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Cautionary Observations From A Chronological Analysis Of The S&P 500 Balance Sheet
There was a time when investment decisions had more to do with fundamentals than whether Bernanke would wake up tomorrow and decide it is time to stop the liquidity spigot (arguably, the only thing that matters these days). Indeed, if in the odd chance Bernanke is not reconfirmed by the Senate, the huge drop the market experienced last year when Congress refused to get Paulson's first TARP version to be shoved down its throat, will seem like a Sunday morning picnic.
In those long gone days when there was more to valuation than persistent bubble liquidity, investors used to look at arcana such as cash flow statement and balance sheets (and income statements as well, before the FASB decided to make a total mockery out of the joke that are "reported earnings").
One recent topic that Zero Hedge has discussed has been the increase in cash and cash equivalents on the balance sheet. We have highlighted how this increase in cash has been primarily a function of increasing debt and decreasing capital expenditures (both maintenance and growth), as companies have bunkered down while the recessionary storm rages.
Today, we analyze a broader set of metrics of the combined balance sheet of the 500 companies in the S&P 500 index. We have compiled key data on a quarterly basis for both the asset and liabilities side of the broadest cumulative balance sheet in the world.
The table below highlights all the data compiled via CapIQ:
Total assets have grown by 30% over the past 4 years, from $19 trillion to $24.6 trillion as of September 30, 2009. And while cash has exploded by 74% from $872 billion at the end of 2005 to $1.5 trillion most recently, as a percentage of total assets it has been relatively flat, rising from 4.6% to just 6.2%.
Ironically, goodwill growth has been substantial, accounting for nearly $400 billion of total asset expansion, from $1.2 trillion to $1.6 trillion. How to believe this "growth" in the face of one the roughest revaluation periods for corporate acquisitions is a different story. It is likely that many companies are far overdue for major goodwill writedowns, which lax accounting standards keep permitting to be indefinitely put off into the future.
On the liabilities side, there are no major surprises: debt has grown by nearly triple the amount that cash increased during the observed period. Debt grew by $1.8 trillion from $5 trillion to $6.8 trillion in the past four years. This is nearly 2.7x greater than the comparable increase in cash. This should be a major concern to all who claim that corporate deleveraging is ongoing, and that the corporate cash increase is sufficient to offset the debt increase.
Yet what likely is the most relevant observation is the disproportionate need to constantly lever up to extract ever declining cash out the asset base, as well as the broadly declining quality of S&P assets as measured by their actual cash generation capacity.
The graph below shows the material increase in both total and net leverage in the S&P as calculated by Total and Net Debt to EBITDA - the one metric that still has some credibility even as Earnings and EPS have been rendered practically meaningless courtesy of ever more toothless GAAP rules. Total leverage has increase from 4.6x to 5.8x in the last two years, and even factoring for the cash increase does not present a rosier picture: Net Leverage is up 20%, from 3.8x to 4.5x. In essence the entire S&P is one big High Yield credit, and would likely be rated in the B2/B area by the rating agencies (assuming these had any credibility). As such, the cost of debt of the combined S&P if it were a standalone company would be around 7.5-8.5%. That it is currently much lower due to the Fed's intervention in the interest rate market is an aberration: look for cost of debt (and, by implication, overall capital) to spike broadly over the next several years, as normalcy (hopefully) returns.
Lastly, an unpleasasnt picture emerges when analyzing the (adjusted) return on assets and equity (however with EBITDA instead of earnings in the numerator). Both the return on assets (EBITDA/total assets) and return on equity (EBITDA/Shareholders' Equity) has plunged, with the first dropping to 4.7% from a four year average of 5.8%, an 18.3% reduction, while ROE has dropped from a 4 year average of 29.2% to 24.1%: a comparable 17.4% plunge.
The preliminary conclusion is that companies are scrambling to beef up the asset side of their balance sheets even as debt continues to be a major threat. The problem, however, as this brief exercise has shown, is that incremental assets are of lesser and lesser quality (even assuming no major goodwill impairments in the future), and the actual cash they generate continues eroding. Absent a major secular breakthrough in economic efficiency, look for cash flow reduction trends to continue even as the S&P labors under ever increasing debt loads. And with the shadow banking and asset system still solidly dead, it appears that creating asset returns out of thin air will not be an option for the corporate world for a long time.
Source: CapitalIQ
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The Dow was at 10,450 according to the picture at the top - above current levels. Dont think its merely a coincidence. Crisis averted for now, but if cash flow continues to erode, what is a fair multiple to apply to earnings? Historical multiples may not apply if we are that law of large number, perpetual earnings kind of multiple. Most bulls will argue that so long as 60% of S&P profits are generated overseas and in emerging markets, 15x (or even higher) remains appropriate.
These valuation concepts throw me for a loop. Throw in a "big word" description of the economy and you've got a p/e to apply. If we don't know where we are or what to call it, it's like firing spit balls from the back of the classroom, "a longshot" to be accurate. In '82-'83 inflation we saw an 8 p/e, in '75-'76, we saw a 10 with "stagflation". 2010 forecasts are within p/e 14-16, pretty much like an 8-1 odds on the morning line at the racetrack, "no one knows". Lastly, I don't understand how S&P EPS has grown 28% yoy during the worst economic failure since the 30's. Major deflation relapse takes p/e down to 6 ('29) and let's see, that puts the S&P no more than $450? See, none of this makes any sense. Help please??
Ouch. Such sobering articles for this time of year. LOL.
(Cautionary Observations From A Chronological Analysis Of The S&P 500 Balance Sheet)-1 There that's better!
Well, I guess it's a great time to IPO. If earnings don't matter, and goodwill is everything -- bring on Web 3.0, alt-energy, the next anti-cancer miracle and whatever else is out there in the land of earnings-don't-matter.
The 'other' way to bring about the crash is to crowd this trade.
The key here is "the actual cash they generate continues eroding."
Assets are not marked to market, which is proven by the returns they generate, irrespective of debt. The gov't can change the way the banks and others configure their balance sheets, but the big picture remains: Sales are down by historic comparisons, the consumer is retrenching and/or tapped, and the ponzi is alive and well.
