AS WE START A NEW DAY ON WALL STREET …. MAY THE INVESTMENT GOD’S BE WITH YOU ………          NEWS FLASH … ……………..   NEWS OF INTEREST:  Credit Suisse is out with a report saying “one of the major features of the U.S. equity market since the low in 2009 is that the U.S. corporate sector has bought 18% of the overall market cap, while institutions have sold 7% of the market cap! What this means is that there has been only one buyer of stock: the companies themselves, who have engaged in the greatest debt-funded buyback spree in history  …………..  Has SILVER production peaked! 2016 was the first year in more than a decade that saw SILVER production decrease year over year. Add to that SILVER has also been trading at a physical deficit to demand for the last 4 years and 5 of the last 6 years and is expected to continue at a deficit again in 2017…. Even more interesting – 70% of SILVER is produced as a byproduct of Copper mining and Lead/Zinc mining operations meaning that there is real scarcity once demand picks up…. Howmuch.net recently released a report showing that the top 5 states in the U S contributed to 40% of the total U S GDP. The leading state was California at $2.11 trillion or 13% of total U S GDP, second was Texas at $1.46 trillion or 9.5% of GDP and third was New York at $1.28 trillion or 8.4%. Ranked number 4 and 5 were Florida at $769 billion or 4.8% and Illinois at $680 billion or 6.3% …….         NEWS OF INTEREST: The U.S. marriage rate has dropped from 8.2 per 1,000 in year 2000 – to its lowest rate ever at 6.8 per 1,000 based on most resent statistics ……..      NEWS OF INTEREST: The Buffett Indicator which measures corporate equities as a percent of GDP shows that the stock markets are now at their second highest valuation point in history – 127.17% of GDP.  The record stands at 153.62% of  GDP,  and was reached at the top of the market back in 2000.   Stocks are now over 2 standard deviations above the mean of approximately 74% of GDP ……….       Census         News:    The U.S. Census Bureau Homeownership Data.  It Confirmed That The Homeownership Rate Continued To Fall To A New Multi Year Low, Coming In At 63.5%, Which Is Just Off The Lowest Reading Since The First Quarter Of 1967.   The All Time Record Home-ownership Low Stands Just Below That At 62.9%, And Was reached 50 Years Ago In 1965 At 62.95%   ……….               NEWS OF INTEREST:    Meet BRAEBURN CAPITAL, The Worlds Largest “Hedge Fund”, Managing $203 Billion …….. Braeburn Capital is the worlds largest hedge fund, and is more than $30 billion larger then what was previously thought to be the largest hedge fund in the world, that being Ray Dallio’s Bridgewater. But the question of the day is – has anybody ever heard of Braeburn Capital? Hint …… Braeburn’s headquartered in Reno Nevada, and it’s mother company is a Cupertino-based company that got its start in a garage many years ago. Still wondering, well here’s a second hint….The company is named after a fruit of which the old saying goes, one _ _ _ _ _ a day is said to keep the doctor away! Got it …. Yes, If you guessed Apple you’re right. Apple is the owner of Braeburn Capital of Reno Nevada and Braeburn’s job is to manage all of Apples cash. And as you can tell by now, Apple has a big stash of cash to invest!                     NEWS OF INTEREST: A recently Released USA TODAY/ PEW RESEARCH Poll Shows That 75% Of Americans See Politicians As Corrupt; 2-to-1 Now Distrust The Police ……….       New Flash ……. Bloomberg:  The CEOs of 350 Standard & Poor’s 500 companies made 331 times more than their employees in 2012, up from a ratio of 46-to-1 in 1983 …. Technology News Flash ….. Did You Know That BlackBerry Has Recently Released The Worlds Most Private Super Secure Tablet, Using IBM Confidential Data Software and in Collaboration with Samsung …. Question: Is The BlackBerry SecuTablet Uncrackable? The German Government Thinks So, And Have Already Placed Their Order!           News Of Interest …. Former SEC Director John Ramsay Admits: The Markets Are Rigged, SEC Director of Trading & Markets, John Ramsay tells Bloomberg he ”had red tape over his mouth,” but now he is ”uncorked.” He says the current markets of today are built to favor insiders and that the system is broken! Ramsay goes on to say, “The current market ecosystem is not sustainable, and significant changes are coming one way or another,” ………. .DATELINE 2015:        The Census Bureau Announced That Home-Ownership Continues On A Downward Slide And Is Now Back To 1994 Ownership Levels Of 64%. Accordingly, 2014 Was The Largest Decline In Home-Ownership Rates Ever!            DATELINE NEWS …… Bond Guru JEFF GUNDLACH of DOUBLE LINE CAPITAL said today that he thinks ALL of the job creation since 2007 has been oil fracking related. As proof, he says that if you extract the data from Texas and North Dakota, you will see no growth in what remains. GUNDLACH thinks this may present a real problem for the Fed and the economy!       DATELINE NEWS: DEBT …… Total Credit Market Debt has grow at an exponential clip of 8% per annum over the last 6 decades. Chris Martinson says we are now in the servicing of our debt ”business” which enriches no one. Even worse, nobody knows how to fix it!         DATELINE NEWS OF INTEREST…… Charity Group Oxfam Research said in a report published recently, that the share of world wealth owned by the top 1% has increased from 44% in 2009 to 48% in 2014 and is expected to reach 50% next year, while the least well-off 80% currently own just 5.5% of world wealth! The scale of global inequity is simply staggering! It is the widest wealth gap ever seen in world history.       DATELINE NEWS: California is set to become the 7th largest economy in the world by surpassing Russia, Italy and very soon Brazil. Interestingly Brazil’s population is five times larger then California’s! California leads the United States in agriculture, technology and manufacturing revenue and has more S&P 500 companies headquartered there than any other state! But there is room for improvement as California has the highest poverty rate in the nation at close to 25%.         DATELINE 2015….. Records are made to be broken, but not this one … The S&P 500 did not drop more than two consecutive days during the entire year of 2014, this is a new all-time record, and one that will probably never again be broken ……

