Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE WIZARD OF ODDS (March 3, 2014)

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The Q4’13 earnings season is practically over as we now have 486 companies in. The beat rate was 64% and the miss rate 24.5%. Only 4 of the 10 sectors beat the average beat rate: Materials (67.7%), Financials (69.6%), IT (75.4%) and Telecom (66.7%). There were only 3 that beat the average beat rate in each of Q2 and Q3. Only IT, where corporations expertly manage expectations (38% of IT companies had issued negative guidance for Q4), beat in each of the last 3 quarters. Economists would say that the diffusion index of the beat rate is weak.

In aggregate, companies are reporting earnings that are 3.3% above expectations. This surprise percentage is equal to the 1-year (3.3%) average, but below the 4-year (5.8%) average. (Factset)

Q4 EPS were $28.02 bringing the trailing 12-month total to $107.07, down from $107.55 two weeks ago. Surprising to mean-reverters, corporate margins just keep rising as the Factset chart illustrates. Importantly, corporate guidance is not getting worse:

At this point in time, 101 companies in the index have issued EPS guidance for the first quarter. Of these 101 companies, 84 have issued negative EPS guidance and 17 have issued positive EPS guidance. Thus, the percentage of companies issuing negative EPS guidance to date for the first quarter is 83%. This percentage is above the 5-year average of 64%, but slightly below the percentage at this same point in time for Q4 2013 (88%). (Factset)

Q1’14 estimates have declined a little more, to $27.93 from $28.17 two weeks ago. Trailing 12-m EPS would then reach $109.23 by mid-May. If inflation stays at 1.6%, the Rule of 20 fair value would be 2010, 2.6% above the current reading of 1960 based on actual trailing earnings. The upside to fair value is therefore 5-8% from the current 1860 S&P 500 Index level.

This is the third time in this bull market that the S&P 500 Index has failed to cross the Rule of 20 fair value. During the last 50 years, each time valuation rose towards the 20 fair value level, enthusiasm carried equities over the line into the higher risk area.

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Between 1963 and 1966, equity markets rose in sync with earnings while inflation remained stuck between 1% and 2%. Equities subsequently quickly lost 17% when inflation spiked from 2% to 3.6% in less than 9 months.

Since 2009, traumatized investors have refused to get carried away, nervous and uncertain as they were about the world economy, U.S. politics and Fed behaviour, all these fears being amplified by generally negative media narratives.

Recently, however, little has really changed other than the capitulation of most of the bears as the most recent equity rally silenced most of them and revived greed instincts supposedly extinct forever after the financial crisis.

Yet, equities have so far refused to enter the dark side. As I wrote on December 2, 2013 in ENTERING THE DARK SIDE,

The best that could happen is a repeat of the 1963-66 ride along fair value. Earnings would keep rising but the remaining mean-reverters and Shiller P/E fans (The Shiller P/E: Alas, A Useless Friend) would keep fear high enough to prevent equity markets from getting overvalued. (…)

This bull is now officially 5 years old. Only 3 out of 16 bulls grew older since 1932 and only 4 became more powerful.The only three bulls that lasted longer ended in a speculative frenzy that eventually led to a catastrophe for their riders. On January 13, 2014, in TAPERING…EQUITIES, the wizard of odds in me wrote

The old bull in me is tiring. Time to taper…equities.

Hmmm, I hear you, yes, you may be right, the Fed is taking care of us this time with all this financial heroin. And, yes, Super Mario will do whatever it takes and Abenomics are rewriting economic Japanese history.

Plus, the U.S. economy is clearly reaccelerating, inflation is minimal, we’re about to get Janet’s “new and improved” forward guidance, the GOP finally learned its lesson and President Obama’s golf game is improving by the day.

Blue skies forever! (…)

The only thing blue skies tell me is that it would be nice going out, walking, golfing, fishing, hiking…Investment wise, blue skies are no reason to buy, or sell. If anything, if the skies are so blue, then everybody must feel great. The contrarian in me does not really like that.

