretch in history unimpeded by a 10% or greater correction.
That stretch now totals 1068 trading sessions, well over four years and
almost triple the span of time in which history has shown a 10% correction
to be a perfectly normal event. As tenacity goes, we note a similar
environment existed from late 1999 to early 2000 when sanity completely
disappeared. Perhaps the only difference between then and now is
the continuing under performance of the formerly so-called "new era" Nasdaq
market, a fantasy that hallmarked greed as well as any episode in history,
including Holland's Tulipmania in 1636, the South Sea Bubble in 1711 or
even the Roaring Twenties. Clearly, the persistence of the upside
for the other major indexes has been at least as emphatic as it was seven
years ago. Of course, as we showed in our last issue, in some cases
the indexes make the fait accompli an easy task. We recently showed
that the Dow Jones Industrials Average is rigged for the upside, since
its very construction assures more positive than negative outcomes.
Most importantly in our view, much of the upside
has been and is still being built upon leverage. Despite the arguments
that the supply of stock for sale has fallen dramatically in the last few
years, as private buy outs have proliferated, there is always more to the
phenomenon than first meets the eye. Just the six recent deals involving
Chrysler, TXU, First Data Corp., SLM Corp., Harrah's and Clear Channel
removed over $144 billion from stock market supply. Given the basic
economic tenet that a reduction in supply is as good as an increase in
demand, it is no wonder that stock prices are higher. Thus, it must
be obvious that there has been a huge expansion in demand.
But the more revealing truth is that the increase in demand is as dependent
upon leverage as anytime in history, with perhaps the single exception
of 1929's madness. The six companies cited above were removed from
play with the necessary addition of leverage. According to Reuters
Loan Pricing Corp., loans to companies bought by private equity firms rose
to $317.3 billion in 2006 from $51.5 billion in 2002. At the end
of 2006, margin debt was $303 billion, less than the sum tallied for buyouts.
Also, although the deals are bigger than before, borrowing has also risen
relative to the cash generated by the companies that have been bought.
And clearly, as our featured chart illustrates, the prices of the 5000
companies remaining are moving higher, thanks to leverage. Today’s
featured charts includes updated stats for NASD firms, which were released
last Friday. Margin debt for NYSE member firms increased 8.5% in
April to nearly $318 billion, $40 billion higher than at the top in March
2000. Total margin debt, including NASD firms, now stands over $342
billion. [ED NOTE: AS OF THE END OF JULY,
TOTAL MARGIN DEBT IS 21.8% HIGHER, AT $416.4 BILLION!]
A few weeks ago in Barron's, Alan Abelson covered
recent remarks by Henry Kaufman about liquidity. Clearly, prices
do not rise in a vacuum. Demand for stocks is driven by liquidity
and liquidity is as apparent now as it has ever been. As Abelson
relates, "Liquidity is the magic and somewhat mystical potion that is destined
to dissolve any little thing that might impede a bull market." And
while liquidity used to be a function of access to assets, in Kaufman's
words, "....it is now commonplace to think of access to liabilities."
Thus, margin debt has become a huge driver of liquidity. Some observers
have noted that margin debt as a percentage of market capitalization was
higher in 1987, but that was after the crash, not before. Lest we
forget, prices collapsed by 22% in only one day and 35% in only a month.
The divisor in the computation was reduced significantly overnight.
Our featured chart only shows year end levels and the current level for
2007. We have highlighted the approximate levels of margin debt at
the August 1987 highs, the 2000 highs (see arrow) and today. Note
that leverage has been extremely high since the end of 2005 and currently
stands at a record for the modern era.
