The Last Two Times This Happened, The Stock Market Crashed

Wolf Richter

The last two times when margin debt reversed and fell after a record-breaking spike, all hell broke loose. In 2000, it was simultaneous. In 2007, it was delayed by a few months. Today, on the surface, everything is still hunky-dory. The Dow is just fractions below its all-time high that it set on Wednesday. But beneath the surface, parts of the stock market are already coming unglued, and holders of momentum stocks have been eviscerated.

The Nasdaq Biotech Index had beautifully shot up along an exponential curve. Then the hot air hissed out of it, and it swooned 21% in six weeks. The index includes big players, like Biogen, not just startups with big dreams and no drugs. After some buying on the dip, the index closed on Thursday down "only" 15%. But that hasn’t saved smaller momentum stocks: Exelixis is down 58% from its 52-week high and 92% from its all-time high shortly after its IPO in early 2000; Halozyme is down 60% from its high in early January. And so on.

In the social media space, the bloodletting has been ugly. The Social Media ETF SOCL is down 23%, but stronger stocks like Facebook (down 16% from its high a month ago) paper over individual fiascos, like Twitter, which has plummeted 48% from its peak last year to below its IPO price.

Other momentum stocks are getting annihilated: Amazon down 25% since January, Netflix down 27% in just two months. From their peaks, Pandora crashed 39%, Gogo 63%, and Imperva, a Big Data security outfit, 65%.

Then there’s the “Cloud,” the single most hyped miracle-sector last year. Escalator up, elevator down. Workday, which sells cloud-based corporate software, went public in late 2012 and soared. Two months ago, it sprung a leak and the hot air hissed out of it. It’s down 36%. Veeve, which sells cloud-based healthcare software, has crashed 60% from its November high, shortly after it had gone public. Salesforce is down 22%. ServiceNow lost 30% over the past two weeks. LinkedIn reported a loss after hours on Thursday and got hammered. It’s now down 40% from its peak last September. Jive Software is down 71% from its high in 2012.

They aren’t just outliers. They’re included in the index of 37 publicly traded cloud companies that VC firm Bessemer Venture Partners put together and updates on a weekly basis. From the beginning of the data series in January 2012 to February 27, 2014, the index had soared 129%. But in the two months since then, the index gave up more than half of its gains and lost $58 billion in market cap! 

Dizzying hype, smoke, and mirrors allowed Wall Street and Silicon Valley to slap crazy blue-sky valuations on startups that are all now trying to go public, 34 of which, at last count, have valuation of $1 billion or more. Airbnb, a bed-and-breakfast site, and Dropbox, a cloud software company, top the list with valuations of $10 billion. CIA startup Palantir [read…. Surveillance Society: If You Drive, You Get Tracked] has a valuation of $9 billion.

By comparison, Box's $2-billion valuation doesn’t seem like a lot. But it’s a tiny money-losing outfit offering cloud-storage and collaboration software – a glorified online file cabinet – in a crowded sector with low barriers to entry, dominated by huge companies such as Google and Microsoft, and populated by startups such as Dropbox. Not exactly promising. In 9 rounds of funding, it raised a total of $399 million. One thing it does really well: burning cash. Last year, it burned $92 million. As of January 31, it had $109 million left. People are already projecting the out-of-money date. So it would be helpful if this thing could be dumped before then into the lap of a blindly adoring public.

But that blindly adoring public has evaporated apparently. And so Box decided to delay its IPO until June or later, the Wall Street Journal reported. "Since filing, we've planned on going public when it makes the most sense for the market," a spokeswoman explained. And apparently, Box’s $2-billion valuation in this crashing cloud market doesn’t make enough sense.

There may be another option for it. Surely if Facebook forked over $19 billion for WhatsApp which has negligible revenues and 50-some employees, or if Google blew $3.2 billion on Nest, which is trying to market a home thermostat, why not blow some megabucks on Box. But what if the big players are seeing what everyone else is seeing, which is a crash back to reality? They might not feel like propping it up singlehandedly.

