The speculative mania galore in full throttle: US Edition

Last week I noted that the intensity of speculation in the Philippines reached a new peak as “locals rotated into the more ‘speculative’ and illiquid issues that paved way for the spectacular record trade churning run supported by the record breaking broader market activities.”

I guess this phenomenon has not just been in the Philippines. A similar thrust towards yield chasing on illiquid stocks has also been heating up in the US

From the Wall Street Journal (bold mine)

Investors are piling into the shares of small, risky companies at the fastest clip on record, in search of investments that promise a chance of outsize returns.

The investors are buying up so-called penny stocks—shares of mostly tiny companies that aren't listed on major U.S. exchanges—at a pace that far eclipses the tech boom of the late 1990s. Those include firms that focus on areas from medical marijuana and biotechnology to fuel-cell development and precious-metals mining—industries that are perceived by some investors as carrying strong growth potential.

Average monthly trading volume at OTC Markets Group Inc., which handles trading in shares that aren't listed on the New York Stock Exchange or Nasdaq Stock Market, has risen 40% this year in dollar terms from a year ago, to a record $23.5 billion.

The renewed interest in a market that used to be known as the pink sheets—because of the colored pieces of paper once used to record prices for unlisted stocks—shows investors are ramping up risk in a bid to boost returns as U.S. stock indexes are hovering near highs and stock valuations have risen above historical norms.

It’s not just pink sheets, retail investors have been pouring in

The rebound also comes as individual investors are showing signs of increased interest in stock trading in general. Discount brokers TD Ameritrade Holding Corp. and E*Trade Financial Corp. last month reported jumps in daily trading volume in the first quarter from the same period a year ago.

The rising volume in the tiniest of stocks is taking more investors into what is arguably the riskiest part of the stock market. These companies have less regulatory oversight than those traded on the exchanges, and their low prices mean that small price moves can quickly add up to big percentage moves.

In addition, penny stocks are often prime hunting grounds for scammers and "pump and dump" schemes. Stock promoters—often masquerading as regular investors on chat boards—tout a name, only to unload shares into a thinly traded market, taking profits for themselves but inflicting losses on other investors.

As of the end of 2013, based on the latest update of the US equity flow of fund from Yardeni.com, retail investors has been stampeding into US stock via Mutual Funds and ETF as institutional investors exit.

I guess a wild speculative ramp has been going on in many places of the world.

Implied volatility covering various global asset classes reveals extreme complacency levels echoing 2007! (chart from the IIF). 

And more interesting is that yields of riskiest bonds have even broken the 2007 lows. Mike Larson of moneyandmarket.com remarks “When you earn rock-bottom yields, you’re not getting the compensation you deserve for the risk of default you’re taking on. After all, the average cumulative default rate for corporate bonds rated CCC to C (at the bottom of the ratings scale) is north of 40 percent to 50 percent over a multi-year time horizon!”

Oh while Wall Street continues to party, subprime lending has also been ballooning.

From Bloomberg:

Doug Naidus made his fortune selling a mortgage company to Deutsche Bank AG months before the U.S. housing market collapsed. Now he’s found a way to profit from loans to business owners with bad credit.

From an office near New York’s Times Square, people trained by a veteran of Jordan Belfort’s boiler room call truckers, contractors and florists across the country pitching loans with annual interest rates as high as 125 percent, according to more than two dozen former employees and clients. When borrowers can’t pay, Naidus’s World Business Lenders LLC seizes their vehicles and assets, sometimes sending them into bankruptcy…

Subprime business lending -- the industry prefers to be called “alternative” -- has swelled to more than $3 billion a year, estimates Marc Glazer, who has researched his competitors as head of Business Financial Services Inc., a lender in Coral Springs, Florida. That’s twice the volume of small loans guaranteed by the Small Business Administration.

All the above suggest the deepening of the GREED environment: extreme overconfidence and over complacency, insatiable hunger for yield and reckless and rampant speculative activities.

Behold the speculative mania galore in full throttle!