Next, we compare the six month differential in
margin debt versus the six month differential in prices, as measured by
the S&P 500. Although the choice of a six month period is indeed
arbitrary, we believe it is a fair representation of how the two measures
correlate. Of course, it can be argued quite vehemently that stock
prices necessarily impact margin levels and not the other way around but
there is only one important point to consider; increased leverage equates
to increased risk. A huge gap between the percentage differentials
in margin and price suddenly appeared in March 2000. Our simple posit
is that prices had ratcheted up to such extreme levels that no amount of
the "mystical potion" of "access to liabilities" was then sufficient to
drive prices higher. The current divergence is muted by comparison
but then again, so is the hysteria that accompanied the final highs seven
years ago. Instead of the mass delusion that permitted Nasdaq to
trade at 250 times current earnings, we now have the delusion that stocks
are cheap at more than 18 times earnings. Meanwhile, in the
first four months of the year, margin debt soared almost 13% while prices
are only ahead by 4.5%.
Clearly, the push for higher
prices requires larger "potions" of leverage.
Like many other charts we have shown in recent
months, total margin debt is never a timing indicator and can only illustrate
rising risks. However, the three year extension in leverage should
be sufficient to convince even the most stalwart bull that risks may have
risen to an intolerable level. Clearly, the "mystical potion" clearly
has a counterpart in the vastly increased exposure of mutual funds to a
major reversal in prices as our next chart illustrates. As we have
repeatedly noted, mutual funds can no longer compete for investment dollars
against fully invested index funds and all stock Exchange Traded Funds.
The battle for survival has been met by the requirement to "dissolve any
little thing that might impede a bull market," you know, like common sense.
article is reprinted from the June 25th issue of Crosscurrents.
The celebrations since last October, when the Dow
Industrials broke above its 2000 all time closing high, have been tumultuous.
Each new record has been trumpeted by CNBC’s anchors as if nirvana had
been achieved. The passing of the 13,000 Dow milestone was immediately
followed by speculation, not of 14,000, but when 15,000 might be achieved.
While we see a smattering of caution voiced by several observers, very
few appear at all committed to a lower exposure to stocks and in our view,
most semi skeptics are simply playing the not-to-be-blamed game if a sudden
tumble should bring their followers to their knees in pain. Truth
be told, optimism is rife.
The best evidence of continuing optimism is seen
in prices, which have ratcheted up on the most consistent and persistent
incline in decades. Although back in February, the market did manage
to conclude the second longest stretch in history without a 2% correction,
we are still very much in the midst of a streak that is either the longest
or second longest in history, depending upon which major average you use,
without a 10% correction. It bears repeating that during the 20th
century, corrections of 10% or greater occurred on average every 17.3 months.
The current run extends over 51 months. The persistency of gains
has resulted in the most amazing display of optimism ever shown by market
letter writers. Steve Hochberg notes in the June 1st issue of The
Elliott Wave Forecast, ’Since 1963, when Investors Intelligence first began
monitoring investment advisors, there have been 2,136 sentiment readings
During this period bulls outnumbered bears 1,569 times, or in 73.4% of
the surveys. The bears surpassed the bulls a total of 567 times, or in
26.5% of the surveys. But since the week of October 14, 1998, a bearish
plurality registered in only 9 of 451 weeks or less than 2% of the time.
This is truly amazing because this time period includes one of the worst
bear markets in at least 34 years. The stock market is in a super-rarified
realm in which a bearish consensus doesn't form no matter what the market
does. The record streak without a net bearish reading now extends back
four and a half years! “
Ironically, the Dow is the only major average to
exceed its 2000 all-time high, but actually remains below that high on
a constant dollar basis. Prices do not rise (or fall) in a vacuum.
The value of a dollar has depreciated significantly since stocks peaked
in March 2000. According to the CPI, the cost of living is now 20.7%
higher than the manic peak. Simply put, if your investment in stocks
has gained 20.7% since March 2000, you can buy no more today with your
portfolio than you could have more than seven years ago.
Remarkably, the best protection against the ravages
of inflation seems to be getting little attention despite very big gains.
Measured from the Dow high, Gold has shone brilliantly, up 91% in inflation
adjusted terms, while the Dow is 4% lower. And Gold has also done
quite well compared to the Dow since stocks bottomed in October 2002. While
the Dow is up very nicely, 56% higher, Gold has advanced by 82%.
