This Week’s Message: Greed In Markets Isn’t Good If You’re Bullish On Stocks — Or — Who’s Swimming Naked?

Personal note: Chatting with Nick after the close this afternoon I found myself venting on behalf of anyone who might be exposed to this market on a short-term basis. I don’t know that in my 35 years of doing what I do I’ve seen a more myopic, purely headline driven market. Of course the now-huge preponderance of algorithmic trading is (in terms of dimension and influence) a relatively (as in the past decade or so) new thing, and not to mention the social media platforms upon which traders become totally distracted — and led through a veritable labyrinth of theories on everything from macro economics to day trading — makes for utter short-term confusion in markets; particularly today, with its intense political and geopolitical backdrop.

The term “venting” above notwithstanding, I’m not complaining mind you, for our purposes the algorithms, etc. provide the market with more liquidity; and if you remain above the fray, that’s a good thing.

Now, if nothing else, the above inspires more conviction in me than ever (if that’s possible) that to be successful in the markets one must cancel out the noise and remain immersed in the big, global, ever-changing macro picture. 

Jesse Livermore, the legend who possessed one of history’s greatest investment minds was gracious enough to share his wisdom with Saturday Evening Post journalist Edwin LeFevre back in the early 1920s. While I’ve read countless books, research reports, essays, etc., on markets and economics over the years, the compilation of those nearly 100-year-old interviews (which I continue to periodically pore through even to this day) I suspect have impacted my thinking, to the benefit of myself and our firm’s clients, more than all of that other literature combined.

The terms he used in the quote below should sound familiar to regular readers:

“Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them up so as to be able to anticipate probabilities. In short, I had learned that I had to work for my money. I was no longer betting blindly or concerned with mastering the technic of the game, but with earning my success by hard study and clear thinking.”  Jesse Livermore

This Week’s Message

Warren Buffet says he “gets fearful when others are greedy and greedy when others are fearful.” He’s also famous for saying:

“Only when the tide goes out do you discover who’s been swimming naked.”

Well, friends, I’m not feeling at all greedy these days, even though the majority of my fellow traders and investors (individuals and professionals alike) seem to be. And, yes, I’m wearing my swim trunks 😎.

It probably won’t surprise you that we now have our own “Fear and Greed Barometer”; today’s score was +75. A score of zero would be our highest fear reading, 100 the highest greed read. 

Here are its components (email me if you’d like a description of any, or all):



CNN Money Fear & Greed Index +1

So, as you might suspect, +75 is a very high (greed) reading; meaning folks are presently bullish, and how!

Also, as you might suspect (or as you know if you’re a long-time reader of this blog, or a Buffett fan), sentiment at the extremes is among the very best contrarian indicators.

So, yes, the market is quite ripe for a fall right here (doesn’t mean it’ll happen “right here”); just needs a catalyst.

Speaking of catalysts, as I type stocks are barreling yet higher on news last night out of China that both sides have agreed to begin scaling back existing tariffs. Following up this morning, the editor of China’s state media outlet, however, tweeted that both sides have to give, and that the U.S. has to agree if there’s to be a phase-one deal. Of course that doesn’t quite confirm last evening’s narrative, and we’ve yet to hear from the U.S., but suffice to say that that’s clearly what the market expects; and I think it’s a reasonable deduction given the political risk of no-deal at this juncture.

Of course commentary from the U.S. denying the alleged agreement to cut existing tariffs (something that the U.S. has strenuously resisted to this point) would indeed be the catalyst that would send our Fear and Greed Barometer plummeting, and the stock market (in the immediate-term) with it. 

Now, given that our time horizon is far beyond the immediate-term, how and where — where they truly matter — might Buffett’s maxims apply? Where are we seeing the sort of greed, for example, that would have us feeling nervous? And when the tide goes out, who indeed might we find to have been swimming naked?

Aside from the short-term character of the stock market, another area where we’re seeing what I characterize as frightening and potentially massively destructive greed is in the corporate debt market. Since we’ve been covering this topic in-depth herein, and in client meetings, I’ll spare the verbiage and express our concerns in pictures:

Ratio of loans and leases to GDP

Buybacks and Dividends Exceed Free Cash Flow for U.S. Companies (i.e., they’re borrowing (again) to give $ back to shareholders):

Baa (junk) debt tripled since 2010:

Corporate interest expense highest since the Great Recession:

Ratings downgrades accelerating:

Biggest share of leveraged loans is near the lowest ratings tier:

Investment-grade interest coverage, and cash-to-debt ratios waning:

Leveraged loan ratings deterioration worst since 2016:

Overall corporate debt to GDP highest ever:

There’s more, but you get the picture.

As for who’s swimming naked, well, of course any investor (individual or institutional) who’s chasing yield down the low-credit-rating rat hole. And, frankly, all other investors who are throwing all caution to the wind and believe that, by some miracle, equity markets (be they stocks, real estate, industrial commodities, etc.) will continue to rise ad infinitum against the narrative that the above pictures paint, amid a world that houses some $15+ trillion of negative interest bonds, and while major central banks are quietly panicking to the point where they’re back to the money printing ways that were once reserved for “great recessions”.

That last point above indeed captures much of what explains present market euphoria. Problem with that is, well, history.

White line = fed funds rate; yellow = S&P 500 Stock Index; red shaded areas = recessions:

Like I said in my opening rant, myopic!!

Thanks for reading.
Have a great weekend!


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