Top Advisors Corner

Alan Newman: Crosscurrents - November 3, 2016

Alan Newman

Alan Newman


Healthcare Cost Dilemma

The most recent numbers show healthcare costs have climbed to 17.5% of our GDP, better than one dollar of every six.  By the way, Happy Halloween—the snapshot at center is quite frightening.  While this picture represents only unsubsidized health insurance premiums, the math surrounding health care costs in an aging society is truly scary.  Consider that over the last year, the medical component for the CPI is up 4.8%.  The National Health Expenditure (NHW) fact sheet (see http://go.cms.gov/1O1cWhR) claims “For 2015-25, health spending is projected to grow at an average rate of 5.8 percent per year….projected to grow 1.3 percentage points faster than GDP….as a result, the health share of GDP is expected to rise….to 20.1 percent by 2025.”  there’s no way consumers will be able to hide.  Healthcare already presents an incredible obstacle for those who live in the real world, unfettered by the government’s statistics.  It’s going to get much worse.     


Another Demand Source Ebbs

Earlier this year, we came across a column by Bob Bryan (see http://read.bi/1YK54FM) detailing a waning era of corporate stock buybacks, for years the largest source of demand to drive stock prices higher.  In just the two years of 2014-2015, companies in the S&P 500 bought back close to $500 billion worth of their own shares and buybacks since 2010 totaled $2.1 trillion.  These numbers are enormous.  Bear in mind if a company buys back 4% of their shares, their earnings will expand by roughly 4% and so will the P/E multiple.  Thus, appearances can be deceiving.  Things are not going as well as share prices imply.

And as we have shown so often, the public has been a net seller as prices have moved higher.  In fact, from the end of May 2007, only four months before the housing and stock bubble peaks, investors have cashed in close to a trillion dollars in their holdings of domestic equity funds.  Share buybacks have previously been more than enough to replace the exit of retail investors, but how is the market to place the impact of waning buybacks?  Answer: it cannot.  Not even leverage can help at this point.  

Margin Debt Nears Record
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Combined NYSE/NASD margin debt boomed 6% in September to $540.6 billion, the fourth largest total in history and only $9.4 billion below the record high of $550 billion established in April 2015.  Margin debt has remained in a fairly tight range from late last summer until now but this new expansion adds greatly to our concerns.  The stock market was substantially over leveraged at the end of 1972, leading to a horrific two year bear market that cut prices in half.  In 1987, leverage played a huge role, enabling a crash and wiping 36% of prices away.  Leverage was the villain as the tech mania neared its peak in March 2000, resulting in a 35% decline for Nasdaq in only six weeks and leverage again took the helm in 2007, resulting in another burst bubble and another bear market that cut prices neatly in half.   
 
Below, net liquidity is only a stone’s throw below the June 2015 total of minus $272.7 billion.  Is there any reason to deny collapses in liquidity trigger collapses in stock prices?   Although we do not see a similar outcome from the June 2015 record low in new liquidity, it did catalyze a three month decline of 16.2% and this relatively modest correction ended with the last 11.4% taking place in only three days.  We have been building a massive and complex top since June 2015.  Last year’s nadir in liquidity has an extremely strong correlation with the present and at best, suggests the high probability that we will soon suffer another substantial decline. 

Total margin debt is now 2.9% of GDP, another in a long line of records set in recent years.  However, this record should send shivers, rather than receive congratulations.  The two previous tops were accompanied by bear markets of 39% and 54%, the principal reason why the public continues to shed stocks to this day.  Instead, the massive top that is forming now is primarily an institutional phenomenon.  We believe the late summer mini collapse last year was only a precursor of what is to come.  Best bet: prepare to seek shelter from the inevitable storm.  It will be interesting to watch.   

For more information, please contact us:

Alan M. Newman, Editor, Crosscurrents
516-557-7171
www.cross-currents.net