To be sure, stocks have better accommodated the ravages of inflation back
to 1982, when the great bull market for paper began, but as our second
chart patently suggests, the age of paper assets now has competition and
the demand for alternative investments, or inflation hedges, is likely
in its infancy.
Our bull market call for gold was initiated with
the horrendous event of 911, but now we see another more important reason
than the need to protect against uncertainty or upheaval. Clearly,
until recently, we hugely underestimated the potential influence of 1.3
billion consumers in China and an additional 1 billion in India, together
roughly 38% of the population of the entire planet. We cannot expect
either country to languish in pre twenty-first century conditions forever
and it is obvious that China has made enormous economic strides in recent
years. As wealth increases world-wide, so will the demand for goods
of all kinds and especially commodities. We expect prices to reflect
increased demand, equating to higher inflation. Sans a worldwide
economic slide, we even expect U.S. stocks to retain a modicum of sponsorship
as wealth continues to build, just at a far slower pace than realized in
the past generation and at a far slower pace than other selected asset
groups, like precious metals.
As our second chart illustrates, the Dow/Gold Ratio
has finally traded back to near the same range as the average from 1990
to 1999, just before the mania peaked. However, there is a considerable
distance for the ratio to travel before it equals the average since 1975
and an enormous ways to go before a test of where the ratio bottomed when
gold futures hit their all time high in January 1980. Our postulated
“eventual target” of a Dow/Gold ratio of 5 would clearly place gold in
a favored status over stocks. If achieved, even a Dow as low as 9000
would mean gold at $1800 per ounce. The Dow at 15,000 would mean
gold at $3000 per ounce. Of course, our target is only mere speculation.
But even if we see an eventual retrace to the average ratio since 1975
at 12.77, gold will clearly shine compared to stocks. At the higher
ratio and Dow 9000, gold would still trade at $705, above today’s price.
At Dow 15,000, gold would trade at $1175 per ounce. So, how likely
are these levels?
Our last chart [ED NOTE: NOT SHOWN]
reveals our resistance levels, which have increased from our last presentation
to account for subsequent increases in inflation. Here one can clearly
see that the bull market began concurrently with 911. Our resistance
levels correspond with prior significant peaks and we expect that only
the January 1980 equivalent peak may be problematic. The lower resistance
levels may take some time to overcome, but we believe they inevitably will
fall just as worldwide wealth inevitably rises. In our January 8th
issue, we suggested that the 2008 Olympics in Beijing represents a very
important event for the planet. Given the tremendous boost this event
will provide for the Chinese economy, we see adequate reason to expect
gold to achieve our first resistance level of $873 per ounce soon thereafter.
In the meantime, although the wait may be tested by the expected scary
correction in U.S. stocks, we do not expect more than a modest correction
Gold, and more importantly
gold stocks, should be well worth the wait.
[ED NOTE: THIS FORECAST
WAS RIGHT ON THE NOSE. FROM THE DATE OF OUR ANALYSIS,
THE XAU GOLD INDEX CORRECTED
13.5% THEN SOARED 43.8% IN JUST OVER ONE MONTH]
article is reprinted from the September 10th issue of Crosscurrents
is probably one of the most important articles we have ever published.
"The Death Of Investment"
The chart before your eyes is without any reservation,
the most stunning we have ever presented in these pages, concrete proof
that the U.S. is no longer a market of stocks and is no longer an investment
arena. In a speech before the International Federation of Technical
Analysts in Washington, D.C., close to four years ago, your Editor claimed
that "The nature of investment has changed dramatically." You can
read the text of the speech at http://www.cross-currents.net/archives/dec03.htm.
