Thursday, 5 November 2015

Macro and Credit - Ship of Fools

"Life is a dream for the wise, a game for the fool, a comedy for the rich, a tragedy for the poor." - Sholem Aleichem, Russian writer and author of Fiddler on the Roof.

Looking at the early and continuous Santa Claus rally without having seen Santa yet as Le Chiffre aka Mario Draghi has not even delivered the Christmas presents, we reminded ourselves, for this week's chosen title of a more philosophical reference when it came to selecting our selected analogy. The ship of fools is an allegory originating from Plato which has long been prominently featured in Western literature (1492 Ship of Fools by Sebastian Brant, 1962 novel by Katherine Anne Porter and 2002 science fiction novel by Richard Paul Russo), in art (Albrecht Dürer), movies (1965 move with Vivien Leigh, Lee Marvin and Simone Signoret) and in music (Pink Floyd, Dr Strangely Strange, The Doors, John Cale, Grateful Dead, Robert Plant, etc.).The allegory or parable depicts a vessel without a pilot (financial markets and the world economy), taken over by force or persuasion by those who are deranged, frivolous, or oblivious (political and banking "elites"), and seemingly ignorant of their course (central bankers "deities"). This mob is willing to kill anyone in the way (euthanasia of the rentier à la Keynes, shutdown of democracy by the European Commission), and to drug the captain if necessary (large injections of liquidity via QEs and a swath of propaganda). The true pilot, that knows the stars, the wind, and how to stay on course, is considered useless by the mob (investors). The allegory is compared to how a philosopher is rejected by the state.

There is of course a deeper analogy, no surprise there, to our chosen title. We apologies in advance but we will take a slight philosophical and historical detour before starting this week's conversation as we think the recent "political" events in Europe are very relevant to our chosen title.

If one refers to Portugal's recent election stalemate, where Mr Costa's Left-wing alliance was not chosen to form a new government by Portugal's head of state president Aníbal Cavaco Silva leading to a constitutional crisis, it ties up well with Plato's allegory of the "Ship of Fools" and the weakness of the democratic system. 

Plato's take on democracy is contained in book 8 of the Republic. Plato, in essence, described how a democracy is an "unlikely stable" political proposal given, he argued, it offers freedom but it neglects the demands of proper statecraft. He therefore predicted an almost certain collapse of democracy and decline into tyranny with a total loss of freedom (Patriot act, Bill on Intelligence in France, Spain's strict anti-protest laws, etc.). Plato argued that in a system where political power (‘cratos’) lied in the hands of the people (‘demos’) it was not guaranteed, and mostly unlikely, that those best equipped to rule would get a chance in managing public affairs.  The only case on the European continent, where we think there is a "stable" political proposal where political power lies in the hand of the people is Switzerland, no offense to Plato. Whereas in Europe, the loudest incompetent voices have dominated, leading to irrational, ill-motivated decisions which has turned the management of the European project to a complete crazy circus as shown by the recent migrant crisis plaguing Europe. 

In similar fashion, Joseph Schumpeter, came somewhat to a similar conclusion to Plato in his seminal 1942 book "Capitalism, Socialism and Democracy":

Schumpeter view on democracy:
"In the same book, Schumpeter expounded a theory of democracy which sought to challenge what he called the "classical doctrine". He disputed the idea that democracy was a process by which the electorate identified the common good, and politicians carried this out for them. He argued this was unrealistic, and that people's ignorance and superficiality meant that in fact they were largely manipulated by politicians, who set the agenda. This made a 'rule by the people' concept both unlikely and undesirable. Instead he advocated a minimalist model, much influenced by Max Weber, whereby democracy is the mechanism for competition between leaders, much like a market structure. Although periodic votes by the general public legitimize governments and keep them accountable, the policy program is very much seen as their own and not that of the people, and the participatory role for individuals is usually severely limited." - source Wikipedia

In his masterpiece, Schumpeter assumed that the decay in capitalism was indeed somewhat leading to some new form of "fascism". Schumpeter argued that capitalism's collapse from within will come about as majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and eventually destroy the capitalist structure.