Just then, the one thing that wasn’t supposed to happen happened. Margin debt declined.

Margin debt, after it has been spiking for months, has a nerve-racking habit of peaking right around the time stocks crash. In the last fifteen years, it had three majestic spikes, each greater than the prior one.

It began to spike in January 1999 during the final throes of the dotcom bubble. In March 2000, it hit a record of $278.5 billion, or 2.66% of GDP. In April, it declined. An epic stock-market crash had just started.

It began to spike in September 2006 to max out in July 2007 at $381.4 billion, or 2.60% of GDP. In August, it declined. In November, the fetid air started hissing out of the market. Momentum stocks got killed first, and as they plunged, margin calls went out, and forced selling set in, and the selloff turned into a rout.

In August 2012, margin debt spiked again, and this time, it turned into a phenomenal spike that set a new record in July 2013 and continued going for the stars. In February, it hit $465.7 billion, 22% above the prior all-time record. And 2.73% of GDP. The highest ratio ever!

It isn’t the spike per se that matters, but when the spike reverses. So in March – the New York Stock Exchange released the numbers Wednesday evening – margin debt declined by over $15 billion. Instead of plowing $15 billion in barrowed money into stocks, as they might have during the upward momentum of the spike, investors yanked out $15 billion – for a difference of $30 billion compared to prior months. And that moolah they yanked out doesn’t sit on the sidelines. It dissipated into thin air by being used to pay off debt. The last two times that reversal happened, the whole construct came tumbling down.

Parts of the market have already tumbled. Momentum stock traders have taken a drubbing, and some of those who trade on margin received margin calls and were forced to sell, and others dumped their positions to avoid getting wiped out. It’s bloody out there, in momentum stocks. They’re the ones that go first. And the last two times, they didn’t go solo.

That’s how it always starts: with a deadly mix. Home sales are collapsing while inventories are soaring in six housing markets that had been white-hot just a few months ago. Read…. Implosion of Housing Bubble 2 Hits Six Cities in the West

via Zero Hedge testosteronepit

“Please Stop Me Before I Vote For A Bought-&-Paid-For Demopublican Again”

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If we only voted for unbuyable candidates, money would become poison in politics rather than mother's milk.

The solution to money in politics is simple: stop voting for politicos who accept millions of dollars in bribes, ahem, campaign contributions and who court lobbyists. It's really that easy: stop rewarding those who collect millions and start punishing them by refusing to vote for any politician who accepts more than $100 from any entity in any one election cycle.

As with so many other issues, we have been well-trained to expect a centralized authority to save us from ourselves: in effect, we're asking the Supreme Court, Congress, etc. to please stop us before we vote for a bought-and-paid-for politico again.

Nobody forces us to vote for the candidate who raises the most money and blows it on media buys to persuade us that they're not bought-and-paid-for. But think about it: the very fact this craven toady can afford to spend millions of dollars on advertising proves he/she is well and truly bought-and-paid-for.

The only exception is multi-millionaires who spend their own millions attempting to persuade us that they'll be more independent that the toadies begging for millions, but a cursory examination of the record of millionaires in office (gosh, the vast majority of craven toadies turn out to be millionaires) finds that once in power, these "I bought myself" millionaire politicos are no different than the bought-and-paid-for politicos.

Nothing will change until the candidates who raise and spend millions trying to persuade us they're not bought-and-paid-for lose elections, not on their platform or party ideology but on the simple fact that they're corrupt to the core.

Politics will change when the candidate who–

1. refuses donations above $100 from any entity–person, company, etc.
2. refuses anonymous donations or donations from slush funds that don't publicly list who operates and funds the slush fund
3. publicly lists every donation and donor on a website
4. refuses to meet paid lobbyists in any circumstance
5. refuses all gifts from anyone, including constituents–every gift is donated
6. refuses to sign secret "loyalty oaths" to powerful lobbies such as the NRA, public unions, Sierra Club, etc.