The metamorphosis of the U.S. stock market has continued without interruption
since that point and the “nature of investment” has deteriorated to the
point where we may fairly imply that as a technique to capture gains or
profits, investment is no longer even relevant. On the other hand,
trading is not only relevant, but appears to have permanently supplanted
investment as the primary driver of stock prices.
At present, there is every reason to believe that
active managers can no longer compete with the growing dollar amount of
assets under the passive management of index funds and Exchange Traded
Funds. The growth of ETFs has been nothing short of spectacular as
total assets have soared at a rate of 46.3% since 1999, before the zenith
of the greatest stock market mania of all time. By comparison, total
assets in mutual funds have grown at an annualized rate of only 5.8% over
the same period of time and much of the growth has been in index funds,
not actively managed portfolios. Since index funds and ETFs have
zero cash components or cash reserves, active managers of traditional mutual
funds must spend down their own cash reserves in any attempt to compete.
As a result, more money has been thrown at stocks regardless of valuations
or prospects. Yes, prices have moved higher but at a significant
cost - as the cash component contracts, exposure and thus risk, must expand.
In the 15 years from the beginning of 1984 through the end of 1998, the
cash-to-assets ratio of mutual funds averaged 8.6%. Since the beginning
of 1999, the cash-to-assets ratio has averaged only 4.6%. In the
last year, the monthly ratio has dropped to a mere 3.5%. The cash
component of mutual funds is rapidly disappearing.
On the other hand, trading has exploded.
In the span of time the country's Gross Domestic Product has doubled, total
dollar trading volume has soared more than 11-fold. The advent of
ETFs has both allowed and encouraged all participants to suspend any notion
of fair values to trade, rather than invest. The greatest investment
market of all time has been corrupted and now serves principally as a casino
for hedge funds, day traders and performance oriented mutual fund managers.
The financial industry's buy-and-hold for the long term mantra is a lie,
and is no longer even the slightest bit relevant. Only the short
The proof is obvious. As our featured chart
on the front page clearly illustrates, turnover is enormous. Compare
today's chart with the original chart we ran in our March 12th issue (see
Please note that the scale has changed from ten days to only six days.
In our last review of this situation, the entire capitalization of the
Dow Diamonds (DIA) were turned over 26 times in one year. They now
turn over at a rate of 56 times a year. The S&P Syders (SPY)
turned over 41 times and now turn over 94 times. The Nasdaq 100 Trust
(QQQQ) turned over 54 times and now turn over 95 times, with an average
holding period of 3 days. Yet, in a supreme display of ignorance
and arrogance, the Trust's sponsor still claims that, "over 1 million people
are harnessing the power of PowerShares QQQ™ through the implementation
of various investment strategies....These strategies include a diversified,
long-term investment approach and the provision of a full suite of derivative
products that may be used in conjunction with the PowerShares QQQ™."
The use of the words “long-term” in this description would appear to be
a blatant lie.
The use of the word “investment” in a description
of a product
of which the entire share capitalization
turns over in less than one week is utterly reprehensible.
Our next chart clearly indicates that you can kiss
the concept of "investment" good-bye. The average holding period
for equities validates that statement. It's not just ETFs, it is
stocks. Google's (GOOG) entire share capitalization will turn over
more than four times this year. Apple Inc.'s (AAPL) entire share
capitalization will turn over 11.5 times. Undeniable logic; if the
average holding period of Apple is just over one month, then traders must
be making the price, not investors. Simply put, the shorter the holding
period, the less likely it is that a purchaser is interested in the issue
as an investment. The more individual share prices are influenced
by traders, the less those prices must be influenced by investors.
Consequently, the price of the shares will not reflect their fair investment
value. In the March 12th issue of Crosscurrents, we showed how the
average time stocks were held on the NYSE and AMEX had slipped from a full
year back in 2002 to as few as six months in 2006. We should not
be at all surprised to learn that average holding periods have again fallen
to new all time lows.
But what could one possibly expect when the most
popular source of financial news prominently displays the time, not just
in hours and minutes, but with seconds and hundredths-of-seconds as well?