In last's week conversation we re-iterated our take on QE in Europe from our "Chekhov's gunconversation as follows:
"Current European equation: QE + austerity = road to growth disillusion/social tensions, but ironically, still short-term road to heaven for financial assets (goldilocks period for credit)…before the inevitable longer-term violent social wake-up calls (populist parties access to power, rise of protectionism, the 30’s model…). 
It is also not a surprise UKIP leader Nigel Farage has been comparing the EU to Former USSR very recently following the events in Portugal. This is exactly what we expected a few years ago with our August 2012 analogy to Milan Kundera's masterpiece "The Unbearable Lightness of Being":
"We do see similarities in the current European "complacent" situation with the Brezhnev Doctrine, first and most clearly outlined by S. Kovalev in a September 26, 1968 Pravda article, entitled "Sovereignty and the International Obligations of Socialist Countries". This doctrine was announced to retroactively justify the Soviet invasion of Czechoslovakia in August 1968 that ended the Prague Spring, along with earlier Soviet military interventions, such as the invasion of Hungary in 1956.
"In practice, the policy meant that limited independence of communist parties was allowed. However, no country would be allowed to leave the Warsaw Pact, disturb a nation's communist party's monopoly on power, or in any way compromise the cohesiveness of the Eastern bloc. Implicit in this doctrine was that the leadership of the Soviet Union reserved, for itself, the right to define "socialism" and "capitalism"." - source Wikipedia.
The Brezhnev Doctrine is interesting in the sense it was the application of the principal of "limited sovereignty". No country would be allowed to break-up the Soviet Union until; the "Sinatra Doctrine" came up with Mikhail Gorbachev.
"The "Sinatra Doctrine" was the name that the Soviet government of Mikhail Gorbachev used jokingly to describe its policy of allowing neighboring Warsaw Pact nations to determine their own internal affairs. The name alluded to the Frank Sinatra song "My Way"—the Soviet Union was allowing these nations to go their own way" - source Wikipedia
"The phrase was coined on 25 October 1989 by Foreign Ministry spokesman Gennadi Gerasimov. He appeared on the popular U.S. television program Good Morning America to discuss a speech made two days earlier by Soviet Foreign Minister Eduard Shevardnadze. The latter had said that the Soviets recognized the freedom of choice of all countries, specifically including the other Warsaw Pact states. Gerasimov told the interviewer that, "We now have the Frank Sinatra doctrine. He has a song, I Did It My Way. So every country decides on its own which road to take." When asked whether this would include Moscow accepting the rejection of communist parties in the Soviet bloc. He replied: "That's for sure… political structures must be decided by the people who live there." - source Wikipedia 
No country is allowed to leave the European Union and the political structures are not decided anymore by the people who live there.

Back in June 2012, in our conversation "Eastern Promises" we made the following prediction:
"We think the breakup of the European Union could be triggered by Germany, in similar fashion to the demise of the 15 State-Ruble zone in 1994 which was triggered by Russia, its most powerful member which could lead to a smaller European zone. It has been our thoughts which we previously expressed (which we reminder ourselves in "The Daughters of Danaus")."
Remember, it is still a game of survival of the fittest after all:
Euro Breakup Precedent Seen When 15 State-Ruble Zone Fell Apart - by Catherine Hickley, Bloomberg:
"While differences between the Soviet Union and the EU are greater than their similarities, there are parallels that may prove helpful in assessing the debt crisis, historians say. Both were postwar constructs set up in response to a collective trauma; in both cases, the founding generation was dying out as crisis hit and disintegration loomed." - source Bloomberg.
As far as Europe is concerned and given the growing economic chasm between France and Germany we are sticking to our view that in the end, Germany will eventually "defect" and we will move from a Brezhnev doctrine to a Sinatra doctrine.

Here ends our long detour, apologies dear reader as we resume our normal macro and credit musing services below.

  • The Q3 release of the Fed Senior Loan Officer Survey on the 3rd of November is yet another warning sign of tightening financial conditions and the lateness in the "credit cycle"
  • On credit we remain short-term "Keynesian" bullish / long term "Austrian" bearish
  • Final charts - Buybacks have replaced dividends in the US

  • The Q3 release of the Fed Senior Loan Officer Survey on the 3rd of November is yet another warning sign of tightening financial conditions and the lateness in the "credit cycle"
For tracking credit availability, you need to use the central banks’ credit surveys. The most predictive variable for default rates remains credit availability. 

For the US you need to follow the Senior Loan Officer Survey of 60 large domestic US banks and 24 US branches and agencies of foreign banks. This is updated quarterly such that results are available in time for FOMC meetings. Questions cover changes in the standards and terms of the banks' lending and the state of business and household demand for loans.