IMH
14.325
-0.435
-2.947%
 
IBM
146.08
-1
-0.68%
 
NEM
33.995
-0.395
-1.149%
 
AXU
1.315
-0.005
-0.379%
 
MRK
62.625
-0.005
-0.008%
 
DD
84.815
+0.275
+0.325%
 
XOM
79.9
-0.22
-0.2747%
 
MRO
11.795
-0.055
-0.464%
 
AA
36.73
+0.11
+0.30%
 
SSRI
9.77
-0.08
-0.81%
 
F
11.295
-0.235
-2.038%
 
MCD
151.935
-1.985
-1.290%
 
GM
35.87
-0.2
-0.55%
 
DOW
66.335
+0.195
+0.295%
 
UK
20.5
0.00
0.00%
 
TXN
80.98
-0.72
-0.88%
 
GG
13.485
-0.235
-1.713%
 
IMH
14.325
-0.435
-2.947%
 
IBM
146.08
-1
-0.68%
 
NEM
33.995
-0.395
-1.149%
 
AXU
1.315
-0.005
-0.379%
 
MRK
62.625
-0.005
-0.008%
 
DD
84.815
+0.275
+0.325%
 
XOM
79.9
-0.22
-0.2747%
 
MRO
11.795
-0.055
-0.464%
 
AA
36.73
+0.11
+0.30%
 
SSRI
9.77
-0.08
-0.81%
 
F
11.295
-0.235
-2.038%
 
MCD
151.935
-1.985
-1.290%
 
GM
35.87
-0.2
-0.55%
 
DOW
66.335
+0.195
+0.295%
 
UK
20.5
0.00
0.00%
 
TXN
80.98
-0.72
-0.88%
 
GG
13.485
-0.235
-1.713%
 

Monthly Acorns

Emerging Trends For 2017 And Beyond

 

July Acorns

 

Gold, Silver and Inflation Protection …

Central banks worldwide have gradually stepped up their attempts to create a demand induced inflation for the last two and a half decades. It started with Japan in the 1990’s, with the rest of the world following in the 2000’s. Since 2003, the major central banks of the world have printed $12.5 trillion but have not managed to boost inflation figures.

But at some point, rest assured inflation will reemerge. The time for insurance would appear to be now. Gold, silver and undervalued mining stocks may be worth the research effort as historically speaking gold’s positive seasonality is close at hand. 

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June Acorns

 

The New Infrastructure Boom

Here is the set up for future growth. The only question is can President Trump pull it off.

 

 

May Acorns

 

FBI Directors job security lacks longevity!

Comey’s dismissal is only the second time the head of the FBI has been fired. The last time it occurred was during Bill Clinton’s presidency when the president dismissed William S. Sessions. Generally, as can be seen from the following infographic featured in the Independent, the position of FBI chief doesn’t involve a high level of job security.

April Acorns

 

Costco wins the America’s Best Employers Award in 2017…

Costco spent the last two years in the top 5 but this year, the company grabbed top spot with a score of 9.58 out of 10. Costco is the second largest retailer worldwide after Walmart and it has a 143,000 strong workforce in the U.S.. One of its more notable perks is insurance coverage for its part-time workers. Google is famous for its perks and benefits and the search engine giant comes a close second in this year’s ranking. The top three was rounded off by outdoor retailer REI who appeared in the ranking for the very first time with a score of 9.53.

 

March Acorns

 

Regulations, Regulations, Regulations… U.S. Ranks Dead Last In “Ease of Starting a Business”

 

 

February Acorns

 

This is likely to change very soon, similar to the 1930’s populism changing of the guard…

 

January Acorns

 

The U.S. Dollar trade is a crowded trade, it also means that Gold is a forgotten trade and under owned, making Gold a buying opportunity for 2017.

