Too High to Notice the Bubbles?

Markets make opinions, the old-timers say. Today, we have empirical proof. Or at least a litmus test on the “mood” out there.

Gone are the days of the stereotypical high-rolling cokehead on Wall Street, says the drug screening firm Sterling. After conducting tests at 270 firms over the past three years, positives for cocaine have dropped 60%…down to just 7% of all failed tests.

Use of ganja, whacky tobacky, sensi, the good stuff – whatever your favorite name for it is – is way up. Marijuana now accounts for 80% of failed tests.

Nationwide, according to the Health Department, growth in cocaine and marijuana use was relatively stagnant over the same period. Perhaps, the stimulus money didn’t reach as far down the ladder as we’d suspected.

Still, dude, doesn’t that explain everything? You must be high – paralyzed by laziness from the neck down – if you think there is no better investment out there than lending the US Treasury money for two years at a record-low 0.46%.

Fuzzy-headed 10-year notes found a new low today, too. The T bill yields just 2.5% this morning – its lowest in 17 months, back when the global banking system was in the grips of the credit crisis.

“Too many institutional investors are looking for yield,” says Agora Financial’s sober managing editor Chris Mayer. “Their quest will end in tears.

“This bond bubble is not only for Treasuries and corporate debt, but across the yield spectrum.

“For example, master limited partnerships, or MLPs, are popular with investors. Mostly these companies own pipelines for oil and gas. They pay out most of their earnings to their unit holders. Yields are now about 5.5% for the popular Alerian MLP Index. A 5.5% yield looks good today. But about a year ago, MLPs paid about 8.8% on average, according to the WSJ.

“To get to just an 8.8% yield from 5.5% means a drop in the price of the MLP of nearly 40%, everything else being equal. MLPs are too popular. They are overpriced, in my view.

“Most everything on the yield spectrum is similarly expensive. Investors are getting paid too little for the risks they are taking…

“In the end, I think it will end badly. Yield-starved investors will get the hammer dropped on them. The big buyers of the M&A boom will have paid too much. Higher taxes on dividends will gnaw away at shareholder wealth. And buybacks will prove too costly.”

Addison Wiggin
for The Daily Reckoning