1929 = The Great Depression
2009 = The Great Coverup
This is not a huge surprise - Kurt Richebacher (before he died) wrote constantly about how US GDP growth was only being acheived by ever-increasing recourse to debt: effectively that the income accounts were being goosed by deterioriation of the national balance sheet.
In other words, the US economy was like the guy we all know from uni - who never did particularly well, who was not a smart kid... but five years out he has a flash car, a massive house and shiny things - if you're economically illiterate you might think that his asset surge was a balance sheet improvement, but in all likelihood he's up to his balls in debt.
And the proof always arrives sooner or later: massive leverage only works if everything goes right... and everything doesn't always go right (ask Chainsaw Al Dunlap, John Meriwether, Myron Scholes... Jack Grubman, Henry Blodget, Abby Cohen).
I honestly think that part of the US' problem stems from its Eugenics-oriented immigration policies (between the wars, when that sort of thing was fashionable).
By 'tilting' its immigration profile towards physical robustness and relying on physiognomic markers, the US doomed itself to importing attractive physical specimens instead of intellect (let's face it - pretty people do less human-capital investment: TD almost certainly does not look like Brad Pitt).
It is my working hypothesis that this - coupled with an education system that does precisely what it was designed to do (produce compliant, indoctrinated drones) is a non-trivial explanator as to why USans are FAR more 'herd like' than other western folk: why its women have a switch in their heads that makes then screech and shriek if they see a TV camera (and there is no depth to which they won't debase themselves in order to be on the telly). And reading the story about the presence of some physics text in Tiger Woods' car made it zoom up the Amazon rankings, and how Obama wearing some-or-other watch made it sell like hot-cakes... further evidence.
And the final nail: you all babble about freedom and such, but you will turn on your own if they refuse to perform some atavistic ritual when some song is playing at a baseball game. Nazi, much.
So the idea that the entire US 'miracle' has been identical to some doofus who overpaid for a McMansion then HELOCed his-self a flatscreen, an Escalade and a boat ... colour me unsurprised.
"Stupid is as stupid does" also applies to "stupid and pretty".
So the idea that the entire US 'miracle' has been identical to some doofus who overpaid for a McMansion then HELOCed his-self a flatscreen, an Escalade and a boat ... colour me unsurprised.
Spoken and spelled like a true Canadian.
Stupid knows no borders, eh?
Colour is spelled right... that is the Canadian spelling. Also, I don't think that there is any meaningful correlation between intelligence and the ability to spell.
Canadians must be smarter than Americans, look at the Canadian debt/gdp ratio.
Canadians and Aussies use king's English... Canadians most certainly do not use the word "telly", eh..
1. Colour is the British spelling, Color is the US spelling.
2. ZOMG he said 'his-self' instead of 'himself'. This is a great point and some solid analysis, good job bro.
Geoffreparody,
Here is another working hypothesis: You are a bigot.
1)You generalize way too much
2) Name one piece of supporting data to the hypothesis that America has more folks prone to be followers than any other nation...I dare you to back that up with a shred of data, research or science
3) Please explain how the exact same over used leverage, greed, arrogance, over consumption and over self indulgence has caused many other nations to have the same or greater problems as we speak? Please explain how some of those nations are on five different continents and represent all major religions, ethnicities and races...yet its America who is herd like? Its America who focuses on pretty? Please explain why many nations bought into the same system, the same instruments and the same foolishness...yet you have America pegged as more likely to have compliant drones. Name a nation without a segement of its society that is over focused on celebrity? Name one? (Odd you are focused on Brad Pitt)
4)Focus on a sophmoric view of eugenics as the explanation of complex economic phenomenon some of which are also playing out all around the world,
5)Do not know or understand the immigration policy, screens, hurdles and rules of the USA and the profile of our immigrant population
6) Spout the same old herd like drivel about other nationalities and ethnicities that led the suposedly superior cultures of Europe to destroy themselves so often in a multi century orgy of violence we had to finally step in and put an end to it (for at least awhile... you have had a longer peace than your world views ever managed on their own) for sanities sake.
You are a bigot. Have no data. Have no facts. Mistake the thin crust of oligarchs for the people. Accuse a whole people of practicing an inferior form of eugenics as your preferred explantion for an economic crisis yet call 300 million people Nazi's. Strange little man.
A bigot and a parody. Plain and simple.
If you saw it so clearly what did you do about it? What did your nation do about it?
Go fix yourself.
Useless, much.
"Name one piece of supporting data to the hypothesis that America has more folks prone to be followers than any other nation"
Simple - your stupid little "Pledge of Allegiance" and that idiotic Hitlerian ritual you all do at baseball games. (and please... baseball? gah)
The fact that your political parties' followers have about as much sense between them as those who followed the 'deme' in Byzantium.
Reality TV (not that it exists, but that it dominated US TV).
The Cult of Personality... Jim Carrey movies... Rob Steiner movies... Ben Stiller movies.... Adam Sandler movies...
LAUGH TRACKS...
Anything else I can think of?
Cheerio
And note - 'colour' is the ENGLISH spelling... like, you know, like... y'know... the LANGUAGE? (like)
the two most popular American credos are
1. I have a life.
2. I don't take things personal.
which means:
don't know and don't wanna know.
The Brit's invented the reality show, the Brit's created the slave Trade and brought it to America under British loyalist landowners. It was the British who supported the South in the civil War, it was the British who enslaved nearly the entire world with their colonialism, that we are still cleaning up today. It is the British who are still ruled by the God/Men monarchy, and it is the British who will go bankrupt well before the U.S..
And by the way, love your education system.
Uh?
Still cannot answer the questions and your answer on the one you thought you could is fraught with sophmoric thinking:
Reality TV and all those movies attracted a minor (as in single digits percentage) segment of Americans. Thats a fact. They attract less than a ten percentage share of viewers. Closer to 3-4%. Thats the reason they have reality TV...its cheap to produce and no one is watching network TV anymore. Its also true that less than half of America is watching any of 1000 channels at all at any one time.
Sorry...try again...another swing and a miss by Mr Sophisticated.
And the land of Bennie Hill has the slightest thing to say? Or the land that worships Jerry Lewis? Or any of the Quebecois folk routines?
