Peak Speculation – All Levered Up

In the the 1980’s bond bubble, many companies issued bonds even though there was little ability to pay the interest expenses. Today, these “zombies” feed on cheap debt to stay alive.

The market caps of these over leveraged firms is at a record.

The obvious problem is what happens when they cannot refinance their debt.

There are a record number of companies unable to cover their interest expense from profits.

Since 2007, a big part of America’s debt crisis has moved from the financial sector to non-financial stocks with too much debt. 

There is also a bubble in investor leverage.

Not only did retail investors take on margin debt to leverage their bets in the markets, but they also took on a record level of speculative single stock options.

Such is the purest form of speculation in the market.

The problem with options and margin debt is that individuals have little control over the outcome. If asset prices fall, for any reason, investors speculating with leverage and options get wiped out from margin calls and contract expiration.

The Ultimate Measure of Speculation 

The number of investors willing to pay more than 10x price-to-sales for an investment. 

But what about 20x? 

Recently investors are willing to buy stocks with price-to-sales ratios greater than 20x. Higher than what they were paying during the tech bubble.