Mini-Bubble in Market Debt (Crosscurrents)

[On the Road]

Total margin debt rose 1.3% in November to $242.9 billion, 0.7% below the September peak tally but still a hair above where margin debt stood at the end of 1999, only ten weeks before the absolute peak of the biggest stock market mania of all time.

Total stock market capitalization today is roughly $15.8 trillion against $17.6 trillion at the end of 1999, thus measured against all stocks, the use of leverage is now indisputably approaching the levels of the previous manic peak. However, we really didn't require the last ten weeks into the March '00 highs to posit that a mania was already in place. At the end of 1999, the Dow stood at 11497, the SPX at 1469 and Nasdaq at 4069. The case for a mania could have been successfully argued then and there.

We can see with only one eye open that valuations are not even remotely close to where they were at the end of '99, but need they be to assume danger lurks right around the corner? P/Es remain quite lofty at 19. in the top 1% of all valuations and accompanied by rising interest rates and rising inflation. Dividend yields of 1.8% remain more than a full percentage point below the level at which history shows past bear markets began. Much as we would love to postulate a brave new world and a paradigm capable of protecting and maintaining current prices, we cannot. The history of stock markets is one chapter after another of human fallibilities in judgment and that is the principal reason why both bull and bear markets eventually reverse.

Wall Street does its job very well. The public is convinced that the long term will bail them out. Professionals are convinced as well by necessity (survival). And where else can pension funds hope to earn enough to pay employees when they retire? The flip side is that eventually prices get way out of whack. Despite the apparent wonder of the long term, the short term can get really ugly. Now seems like the right time.



http://www.decisionpoint.com/TAC/NEWMAN.html

Crosscurrents is a good site. Check out their regularly updated "Pictures of a Stock Market Mania."