Alan Abelson in this weekend’s Barron’s:

“THE BULLS SEEMINGLY HAVE DEVELOPED an immunity to bad news. We’re admittedly jealous, since we’d love to glom onto the potion that makes everything, no matter how dire, come up smelling like a rose. It isn’t that we’re oblivious to good news; frankly, we hunger for it. Thus, when Bloomberg reports, citing data from Paychex, Intuit, Insperity and the National Federation of Independent Business, that small businesses, which have been down in the dumps forever, suddenly are energized by a surge of optimism and have started to actually hire people, we feel like emitting a discreet cheer.

But we somehow can’t blithely ignore disturbing bulletins out of Japan on the troubles besetting its effort to fix its damaged nuclear facilities. Or, the recurring financial woes in Europe. Or, closer to home, the mercurial rise in food and gas prices that threatens to effectively wipe out the bounty awarded the consumer via a temporary tax cut.

Nor can we turn a blind eye to less cosmic stuff like the decline in February durable-goods orders and, most notably, the drop in orders for nondefense capital goods excluding aircraft, which were off 1.3% versus an anticipated gain of 4.3%, a persuasive indication that businesses are still wary and keeping a tight grip on spending.

But our concerns about Wall Street’s pervasive bullishness go beyond the market’s lack of interest in, much less reaction to, unfavorable events, large and small. It’s also the not-unimportant matter of sentiment: pure and simple optimism among investment pros reigns supreme (apart from the usual scattering of cranky pessimists)—usually an early warning signal. In the latest Investors Intelligence survey, 50.6% of the advisors were bullish, a meager 22.4% bearish.”

Other factors Abelson cites: Margin debt is ballooning — $350 billion, equivalent to 2.2% of total market cap — one of the highest percentages ever. This last happened back in 2007 and 2008.


No Exit, No Entry
Barron’s March 26, 2011

Category: Markets, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Abelson on “Immunity to Bad News,” Margin Debt”

  1. BigSioux says:

    Alan obviously missed the memo – BTFD!

  2. rip says:

    Well, IMHO the stimulus (now fading) and QEII have everything squirreled.

  3. farmera1 says:

    Oh, oh.


  4. derekce says:

    Increases in margin debt have been good contrary indicators. If the banks and brokerages aren’t leveraged 30-1 and 50-1 anymore, who is leveraging up?

  5. quaternion says:

    Barry, what precisely is the problem: is it that the market is behaving “badly,” or is it that the market hasn’t behaved the way you predicted it would?

  6. farmera1 says:

    So what’s to worry about. Everything will be fine. Buy, buy, buy; spend, spend, spend.

    So the IV drip of QE II stops in June 60 days or so from now. The stimulus is running low. The FED and the Fed gov. have pretty much shot their wads at the big still smoldering fire trashing the economy. Wait, maybe Europe or China will save us. Maybe not so much. The extent of the permanent damage to Japan is not yet completed and certainly not defined. The Japanese mess is being “managed” through press releases, salt water (using sea water to cool reactors says it all about how desperate the situation was/is) and PR. The energy situation looks like a killer, no more nukes and dwindling oil mainly from an unstable boiling part of the world.

    When you talk probabilities, maybe one of six things could sink us and maybe each has a .15 (aka 15%) probability of coming true. But they are additive, so the probability of being got is say .9 (90%). I wouldn’t bet against those odds.

    So it seems to me now is the time to away the life boats and row like hell away from the sinking burning wreckage that was our economy.

  7. louiswi says:

    Has anyone checked to see if Ableson may have passed away some years back. He has the same old saw every week. I’m thinking “Bear”ons may be re-issuing past pieces albeit dolled up a bit. This is the feeling I get having read him faithfully for years. He is my personal contrarian indicator by the way.

  8. dead hobo says:

    BR quoted:

    Other factors Abelson cites: Margin debt is ballooning — $350 billion, equivalent to 2.2% of total market cap — one of the highest percentages ever. This last happened back in 2007 and 2008.

    Cha-ching!! Sauce for the goose.

    This tells me the market will keep going up strongly until it stops and the fall will be steep unless the economy is strong enough to soften the slide. The end of QE2 will be interesting. I announced my strategy before re-entering the market in 11-2010. Except for minor adjustments, I plan to stick with it.

  9. Robespierre says:

    Ah to steal stuff directly from Barry, I think professional investors are suffering from “recency effect”. Recency being of course the huge gains in the market despite of head winds…

    John Qpublic, however, being still under employed (or unemployed) has not seen those gains and is therefore suffering from “primacy effect”.