Here’s the rub:

  • image_thumb[8]The economic blue skies have darkened since mid-January. The apparent economic acceleration has all but disappeared.
  • Tapering is underway. Soft or hard patch? Nobody really knows. Mrs. Yellen wants more data before concluding. We shall see how she reacts now that she controls the trigger. Excellent analysts don’t necessarily make good managers. Some people are simply not comfortable pulling the trigger and tend to analyse to death…
  • Inflation is dead for most investors and economists. But it is not. Total CPI was +0.9% YoY last October, +1.2% in November, +1.5% in December and +1.6% in January. Core CPI is +1.6% while the median CPI is +2.0%, unchanged for the past 6 months.  Core PPI jumped 0.4% MoM in January following a 0.3% rise in December. This is a 4.3% annualized rate over the last 2 months. Also, nonpetroleum import prices rose 0.4% in January. House and rent prices have been rising rapidly in the past year. Food-at-home prices jumped 0.7% MoM in January and the BLS is now forecasting they will rise 2.5-3.5% in 2014. We shall see how the California drought impacts fruits and vegetable prices. Gasoline prices rose nearly 8% since early November, 5.5% in the last month. Cold weather is certainly at play here but Brent crude is $109/bbl, up 12% from its April 2013 low while WTI is up 20%.

image_thumb[10]Energy and food prices may not matter much to those only caring for core CPI. But for most Americans, they eat at the core, especially when wage growth is minimal as it is now.

Should we read something in recent Fed officials debating whether the Fed should allow inflation to run a little without intervening? Prepping investors to prevent a negative wealth effect?

And now there is Ukraine. But don’t worry Barron’s tells us, it is  “Hopeless, but Not Serious”:

While much more is at stake politically for Vladimir Putin, the situation is “hopeless, but not serious,” at least in economic terms, quips David P. Goldman, head of Americas strategy at Hong Kong–based Reorient. To put Ukraine’s economy in perspective, he noted in a CNBC interview that its entire stock-market capitalization is roughly that of Walt Disney, its gross domestic product is one-fifth of Turkey’s, and its per capita income is a bit higher than Egypt’s. Per capita income of Ukrainians is estimated at well less than half of Russians’ and even less than that of Poles.

But, as Bloomberg reminds us, Ukraine is also a breadbasket, a natural gas chokepoint, and a nation of 45 million people in a pivotal spot north of the Black Sea. Ukraine matters—to Russia, Europe, the U.S., and even China. Ukraine may not matter directly to Americans, but it matters much to Europeans and Chinese, both of which matter to the U.S. and both of which are weighing on world economic growth these days. The WSJ’s Matthew Kaminski interviewed Mikheil Saakashvili, former president of the ex-Soviet nation of Georgia who knows a thing or two about Putin’s intentions and ways and means:

“What does he want here? Chaos,” Mr. Saakashvili says. “He has good chances here this time to really chop up Ukraine. It’s going toward big-scale conflict. Big, big internal conflict. He’ll stir up trouble in some of the Ukrainian regions. It’s a very crucial moment. Russia will try to Balkanize Ukraine.”

Why?

“If [a European] Ukraine’s a success, a smooth transition, a nice government, doing nice reforms—for Putin, it’s the end of him,” says Mr. Saakashvili. Russians will see the contrast with their slowing economy dragged down by an oligarch-Putin complex that makes Mr. Yanukovych’s corruption look thrifty. “Putin is old fashioned,” says the Georgian, who is now 46. “He is really obsolete.”

How?

Based on Georgia’s experience, Mr. Saakashvili believes that Russia will try to incite a clash in Crimea and then offer its services to restore order. He doesn’t believe Russia will provoke a direct military clash with Ukraine’s still-formidable military, which wouldn’t be popular in Russia itself. “It’s not Georgia,” he says. “Putin wants to be at the same time a peacemaker and a troublemaker,” he says. “He did it quite well in Syria.” The Russians shielded and armed Bashar Assad’s regime. When President Obama late last summer sought a way out of his empty promise to intervene militarily, Russia popped up to mediate with Syria.

However,

The Crimean crisis has brought back from diplomatic obscurity the “Budapest Memorandum” of 1994, in which the U.S., U.K. and Russia pledged to guarantee Ukraine’s territorial integrity. Mr. Saakashvili says the outcome on the Maidan showed that the Russians overestimate, and the U.S. and Europeans underestimate, their leverage in the region.

The West dragged its feet on financial sanctions against the Yanukovych circle, but on Thursday last week a move by the EU—after 77 protesters were shot dead in broad daylight—helped bring down the Ukrainian leader. Fearing for their assets and visas, his cronies quickly dropped him.