 

December Acorns

 

Hedge fund returns, Russell 2000, Gold and the S&P 500 leads the way.

November Acorns

 

Surprise, federal tax revenues set new record…

tax-revenues-october-16

 

October Acorns

 

Unsustainable record amounts of debt continue out of control, this should force interest rates to stay low. 

total-debt-2016

September Acorns

 

‘Animal spirits’ are absent – in the United States economy these days; and that’s a (twice repeated) comment by Fed Vice Chairman Stanley Fischer at the recent New York Economic Club luncheon.

sp-chart

August Acorns

 

This chart confirms that bank lending, which is broadly the difference between M2 and M1, is shooting out of control.

Money Supply

July Acorns

 

The top 1% have been rolling since the 1980’s… Not so good for the bottom 90% though.

 Income Growth

Source: ZeroHedge

 

June Acorns

 

It’s the FED that creates inflation.

U.S. Inflation

 

May Acorns

 

The U.S. Consumer – Big Problems Ahead!

US consumers spending on discretionary items has collapsed for the simple reason simply because these same consumers are forced to spend much more on staples such as housing (or since nobody can afford houses anymore, on rent) and health insurance (thanks Obamacare), has made it into the sellside, in this case the latest Greed and Fear report by CLSA’s Chris Wood.

The failure of American consumption to pick up over the past year and more in the manner expected can be explained not just by increased consumer caution but also by the increasing costs of two essentially non discretionary items for most Americans. That is the soaring cost of medical care and the rising cost of rents.

Sources: ZeroHedge

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April Acorns

 

Stocks Should Double In 3 Years (…Or Drop By A Third)

In our April 1st Chart Of The Day, we showed that the Dow Jones Industrial Average (DJIA) did something that it has only done 3 other times since 1900. After dropping over 10% during the quarter, it recovered to close the quarter positive.

The 3 prior quarters that saw the DJIA accomplish this feat were the 4th quarter of 1933, the 4th quarter of 1971 and the 4th quarter of 2000. Following these reversals, the index had some interesting returns over the subsequent 3 years: it was up a lot…or it was down a lot. After the 1933 occurrence, the DJIA rallied as much as 98% over the next 3 years. Following the 1971 and 2000 events, the index dropped by as much as 35% and 33% in 3 years, respectively.

So which will it be this time? The size of the deficit that stocks overcame in the 1st quarter may give us a clue. At its low, the DJIA was down -11.3% for the quarter. Looking at the prior reversals, we see that the DJIA’s max intra-quarter loss in 4Q, 1971 was -10.9% and in 4Q, 2000 it was -10.1%. The max drawdown in 4Q, 1933 was…-11.3%, exactly the same as this past quarter.

Therefore, bulls can take heart in the fact that our prior circumstances are more similar to the 1933 event. And if history is to repeat, we should expect the DJIA to nearly double over the next 3 years to around 35,000. Of course, we can never be too sure, so we would recommend adjusting one’s portfolio to take advantage of both potential scenarios.

In all seriousness, one thing that may be instructive about such reversals is the overall investment climate in which they occur. The three prior events took place within secular bear markets. Additionally, there were 26 other quarters since 1900 which saw the DJIA recover at least 8% off its quarterly low after being down at least 10%. All but 2 of those quarters (4Q, 1987 and 4Q, 1997) occurred within a secular bear market.

Therefore, if there is anything that is to be gleaned from such large positive reversals, perhaps it is that they tend to occur within negative secular environments.

Source: Dy Dana Lyons of My401kPro.com

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March Acorns

 

During times of stress, people focus more on essentials; less on consumption.

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February Acorns

 

Looks like we are slowly working our way up the recession probability latter. We should know soon.

 

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January Acorns

 

Some Food For Thought From The Dalai Lama!

KWN I 1:14:2016

Source: King World News

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Emerging Trends For 2015 And Beyond

 

December Acorns

 

Loan Funded Stock Buybacks Will Be The Ticket To Future Market Under Performance, And It May Persist For A Long Long Time!
Virtually every single corporate dollar raised through issuance of debt has been used for one thing – to buyback stock!

This is not to say that companies haven’t used their own organic cash creation, declining as it may be, for other purposes such as spending on CapEx and M&A, but the chart below shows very clearly that in isolation from all other sources and uses of funds, several trillion in fungible debt has had just one simple use – to boost stock prices, and to make management teams richer, while letting bondholders managing other people’s money foot the bill for record high management bonuses and stock prices.

The chart below makes it clear what all the debt issued in the 21st century (and really ever since 1990) has been used for stock buybacks,

Sources: Societe Generale, Zero Hedge

 

 

November Acorns

 

This heat map tells an interesting story … where the money really is!

Where The Money Is

 

 

October Acorns

 

Corporate profit margins Are Just Off All Time High’s, What Does It Mean!
A picture is worth a thousand words … or in this case maybe it’s millions of dollars!
Is this an infallible indicator, it sure looks like it!