As a reminder from our May 2013 conversation "What - We Worry?", exceptional liquidity provisions by central banks (QEs from the Fed, LTROs and QE from the ECB) as well as “amend and pretends” on banks balance sheet in Europe have arguably kept default rates artificially low, at least below levels consistent with economic fundamentals. 

Lower growth (recently revised downwards globally) should normally led to a rise in default rates, in that context, a widening in credit spreads should be a leading indicator given credit investors were anticipatory in nature, in 2008-2009, and credit spreads started to rise well in advance (9 months) of the eventual risk of defaults. We pointed out at the time UBS work on the subject of the predictorynature of both leverage (a subject we discussed at length this summer) and credit availability:
"Average leverage of non-financial corporate sector (Nonfinancial Corp Debt/Nonfinancial Corp Earnings, source Federal Reserve).

In terms of predictive value, the SLO survey and Non-financial leverage are two clear winners and these two factors alone produce an R^2 of about 0.6 in the best two-factor model." - source UBS
Whereas we have shown in previous conversation the significant rise in leverage in the US for HY and Investment Grade companies (which has not been yet the case in Europe hence our more favorable "approach" to European credit from a "relative value perspective"), the most recent Q3 release of the Fed Senior Loan Officer Survey is yet another cause for concern for 2016 when it comes to assessing the lateness in the credit cycle. As such we agree with UBS take on the subject from their Global Credit Comment note from the 4th of November entitled "Credit Cycle Update - Now Bank Standards Tighten To Cycle Lows":
"Credit Cycle Update: Now Bank Standards Tighten To Cycle Lows
As we detailed earlier in October, the significant tightening in non-bank lending standards, through lower HY issuance and deteriorating terms of trade credit, posed a structural risk to the credit cycle with potential knock-on effects to bank standards. Yesterday’s Q3 release of the Fed Senior Loan Officer Survey illustrated this latter point well; bank lending conditions have now hit multi-year lows (Figure 1). 

A net 1.5% of banks tightened standards on C&I loans to small borrowers, vs. -6% in Q2 and the worst since Q1’ 12. More surprisingly, a net 7.4% of banks also worsened terms for C&I loans to large borrowers, vs. -7% in Q2 and the worst since Q4’09. To be fair, these levels, particularly for smaller companies, are not very high and are far from levels seen prior to past recessions. But the trend has begun to shift.
What does this mean for our forward credit spread and default targets? It reaffirms our view that today’s spreads are merely fair-value for what is a late cycle environment. Even though spreads may tighten a bit more from today’s levels given positive momentum and a reduction in market volatility, we ultimately believe spread tightening will be limited and will gravitate back to current levels. Our 6 month ahead forecast for IG spreads is now 156bps (vs. 157bps currently) and HY spreads is now 603bps (vs. 596bps currently). Our 12 month forward HY default rate forecast is now 3.4%, though this doesn’t fully capture the extra defaults likely coming from the energy/mining sectors if commodity prices stay low. We have been consistently calling for a 4-4.5% default rate through 1H 2016. With this tightening in standards, there is greater upside risk to the high 4% or low 5% range toward the latter half of 2016.
Why have bank lending standards taken a turn for the worse? Quite simply, fundamental concerns about the economy are leading the way. Figure 2 makes this clear. For those banks that cited the economy as an important reason to change its lending standards, only 37% eased conditions (i.e. 63% suggested the economy motivated them to tighten standards) (Figure 2). 

This was the worst showing since Q1’10. For banks that cited industry-specific issues as important, only 25% suggested that was a positive, the worst showing since Q4’09. Competition from other banks and non-bank lenders was effectively the only reason why banks were still easing standards. To be clear, this is a positive in the short-run as it keeps the cycle going; however it is a negative structurally. Lending based on competitive factors alone is a game of musical chairs, in which the music will assuredly stop before long without an improvement in the economy.
Have October non-bank lending indicators provided any glimpse of trends for Q4?
Right now, it’s too early to tell. October’s Trade Credit Survey registered an improvement in overall conditions (from 52.9 to 53.9, where 50 = neutral). However, this reading is actually slightly less than the Q3 average and the components related to debtor-creditor disputes improved less. The rate of deterioration has slowed, but the trend is unclear at this point (Figure 3).
October’s HY issuance total was anemic at $9.4bn, continuing a theme where issuance is falling despite a larger overall market size, a worrying sign for future refinancing risks. With that said, November has started out strong, almost matching October’s total already in two days, albeit skewed more to higher quality BB names. We would need to see more follow-throughs to B/CCC names to better signal a risk-on trend." - source UBS
Furthermore, despite their alleged high degree of sophistication, credit investors have a very weak predictive power on future default rates. This was largely discussed by our Rcube friends in their long March 2013 guest post entitled "Long-Term Corporate Credit Returns":
"When default rates are low, credit investors believe that stability is the norm, and start piling up on leverage, inventing new instruments to do so (CLOs, CDOs, CPDOs etc.). This recklessness leads to mal-investment, and sows the seeds of the next credit crisis.