If Russia keeps up the heat on Crimea, Mr. Saakashvili says, then the West should hit the Putin circle with sanctions. “It would be the same” reaction as in Ukraine. “The last time I was in Miami, it was full of rich Russians. If you tell them you can no longer come here and you have to freeze in Moscow, then they will turn on Putin.” Western governments have “much more leverage than they realize. They just need to apply it.” (…)

“I’m worried about Crimea, but I’m more worried about Kiev. If Kiev goes into protracted political crisis, then everything else will explode.”

How does that impact the U.S. stock market? I don’t really know. What I know is that the equity investment odds are not compelling in this highly uncertain world. Allow me to re-quote Ben Hunt from my Nov. 4, 2013 post BLIND THRUST:

We are enduring a world of massive uncertainty, which is not at all the same thing as a world of massive risk. We tend to use the terms “risk” and “uncertainty” interchangeably, and that may be okay for colloquial conversation. But it’s not okay for smart decision-making, whether the field is foreign policy or investment, because the process of rational decision-making under conditions of risk is very different from the process of rational decision-making under conditions of uncertainty. The concept of optimization is meaningful and precise in a world of risk; much less so in a world of uncertainty.

That’s because optimization is, by definition, an effort to maximize utility given a set of potential outcomes with known (or at least estimable) probability distributions. Optimization works whether you have a narrow range of probabilities or a wide range. But if you have no idea of the shape of underlying probabilities, it doesn’t work at all.

As a result, applying portfolio management, risk management, or asset allocation techniques developed as exercises in optimization – and that includes virtually every piece of analytical software on the market today – may be sub-optimal or downright dangerous in an uncertain market. That danger also includes virtually every quantitatively trained human analyst!

(…) We should be far less confident in our subjective assignment of probabilities to future states of the world, with far broader margins of error in those subjective evaluations than we would use in more “normal” times.  (…)

Ben is totally right. We are all, in fact, blind investors hoping that our blind leaders, clueless as to where we are in the “cycle”, will shortly safely guide us to some unknown promised land that remains to be landscaped by the never tried before QE experiments.

Add China to the portrait, and the 5-8% upside with similar downside to the (still rising) 200 day m.a. with all the uncertainty (known unknowns) and blindness (unknown unknowns) warrants continued caution. On the other hand, there are no signs of a recession in the U.S. As to the bear market risk, while earnings growth could disappoint, an outright decline is not apparent at this time. The main risk is valuation given that multiples of all kinds are in extended territory, although not in bubble area as many contend. Central bankers remain determined to keep the U.S. and the Eurozone economies growing, even if it is at very slow speed. The financial heroin will continue to flow. I remain moderately invested, carefully watching inflation trends.

NEW$ & VIEW$ (3 MARCH 2014)

UKRAINE
Matt Kenyon illustration - RussiaEdward Luce
Obama faces his own ‘chicken Kiev’ moment

(…) Can Mr Obama stand up to Vladimir Putin, the Russian fox circling the chicken coop? It is unclear whether he has the will and the skill – let alone the means – to do so. Yet the future of his presidency depends on it. There can be little doubt that Mr Putin wants to restore the boundaries of the Russian empire. Mr Obama must somehow find a way to frustrate him. (…)

Russia’s occupation of the Crimea dramatically changes the landscape. Everything that Mr Obama wants – nation building at home, a nuclear deal with Iran, a quiescent Middle East and the pivot to Asia – hinges on how he responds to Mr Putin. At the start of his presidency, Mr Obama offered to “reset” US-Russia relations. That is now in tatters. Along with many others, Mr Obama has consistently underestimated Mr Putin’s readiness to challenge the status quo. As recently as last Thursday, the White House dismissed predictions of a Russian incursion into Crimea. In a 90-minute phone call on Saturday, Mr Putin hinted to Mr Obama he was prepared to extend Russia’s Crimean occupation into eastern Ukraine. It would be naive to assume he will not. (…)

There is no US military solution to the crisis. Drawing a “red line” between Crimea and the rest of Ukraine, or between its eastern and western halves, would merely invite Moscow to call Washington’s bluff. Besides, Mr Obama’s record on red lines is a poor one. The last one he drew was in Syria, where he promised to intervene if Bashar al-Assad’s regime used chemical weapons on his people. Mr Assad repeatedly called Mr Obama’s bluff last summer. Ironically, it was Mr Putin who saved the US president from the consequences of his own rhetoric – and a humiliating rebuff on Capitol Hill – by persuading Syria’s dictator to agree to dismantle his chemical stockpile. That now looks to be a dead letter. In retrospect it would have been better if Mr Obama had ordered air strikes on Syria without consulting anyone. In any case, red lines will only embolden Mr Putin. (…)