Corporate

September Acorns

 

Political Science – Class 101 … Monkey business and the government. Pay attention class, there will be a quiz on this!

You start with a cage containing four monkeys, and inside the cage you hang a banana on a string, and then you place a set of stairs under the banana.

Before long a monkey will go to the stairs and climb toward the banana.

You then spray ALL the monkeys with cold water.

After a while, another monkey makes an attempt.  As soon as he touches the stairs, you spray ALL the monkeys with cold water.
 
Pretty soon, when another monkey tries to climb the stairs, the other monkeys will try to prevent it using force !Now, put away the cold water.  Remove one monkey from the cage and replace it with a new monkey. The new monkey sees the banana and attempts to climb the stairs. To his shock, ALL of the other monkeys beat the crap out of him.  After another attempt and
attack, he knows that if he tries to climb the stairs he will be assaulted.

Next, remove another of the original four monkeys, replacing it with a new monkey. The newcomer goes to the stairs and is attacked. The previous newcomer takes part in the punishment – with enthusiasm — because he is now part of the “team.”

Then, replace a third original monkey with a new monkey, followed by the fourth. Every time the newest monkey takes to the stairs, he is attacked.

Now, the monkeys that are beating him up have no idea why they were not permitted to climb the stairs. Neither do they know why they are participating in the beating of the newest monkey.  Having replaced all of the original monkeys, none of the remaining
monkeys will have ever been sprayed with cold water. Nevertheless, not one of the monkeys will try to climb the stairway for the banana.

Why, you ask? Because in their minds, that is the way it has always been!
 
This is how our House and Senate currently operates, and this is why, from time to time, ALL of the monkeys need to be REPLACED AT THE SAME TIME!

DISCLAIMER:  This is meant as no disrespect to the monkeys!

Source: Unknown
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August Acorns

 

Corporate Hocus Pocus

 

Corporations today are more leveraged now than they were back in 2007 when they showed $3.5 trillion on the books, a record at the time. So when somebody mentions how much cash corporations have on the books, lets look at the facts …. most of the cash has been borrowed, primary for stock buybacks and dividend hikes.
Stanley Druckenmiller, the hedge fund genius noted recently …. ” in 2007 corporate bonds were $3.5 trillion, today they are $7 trillion: an amount equal to nearly 50% of US GDP”. 
Gulp!

 

 

July Acorns

 

Peak Spending Years Tell A Different Story

Statistics have proven it to be a down hill ride for the age 54 and over club, especially in spending abilities…..

Peak Spending

Sources: Inger Letter, Oak Tree Asset Management

 

 

June Acorns

 

The Velocity Of Money … Has An Epic Plunge To The Downside

The velocity of money, which is the turn over rate of money in the economy is now at all time lows. Hmm….truly amazing!
Now it’s easy to understand why there’s no inflation.

Velocity-1910-2010

Sources:FRED, Wise Dog Research

 

May Acorns

 

Energy Of The Future: Water Driven Synthetic Fuel …. Except In Drought Stricken California

Ah, so maybe we now know why Warren Buffet sold his recently purchased oil stocks? This could be really big. We mean really really big!

Dresden, Germany:  

Audi has for the first time managed to produce carbon-neutral fuel. They have produced a small quantity of 160 liters of synthetic diesel fuel that produces a “clean diesel quattro”. They announced, “If we succeed, CO2 broad use as a raw material, we make a significant contribution to climate protection and resource efficiency and pave the way towards a green economy.” Some are calling this breakthrough liquid gold. It appears that when it rains, indeed it rains oil.

The clear fuel is produced through a “power to liquid” process, masterminded by the German clean tech company and Audi partner Sunfire.

The process uses carbon dioxide, the most common greenhouse gas, which can be captured directly from air. Carbon dioxide is created largely by burning fossil fuels and contributes to global warming. Now Sunfire said it can recycle the gas to make a more efficient, carbon-neutral fuel.

Unlike conventional fossil fuels, the “e-diesel” doesn’t contain sulphur and other contaminants. “The engine runs quieter and fewer pollutants are being created,” Sunfire’s Christian von Olshausen said.

The fuel is produced in three steps. First, the researchers heat up steam to very high temperatures to break it down into hydrogen and oxygen. This process requires temperatures of over 800 degrees Celsius (1,472 Fahrenheit) and is powered by green energy such as solar or wind power.

Second, they mix the hydrogen with carbon dioxide under pressure and at high temperature to create so-called blue crude. Lastly, the blue crude is refined into fuels in a similar way fossil crude oil is refined into gasoline.

Audi (AUDVF) said its lab tests have shown the “e-diesel” can be mixed with fossil fuels or used as a fuel on its own.

The new fuel was tested by German Education and Research minister Johanna Wanka last week. She put the first five liters into her official car, and declared the project a success.