–wins the election not on ideology or platform issues but on the integrity of his/her campaign.

You want to clean up politics? It's easy: make sure every candidate who accepts millions of dollars for campaign advertising, welcomes gifts from paid lobbyists and makes secret promises to powerful national lobbies loses every election.

Alternatively, only vote for candidates who run a grassroots social-media campaign that costs next to nothing, who refuse all donations above $100, who leave footprints on the rear ends of lobbyists and who tell all the powerful lobbies to shove it where the sun doesn't shine because they're not pledging anything but not being for sale.

If we only voted for unbuyable candidates, money would become poison in politics rather than mother's milk. We don't need a centralized authority to save us, we can save ourselves if we throw out all the bought-and-paid-for politicos instead of rewarding them with our lemming-like approval of their corruption.

via Zero Hedge Tyler Durden

Obama Assisted By Merkel In Explaining The Russian “Costs” – Live Webcast

Two months after Obama first mentioned the “costs” to Putin should he continue to do what the Russian leader has been doing for, well, the past two months, namely copycatting how the US would act if in the exact same situation, Obama today will be assisted by Germany’s Angela Merkel on her first visit to D.C. in three years, to further reinforce the US deterrence idea of “costs” (perhaps to Germany in the form of a third of its gas imports being cut off?), just in case Obama alone can’t handle Putin. Somehow we doubt Russia will pay much attention – after all it has been revealed time and again that Russia has all the trump cards.

via Zero Hedge Tyler Durden

Roof Snipers Appear In Odessa

First Kiev, now Odessa? The answer to the question of who is doing the shooting and who is being shot at will need to wait until another Victoria Nuland phone recording is released.


And not just snipers, but Molotov Cocktails.


Will this weekend be a repeat of Kiev from late February? Judging by the violent reaction in gold, some are saying a definitive yes.

via Zero Hedge Tyler Durden

30Y Yield Retraces 50% Of 2013 Taper Tantrum; JPY Surging, Stocks Tumbling

30Y yields have plunged back below 3.40% for the first time snce June 2013 and have retraced over 50% of the “Taper tantrum” sell-off. Yields have accelerated lower this morning after spiking on the jobs data, as a combination of blood on the streets of Ukraine and the reality of the jobs data send investrs to safe havens. JPY is aggressively bid (with AUDJPY ruling US equity weakness) and Gold and silver are in heavy demand.

30Y yields have collapsed…


as investors dive for safe havens – JPY is surging (and thus AUDJPY is dragging US equities lower)..


and gold is bid

Still plenty of catch down for stocks…


Remember, it’s not Tuesday!

via Zero Hedge Tyler Durden

F-Line Subway Train Derails In Queens

As if there wasn’t enough news for the market to ignore, here is another. NBC reports that a subway train has derailed in Queens, the MTA says.  FDNY was responding to the Broadway and 65th Street area in Woodside, and reported heavy smoke conditions. Authorities say the train that derailed is a Manhattan-bound F train on the express track. The MTA could not immediately say how many wheels derailed. Riders should expect delays on the E, R, F and M lines.

And from the MTA:

  • Due to a train derailment at 65 St, the following service changes are in effect:
  • Northbound E trains are terminating at Queens Plaza.
  • Northbound F trains are terminating at 21 St-Queensbridge.
  • Forest Hills bound M trains are terminating at Essex St.
  • Northbound R trains are terminating at 57 St/7 Av.
  • Some northbound R trains are running on the N line from 57 St-7 Av to Queensboro Plaza.
  • Allow additional travel time.

via Zero Hedge Tyler Durden

Ukraine’s “Anti-Terrorist” Operation Turns Deadly In Odessa – Live Feed

The earlier Ukraine “anti-terrorist” operation in Solvyansk has resulted in the death of at least 2 servicemen and now tensions are roiling in Odessa as the Ukraine government tries to live up to the IMF’s demands or “fight or no money”. Violent clashes have broken out at a pro-Ukraine rally in Odessa and at least one person is dead. As the live feed below shows, things are getting out of control fast. Ukraine’s acting president adds:


Ukrainian authorities have also banned Russian air companies from making flights to the eastern Ukrainian cities; and, perhaps ironically to some, Russia has called for an emergency UN meeting to discuss Ukraine’s actions.