Spreads moves between June 2007 and October 2008 (from 250bp to 2000bp in just 16 months) were a great illustration of this manic-depressive behaviour (which can also be related to Minsky’s model of the credit cycle)." - source Rcube
From a medium term perspective and assessing the "credit cycle" we believe the latest US Senior Loan Officer Survey points to yet another "warning" sign in the deterioration of the on-going credit cycle which has been so far pushed into "overtime" by central banks with ZIRP and their various iterations of QEs.

But what does it means for the weeks ahead when it comes to our "fundamental" view of credit? This leads us to our second point.

  • On credit we remain short-term "Keynesian" bullish / long term "Austrian" bearish
As we indicated in our "Bouncing bomb" October conversation, given the strong inflows in the asset class (US High Yield in particular), we remain Keynesian bullish short term when it comes to credit:

"While we have been "tactically" short-term "Keynesian" bullish, when it comes to our recent "credit" call, we remain long term "Austrian" bearish, particularly when it comes to our "credit" related "Bouncing bomb" analogy and the High Beta gamblers. We would recommend moving into a higher quality spectrum in terms of "credit ratings" and exposure." - source Macronomics
From a tactical and leverage perspective, we would overweight European High Yield versus US High Yield and remain more inclined towards US Investment Grade credit versus Europe taking into account the risk for a potential hike in December and from a European investor perspective, favoring in essence a USD credit exposure.

We would not at the moment go against the "flow" given the latest inflows so far in US High Yield have been very significant, hence our tactical "Keynesian" bullishness and as indicated by Bank of America Merrill Lynch High Yield Wire note from the 30th of October entitled "Spooky action":
US high yield saw $3.252bn (+1.6%) net inflows this week, the largest dollar change in AUM since October 2011. HY ETFs recorded net inflows of $1.14bn (+3.2%) to bring their MTD change in AUM to a record $3.67bn. Non-ETFs made up the remaining $2.1bn (+1.3%) this week, the asset class’ largest weekly net inflow since November 2014’s $2.9bn gain.
DM high yield issuance was light once again this week with 3 companies pricing bonds for a total of $1.45bn on the week. 2 deals ($660mn aggregate) came out of the US while the other deal ($790mn) came from Canada. In the loan market, 3 companies priced 4 deals this week to bring $1.8bn in new money, all coming from the United States.
Ratings performance within US corporates was mixed, though all segments posted positive gains. BB paper was the top corporate segment last week, adding 3.25%. Meanwhile B’s were up 2.39% and CCC’s gained 1.32%. Sector performance was positive with 17 out of 18 high yield sectors gaining on the week"  - source Bank of America Merrill Lynch

But, clearly our recommendation of moving into a higher quality spectrum in terms of "credit ratings" and exposure has paid-off and we continue to do so. Use the on-going rally to climb up the rating spectrum. It is time we think to start thinking about "playing defense" for 2016.