Some people slum in every culture
You would know that if you actually dug a little deeper and if you were not fascinated by and blinded by the mistake of all self fashioned and low usefulness critics. You read too much into celebrity sub-culture. You think that surface stuff is a sign of more than a slice of America?
Well yeah you would....have not gotten a thing right yet.
Geoffrey,
You either don't understand Americans or don't want to understand Americans. Sure much of our culture is low-brow and the results of our education system would indicate that we're functional idiots but the same people that you underestimate can be remarkable in figuring out solutions to complex problems. In short, Americans can't be categorized by simple generalizations because you will be proven wrong every time.
I visit this site because there are many remarkable people who help me understand our complex world. I'm simply suggesting that you keep an open mind as a means towards setting the right expecations for your future plans to the extent that they include the US. I expect to receive a caustic but witty response, yet I hope to be pleasantly surprised.
What a lame response to an excellent challenge. Go flog yourself for being inadequate to the task.
Oh - and 'American exceptionalism', of course... after all ,we were abolishing slavery 100 years before your Civil War.
And as to your quesiton about 'my nation'... I don't have a nation. As Diogenes said, 'I am kosmopolites'.
One thing I agree about is that your people shold not be blamed for the actions of your government... except that they have been too supine to rise up and slaughter the arseholes, the way the French did when their government was only 1/3rd as corrupt a yours is.
How did you know I was 'little'? (for the record, I'm 188cm and 110kg)
Cheerio
GT
Weak responses. Very weak.
Babe: I did not claim American exceptionalism. I claimed all societies and humans are flawed. That has escaped your strange little mind and ability to read.
I also said you were a strange little MAN.
Guilty as charged on both counts
A bigot, wrong on the facts, fascinated with eugenics which you then misapply as an explanation for the self indulgence, greed and foolish economic behavior of some people in every nation and race and wrap it all up by calling 300 million people Nazi's
Oh and babe....self appointed faux kosmo's are a parody of themselves. They are found in every society. Never got past their sophmore year franzfanonization of themselves.
Over here we call you a Non Stop BBGOTFO machine and an empty suit.
Big Blinding Glimpses of the Fucking Obvious is not actual thinking
Fashion yourself a critic; but to use the baseball analogies you seem to find illuminating: A lot of swings and misses.
Back to the minors babe. Cannot hit a fastball
Nice!
The civil war wasn't about slavery. Slavery was already being priced out of the 'free market' anyway - getting crushed by its own weight.
Old TJ knew this was going to happen. Human nature, not 'Mericanism.
Just history, rhyming again - this time it will be interesting in that 99%+ of 1st world citizens will starve without a perfectly functioning food distribution system. 3rd worlders will still have their goats, and the sunshine will still grow their crops. Survival of the fittest?
I don't agree with the eugenics part because it boils down to education not looks, having said that the uneducated pretty ones are probably less inclined to work hard and get what they want with their looks . They are brainwashed by the media machine.
I am personally acquainted with a goodly number of people in Euroland, doctors, lawyers, mayors, EU officials, friends of the Queen. In other words some of their best and brightest. Their herd-like thinking never fails to astonish me when compared to the diversity here in America.
yoo ar jus jellus cause ar porn has much mor prettier girls an boys than yurs
careful, dawg, this cute bovine might circle up with a few others and stampede your elite ass....
we know we're dicks- that's the diff between us- you just haven't figured out you're a dick, too
It is wrong to judge people/culture on a moment in time and also sloppy to focus on just one aspect of a culture/people we see as bad not looking at overall picture.
In just one generation, a region of a country or country can change greatly due to forces largely beyond the regular folks control. Were East Germans of different culture, freedom-seeking instincts compared to West Germans the moment they split? Were regular East Germans culture in mid 40s to blame for their subsequent loss of civil liberties?
How about macroeconomic forces.Did Liverpool or Flint MI kids suddenly descend into drugs, thugs because they were raised poorly?, or was it because, as a whole, the steady, stabilizing force of good paying, plentiful manufacturing jobs get ripped away in one generation in these cities?
Did African Americans in the first 100 years of US history just lack proper desire for freedom and stay in slavery due culture lack of resistance (or were they in tactically much worse than African slaves in Haiti who did manage to overthrow their masters, did African raised in slavery just come out fightier than Africans raised in slavery in US), and did African Americans they suddenly become so much desirous of freedom during reconstruction, or did an army have something to do with it? Were African Americans trying harder for freedom, civil liberties, and economic parity in 60s than in 1890, 20s or 40s or did some macroeconomic, political forces allow their, in my view, never-ending heroic struggles and aspirations, to be more effective in 60s than in 20s, 30s etc.
European immigrants in US had an outright revolution with Brits, while the ones to the north on the American continent did not. Were Canadians saps then, but now US is, maybe...but I think there is more going on than the state of people's culture at the beginning of world changing events.
I think you and I could think of many such examples, where similar people of similar moral fiber, desire for freedom etc end up on very different paths due to influences beyond their control.
Also on cultural dispersions, I find there is often redeeming and damning features in all cultures, which based on our cultures, were are blind to or sensitive to. In spite of many many evils and horrors I think western cultures and countries have inflicted on other countries, I think that, in at least modern history, closer-to-equal treatment of women in something we have progressed on the world stage. Not to say other cultures never ever were better on this, but in these times, it is a redeeming feature of culture. Again, I think we could all go on with such analysis of the good and bad of each cultures.
I prefer to think of all us regular folks in a bind together rather than blaming one country's style over another. Iranians had their popular nationalistic leader taken out by the CIA (this is fact that even CIA does not contend) and replaced with brutal, tyrannical, foreign-serving Shah, so in their resistance to this, they ended up with a nationalistic, tyrannical religious regime, which they now are fighting (and this time we laud their cause). Russia is being run by oligarchs, US is run by Wall Street, most African countries are run by propped-up-by-foreigners sell-out dictators, list goes on. Maybe Bolivia and Norway have regimes that are truly representative of the people but I think we are all in stages of trying to make this world work best for the most of us. Kudos to coutnries that are closest to making that happen, welcome to our joint cause to those that are still struggling.
Moneymutt,
Thank you. Much nicer and complete a reply than I could muster in my jetlagged state.
