Now, to answer why….

“‘Five years after excessive debt propelled a housing-market collapse into a financial crisis and recession, similar bets are being placed across the U.S”.

“Total corporate-bond debt has grown to nearly $6 trillion, up 59% since 2007, the year before the financial crisis. … Leverage by companies rated investment grade has risen 20% since 2010 … about 6% higher than in 2008…

In 2008, mutual funds held, on average, 17% of the bonds and 3% of the loans made to junk-grade companies, according to Bank of America. Today, they own about 26% of the bonds and 19% of the loans.

“Assets in mutual funds and exchange-traded funds that invest in junk bonds have grown to $285 billion in July from $92 billion at the end of 2008,”

“‘Many companies are repeating some of the mistakes of the past,’ by taking on too much debt,…”

“Overall corporate health was ‘no better than it was in 2007 and by some measures worse.”

(All quotes culled from Wall Street Journal)

For those that don’t do this all the time, here is how it works….

You buy $100 million dollars of stock X on margin…  You pay 50% of the cost or  $50 million, owing the remainder $50 million to your broker.  The stock value rises to $150 million and you sell it….   You get the $150 million minus the $50 million owed back to your broker… You pocket an extra $50 million on the $50 million you invested…   Your $50 million returned a 100% on your investment, congratulations….

If done in cash, you should have paid $100 million, and gained $50 million when sold at $150 million…  Wait … is that the same exact total?…  Yes, you are right, but your investment only gained 50%… not 100%

This is why borrowing for stocks is up…  Worse than it was in 2007-2008?…. Yes. Correct.  Despite the Dodd-Frank bill, it is worse now, than in 2007-2008…..

So then what happens if the price of stocks fall…..   ???

You bought $100 million of stocks putting $50 million down and borrowing $50 million from your broker… Rule number one:  you broker does not lose:  you do….

Stocks fall 2%….   Your value is dropped to $98 million.  You now owe the broker $2 million on top of the $50 you put down. Stocks fall again, 2%….  You value drops to $96 million.  You know owe your broker an additional $2 million you put down…  Getting scared?  Sell at $96 million and by the time it goes through, you only get $95 million.  Since you owed your broker $50 million and only get $45 million, you immediately cut him a check for $5 million dollars…. You originally put up $50 million so your investment cost you…. 10%….

If you paid cash and put  the full $100 million up front, your loss to your company would have only been 5%….

So let us imagine this on the volume of the New York Stock Exchange…  Where  last Friday on the NYSE, $30 billion traded hands (positively for most, fortunately)    … Assuming it was a bad day, and everyone was leveraged, on the minimal 5% drop outlined above, America would have to pay an minimal $1.5 billion to their brokers…  In other words… Americans who leveraged, would be $1.5 billion poorer just from the NYSE one day drop alone….

At the 16,000 mark, a 5% drop means the DJIA would rest at 15,200….  or where it was back in the middle of this past October…. just 23 trading days ago…..  Because of leveraging,  that 5% drop means corporate America takes a 10% clip….

I don’t know if you’ve ever taken a loss of 10%, but if you haven’t… let me tell you… one does cut back on spending….

And that, is what makes this chart so scary……….

QE versus Stock Prices

(Click image to enlarge)

Makes one understand now exactly why the market-rise continues despite the reality of our current economic situation, doesn’t it? Now…..remember what happened when Bernacke said… “Well, eventually this easing will someday have to end.”?

So….. what to do?

Quietly exit…  slowly get off the ice so no one notices….  Just be totally off before all the cracking starts….  and the scrambling begins.