From our "Austrian" medium to long term bearishness credit perspective, we continue to advocate a more defensive play when it comes to "beta exposure" and US High Yield. On that point we share our concerns with Bank of America Merrill Lynch from the same note:
"Cash in, cash out – The rally and why you should fade it
It’s no surprise to our readers that we believe we are at the beginning of the end of the credit cycle, as easy monetary policy has benefitted corporate issuers’ ability to gain financing despite poor fundamentals. Leverage is high, a lack of capex has led to low recovery rates, EBITDA growth is anemic and the price of risk has skyrocketed over the last several months. Furthermore, what started as weakness in commodities and retail has spread to wireless, wireline, media, semiconductors, healthcare, and chemicals. Throw in a scandal or 2, a plummet in CCC issuance, and a general move from refinancing issuance to M&A issuance, and our view remains that the death by a thousand cuts scenario we forecast earlier this year has quite a bit longer to play out. Furthermore, we question the ability for the equity market to sustain high multiples by levering up returns in a market where debt financing has become increasingly more expensive. In such a world, a negative feedback loop from the equity market to credit and vice versa, coupled with retail flows and hedge fund redemptions could leave the exit narrow for many large cap structures and their debt holders.
With such a strong conviction about the longer term prospects for the market (read: the next year) we have found it easier to talk about the strategic view more than the tactical over the last several months. Our feeling has been that one could make just as easy of a case as to why high yield could sell off headed into year-end as it could make for why the market could rally. However, we feel compelled to address how technicals clearly favor the asset class today and reiterate that due to the lack of liquidity in the market, would take opportunities of strength to sell paper into year end.
Cash inTo begin with, the market has undoubtedly seen a large influx of cash so far this October – both through inflows but also through organic means. In fact, as we have been on the road largely since Labor Day, we have heard a huge increase in the number of accounts discussing a pickup in pension fund mandates and inquiries. So far high yield has generated about $6.8bn in cash in October when accounting for issuance, coupon, maturities calls and tenders. With 21.7% of the market owned by open ended mutual funds, and an inflow of $3.2bn mtd (note, this number will change at month-end once all filers report), retail funds have seen an increase in cash of nearly $4.7bn so far this month, or an increase of 1.7ppt in cash levels. For accounts that have been managing higher than normal balances (4%+), a 1.7ppt increase is quite a lot of cash to have in the portfolio, likely creating a bit of a buying pressure ahead of year-end.
More than mutual fund flows, however, the biggest driver of strength has been high yield ETFs. Note that open ended mutual funds routinely see cash balances inflate and deflate- a 1.7ppt increase, though substantial, isn’t out of the norm- but ETFs, have seen an increase of nearly 15ppt in cash levels, or an increase in $5.1bn in buying power from these instruments. We note that despite this technical bid, the market has still only recovered to mid-September levels and is still significantly off May highs.
Low IssuanceYet another strong technical has been the lack of primary issuance lately. Developed market issuance so far this month has been just $3bn, which is the lowest since the summer of 2011. US issuance is even lower, at $1bn, also the lowest since the $930mn priced in Aug 2011. Issuance is running 9% behind last year’s pace in the US (note our forecast for 2015 was -10% yoy), a sharp contrast to earlier in the year, when we were running well above it (Chart 3).
So what’s driving the sudden drought? First, there are not a whole lot of event driven deals in the market right now. And for opportunistic supply, the new issue clearing yields have become significantly more expensive in a short period of time. Chart 4 shows how the clearing yields in the last four months are now at the highest level all year. And as a consequence, the number of issuers tapping the market has fallen significantly.
What’s different about this stretch is the length of it – yields have been greater than 6.5% for 4 months now, which has choked supply. The last time we saw new issue yields remain high for an extended period was post taper tantrum when 5yr rates jumped 85bps. In contrast, over the last 4 months, the benchmark risk free rate has actually fallen 20bps, inclusive of the move yesterday post the hawkish Fed remarks. Meaning today’s bond pricing is clearly dictated more by the risk premium than than by rates.
All that glitters is not goldWhile the prospects of jumping into today’s rally may be tempting, there are a number of reasons not to. A technical rally, driven by a combination of high cash and low issuance does not, in our opinion, scream buy. All the technicals currently favorable to HY can just as easily turn tomorrow. History is witness to how fickle retail money can be, especially in and out of ETFs, which is where most of the recent inflows have been concentrated. More so, the inflow into open-end funds has been dictated by a handful of accounts, with top 3 funds accounting for 66% of the inflows. Back in February, HY retail funds saw a larger inflow (-$9.5bn), only to be followed by 6 months of continuous outflows. It won’t be misplaced to expect a similar pattern this time around.
On the same note, issuance will not stay at the same depressed levels for an extended period of time. We know that accounts are flushed with cash, and have been buying bonds in the secondary, (high beta ones at that) as evidenced by the intensity of the spread tightening (85bps in last 2 weeks). It seems to us a matter of time before the accumulated dry powder starts chasing stable, money-good credits in the primary, and issuance picks up. Additionally, the Fed’s hawkish stance at yesterday’s meeting only makes it more likely that issuers will start tapping the market before December, more so if the October payrolls don’t disappoint.
Finally, and most importantly, nothing has changed fundamentally. Companies continue to disappoint on earnings and revenue alike, even outside of commodities (Chart 6), with each passing day reminding us that the very same reasons that pushed the HY spreads higher over the summer and into the fall still exist today.
The illusion of liquidityPerhaps a bigger issue today is that liquidity, or the lack thereof, makes it challenging to express tactical views in the HY space outside of the indices (TRS, ETFs, CDX). We would caution investors who plan on legging into risk into year end with the expectation of selling early next year as a plan that sounds better on paper than in reality. The most common push-back we get against this view (and the views are varied when it comes to liquidity) is that the total traded dollar volume in HY has gone up- and that statement is not wrong. In fact, even when measured as a percentage of market outstanding, daily HY trading levels have been steadily improving per FINRA (Chart 5). 