“If we can make widespread use of CO2 as a raw material, we will make a crucial contribution to climate protection and the efficient use of resources, and put the fundamentals of the green economy in place,” she said.

Sources: Armstrong Economics, Wise Dog Research

 

 

April Acorns

 

Larry Fink – CEO of BlackRock, the largest asset manager in the world – has unleashed a letter to 500 CEOs around the world – telling them that “the effects of the short-termist phenomenon are troubling both to those seeking to save for long-term goals such as retirement and for our broader economy,” bucking the dividend/buyback trend that investors are demanding. As NYTimes notes, the shortsightedness that pervades corporate America is just a symptom of a larger issue. “This is not just a corporate problem,” Fink explains, “It’s a societal problem, we’re currently living in a “gambling society.”

Insider Sellers

BlackRocks Larry Fink’s Letter… encouraging a focus on long-term growth strategies… But will anyone listen?

Dear Chairman or CEO,

As a fiduciary investor, one of BlackRock’s primary objectives is to secure better financial futures for our clients and the people they serve. This responsibility requires that we be good stewards of their capital, addressing short-term challenges but always with a focus on the longer term.

To meet our clients’ needs, we believe the companies we invest in should similarly be focused on achieving sustainable returns over the longer term. Good corporate governance is critical to that goal. That is why, two years ago, I wrote to the CEOs of the companies in which BlackRock held significant investments on behalf of our clients urging them to engage with us on issues of corporate governance. While important work remains to be done, good progress has been made on company-shareholder engagement. I write today re-iterating our call for engagement with a particular focus on companies’ strategies to drive longer term growth.

Many commentators lament the short-term demands of the capital markets. We share those concerns, and believe it is part of our collective role as actors in the global capital markets to challenge that trend. Corporate leaders can play their part by persuasively communicating their company’s long-term strategy for growth. They must set the stage to attract the patient capital they seek: explaining to investors what drives real value, how and when far-sighted investments will deliver returns, and, perhaps most importantly, what metrics shareholders should use to assess their management team’s success over time.

It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks. We certainly believe that returning cash to shareholders should be part of a balanced capital strategy; however, when done for the wrong reasons and at the expense of capital investment, it can jeopardize a company’s ability to generate sustainable long-term returns. We do recognize the balance that must be achieved to drive near-term performance while simultaneously making those investments – in innovation and product enhancements, capital and plant equipment, employee development, and internal controls and technology – that will sustain growth.

BlackRock’s mission is to earn the trust of our clients by helping them meet their long-term investment goals. We see this mission as indistinguishable from also aiming to be a trusted, responsible shareholder with a longer term horizon. Much progress has been made on company-shareholder engagement and we will continue to play our part as a provider of patient capital in ensuring robust dialogue. We ask that you help us, and other shareholders, to understand the investments you are making to deliver the sustainable, long-term returns on which our clients depend and in which we seek to support you.

Sources: NY Times, BlackRock, Wise Dog Research

 

 

March Acorns

 

We Ask The Question, But The Answer Will Depend On Where One Stands ……

Which is better: A stronger dollar or a weaker dollar? It’s for you to decide!

Where You Stand

Sources: Zero Hedge, Wise Dog Research

 

 

February Acorns

 

Mapping the last 215 years of interest rates………

Interest-Rate-Map

Sources: SG Cross Research, Wise Dog Research

 

 

January Acorns

 

Goldman Sachs has just released this S&P Sentiment chart. The boundaries shown by the dotted line show extremes in the markets…. currently we are at 100/100, the highest positive reading possible.  This happens only on rare occasions, this being one of them. It would seem that there is NO risk in the markets, but this chart says otherwise. Buyers are living on borrowed time. Buyers beware!
It’s worth noting that Goldman Sachs is a perma bull, so when they post a chart like this, it is worth a double take, and we would error on the side of caution at the first sign of a reversal in the markets.

Sentiment Indicator

Sources: Goldman Sachs, Wise Dog Research

 

Emerging Trends For 2014 And Beyond

 

December Acorns

 

Play it again, Sam…… History has a habit of repeating itself, but never like this!
Everyone should read this article, then look at the reflections in the mirror. Hint, things look similar to 2006 through 2009 (but covenant-lite potentially makes this time worse).

A very simple but  loose example of cove-lite would be similar to  a bank making a loan on a car, but not having covenant rights to reposes the car for a lack of auto insurance. A covenant in this case would require proof of auto insurance, which if not met would allow for the rescinding of the loan and reposition of the car.

DEFINITION of ‘Covenant-Lite Loans’

A type of loan whereby financing is given with limited restrictions on the debt-service capabilities of the borrower. The issuance of covenant-lite loans means that debt is being issued, both personally and commercially, to borrowers with less restrictions on collateral, payment terms, and level of income.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

In its 2014 Annual Report to Congress, the US Treasury’s Office of Financial Research, which serves the Financial Stability Oversight Council, analyzed for our Representatives the “potential threats” to the US financial house of cards. Among the biggest concerns was a financial creature that has boomed in recent years. The Fed, FDIC, and OCC have warned banks about it since March 2013. But they’re just too juicy: “leveraged loans.”