The implication is clear; everything is of and for the moment and we define
moment as the merest fraction of a second. How in heaven’s name can
investment be possible in this environment?
Of course, there is another reason why trading
has exploded and it does not encompass the traditional notion of a trader,
an individual who might nevertheless still be somewhat concerned about
committing capital to a grossly overvalued situation. The explosion
in trading also has everything to do with the inordinate sway of program
activity. Over the last ten weeks, programs have accounted for 34%
of all transactions on the NYSE. The buy program executed by a firm
such as Credit Suisse or Deutsche Banc might be unwound in a matter of
days, perhaps even hours. But whether an arbitrage was based on a
price discrepancy between the actual issues in the program and futures
or some mathematical model that suggested the stocks were momentarily under
priced, it is obvious that the rationale for these transactions was not
“investment.” In the week ending June 22nd, 46.8% of all share volume
on the NYSE was attributed to program transactions.
Investment has been dis-incentived in favor of
trading. Stocks are priced in relation to one another, to indexes
and to sectors. Sadly, participants have apparently decided that
the determination of fundamentals and prospects are too time consuming
and too expensive.
Our estimate of total dollar trading volume
in June implied
the average position holding period had
fallen to 5.38 months.
The same indicator implied
an average position holding period of 5.26 months in 1929.
Need we say more?
Our favorite chart of market potential has become
the Dow Industrials versus a 5% regression line imposed since 1897, a period
of 110 years. As you can see below, the Dow has traded UNDER this
line 78% of the time, affording us the logic that over the very long term,
the regression line should at the very least, approximate price.
We can also see how the super bull market from
1982 took prices up 15-fold, the most significant rise in modern history.
The regression line was actually touched for only one day in October 2002
but we should expect at least another touch of the line, perhaps many touches
in the decade ahead.
The regression line now stands at Dow 9222, roughly
33% below today's price. We believe that going forward, the
line may now represent a worst case for a bear market.
The good news is that this means the October
should represent the secular bear market
lows and will very likely not be violated.
The bad news is that
we do expect an eventual return journey to the regression line.
For the sake of conjecture,
if the regression is not touched until three years from now,
the Dow will still be trading
at 10,676, 22.5% lower than today!
bearish analysis has been trumped over the last year by phenomenal increases
in liquidity, brought about by foreign investors, hedge funds and most
significantly, by the use of leverage. Liquidity could conceivably
increase from current levels, affording a continuing environment that encourages
trading and optimism. However, recent events leading to the near
10% brief turndown in prices lead us to believe that risks are still incredibly
high. See http://tinyurl.com/2ggp2y
for a disturbing analysis. We quote an excerpt below:
".....a coordinated withdrawal
of liquidity among an entire sector of hedge funds could have disastrous
for the viability of the financial
system if it occurs at the wrong time and in the wrong sector."
These are strong words, but what would you
expect if investment was no longer an issue and only trading was.....?
odds the closing highs for 2007 have already been achieved
Dow 14,000 /// SPX
1555 /// Nasdaq Composite 2724
UPSIDE POTENTIAL LIKELY
TO BE NO MORE THAN 1% to 2% HIGHER
Targets for 2007
Dow 11,900 /// SPX
1320 /// Nasdaq Composite 2315
view, the odds still imply a 15% correction from the highs
occur before the end of the year.
OF THE ENTIRE WEBSITE ARE COPYRIGHT 2007 CROSSCURRENTS PUBLICATIONS, LLC
I hope you have enjoyed your visit and please return
again. If you know anyone who might be interested in seeing what
we have to offer, we'd be happy to have them visit as well!
Alan M. Newman, September 28, 2007
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All information on this website is
prepared from data obtained from sources believed reliable, but not guaranteed
by us, and is not considered to be all inclusive. Any stocks, sectors
or indexes mentioned on this page are not to be construed as buy, sell,
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are subject to change without notice. We assume no responsibility
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