However, when we break down what’s trading at the bond level, we find that the trend has unequivocally been towards trading of new issues.
Liquidity is where the heart isBelow is a chart that shows the components of what is being traded on a daily basis as judged by the total number of months since issuance of the bond traded. In 2015, bonds issued in the last one month (dark blue in the chart below) have on average made up 14% of the trace volume on any given day, going up to 30% on certain days. In contrast, the average contribution of recently issued bonds was less than 7% in 2013, peaking at 10%. What’s more is that the dynamics seemed to change in Q2 2014, right about the time we first starting sensing a turn-around in investor sentiment from worrying about  being saddled with non-core holdings in the long run than missing out on the next big rally. There may have been lapses in that collective investor sentiment before too, just like right now, but that hasn’t changed the larger trend which seems to verify what we have been hearing anecdotally for a year now- that the liquidity in the marketplace today remains elusive. Note that the recent fall in trading issuers that came to market in the last month may have as much to do with the lack of issuance of late than anything else. What is startling, though, is the proportion of trades last October following a strong September issuance vs. the proportion of trades in October 2013 following a strong September 2013 calendar. In the post QE world where indiscriminate beta compression is dead investors have consciously gravitated towards liquidity; and as a consequence, trading has become concentrated in more on-the-run securities.

In light of all these issues, it hardly makes for a good strategy for us to buy a technical rally only to have to make a complete U-turn to position, in a low-liquidity environment for what we are forecasting to be a mid-single digit type default year in 2016. We would rather take this opportunity to sell into strength any credits that we don’t consider to be either long-term core holdings, or on the margin yield enhancers." - source Bank of America Merrill Lynch
In essence while remain on the "Ship of Fools", you should continue dancing but ensuring that you are dancing closer to the door given the rising signs in the lateness of the credit cycle. What is of interest to us and as pointed out above, clearly the behavior of our "CCC Credit Canary" in terms of performance clearly underlines the lateness in the "credit game" as far as we are concerned.

Whereas the markets have been viciously choppy in terms of corrections and rebound, we feel strongly that this early "Santa Claus" rally is once more central banks driven and given the "lack of performance" for many "balanced funds", it could well extend until December, when we will "discover" what the captains of the Ship of Fools have in mind (Fed and ECB).

Obviously, positive correlations and large standard deviation moves, given the fickleness of "retail investors", could indeed trigger some large reversals before year end. Whereas the Fed has clearly indicated it is "data dependent", the two most important data points will clearly be the next Nonfarm payroll releases.

  • Final charts - Buybacks have replaced dividends in the US
In the US cheap credit has led to a "buyback binge" hence the reduction of the number of shares leading to an increase in leverage given many corporates have issued bonds to finance their buybacks program. A large part of the rise in the S&P 500 can be attributed to "multiple expansion" rather than "strong earnings" growth thanks to the "buyback" policy. As of late Margin debt has stopped expanding given corporate earnings are to some extent faltering. Margin debt balances at NYSE member firms sustained a $19.5 billion decline (-4.1%) in  September, the biggest monthly fall in margin utilisation since August 2011 ($33.9 billion or -11%). More interestingly, "Buyback" have replaced dividends in the US, which we think is an interesting development as displayed in Société Générale's below graph from their Global Investor Slide Pack for November 2015:
"Buybacks have replaced dividends in the US
But, Buybacks are used to pay for stock option issuance
And, Buybacks are mainly funded by debt
 - source Société Générale

To paraphrase Charles Gave of Gavekal research for whom we have great respect:
"if there is more money than fools then market rise, and if there are more fools than money markets fall"
End of the day, you are going to have to decide if indeed you are on a "Ship of Fools" or not, when it comes to your "allocation" strategy.

"A fool thinks himself to be wise, but a wise man knows himself to be a fool." - William Shakespeare

Stay tuned!

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