Leveraged loans are issued by junk-rated corporations already burdened by a large load of debt. Banks can retain these loans on their balance sheets or sell them. They can repackage them into synthetic securities called Collateralized Loan Obligations (CLOs) before they sell them. They have “Financial Crisis” stamped all over them.

So the 160-page report laments:

The leveraged lending market provides a test case of the current approach to cyclical excesses. The response to these issues has been led by bank regulators, who regulate the largest institutions that originate leveraged loans, often for sale to asset managers through various instruments. Despite stronger supervisory guidance and other actions, excesses in this market show little evidence of easing.

Financial engineering has taken over.

Early on in the credit cycle, corporations borrowed money long-term to replace short-term debt and to fund capital expenditures. Now they use the borrowed money to “increase leverage such as through stock buybacks, dividend increases, mergers and acquisitions, and leveraged buyouts, rather than to support business growth.” And ultra-low interest rates and loosey-goosey lending standards have encouraged corporations to “take on more debt than they can service.”

So the ratio of debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) for the most highly leveraged loans reached 7.7 in October, near the peak in 2007, at the cusp of the Financial Crisis. Large corporate loans with leverage ratios above the regulatory red-line of 6 times EBITDA soared from 15% of corporate bank loans, back when regulators started warning banks about them, to nearly 30% in 2014, exceeding the record set in 2007 before it all went down the tubes:

US-OFR-leveraged-loans-leverage-6x-ebitda

Why would that be a problem? Because…. “Even an average rate of default could lead to outsized losses once interest rates normalize.”

And the quality of the debt sucks.

Junk debt accounts for 24% of all corporate debt issued since 2008, up from 14% in prior cycles. Over the past year, junk debt “dominated new issuance volumes.” And ominously for the holders of this debt:  Two-thirds of these loans during the current credit cycle lack strict legal covenants to protect lenders, compared to one-third in previous cycles. Once the tsunami of defaults sets in during the downturn, these “covenant lite” loans will lead to lower recovery rates on defaulted debt, thus increasing the losses further.

This chart (2014 data through September, annualized) shows how volume of “highly leveraged loans” (those with a spread of 225 basis points above LIBOR), at nearly $600 billion this year, is about 50% higher than it was at the cusp of the Financial Crisis.

And the dreaded covenant-lite loans:

US-OFR-leveraged-loans-cov-lite_highly-leveraged

Now enter CLOs.

The combined issuance of CLOs and leveraged loans has exceeded the peak levels of the last credit cycle, whose downturn phase turned into the Financial Crisis. This buildup in credit risk has frazzled bank regulators, and they have responded harshly, the OFR reported, um, “with guidance and exhortations.”

It may be too little, too late. As the credit cycle enters the downturn phase with the deterioration in corporate credit fundamentals and rising debt levels, “the buildup of past excesses will eventually lead to future defaults and losses.”

But we’re not there, yet. Oh we’re real close though!

Yields on leveraged loans and junk bonds, and spreads per unit of leverage, are still at historic lows, the OFR found (though some of it has very recently gone to heck, especially in the energy sector). And “investors are not being compensated for the incremental increase in corporate leverage.”

The increased credit, liquidity, and volatility risks – that “tend to rise simultaneously during periods of stress” – have led to these junk loans being wildly “mispriced.” When they’re repriced during the downturn, investors will lose their shirts.

And “product innovation” has soared, another “hallmark of late-stage credit cycles.” They led to “broader, cheaper access to credit such as exchange-traded, high-yield, and leveraged loan funds; total return swaps on leveraged loans; and synthetic collateralized debt obligations (CDOs).”

Banks, after originating these leveraged loans and repackaging them, increasingly sell them to nonbank lenders, such as institutional investors, pension funds, insurance companies, finance companies, mutual funds, ETF, etc. This process started long before the Financial Crisis – manifested by the collapse and occasional bailout of nonbanks, such as AIG. This chart (data through June 2014) shows this trend of risk being sloughed off to others:

The problem with nonbanks?

They’re not regulated by banking regulators. Even if the Fed, the FDIC, and the OCC crack down on banks with regards to leveraged loans, there is little they can do about nonbanks. And pushed to desperation by the Fed’s near-zero interest rates, nonbanks “engage in riskier deals than banks….”

Short-duration funds, which invest in leveraged loans, have shown the most significant growth. Assets under management have increased ten-fold over the last five years, driven by a search for yield and a hedge against an eventual rise in interest rates.

But banks can still be at risk when “a sudden stop in the leveraged lending market” – for example, when investors in ETFs and mutual funds get spooked – forces banks that originated these leveraged loans to hang on to them.