Diplomacy is Mr Obama’s preferred weapon. Now he must prove that he knows how to wield it. (…) Rallying America’s allies to the side of Ukraine’s shaky government is obviously one. That must include large pledges of cash. Reassuring America’s eastern European allies that their sovereignty will be protected is another. This could include restoring the missile defence systems Mr Obama scrapped in the days of the “reset”. He could also accelerate plans to export US natural gas and oil to Europe to counter Moscow’s energy stranglehold.

Above all, Mr Obama needs to convince Mr Putin that he will not be outfoxed. That means summoning a determination he has too often lacked. It will mean taking risks without being reckless. In 1991, Bush senior flew to Kiev to warn Ukrainians against “suicidal nationalism”. Mr Obama must warn Mr Putin against embarking on a course of suicidal imperialism. In spite of everything, he remains the right person to deliver that message. Kiev would be the perfect venue to deliver it.

Russia raises rates as rouble tumbles Investors pull money out on fears of war with Ukraine

The rouble, already one of the world’s worst performing currencies this year, slid as much as 2.9 per cent early on Monday to a new low of Rbs36.90 against the dollar as investors pulled their money out of Russia, fearing the prospect of war in Ukraine and international financial sanctions.

The RTS index of Russian equities tumbled 10.7 per cent while Sberbank, Russia’s state lender, dropped 9.8 per cent and Gazprom, the gas giant, fell 10.7 per cent.

The central bank made the surprise announcement on Monday morning that it would raise its benchmark lending rate from 5.5 per cent to 7 per cent from 11am Moscow time. It justified the move in a short statement, saying: “The decision is directed at preventing the emergence of risks for inflation and financial stability associated with the recently observed increased levels of volatility in financial markets.” (…)

Economists said the impact of hostilities with Ukraine could tip the already struggling Russian economy into recession. Moreover, analysts said, the prospect of international sanctions against Russia was likely to drive both Russian and foreign investors to withdraw money from the country.

U.S. MANUFACTURING PMI SURGES

imageThis morning’s Markit PMI for the U.S. showed strength across the board. There were some curious segments in Markit’s release including these:

  • Some manufacturers noted that unusually bad weather had a less disruptive impact on production growth than in the previous month, in part due to efforts to build up inventories of critical inputs at their plants.
  • In a further sign of pressures on capacity, latest data indicated that stocks of finished goods fell for the eighth month in a row.

Given the apparent bulge in auto inventories, the “efforts to build up inventories” is bizarre.

U.S. Pending Home Sales Remain Depressed by Winter Storms

The National Association of Realtors (NAR) reported that pending sales of single-family homes ticked up 0.1% during January following a 5.8% December decline, revised from an 8.7% shortfall. The latest uptick followed six consecutive months of sharp decline. Therefore, sales were 14.3% below the peak last June.

Home sales were mixed across the country last month. In the South, sales rose 3.5% (-5.5% y/y) following a 5.7% December drop. In the Northeast, a 2.3% rise (-5.3% y/y) followed two months of sharp decline. In the West, sales declined 4.8% (-17.5% y/y) and have fallen in each of the last seven months, a decline totaling more than one-quarter from the peak. In the Midwest, sales fell 2.5% last month (-9.3% y/y), off for the seventh straight month and down 17.6% from the May peak.

Weather blamed again. Haver’s headline writer did not even bother to read the text where he might have found a hint or two that weather was not the big factor in January. Sales rose in the NE and declined in the West…And if he had looked at the past 3-6 months data, he would have seen that overall, January was a pretty good month.

But weather-blaming can get even more ridiculous. Take this WSJ piece Mess in the West: Home Sales Index Hits 7-Year Low (my emphasis, of course):

The index fell in the West to its third lowest level since the NAR began its tab in 2001, surpassing only two months from the summer of 2007, when housing markets were beginning their free fall. (…)

It’s not clear that weather can be blamed on this: the index is seasonally adjusted, and this is the West, where winters are milder. Confused smile

Not clear! Economists may be taking their cues from Mrs. Yellen:

“A number of data releases have pointed to softer spending than analysts had expected,” Ms. Yellen told members of the Senate Banking Committee on Thursday. “That may reflect in part adverse weather conditions, but at this point it is difficult to discern exactly how much.”