Most of all, kudo's to a beautifully realized last sentence
Honestly, your post made me think that when you look in the mirror you don't like what you see.
Eugenics-oriented immigration policy? Where did that idea come from? It's a straw man. I'm wondering if you've ever visited the US to test your "pretty" hypothesis.
As to the US being far more "herd-like," how do you explain the headlong dash into the EU? If that isn't a herd mentality, I don't know what is.
As to stupidity, I'm sure you have a mirror in your bathroom where you can verify the definition.
Does this analysis include or exclude Financials? If it does, it's not terribly valid since their bullshit balance sheets would thoroughly distort the numbers. If Financials are exluded, then this analysis is indeed disturbing.
Hi,
Do you call bullshit on this? There are numbers and farmer accounts at the site.
http://www.marketskeptics.com/2009/12/2010-food-crisis-for-dummies.html
All someone needs to do to know the world is headed is for food crisis is to stop reading USDA’s crop reports predicting a record soybean and corn harvests and listen to what else the USDA saying.
Specifically, the USDA has declared half the counties in the Midwest to be primary disaster areas, including 274 counties in the last 30 days alone. These designations are based on the criteria of a minimum of 30 percent loss in the value of at least one crop in the county. The chart below shows counties declared primary disaster areas by the secretary of Agriculture and the president of the United States.
The same USDA that is predicting record harvests is also declaring disaster areas across half the Midwest because of catastrophic crop losses! To eliminate any doubt that this might be an innocent mistake, the USDA is even predicting record soybean harvests in the same states (Oklahoma, Louisiana, Arkansas, and Alabama) where it has declared virtually all counties to have experienced 30 percent production losses. It isn’t rocket scientist to realize something is horribly wrong.
USDA motivated by fear of higher food prices
The USDA is terrorized by the implications of higher food prices for the US economy, most likely because it knows the immediate consequence of sharply higher food will be the collapse of the US Treasury market and the dollar, as desperate governments and central banks dump their foreign reserves to appreciate their currencies and lower the cost of food imports. Fictitious USDA estimates should be seen as proof of the dire threat posed by higher food prices, as the USDA would not have turned its production estimates into a grotesque mockery of reality if it didn't believe the alternative to be apocalyptic.
While the USDA may be the worst offender, the United States isn’t the only government trying to downplay the food situation out of fear. As one Indian reporter writes, governments are lying about the looming food crisis.
Thanks for this info MsC!
:-)
One of the areas I actually agree with Jim Rogers on is the future of ag. Life is better when you grow your own and when you appreciate the DIY lifestyle.
Jim Rogers saw this comming miles away.
Just think the only thing standing in the way of him making a fortune is the govt. comming in to nationalize the farming industry via the printing press.
That would be only too tempting once the voters are starving!
Thanks for the info. I think that I saw similar reports of globally widespread droughts last year. Either way, it cannot be good.
Any idea if it is related to this:
"Gold jumped to a record after India's central bank bought 200 metric tons of the metal from the International Monetary Fund."
If so, we may see some buying opportunities if the situation in India becomes more dire. Distressing though, I wish the suffering on no-one (well, not on them).
Undecadent
The Plains States (ND - TX) receive "disaster" agricultural subsidies in most years. Although that's disturbing, IMO it's troublesome not because it indicates an upcoming agricultural disaster but because it indicates that a minority of farmers are regularly receiving taxpayer money for typical problems that are expected based on the normal weather patterns where the farm is located.
Here's a link to a map of farms that received USDA "disaster" relief payments for at least 11 years of the 21-year period from 1985 - 2005 (i.e., over half the years in the period). There's a swath of farmers who received "disaster" aid in at least 11 of those years. It's mostly in the Dakotas through Texas, though quite a few are also in the Southeast and nearby states (e.g., AR, MS, GA, MO, SC). And it doesn't show any farms who, e.g., received "disaster" subsidies in, say only 1/3 of those 20 years.(IMO if a weather "disaster" occurs in 1/3 of the years, it should be considered normal and not indicative of exceptional problems.)
http://www.ewg.org/reports/disasterwaiting
Just because a county is declared a disaster area, it doesn't mean that crops yields will be lower than normal for that crop overall (even in that county but certainly in the USA as a whole) or that other crops in the same county will suffer at all.
We may be headed for a food crisis but I'd like to see comparable maps for several other years. Without similar maps for other years, I don't think this is much support for your thesis.
Yes thank you. Food for thought.
You may have discovered the secret backdoor in the Matrix where Washington can directly feed the counties with what `appears` to be Ag-welfare. Of course the states will get their cut if they are nice to the counties ;) and get their spending under control.
Compare 2005 to 2009:
http://www.fsa.usda.gov/FSA/newsReleases?area=newsroom&subject=landing&t...
Great find. Lots of disasters. When are they not disasters? Be intersting to find out how many $ disasters cost every year and how much is deficit spending.
USDA supports Big Assed Pharma through inactivity and saying yes, easily, to lobbying. Ag would be more of the same.
There is a potential boy who cried wolf effect here. They can tell us the truth, that something is bad, and we would never believe them.
I tried to post this twice last night but it's still not showing up. Maybe the third time will be a charm.
Here's a link to a map of farms receiving USDA "disaster" relief in at least 11 of the years in the 21 year period from 1985 - 2005. (i.e., they got "disaster" relief in over half of those years.) There's a wide swath of farms that usually got "disaster" relief from ND to TX along with parts of the SE and midwest (GA, AL, AR, MO, SC). This doesn't show those farms who got "disaster" aid in, e.g., 1/3 of the years, only those who got it over half the time. (IMO if weather problems occur in 1/3 of the years, it's not abnormal but part of a normal pattern for the area.)
http://www.ewg.org/reports/disasterwaiting
There may be food shortages but using USDA declarations of disaster doesn't demonstrate that. A typical yield (for that farm) could still be declared a disaster. Further, even if the "disaster" indicated a poor yield in one crop, there might be above-average yields in other crops that are more widely grown and important in that area.
