Market Update: Spotlight on Credit
May began with some down days in the stock market. Is this the first inkling of bigger things to come? Remembering the old wisdom to "sell in May," along with the length of this stock bull market - decidedly long - it's possible. Contraindicating this, though, are arguments that we haven't seen a really strong "blow off" that you'd typically get in a bull market. That's true. But we're thinking that may be explained by the fact that this bull may be brought low by a growing credit crisis. With credit in various sectors of the markets tightening, it's a trend that, if it strengthens, would pull stock down. The theory behind this is simply that if "liquidity" - a/k/a credit - dries up, stock will too.
A few indicators of credit contracting: NYSE market margin debt began a downward trend in 2015. Yes, it increased in March. But such action doesn't reverse the bigger trend. It's the trend we need to watch. Unless it turns around - and that would be an unlikely turn if one considers past margin debt trend history, that's a significant sign of credit shrinking. From various sources, we've learned that venture capital's getting harder to access. Until recently, money was flowing pretty freely for all sorts of growing start-ups. Now the investors are getting a lot more particular. It's available for the "best" ideas. And when that happens, it means less credit being doled out. Again, credit tightening. Finally, it seems banks are getting more particular about whom they lend to. Of course, government programs step into the breach and you can still get loans at 3% down. But that's, of course, for fools who can't wait to save up enough for the desirable 20% down payment. If you go for the better loans (lower interest rates, less loan to value, more chance you won't be underwater on your mortgage in the next few years), the bank wants more than a pulse and passport or driver's license.
The two interesting assets continue to be precious metals and treasuries, specifically the long (30-year) bond. The precious metals have perked up, as we've noted, and now the gold-silver ratio - recently as high as 84 - has begun to shrink. Yesterday it finished the day at 73.43, after dropping close to 70 through April. We suspect that, after a rest, it will continue to decline. Since gold has had a good run Q1, it looks like it's resting too. And platinum finally woke up out of an extended slumber, finally breaking 1,000. Looks like it wants to join the party.
As for the mining shares, their tear since January 19th lows has been unprecedented. And that "high pole" in the point and figure chart we recently noted remains intact. One theory is that we who are waiting for a correction before adding new or adding to existing positions will likely not get what we came for. The devastation of the mining shares, especially in 2015, was so extreme, they'll just continue pushing upwards without a rest. If they do, it'll be the first time we've seen such action. But, hey, there's a first time for everything, I suppose.
As for the long treasury, the chatter remains as it has for years: the Fed will raise rates; treasury rates will increase. Right. We continue holding a position here, despite the prognostications that have been consistently wrong for what seems like forever. The possibly building credit crunch would likely funnel money into the "safe harbor" of treasuries if the stock market reacts to tightening credit by heading down. So unless that pattern changes, long treasuries should make sense.
To sum up, we keep one - if not both - eyes on developments in the credit markets. After bounces in junk and emerging debt, it's time to see if that was just a blip with further losses ahead. Some say yes, some say the bottom is in - kind of like the comments that oil has bottomed. We'll believe that when we see it.
Enjoy your weekend!
A few indicators of credit contracting: NYSE market margin debt began a downward trend in 2015. Yes, it increased in March. But such action doesn't reverse the bigger trend. It's the trend we need to watch. Unless it turns around - and that would be an unlikely turn if one considers past margin debt trend history, that's a significant sign of credit shrinking. From various sources, we've learned that venture capital's getting harder to access. Until recently, money was flowing pretty freely for all sorts of growing start-ups. Now the investors are getting a lot more particular. It's available for the "best" ideas. And when that happens, it means less credit being doled out. Again, credit tightening. Finally, it seems banks are getting more particular about whom they lend to. Of course, government programs step into the breach and you can still get loans at 3% down. But that's, of course, for fools who can't wait to save up enough for the desirable 20% down payment. If you go for the better loans (lower interest rates, less loan to value, more chance you won't be underwater on your mortgage in the next few years), the bank wants more than a pulse and passport or driver's license.
The two interesting assets continue to be precious metals and treasuries, specifically the long (30-year) bond. The precious metals have perked up, as we've noted, and now the gold-silver ratio - recently as high as 84 - has begun to shrink. Yesterday it finished the day at 73.43, after dropping close to 70 through April. We suspect that, after a rest, it will continue to decline. Since gold has had a good run Q1, it looks like it's resting too. And platinum finally woke up out of an extended slumber, finally breaking 1,000. Looks like it wants to join the party.
As for the mining shares, their tear since January 19th lows has been unprecedented. And that "high pole" in the point and figure chart we recently noted remains intact. One theory is that we who are waiting for a correction before adding new or adding to existing positions will likely not get what we came for. The devastation of the mining shares, especially in 2015, was so extreme, they'll just continue pushing upwards without a rest. If they do, it'll be the first time we've seen such action. But, hey, there's a first time for everything, I suppose.
As for the long treasury, the chatter remains as it has for years: the Fed will raise rates; treasury rates will increase. Right. We continue holding a position here, despite the prognostications that have been consistently wrong for what seems like forever. The possibly building credit crunch would likely funnel money into the "safe harbor" of treasuries if the stock market reacts to tightening credit by heading down. So unless that pattern changes, long treasuries should make sense.
To sum up, we keep one - if not both - eyes on developments in the credit markets. After bounces in junk and emerging debt, it's time to see if that was just a blip with further losses ahead. Some say yes, some say the bottom is in - kind of like the comments that oil has bottomed. We'll believe that when we see it.
Enjoy your weekend!
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