Housing is now leaving investors cold. From Zerohedge via Lance Roberts via Doug Short:

Alas, just like the rental bubble whose bursting we chronicled here just last week, so the institutional bubble has just popped, which we know courtesy of RealtyTrac data reporting that institutional investors — defined as entities purchasing at least 10 properties in a calendar year — accounted for 5.2 percent of all U.S. residential property sales in January,down from 7.9 percent in December and down from 8.2 percent in January 2013.

From RealtyTrac:

“Many have anticipated that the large institutional investors backed by private equity would start winding down their purchases of homes to rent, and the January sales numbers provide early evidence this is happening,” said Daren Blomquist. “It’s unlikely that this pullback in purchasing is weather-related given that there were increases in the institutional investor share of purchases in colder-weather markets such as Denver and Cincinnati, even while many warmer-weather markets in Florida and Arizona saw substantial decreases in the share of institutional investors from a year ago.”

COLD SHOWER ON ACCELERATION THESIS: GDP Growth Sharply Lowered

Gross domestic product, the broadest measure of goods and services produced across the economy, grew at a seasonally adjusted annual rate of 2.4% in the final quarter of the year, the Commerce Department said Friday, down from an initial reading of 3.2%. Private economists’ projections for the first quarter are even weaker, with many coming in below 2%.

The economy’s trajectory has dipped since the fall, when a healthy 4.1% growth rate sparked enthusiasm across financial markets and corporate America about a stronger expansion, faster job creation and rising wages this year. (…)

Friday’s report showed consumers continued to drive growth with steady spending, though not as much as initially estimated. Personal consumption expenditures, adjusted for inflation, rose 2.6% in the quarter, below the initially reported 3.3% pace.

(…) Americans have been saving less to maintain spending—the saving rate was only 4.5% in the fourth quarter, about a percentage point below the average of the prior three years.

While consumers were spending, the U.S. government was pulling back. Federal spending and investment dropped 12.8% in the final quarter of 2013, a period that included the October government shutdown. Now, with a budget in place and little risk of another fiscal showdown, the federal government should be less of a drag on the economy.

A sharp buildup in companies’ inventories drove much of the strong growth in last year’s third quarter and a bit in the fourth quarter. A drawdown of those stockpiles is expected to weigh on overall growth in first three months of this year. (…)

Business spending was a bright spot late last year, with companies investing more in equipment, software and buildings. Overall, nonresidential fixed investment expanded 7.3% in the fourth quarter, up from the advance estimate of 3.8%. The big gain may be a sign of optimism for future growth. (…)

Here’s the best GDP chart from Doug Short:

 
Soaring Prices Test Wealthy’s Will to Pay The luxury-goods business has been relying on sharp price increases to drive sales. But there are signs that even the very rich are nearing their limits.

In the past five years, the price of a Chanel quilted handbag has increased 70% to $4,900. Cartier’s Trinity gold bracelet now sells for $16,300, 48% more than in 2009. And the price of Piaget’s ultrathin Altiplano watch is now $19,000, up $6,000 from 2011. (…)

The U.S. price of a basket of luxury goods tracked by market-research firm Euromonitor International rose 13% last year, while the consumer-price index increased just 1.5%. (…)

Spending on luxury apparel, leather goods, watches, jewelry and cosmetics reached $390 billion last year, according to Boston Consulting Group. But growth is starting to slow from its postrecession pace. Sales of such items rose 7% last year, down from the 11% annual rate in 2010 through 2012, according to the firm. BCG forecast that sales growth would hover around 6% for the next few years. (…)

LVMH Moët Hennessy Louis Vuitton SA MC.FR -2.11% said sales growth for fashion and leather goods slowed to 5% last year from 7% the year before, excluding the effects of acquisitions and currency movements. But the French company said it increased prices on its Vuitton products around 3% to 4.5% last year without an impact on its business.

“The client base is used to that type of price increase,” Chief Financial Officer Jean-Jacques Guiony said. Vuitton raised the price of a monogrammed Speedy bag in the U.S. by 15% last year to $910. That made it 32% more expensive than in 2009. (…)

One reason ultraluxury brands are raising prices is to distinguish their products from entry-level luxury goods that are fast picking up market share.

