Roger Martin in the Washington Post responds to the question: “What does Wall Street have to change to produce better leaders, a different culture and a more long-term focus?“:

Forget about it. Don’t even waste time thinking about it. The purpose of Wall Street firms is to trade value for their own benefit not to build value for the economy either short-term or long-term. While at one point in its history, a non-trivial part of Wall Street’s activity involved financing the growth of American companies, that is now a minor piece of its business. Wall Street is primarily engaged in encouraging individuals and companies to trade value between one another and tolling the parties for the service, and trading against the outside economy for its own account.

A refreshingly candid and accurate assessment. The bums won’t change and it’s foolish to expect it. Wall Street no longer functions as a vehicle for real investment/capital formation. It’s just a big casino and con game.  Many of the participants and their government sponsors need to be in jail.

In keeping with our recent focus on the possibility that junk bonds may be signaling a decline in stocks, we present Daneric’s chart showing the possibility of an exhaustion gap in junk bonds:


Click here to see enlarged chart.

“if they happen during a bull move, some bullish euphoria overcomes trades, and buyers cannot get enough of that stock. The prices gap up with huge volume; then, there is great profit taking and the demand for the stock totally dries up.”

Is that what we are seeing in junk bonds right now?

Mish has a post about the correlation of corporate bonds – specifically high yield corporates – with the stock market.  The idea is that market participants are bidding up the prices of both risky bonds and risky stocks, even in the face of a scary rise in the junk-corporate default rate:

Inquiring minds have been asking “With Junk bonds defaults so miserable, why is the stock market rallying?” … The corporate debt market is still in control, but we now have a warning sign from treasuries yields about the strength of the so-called recovery. This rally is extremely long in the tooth, but the fact still remains: as long as corporate bonds hold up, huge equity selloffs are unlikely.

Over the last.. call it 6 months… the trend toward risk has been in full force. But a closer examination of charts suggests there is now a divergence: High yield bond prices have turned down since late July, while stocks have continued on their upward climb.  To show what we mean, we sketched in an “eyeballed” trend line for each market on the charts supplied by Mish below.

HYG vs SPY weekly

Gary shilling offers some reasons why he thinks the economy will not just “snap back”.

The Godfather of Government Stimulus, J.M. Keynes, (General Theory, Chapter 7) defined Investment as “the increment of capital equipment, whether it consists of fixed capital, working capital or liquid capital” and noted that “exchanges of old investments necessarily cancel out”.  We should point out that although “liquid capital” is included in Keynes’ definition, this is not cash which can be withdrawn from the business without a reduction in investment. It is cash committed to enabling future production.

Some will argue with how we apply this definition, but let’s give it a whirl:  If I buy already-committed capital assets, that is, “old investments”, I have not made an investment (added to the capital stock).  So, to the extent that a share of stock (or a bond) represents ownership of previously committed capital, when I refrain from consuming some of my income to buy it, I have saved, but I have not invested. Sure, it is true that the companies whose shares I own are retaining earnings and thus making new investments, which, by the way, I could use to manufacture my own dividend income, but let’s keep this simple. I have truly “invested” only when I buy an asset that is newly issued to fund creation of new capital.

So, we have two choices for what to do with our savings:  1) we can “park it” in existing assets (stocks, bonds, mattresses), or 2) we can invest it in new capital formation.  What makes us choose one over the other? Answer: a sufficiently higher expected rate of return of the one over the other. When we park it, we hope to get a financial return, but part of the “return” from investing in new capital formation is real: new jobs.  Thus, for example, IF we can put my and your savings to work AND put our out-of-work sons and daughters to work too, that may represent a more attractive opportunity than the financial return of existing assets.  Actually, IF we can put enough of our out-of-work buddies to work, we may actually grow the number of customers for the product which our investment produces and “everybody wins”.

The keyword above is “IF”. There is more than the usual uncertainty “out there” right now and the IF’s are scary-big ones.  Should we make an investment or buy the relatively sure thing available in parking our savings in existing savings accounts, bonds, stocks, or even credit default swaps?  Which offers the best “risk adjusted return”?  No one, except perhaps, communists like the Chinese, wants to build new production capacity without a reasonable dependable market.   Brad Setzer has been saying for a while that there is a lot of savings floating around, but no investments.  Where is the savings being parked? Hmm…. The FED has made sure its owners, the banks, have plenty of reserves and, while they aren’t being lent, many are “somehow” being used to inflate existing financial asset prices.

When will existing asset returns become sufficiently less attractive so that new investments will be made and people will be put back to work? It looks like another existing asset bubble (or two) needs to pop first and the FED just needs to refrain from financing any more of them…

Reuters has a piece about “Insider trading and investor sentiment signaling a market top“. Is it a self-fulfilling prophesy?  Tech investors’ blood run cold on the possibility that the tech market is a reflated March 2000 bubble:

Charles Biderman at TrimTabs told Bloomberg in this video that insider selling indicates the market has topped.

As TrimTabs writes, “If the economy is starting to recover, then why are insiders buying so few shares?” That seems to be a question investors may want to consider. Perhaps it is a “done deal” that the market will decline —-but for how long and how far?

Here’s New York commercial real estate investor Harrison LeFrak predicting a 2010 crisis in the $1.7T CRE debt that is on the books of regional banks (ht TPC):

Todd Harrison, CEO of, thinks the best risk-reward trade-off favors shorting the market…

Below is a chart as of the 25th from  It shows that over 90% of stocks on the NYSE are trading above their 200 day moving average -  a level not seen since around 1986.  My father used to tell a story (probably one of his tall “tails”) about puppies who drank so much buttermilk that when one fell off the porch – it burst.  How much more can these puppies be pumped?


Here’s a simple set of rules that remind us about how to trade market announcements:

Cheat sheet: reacting to data and market releases

weak data =  Fed ease, stocks rally

consensus data =  lower volatility, stocks rally

strong data =  economy strengthening, stocks rally

bank loses $4bln = bad news out of the way, stocks rally

oil spikes =  great for energy companies, stocks rally

oil drops =  great for the consumer, stocks rally

dollar plunges =  great for multinationals, stocks rally

dollar spikes =  lowers inflation, stocks rally

inflation spikes =  will inflate all assets, stocks rally

inflation drops =  improves earnings quality, stocks rally

« Previous Page | Next Page »