Yet a “significant amount of this risk continues to migrate to asset management products,” including mutual funds and ETFs that people have in their retirement funds. And investors in these products are largely on their own. When redemptions and fire sales start cascading thorough the system – the dreaded “structural vulnerabilities” – all heck could once again break loose. And that “adds urgency to the discussion” of how “a poorly underwritten leveraged loan that is pooled with other loans or is participated with other institutions may generate risks for the financial system.”

US-OFR-leveraged-loans-banks-v-nonbanks

Sources: Wolf Richter   www.wolfstreet.com   www.amazon.com/author/wolfrichter, Wise Dog Research, Zero Hedge

 

November Acorns

 

The dollar has been the strongest of all major currencies recently (which imports deflation at home by making things we buy cheaper, but it also makes our exports or things we sell more expensive, thus potentially cutting demand for them). The result of this is that most other currencies are down, in effect they’ve lost their marbles…and if you include gold as a currency, it’s down too and lost its marbles! That’s why the United States can successfully control things. The U.S. isn’t particularly worried about anything at the moment. But rest assured there will come a time when the tables get turned and we get our comeuppance. When that day comes, it will be very interesting to see how we react to losing our marbles!
In the mean time, stock and bond markets are ramping to new highs while gold and silver are plunging. The remainder of the year will most likely break all known records to the upside for the stock markets. In fact it’s entirely possible that Wall Street won’t have a down week until next year, 2015.  Enjoy!

The chart below shows how our monetary base has exploded since 2009. The consequences to this are still unknown, but rest assured the derivative side of this could ruin the world if it ever blew up!

Dollar

 

October Acorns

 

These are the three most important charts you will see this year! Each one tells the same overall story, that of financial carelessness like we’ve never seen before. Soon investors will be forced to pay attention to these reckless actions. The end result won’t be pretty, and we wouldn’t be surprised if the markets have put in multi year highs, highs that maybe we won’t see again for many years!

Chart 1) We see an all time record amount of stock on margin and margin debt, and an all time record low for account equity. These are bad combinations.

Margin Debt Record Levels

Chart 2) We see a record dollar valuation put on new company startups.

Start Ups

3) We see record amounts of new subprime non-revolving credit debt…..

Non Revolving Credit

Sources; Wall Street Journal, NYSE, Zero Hedge

 

 

September Acorns

 

September 03, 2014    Special Interview….Questions and Answers on the markets with real estate titan and billionaire Sam Zell…..

Oak Tree Asset Management: Hello Sam, so what do people do with their money today, where do they go with it…..

Sam Zell: “People have no place else to put their money, and the stock market is getting more than its share. It’s very likely that something has to give here.”

Oak Tree Asset Management: Sam, what are some of the things that worry you here?  People are really confident they can’t lose money in the markets. Can anything ever make people worry again?

Sam Zell: “I don’t remember any time in my career where there have been as many wildcards floating out there that have the potential to be very significant and alter people’s thinking,” … “If there’s a change in confidence or some international event that changes the dynamics, people could in effect take a different position with reference to the market.”

Oak tree Asset Management: So what bothers you the most on the corporate side…what do you see out there right now?

Sam Zell: “It’s almost every company that’s missed has missed on the revenue side, which is a reflection that there’s a demand issue.” “When you got a demand issue it’s hard to imagine the stock market at an all-time high.”

Oak Tree Asset Management: Sam, are we at a top, how do people know when to protect themselves?  Markets never go down, and everybody knows it, so why worry?

Sam Zell:  “If you’re wrong on when, that’s a problem.” “You got to tiptoe … and find the right balance.””This is the first time I ever remember where having cash isn’t such a terrible thing, despite the fact that interest rates are as low as they are.”

Oak Tree Asset Management: Sam, thanks so much for talking with us!

Buyer Beware, the Investors Intelligence Bull/Bear chart below has never been higher!  You have been warned….this is extremely bearish longer term.

Investors Intelligence

August Acorns

 

With a correction on the the way early, and technical indicators heading down toward over sold levels, stock markets surprisingly (now) look to reverse higher into September, maybe even hitting new highs in an over shoot exhaustion rally. Labor Day is just around the corner and a change in behavior from up to down is a distinct possibility soon thereafter. Our eyes are set firmly on October, with a event driven Black Swan derivative blow-up a real possibility based on linguistics data. Some things to watch for in the September / October period include volcano eruptions, earthquakes and early winter weather in the U.S. Midwest and East!  Buyer beware!

July Acorns

 

So far… so good, the stock market looks like a big juicy hot dog with a lot of mustard on it, but if the mustard comes off the hot dog, we’ve got a mess on out hands. We continue to think that the market will slowly work its way higher into Labor Day. From that point we see a correction heading into December. 

