It was just too beautiful. After an at best lackluster shopping season, when the world’s consumers of last resort were too exhausted to do their jobs, one of the more successful retailers, Macy’s, reported same-store sales afterhours that were, well, lackluster. It announced in the same breath that it would throw out 2,500 workers, not the seasonal kind but full-time staff. And look what happened: shared jumped nearly 6%.
The company would implement “focused cost reductions,” close stores, “combine” regions and districts. It would “eliminate,” “realign,” “reduce,” and “trim.” There’d be up to $135 million of charges. Traders loved it.
They didn’t get to the bottom of the press release where the company clarified that it would also hire people so that the overall workforce would remain the same. But these kinds of announcement shenanigans work: the stock closed at $51.84 on Wednesday, up 33% over the last 12 months. It’s where it peaked in 2007 – before it crashed into the mid-single digits.
Since the financial crisis, the Fed has been buying assets with the express purpose of inflating asset prices and creating that “wealth effect,” however illusory it would be. Trillions would be pocketed by a small number of people, and hopefully, a few droplets would trickle down to the folks who were trying to find jobs and make ends meet. The Fed may not have accomplished much to help the latter, but Macy’s stock – like many other stocks – soared by a factor of ten during the period.
Now even the Fed is worried. In the minutes of the December policy meeting, hidden in the middle of an interminable paragraph on page 8 of 25 pages of wooden and convoluted prose, the Fed issued a doozie of a warning.
In its own abstruse manner, it admitted that its asset purchases had inflated asset prices to such levels that they’d become “financial vulnerabilities” that were starting to threaten “financial stability and the boarder economy.” They carefully inserted language to the effect that such risks were “moderate” – to avoid an instant panic.
And they went on (emphasis added):
In their discussion of potential risks, several participants commented on the rise in forward price-to-earnings ratios for some smallcap stocks, the increased level of equity repurchases, or the rise in margin credit. One pointed to the increase in issuance of leveraged loans this year and the apparent decline in the average quality of such loans.
Did the Fed finally read my humble site and other sites outside the MSM that have been hammering on these very issues for months, if not years?
Forward price-earnings ratios. However high they may be, they’re fictitious. They’re based on ridiculously high earnings estimates that are then, as earnings season approaches, chopped down to near-nothingness. A year ago, analysts pegged earnings growth for Q4 2013 at 17.6%, according to Thomson Reuters. It became the base for forward P/E ratios, bandied about to rationalize soaring stock prices. Now, S&P Capital IQ expects Q4 earnings to inch up a measly 5.7%. Forward P/E ratios from a year ago have turned to BS [read…. Corporate Earnings Goofiness Goes Hog Wild].
Increased level of equity repurchases. Our corporate heroes borrow at rock-bottom interest rates then plow that moolah into their own stock. Equity is replaced with debt. Balance sheets get hollowed out. But it makes earnings per share look better. And it drives up the stock price by creating artificial demand. Buybacks have been a powerful driver of the rally. But the bonanza could not have happened without the Fed’s unlimited amounts of nearly free money [it worked out wonderfully for IBM…. Stockholders Got Plundered In IBM’s Hocus-Pocus Machine].
Rise in margin credit. On the New York Stock Exchange, margin credit has been hitting new records for months. All three mega-crashes in my investing lifetime have been accompanied by record-setting peaks in margin debt. In September 1987, a month before the crash, margin credit peaked at 0.88% of GDP. In March 2000, when the crash began, margin credit peaked at 2.7% of GDP. In July 2007, three months before the downdraft started, margin credit peaked at 2.6% of GDP. Now, margin credit has already reached 2.5% of GDP [read…. When Soaring Margin Debt, Sign of Investor Confidence, Turns Into A Nightmare On Steroids].
Issuance of leveraged loans with a decline in quality. The Fed’s fretting about these high-risk “opaque” loans issued in a loosey-goosey manner with low underwriting standards to highly leveraged companies with junk credit ratings seeped out in the New York Fed’s report on shadow banking. With a twist: hedge funds and banks were bailing out by selling them to small investors via harmless-sounding mutual funds and ETFs. In 2007, issuance of leveraged loans peaked at $680 billion before collapsing during the financial crisis. In 2013, issuance set a new record: over $1 trillion! “One area of concern,” is what the NY Fed called this phenomenon [my take….. Fed: Hedge Funds, Banks Sell Crappiest Debt To Small Investors (Before Credit Bubble Blows Up)].
The Greenspan Fed invented the Wealth Effect and the Greenspan Put on the stock market. While he saw “irrational exuberance” once, and only once, and long before the bubble blew up in 2000, he never saw the actual bubble. Neither the Greenspan Fed nor the Bernanke Fed saw the housing bubble, the credit bubble, and the stock market bubble that all blew up starting in 2007. But now something has changed.
Suddenly, “the importance of financial stability considerations,” the minutes pointed out, “should be incorporated into forward guidance for the federal funds rate and asset purchases.” And they’re talking about “potential consequences of specific risks to the financial system.”
They’re seeing the bubbles. And they don’t want to go through another implosion. They’re largely itching to get the taper over with, and if the bubble continues to inflate, they might step on the brakes. This is a momentous shift in their market manipulation mania – from trying to create the wealth effect to fretting about having gone too far. Instead of a put, they’re playing with pins.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