    “It was the best of times, it was the worst of times,…”

  10. VennData says:

    Alan Abelson is a national treasure.

    Just Buy, Hold, Rebalance Annually; early May works for me. That way you can spend time on important matters …and still outperform the “alpha chasers” if you’re using low-cost index funds and/or ETFs.

    …and to our friends in North Africa and the Middle East, Let Freedom Ring.

  11. cfischer says:

    @quaternion: My issue is that the market is not reacting to the news the way it historically has. Couple that with everything the article mentions, + housing + still extraordinary government intervention 2 years after the bottom + unsustainably low tax rates/government spending PLUS equity valuations that aren’t cheap.. well yes, I’m concerned.

    Before you accuse me of a being a bear, I’m 80% long right now..

  12. chartist says:

    There’s a ton of baby boomers who relied on the stock market for their retirement which is now here….IMO, the government isn’t about to let the market tank. This is the new normal.

  13. aiadvisors says:

    Age old dogma: “Don’t Fight the Fed.” Exactly how hard can it be to accept that?


    BR: If you bought on the Fed cuts in 2001, you got killed.

    If you sold on the Fed increases in 2004-05-06, you missed a helluva raly . . .

  14. baychev says:

    don’t worry, believe in the bernank and his ability to goose up the markets.

  15. Bill Wilson says:

    It would be nice to see a fifty year chart of margin debt along side a chart of the S&P. Does high margin debt always lead to a market crash?

    I suppose this is where I need to do some homework.

  16. Jojo says:

    He forgot to mention the problems with the auto industry in the aftermath of the Japan earthquake.
    As Japan shutdowns drag on, auto crisis worsens
    With shortages looming at car dealerships and factories, the global auto crisis deepens

    TOKYO (AP) — The auto industry disruptions triggered by Japan’s earthquake and tsunami are about to get worse.

    In the weeks ahead, car buyers will have difficulty finding the model they want in certain colors, thousands of auto plant workers will likely be told to stay home, and companies such as Toyota, Honda and others will lose billions of dollars in revenue. More than two weeks since the natural disaster, inventories of crucial car supplies — from computer chips to paint pigments — are dwindling fast as Japanese factories that make them struggle to restart.

    Because parts and supplies are shipped by slow-moving boats, the real drop-off has yet to be felt by factories in the U.S., Europe and Asia. That will come by the middle of April.

    “This is the biggest impact ever in the history of the automobile industry,” says Koji Endo, managing director at Advanced Research Japan in Tokyo.

    Much of Japan’s auto industry — the second largest supplier of cars in the world — remains idle. Few plants were seriously damaged by the quake, but with supplies of water and electricity fleeting, no one can say when factories will crank up. Some auto analysts say it could be as late as this summer.

  17. helge58 says:

    I gather Mr. Abelson does not subscribe to the theory that the market is moved largely by psychological trends rather than economic trends.

  18. obsvr-1 says:

    however, the height of psychological rise will eventually succumb to the reality of economic gravity. Enjoy the gains while you can get em.

  19. farmera1 says:

    I keep wondering if/when plutonium will get away from the reactors. According to this article Japan is testing for plutonium in the soil. Wonder why not the water. The nasty thing about plutonium is that the half life is something like 20,000 years. It is also one of the more toxic substances on earth. Some of the rods contained reprocessed plutonium. The worst nightmare for a nuclear engineer is that containment is lost. Hate to think it has happened. If so Japan’s problems are just beginning.

  20. contrabandista13 says:

    It’s not the case that markets are immune to bad news, it’s more the case that markets lack immunity to extraordinary stimulus. And, that appears to be the only certainty the markets can rely on… I’m just dying to see how those who are in charge and responsible for this amazing recovery will react when the music stops, and stop it will…. It’s going to be very entertaining….

    What I don’t want to hear from these A-Holes is that it blind-sided them….

  21. EIB says:

    All this sounds like a “wall of worry” if you ask me….

    Also, margin debt was over $300B for over 1.5 years in 2007-2008
    Useless to time anything precisely.

  22. Bokolis says:

    It matters to know the source of the increase, relative to market cap. I’m thinking that, given ZIRP and the beating mom & pop have taken in this cycle, it’s more likely that the margin money that has come back more likely relates to high-net worth (high balance) clients using the brokerages as a cheap (and easy) source of capital.

    After all, aren’t we saying that we haven’t even seen the johnny-come-lately phase of this move? If mom & pop aren’t here (my reckoning is that they started showing up in January), they can’t yet be on margin.

    If margin is to become the next great bubble, it’s the TBTF clients and the “easy” that’s going to inflate it.