Thanks for posting this. Good link. Answered a lot of my questions.
http://www.ewg.org/reports/disasterwaiting
Here is a comment worth repeating on the article you reference:
You called for the exact same catastrophe in 2009. What a waste of time. Your insight is completely skewed with your own personal neurosis and myopia, and the entire article is rife with grammatical errors that make me wonder how anyone could possibly take you seriously. This is not Germany of 1923 or Britain of 1947. The world is in financial turmoil and the US dollar may be done-for, but your prognostications are the same "the sky is falling" kind of crap that crackpots, mostly american crackpots, have been declaring to be imminent for decades. Buy gold, great. But build a bomb shelter and get the bbq ready for the neighbour's cat? God, who the hell do you think is going to buy all of china's goods if they suddenly decide to stop extending credit to us? God, everyone wants to keep betting on China, but China can only succeed WITH the United States, even if it means continuing to prop up a dollar and extend credit that won't ever get repaiod. Enjoy your gulash, comrade. Good riddens.
The only reason I worry at all is that I know our strategic grain reserves have been going down yearly for the last 10 and that they are at record lows.
http://www.fourwinds10.com/siterun_data/health/food/news.php?q=1212803067
Add on: I tried to find something telling me what the reserves actually were (if you read some of the peak oil folks they are always reporting scary numbers). Could not find it (may be I don't have the right keywords). Did find this, which may be scarier, using "cash" as part of the grain reserves composition.
http://www.fao.org/docrep/w4979e/w4979e0b.htm#composition%20of%20the%20r...
Eat that fiat baby!
I don't usually comment on Agri-stuff, but the US has great potential in increasing food production if the government recognized its importance. It seems that food production and markets, are as mismanaged by our government as industrial policy.
One interesting aspect to food production, is that food is only profitable when it can be cheaply conveyed to the market, in a finite amount of time. The question with food going forward, will not be on increasing production, it will be in moving it to market in the face of rising energy prices. Unless our government takes action on behalf of the farmer's, the real profits will be in owning the channels for food distribution. Just ask Mr. Railroad Warren Buffett.
John D Rockefeller understood that controlling low cost distribution is at times better than owning the commodity (Oil). In business the key is in connecting the product to the market at the lowest cost. Because once you control distribution you can influence price and markets. Step two for food distribution, is own food processing technology close to your railroad. Because, processing to a certain extent, provides a way to optimize shipped tonnage. So Warren's next purchase could be ADM.
Mark Beck
When the Russians left Cuba, something like 2/3 of their fossil fuel inputs halted. The average citizen lost something like 20-30 pounds each. There were deaths. People had to live on 1,300 calorie a day diets (government mandated) and farming became the most important profession there. Distribution was a huge issue because of the cut in oil imports AND the lack of new inputs in car/truck production. They made do, small tool and dye businesses took off producing parts for very old cars to keep them running, and other shops were welding odd vehicles together to create vehicles that would work to get the workers to the fields, as well as distributing food. Hitchhiking was also "just the way things were." They had to rethink how they did Ag entirely.
If we don't get our act together, I believe this is a very possible outcome for us. It may be too early for that worry, but I do think it is on the horizon and we are fools for not having at least a contingency plan in place for it. Then again, we have been fools about a whole lot, haven't we?
It's pretty sad when someone castigates another for "grammatical errors" and then comes up with "Good riddens." Good heavens, riddens? What in the world is that?
china's consumer economy is far more advanced
than most westerners realize....china will be
independent of the usa in 10-20 years - probably
closer to the short end....
This is a sort of Zen observation, maybe not appropriate here, but it seems to me all of us, locally, need to be able to be self sufficient independent of one another. That is the mistake that was made here, folks became dependent on dysfunctional relationships that worked for a little bit, but in the big picture were too fragile to sustain, and too destructive in their outcomes. Because things are not local, we can enjoy the products without having to deal with the consequences (child slave labor, the pollution from the textile production, etc). If you have to deal with it in your back yard, you won't do it, except (if you are like China) if you are desperate for a job to survive in the first place.
We need desperately to be independent of them too. Only when all of us are self sufficient do we stand a chance of getting along and making a go of good relationships in the future. This is true of individuals and countries.
The overused term "economic miracle" might finally be appropriate if China achieves consumer self-sufficiency in the time frame you note. With 99% of the population earning less than 40,000 yuan per year, the ability to consume is limited, and with the lack of profitability in many firms, coupled with the tumbling trade surplus, income growth (in a pegged currency) will not be easy. China's consumer consumption currently stands at $1.3 trillion per year. In contrast, the US stands at $9.4 trillion. That's quite a hill to climb to replace the US consumer on the world stage. It's even a hefty jump just to replace the fall in the US export market.
The recent stimulus, which flooded the economy with money and greatly enhanced the concept of buying durable goods on credit, has run its course in terms of purchasing power, but has not yet begun to be tested in terms of debt serviceability. Time will tell how this turns out. Perhaps China will have better luck with exceedingly onerous debt levels than the US had, or they will just keep printing money again next year. Will that bring out the same commentary about the inevitable decline of all fiat currencies?
The USDA can fix it. They know how to handle these things.
http://www.theonion.com/content/video/usda_official_takes_courageous
Imagine if a GSer came out about HFT or derivatives. The confession might sound as obtuse.
We have had a policy of cheap food for 40 years (Earl Butz, anyone?). The quality of food has materially worsened, the quantity increased. Improved seeds, fertilizers, and machines (automation in Deere's equipment is incredible if you can afford it), has increased production for the last 10-15 years. Weather plays a huge role year over year, but the Ag industry is no different than the banking industry: the big get bigger, the small go away (all the quotes in that scary article are from small farmers and "lobbies" for small farmers). As an Okie, I can relate both sides of this story first hand (but won't, it's not interesting). The Ag industry and Ag lobby has no problem with higher prices. They also have no qualms about feeding the USDA the story that food will run out next year (we've heard this for decades). If the perception was that food wasn't running out big Ag wouldn't get such massive subsidies, and big Ag elected officials wouldn't get such massive handouts. Unless a radical gets in office (Ron Paul) and blows up the big Ag giveaway infrastructure (unlikely) this will continue for years. Put another way: if the government refuses to let big banks fail you seriously think they'll let big Ag fail?
I do love my H.E.B., though!