“The more Tory Burches and Michael Kors there are, the more the Chanels and Louis Vuittons will try to price up,” said Milton Pedraza, the chief executive of the Luxury Institute, a research and consulting firm.

The unintended consequence could be that the luxury brands drive even more customers toward less-expensive rivals. (…)

Inflation Threatens Euro-Zone Recovery

A prolonged period of low inflation in the euro zone may derail the currency area’s fragile economic recovery, and must be fought with additional monetary stimulus, International Monetary Fund chief Christine Lagarde said Monday.

Ms. Lagarde, who was speaking at a conference in Bilbao, northern Spain, said that while the European Central Bank already has taken a number of strong measures to help the euro area, “even further accommodative policies and targeted measures are needed to address low, below-target inflation and achieve lasting growth and jobs.”

Annual inflation in the euro zone was 0.8% in February, according to European statistics office Eurostat, well below the ECB’s target of just below 2%. The ECB will meet Thursday to decide on interest rates for the area.

China PMI Drops to 50.2

The government’s official purchasing managers index fell to 50.2 in February from 50.5 in January, where any number of more than 50 indicates expansion.

A preliminary reading of the HSBC manufacturing PMI, a competing index, fell to 48.3 in January, well into contractionary territory.

“The effects of the holiday can’t be excluded,” when interpreting the PMI, said a statement from the China Federation of Logistics and Purchasing, which compiles the index along with China’s official statistical bureau. “Based on market demand and the production situation in some sectors, we expect that future economic growth will remain generally stable.”

Sad smile The PMI subindex for new export orders fell to 48.2 from 49.3, casting doubt on the strength of global demand for Chinese goods. China’s exports in January rose 10.6% from the same month of 2013, a strong performance that was nevertheless muddied by the holiday effect and persistent doubts about the quality of China’s trade data.

South Korea’s exports, which serve a similar market, rose a lackluster 1.6% year-over-year in February, according to data released Friday.

Confused smile Still, the poor showing for export orders might be a result of one-off factors such as the exceptionally cold winter in the U.S., said Ting Lu, an economist at Bank of America Merrill Lynch. “I would expect the PMI to rebound in March,” he said.

The more reliable HSBC PMI was out this morning (HSBC CHINA MANUFACTURING PMI CONFIRMS SLOWDOWN)

China Pushes Yuan Down Further

(…) On Friday, the People’s Bank of China stepped up its week-and-a-half-long effort to weaken the yuan by instructing big state-owned banks to buy dollars aggressively in the mainland market, according to currency traders at both Chinese and foreign banks. The move caught the market by surprise and caused the yuan to register its biggest one-day fall since its revaluation in 2005, when China dropped a decadelong peg to the dollar. The yuan ended at 6.1450 per dollar Friday, down 1.5% since the beginning of the year and its lowest level in 10 months.

“Nobody dares to trade against the PBOC. Nobody dares to buy the yuan heavily,” said a Shanghai-based trader at a large foreign bank. (…)

Why Maxed-Out Canadians Are Pulling Back on Borrowing While their spending is still the key driver of economic growth, Canadians are pulling back on borrowing, says a report from Moody’s Analytics.

Moody’s points to declining growth in consumer borrowing; total household credit growth slipped to 4.1% annually in December. It hasn’t been that low in more than 20 years.

GDP data released Friday showed Canadian households were still spending pretty freely in the fourth quarter of the year. In fact, the solid growth recorded in the quarter depended heavily on their spending.

Average weekly earnings grew by 2.9% in December, the fastest pace since last February.

Friday’s fourth-quarter GDP report from Statistics Canada, which said the household saving rate increased to 5.0% in the fourth quarter, as disposable income grew at a slightly faster pace than that of household spending.

S&P’s rise underpinned by borrowed money Margin debt levels have increased by 20% in a year to fresh high

Though margin debt has been hitting record highs in recent months, it now stands at $451bn on the NYSE, a rise of more than 20 per cent over the past year and above 2007’s peak of $381bn. Five years ago it hit a low of $173bn.

Pointing up In past market peaks, excessive levels of margin debt exacerbated the subsequent slide in stocks, as investors were forced to quickly sell their holdings as prices fell, sparking a nasty downward spiral.

Call me Warren Buffett’s letter to shareholders here. 

Contact: edgeandodds [at] gmail.com