Gold and Silver are in the midst of an uninteresting rally…but mining stocks have acted better then their respective physical metals (at least so far), and have been surprisingly positive during a negative seasonal period. This is normally a good longer term sign. The daily gold and silver market technical indicators look over bought, but many weekly and monthly technicals are at or near all time lows going back into the 1970’s. A shallow pull back into July would be the set up for an explosive metals rally into August and September, then likely into year end. A hard punch to the downside for the metals will ruin the positive setup. If this becomes the case, it favors dead cat bounces for the metals, and tax loss selling for the mining stocks into year end.

 

 

June Acorns

 

As we review our most likely short term scenario for the stock market, we see a slow slumbering upside lasting into the Labor Day period. If we error, we feel it will be a shock to the negative side. It is possible, but not probable that suddenly the world of investors pressing for return finally come to their senses and realize that the markets are radically over extended. Leverage (of which there is a lot of) will then become a dead weight. If so, a correction starts early and we wouldn’t be surprised to see it snow ball very quickly into a 25-30% downside correction by year end. If this situation progressed, it would cause the economy to slow rapidly and send us into another recession.

Of interest and not as market sensitive, we have a small biotech that has first in class neurogenic small molecule drugs waiting on key phase 1b and II test results. This company is small and virtually unknown. They’re drugs are patented and 100% owned for commercialization and they have early mover advantage on a specific drug of real significance. Could be a barn burner if positive outcomes are confirmed like we suspect. Also, they have another drug in phase studies, and it has just turned the tables on everyone. This unexpected surprise could become substantial very quickly with phase II studies dead ahead…worth maybe up to $100 million to a large pharma partner under the right circumstances. The key here is the above scenario would self fund the company’s main drug, which has blockbuster potential.

Lastly, with the weakness in Gold and Silver, we are close to re-entering two or three very intriguing gold and silver mining stocks that are selling at major discounts to net asset values. These are in our opinion low risk, high reward situations with a 3 year time frame. We wouldn’t be surprised if each one turned into a 5 to 10 bagger by 2017, maybe even sooner depending on geopolitical and economic time tables!

 

 

May Acorns

 

Sell in May and go away….except this year! Government rigging in every  kind of market leads us to believe that there is no liquidity stress in the stock markets in general and little downside to the markets over the foreseeable future, but there are stresses in the economy, which is the reason for all of this liquidity floating around. It is also creating forced investment decisions on everyone. The slow limited upside market action could last until Labor Day. There will come a time when market stress reenters the market place, but it isn’t here! Record amounts of margin and record low volatility are big negatives, so if we have a negative liquidity event hit Wall St, markets would probably crash, but governments of the world would have to lose control of things for that to happen. It’s something to be aware of concerning the risks and dangers later down the road.

 

 

April Acorns

 

Here is an interesting Acorn recently brought to our attention. It concerns Saudi Arabia. It was reported that the Kingdom is negotiating with Pakistan for the deployment on KSA (Kingdom of Saudi Arabia) soil of up to 30,000 troops. Given the predominance of Sunni Muslims in Pakistan, it is understandable for the Saudis to expand upon economic and political relations with Pakistan. However, the stationing of troops on their soil in such large numbers might lead one to the conclusion: that the potential for unrest in Saudi Arabia is greater than most people thought.

And here’s another Acorn shown below…..this one spells big trouble ahead in our social and economic structure, and it may last for many years! The Rich aren’t going to be singing the same money song much longer, but instead they look to be in for a bumpy ride going forward.

 

 

March Acorns

 

Gold and silver have gone up in a slow methodical meander.  In fact it looks to us like a potential range bound rally in a downtrend, and althoough some positive trend lines have been broken to the upside, we view the overall rally for the most part as unimpressive with an upside target of maybe $1420-1445. Gold and silver stocks have seen larger runs then the physical metals.  Here is what could cause Gold to bolt higher. 1) A shallow gold pull back that can’t pickup steam to the downside, or… 2) if the Chinese Yuan (Renminbi) were to see a rapid devaluation, or…3) a war breaks out in eastern Europe (Ukraine).  Scenario 2 or 3 could trigger a derivitive blast that might rapidly change many things around the world! It likely would also change how gold is percieved as a store of value.

Markets look risky here, but with so much government backing (rigging), markets may well hang in until after tax time. We expect a tough year for 2014.

03-03-2014  This just in from Art Cashin on the floor of The New York Stock Exchange…. Worthy of note: After some delay, the recent NYSE margin debt has been released.  The always savvy Jason Goepfert over at SentimenTrader saw some uncomfortable parallels. Here is a bit of what he wrote: The latest margin debt figures were released for January, showing another uptick in debt and a decrease in the net worth of investors.  The “available cash” for investors to withdrawl is now negative $159 billon, another new record low.  As a percentage of the market cap of all U.S. equities, it amounts to -0.75%, tied with February 2000 for the most extreme figure since 1987.   Not happy precedents!