This will be the commercial of the century.
http://www.youtube.com/watch?v=hn5EP9StlVA
duplicate
Thanks Tyler, excellent work.
The implications of the Debt/EBITDA graph could be staggering. When interest rates rise, equity prices will get hammered from both sides - investors choosing to shift assets away from stocks to chase higher fixed income returns, and soaring cost of capital for companies and the consequential hit to earnings. So much malinvestment today due to the mispricing of money.
Two questions. (1) could the Fed lose the ability to keep interest rates at zero if they really do stop QE as planned? (2) Any chance to see that Debt/EBITDA graph over a longer time period, like a decade or two?
For some reason there's a recurring vocal track in my head that just keeps repeating the Austrian econ phrase "declining pool of real savings." I wonder what that means?
could the Fed lose the ability to keep interest rates at zero if they really do stop QE as planned?
Answer is absolutely Yes. Ultimately, the Fed cannot control the markets nor can it control interest rates. It can have a major influence certainly but not control. I would say the Fed's power in this regard has waned over the past 20 or so years due to the growth and competition now offered by other non USA markets.
Even if the Fed goes with a QE 2, that still does not negate my above response. For actions there are reactions. We just may get to see some beauties over the next couple of years.
Ultimately, the Fed cannot control the markets nor can it control interest rates.
I disagree. I think everyone underestimates what is possible in this country. Or more accurately, just what sort of lunacy our leaders will stir up to keep the hustle running. They can do anything they wish with the market. Who would have thought it would be possible for The Fed to extort $12 tn from the tax payer and hand it over to the banks in the first place? Everyone saw the trainwreck coming, but no one expected the bailouts. I remember the outrage when Paulson said he needed $30 bn to bailout Fannie. Who would have thought that they weren't even getting warmed up?
This all drives to a larger point. Specificlly, those in power will do whatever they can to remain in power. Desperate times call for desperate measures. I mean, think about it in the abstract. Who would have thought it would have been possible in, say, 1930 that Germany would have murdered 6 million Jews on a industrial scale in the next 15 years? All we're talking about is levitating a stock market that everyone wish-thinks to go up anyway. How hard can that be? Shit, for 99% of the population, the entire market is just a little number in the corner of the TV screen. We could see the SPX top 5000 before the first major brown out or food shortage. Hell, they have already severed ties to reality by legalizing accounting fraud and counterfeiting. What is to stop Congress from just passing a bill stating the SPX shall rise 10% every year?
All it took was a 700 pt plunge in the market to get our gutless congress to roll over and pass EESA / TARP. Who knows what sort of goof-ball, non-sense Bernanke, Geithner, Summers and Rubin have up their sleeves? They have to have thought about it by now. If there is a real emergency - like a bond market dislocation - that, say, threatens national security, 'our' government could call in gold, freeze retirement assets, declare martial law and shut the market down.
Well said.
commenting on financial matters is one thing, but 6 million jews killed, get real, check the census before, and after the war. I don't deny the holocaust, only the acceracy of the reporting. what about the 20 million russians, that died? I guess they're not as important.
You miss his point, he simply is saying the unthinkable can happen with a determined ruling class. Regarding your point, WWII was also unthinkable, any innocent death is tragic and important.
And the miilions upon millions of Ukrainians starved to death for not following collectisation orders from the Man of Steel. This was after the war, so it proves that indecency and criminality exist no matter the time and place.
This is where we differ. One thing is certain - the money rate of interest cannot be maintained below the natural rate of interest forever.
I agree the powers that be can, and probably will, attempt many crazy things in an attempt to "keep the hustle running", as you put it. And the final day of reckoning could still be years off.
But the money rate of interest cannot be maintained below the natural rate of interest forever. Any attempt to do so will necessarily lead to hyperinflation. I'm hedged for both possibilities, but I've got more money riding on the depression scenario.
"All it took was a 700 pt plunge in the market to get our gutless congress to roll over and pass EESA / TARP."
Bullshit. Recall that the bill that finally passed was $850 billion. The congressclowns could have cared less about the market plunge... it was the extra $150 billion of pork/payoff that sealed the deal.
Good call. I recall my senator stating he had too many calls from people losing retirements in the casino and had to flip flop. But you are right, they were just using the collapsing market as an excuse to vote for TARP, it was all about the pork.
Man, you're all over this and I share your sentiments. Frustrating when we pee'ons are forced to "baby-sit" our future tick by tick of that little bug in the corner of the screen.
In order to keep interest rates at zero, the government will have to keep selling money in greater and greater quantities. In order to keep selling money in greater and greater quantities, they will need to keep printing money in greater and greater quantities.
If/when they stop printing, the ponzi will implode and the depression will be upon us. Other games are of secondary importance.
If they do not stop printing, we eventually get hyperinflation.
All it takes is the rest of the world to keep buying up our debt with central bank counterfeit money. Obviously, this situation isn't in the best interest of the rest of the world over the long run to keep propping up the USA, disaster capitalism and the USD as a reserve currency. The world over, the USA is seen more and more as 'the problem' in world affairs.
Now enter the world of geo politics. Sure, as a country we are a unproductive, overweight, degenerate debtor that won't ever repay the money we owe to our lenders, but so what does that mean? What are they going to do about it if we don't pay? And more importantly, what are we going to do about it if they don't want to lend us more? We have the largest military on the planet and if any country wants to two-step I bet we can - and will - make things very interesting indeed. After all, this is our 'freedom' and 'the American way of life' we're talking about, right? Nevermind it is the 'freedom' to constantly consume more than we produce or spend more than we earn, don't get bogged down in the details. Freedom is freedom and it must be protected! We will even pre-emptively strike to defend our freedom!
Just look at the Middle Eastern / energy situation if you don't think our government has the resolve to go on with the tragic business of sustaining the unsustainable. Saddam Hussian didn't play nice and the USA voted him off the island. It is as simple as that. The US government will smash all sorts of round pegs into square holes to maintain American hegemony. Look at what is going on in Latin America? That will be the next shooting war. Hugo Chavez might not want to be a good little client state for the US, sell us oil on the cheap and let western corporations run roughshod across the land. Let's see if he changes his tune with a couple dozen new military bases sprouting up in the region.
