Investors Borrowing To Buy Stocks, Again

This morning we learned sales for this year’s Black Friday weekend declined for the first time since 2009. I have been warning my readers for months that falling consumer confidence would result in a pullback in consumer spending—and that’s exactly what’s happening this holiday shopping season.

According to the National Retail Federation, consumers spent an average of $407.02 from Thursday through Sunday, down about four percent from what they spent last year. (Source: National Retail Federation press release, December 1, 2013.)

The first decline in holiday spending since 2009 does not bode well for the economy, and as far as I’m concerned, it is an early indication of a weakening economy going into 2014.

But there is one place people are spending. In fact, you can say they’re spending so much here, they’re borrowing to buy more!

Investors have borrowed more money to buy stocks than at any other time in history!

The chart below shows the use of margin debt on the New York Stock Exchange (NYSE). It stands at the record-high level.

Yes, NYSE margin debt stands above the level it stood at just before the peak in stock prices in 2007 and much higher than it was when the Tech Boom bubble burst in the year 2000. The risk with margin debt is that it can turn a minor stock market sell-off into a major one for key stock indices as investor loans are called.

And while investors are borrowing like drunkards to buy stocks, earnings of companies that trade in key stock indices are anemic. In the third quarter of this year, the “surprise” rate for the S&P 500 companies that reported as of November 22 was 1.7%. This rate is 54% lower than the average surprise rate of the last four quarters. If this remains the “surprise” rate for the third quarter, it will be the lowest since the fourth quarter 2008 rate in key stock indices. (Source: FactSet, November 22, 2013.)

But back to the consumer…

The Consumer Confidence Index, tracked by the Conference Board, declined in November to a seven-month low! The index declined to 70.4 in November from 72.4 in October. (Source: Conference Board, November 26, 2013.)

To recap: retailers had a weak Thanksgiving sales weekend; corporate earnings are soft and getting softer; and consumer confidence is at a seven-month low. But investors have borrowed a record amount of money to buy stocks and key stock indices keep hitting new record-highs. Sounds like a recipe for disaster to me.

Michael’s Personal Notes:
As gold bullion prices continue to take a beating because of the belief that the easy money policies of the Fed won’t go away anytime soon, silver prices have fallen into the same rut. Just like gold bullion, the silver market has also become a place where bears prevail.

But in the midst of the negativity towards silver, I see that the fundamentals that ultimately drive silver prices higher are getting stronger.

Demand for silver is robust. Sales of one-ounce silver coins at the U.S. Mint have reached a record for the year, and 2013 still isn’t finished! The table below shows how demand for silver (coins in ounces) has increased at the U.S. Mint since 2007.

* Data as of November 28, 2013

Data Source: U.S. Mint, Sales & Figures, last accessed November 28, 2013.

Notice on the table above how demand for silver coins at the U.S. Mint this year has already surpassed the level seen in 2011—a time when silver prices were at about $50.00 an ounce.

Rising demand for silver is just one reason why I am bullish on silver prices. But I have another reason, too, as to why I expect silver prices to rise ahead.

While there have been some comments among economists that the Federal Reserve will start pulling back on printing paper money in 2014, the Fed has printed so many trillions of dollars in new money that it has placed downward pressure on the value of the U.S. dollar. Other central banks in the global economy are doing the exact same: printing more paper currency in an effort to lower the value of their currencies to increase exports.

Precious metals like gold bullion and silver, from a historical perspective, have proven to be great stores of value in times of uncertainty. (As I have been writing for some time now, the massive fiat currency printing we see now by world central banks will not end well.)

My take on silver? With silver prices having fallen so much, and demand for the metal rising, I see a significant opportunity in quality, well-managed silver mining companies.

Disclaimer: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. The opinions in this e-newsletter are just that, opinions of the authors. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose.

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