The initial operation started in Solvyansk…



Then they moved to Odessa:


“There are at least 10 injured, have shrapnel wounds, there is a traumatic injury from a weapon. At the moment, both sides are building barricades in different areas of the city center, some of the streets has captured one side, some – other “

According to local media, the site of the collision are fifteen hundred aggressive young people, many of whom are armed. Gathered chanting: “Glory to Ukraine!”, “Death to the enemies”, “Moskal knives.” In the course went firecrackers, smoke grenades, batons. Fighting used stones from the dismantled bridge, there were “Molotov cocktails”. People continue to arrive.

With Molotov Cocktails flying…

And mass brawls:


Live Feed:

Live streaming video by Ustream


And in case you werew wondering where the anti-terror operation will do next.. here is a threat assessment map of the south and east…


Russia has called for an emergency UN meeting:



As Ukraine bans Russian flights:

Russia’s Federal Air Transport Agency stated on Friday that Ukranian aviation authorities have unilaterally banned Russian air companies from making flights to the eastern Ukrainian cities of Donetsk and Kharkiv starting from today, Russian news agency Itar-Tass reports.


Russia’s claimed that this ban was unprecedented violantion of international air traffic agreements, but said Moscow would not respond with similar measures

via Zero Hedge Tyler Durden

As America Recovers The Jobs Lost During The Depression, Here Is What Sticks Out

While we expect much media coverage of the fact that as of the end of April, total jobs have risen to 138,252K or just 98,000 jobs shy of the December 2007 highs when the depression started (which means that the next jobs report will finally show a full recovery of the jobs lost in the past 6 years), another fact which will not receive nearly as much attention is that the cumulative increase in Americans who have, over the same period, dropped out of the labor force has more than “made up” for the job gains. In fact, it may come as a surprise to most, that since the peak of the depression in February 2010, when the job number dropped to 129.7 million and has been rising ever since, the average monthly number of job adds is 172K.

And what about the average monthly number of people who drop out of the labor force since February 2010? 175K, or a virtually perfect mirror image.

via Zero Hedge Tyler Durden

Senate Democrats Declare Victory Over Winter Weather, Praise Collapse In Jobless Rate

Statement from JEC Vice Chair Klobuchar on April 2014 Employment Report

U.S. Senator Amy Klobuchar (D-MN), Vice Chair of the U.S. Congress Joint Economic Committee (JEC), released the following statement on the Bureau of Labor Statistics’ April 2014 jobs report showing that 288,000 total nonfarm jobs were added and the unemployment fell from 6.7% to 6.3%:

“After a long hard winter it is good news that the employment numbers are picking up.


To hit the lowest unemployment rate in five and a half years is a positive sign as we move into the summer season that should bring more construction and tourism jobs.


Many American families are still struggling with high costs of housing, childcare and college and we need to continue our work to give them a fair shot.”

Where are the banners proclaiming Mission Accomplished?

via Zero Hedge Tyler Durden

Q1 GDP Takes Another Hit As Factory Orders Miss

Yesterday it was construction spending that took the positive shine off a measly Q1 GDP print and today it is New Factory Orders. A mere 1.1% gain MoM, missing expectations of a 1.5% bounce (and down from a 1.5% rise in February) suggest anything but a post-weather bounce in the economy. This is the 4th miss in the last 5 months and missed even with a huge spike in defense spending (+21.5%). Who will be first to lower Q1 GDP final expectations today?



Of course, this is all in the past and so can be ignored in favor of hope… but wait – isn’t the jobs data also from the past and yet we are happy to extrapolate that into Utopia?

via Zero Hedge Tyler Durden