Now obviously, this sort of thing won't be able to go on forever. The US cannot sustain global hegemony, but that won't stop us from trying over the next 10 - 30 years or so.
Where does the counterfeit money come from? Printing. I stick by my position.
As ideologically perverse as this sounds, one characterisitic of the current system is that at least the depression will come at a time of the Fed's choosing.
Perverse might be the wrong adjective. I believe it is, in fact, fully intended.
Mercer’s Little Alaska Problem
But an even bigger grenade dropped earlier this year when the Alaska board, citing depositions of Mercer employees, contended that company executives had known about the actuaries’ errors and covered them up.
If Alaska prevails in court, it could entitle the retirement system to punitive as well as treble damages.
Mercer, with 4,000 employees in 150 offices around the world, concedes that the Alaska case is a threat. In its usual corporate filings, a brief discussion of the case heads a list of risks facing Marsh. It also notes that it has “limited” insurance to cover the costs of an adverse outcome.
Unlike most public pensions that promise to pay future benefits out of money they hope to earn, the Alaska systems funded health care costs in advance.
As actuary for retirement plans that serve both teachers and other public employees, Mercer had the duty to calculate the plans’ liabilities and determine the employer contribution rates to fund those promises.
But, according to the lawsuit, when Mercer prepared the plans’ 2002 report, it understated their liabilities by as much as $1 billion.
Then, rather than own up to the mistake, Mercer executives covered it up, the documents say. “Following standard Mercer policies designed to prevent clients from discovering Mercer’s errors,” Alaska’s lawyers contend, “Mercer’s actuaries carefully avoided creating a written record of their discussions and calculations, in order, one of them testified, to avoid creating a ‘trace.’ ”
Because of the errors and cover-up, the lawsuit said, Mercer underreported by more than $2.8 billion the contributions required to fund the plans.
For all employees hired after 2006, the funds no longer offer a classic pension fund, where retirees receive a specified amount each year. Now those workers receive a defined-contribution plan, similar to a 401(k) account.
http://tinyurl.com/yawltun
For anyone that wants a quick explanation of goodwill see:
http://marketplace.publicradio.org/display/web/2009/02/03/pm_goodwill/
You can see how this is definitely being inflated given the asset deflation reality in the real economy.
Caution in the S&P balance sheet evaluation continues into the income statements. The operating earnings lie vs reported earnings. This is another S&P, Wall Street analyst failure, similar in magnitude to their credit ratings shortcomings. Hey, if you're really thirsty, drink the cool aid.
Caution in the S&P balance sheet evaluation continues into the income statements. The operating earnings lie vs reported earnings. This is another S&P, Wall Street analyst failure, similar in magnitude to their credit ratings shortcomings. Hey, if you're really thirsty, drink the cool aid.
For those interested in such things -- a lot of today's history in the making relates to the Mayan Longcount calendar. The calendar doesn't count down to the end of the world -- rather, it measures the evolution of consciousness. There are 9 levels. The 9th and last begins Feb. 10, 2011 and, of course, ends Dec. 21 2012.
www.calleman.com is a good source.
For example, the 8th period which we are in is characterized by Ethics replacing Power. Power characterized the 7th period (1755 AD - Jan. 4 1999).
Power - think Industrial revolution and corporations
Ethics - see the news of the day. the power of corporations and institutions are being called in question.
We are in the age of deleveraging
http://www.safehaven.com/article-15306.htm
CNBC commentary from 2007.
Classic yet an epic fail at the same time.
http://www.youtube.com/watch?v=jJt77Kd_FiY
http://www.washingtonpost.com/wp-dyn/content/article/2009/12/18/AR200912...
"Snowmaggedon"
"Lost sales also equal lost opportunities," Walsh said Friday. "I can guarantee you there are retail executives that will not be sleeping well tonight."
To MsCreant:
I looked at your comment and then looked at the data on the indicated web link regarding food shortages. I agree that food shortages are looming, but the web data seems to be a bit panicky.
1. I am in Louisiana and the record-breaking soybean crop was devastated by very late season rains (in October) which destroyed much of the crops after they had ripened and were ready to be harvested. We were into November before the full extent of the damage was realized. It looks to me like the USDA put out correct reports of a record crop but then the crops were destroyed by the unusual rains. It looks more like a timing problem than an attempt to put out a false report.
2. The website also talks about false reports being used to hold market prices in check. In reality, the people on the ground doing the buying are going to be the determiners of price. I don't think false reports would have much long-term effect if buyers were seeing an actual shortage.
Maybe I am overlooking something.
Same thing for me here in Arkansas, I believe the report is a little too overly exaggerated.
This thread was not the place for me to ask this but thanks to all who replied. I worry about food security and garden a little bit. I try to keep an eye on this for my family and my neighbors. I stock up some, but not as much as I could. It is a razor's edge awareness being prepared and being paranoid. Don't want to call it wrong either way.
Thank you.
The same razor's edge applies to the perception of others when you attempt to explain your actions. My position is that this fiat currency, AKA 'dollar' will fail sometime in the near future.
38 million on foodstamps? Imagine what happens when the plug gets pulled. Not when, but how soon? Or, in other words, when will gravity apply again?
Paranoid is a lazy way to label and marginalize the very, very concerned: "You same people have been saying the same thing for decades. Has anything changed?" Usually the opinion of others is based on their perfectly functioning worldview ('we have learned from past mistakes, it won't happen again') which tends to be heavily devoid of the most classic cycle in history: the collapse of an empire. The best of the founding fathers knew this would happen. Whether or not we collapse financially, our perceived freedom is forever limited - will it get worse? What is paranoid about that? The founding fathers must have been extremely paranoid!
So, when it comes to 'life enjoyment', would it be better to be sleep-deprived, or asleep, when a collapse occurs?
There are a few of us here that are very like minded regarding some issues. I try not to be over the top with it because this blog isn't "survial blog." Maybe we could get our own thread going if we asked Marla and Tyler nice. That way, others could peek in or not and we could talk openly. There are other sites where these conversations happen, but they don't have the econ sharpness which I want to integrate into my thinking.
Thanks WW.
Nope same thing in Canada. I can't find any data on commodities (edible kind) anywhere. I'm in the country and lease my 300 acres for profit sharing. Per acre I made a huge .05 cents an acre. The guy growing the soy and corn, they are fucked. Only thing that made money on the land was the Hay for race tracks.
Soy and corn are fickle bitches. Then after i say cornI should state it's cow corn and soy meal to feed livestock. The rain in combination with the hail during the summer pretty much destroyed around 250 sq miles of food. That's just looking around the Ottawa valley and northern New York State. Add in the fact corn seed sells exactly for the same price as retail, there is no money in growing corn next year for the local big box farmer under contract. My understanding is that there wasn't much money in anything this year unless it was sold road side.
We'll see what the world looks like in grains with Argentina cutting down the last of it's forests and starting first time corn crops over the winter. My bet is with crop failure in Australia and South Africa, it'll be the same story.
Otherwise if you can't hunt, grow a metric tonne of food or raise livestock in a year you'll be SOL. Of course there's always long pig. Last I heard the head count is closing in on 7 billion and freely available. Just make sure everything above the neck is gone and avoid gammy thighs.
I wish you would have separated out financial from non-financial companies and reported the results separately. Everyone knows financial companies are doing crazy things; we want to know if non-financial companies are doing them
This is weak analysis. The inclusion of financials skew the totals in terms of total assets and debt. Plus, with financial you are double counting debt. Financials over levered their BS? Thanks for the hot tip!
Should be broken down by sector and appropriate metrics should be used for each. How do you use EBITDA for banks whose primary revenue and expense is interest related?
Instead of taking a position and skewing data to confirm your position why not let the data talk then figure out how to profit from it?
The more I read this blog the more I believe you are a former hedge fund trader shunned from the business who has an ax to grind.
How about you producing your analysis with the breakdown that you have suggested and defining and writing about the appropriate metrics?
Will look forward to your analysis.
Maybe we're coming to an age where we reassess what has value. Instead of paper money and gold, (though gold is in Bible and, therefore, has a different kind of value) we will value those enterprises that further the more noble objectives of mankind, building shelter for shelter's sake, innovating computer models and developing new ways of using non-embryonic stem cells to cure diseases, doing what Disney called "imagineering" for the betterment of mankind....you get the idea.
I am reminded of an H.L. Mencken quote:
Shave a chmpanzee, and the only way you could tell it wasn’t the average politician was that the chimpanzee would have some principles.
Why isn’t anyone asking questions about how come rthe Magic Mulatto can just 'declare' someone t obe a non-person, as bereft of rights as a slave after ? Are we allowed to just “move on’ from a War Crime?
Why doesn’t someone just yell “He’s got a sword!” then shoot him in the head and plead self-defence?
Then when the trial date arrives and the prosecution claims he had no sword, say to the judge “Your Honour, we could debate this ’sword’ issue until we’re blue in the face – personally I’ve moved on from that particular issue; it doesn’t matter whether he was about to assault me with a huge sword, or whether he simply had sword related programs … it was self-defence, and the world is a better place without him”.
See how far that gets you… if a crime is a crime for a citizen, it is a crime for a government – or the government is a tyranny.
You're right, you know. However, being right doesn't buy you a damn thing. It's actually worse; there's a good reason ignorance is bliss.
How are you going to capitalize on your observations & insights? Make more money? Get laid more often? Eat more caviar, lobster & steak? Go on more vacations? Go under the knife for a complete cosmetic makeover?
What did fame & fortune buy Tiger? What does it buy any of the cut-up guys & dolls parading around West LA or Newport?
Wouldn't you just rather be a drunken, unemployed sod in a played out mining town in north England, betting on a few games and snarking on your buddies?
Eat, sleep, shit, screw, die. Chimps have got it easy.
well I guess the government is a tyranny. has been for quite awhile, just more blatant now. and if you had thick hair covering your whole body, someone could mistake you for a baboon.
As trav777 and some other astute observers have noted, anything short of a miracle development in fusion technology or digitizing our souls (virtual machines) will simply fail to provide a sufficient enough energy boost/optimization in which to propel our global society onto a whole new level of economic efficiency.
It's really all over except for the crying. The entire Ponzi model was dependent on ever escalating (false) asset valuations in which to collateralize ever increasing (real) debt loads, all driven by monetary expansion (inflation) in which to imaginarily pay off (defer/amortize/capitalize) accruing interest charges.
To top it off, the whole shabang was enabled by an extremely crude energy consumption & utilization model that places people in a position not much different than yeast fermenting in a bottle of champagne. We don't know why we're engaged in resource depletion & environmental degradation; we're simply biologically programmed to exist as best as we can make out.
So stop worrying & engage at will.
Sorry to disagree but the US has enough natural gas to last us well over 150 years. It is readily extracted and the technology for cold storage is there now, as is technology for NatGas-driven autos, trains and buses.
I will agree with Geoff about one thing: it is our government that is preventing us from living the most fruitful lives possible through their short-sighted and self-enriching enterprises. (The rest of his remarks, I disocciate myself from entirely...)
We don't need to build a mini-sun on our planet (nuclear fusion...) in order to survive. The danger that proposes to our livelihoods is enormous and should never be taken lightly.
We have the gas, we have the technology. The only thing we are missing is proper leadership away from the interests of big oil, conflict with the Russians and the economic decimation of Ukraine, Afghanistan and the entire Caspian Sea region.
I say we let the Tbilisi pipeline rot, pull our troops out of Iran (yes, Iran...), Iraq, Turkey, Georgia and Azerbaijan. They can come back home and build Natgas facilities and take stock in NatGas filling stations. When that happens (and it is inevitable...), the entire world will change virtually overnight.
The long term monthly trend for key equity indexes has been down since early 2008 and that has not changed.
The charts tell us the economy is in trouble.
http://www.zerohedge.com/forum/market-outlook-0
TD, Great post. This echoes my response to Leo K. in a prior article.
Does this chart include or exclude the financial stocks?
Since the financials grew assets faster than non financials what this may be showing is leverage rose because financials became a higher portion of the S&P500. Now that speaks to how our economy became too reliant on financials and all that. But debt/EBITDA isn't comparable for a financial to a non financial company. In short if it includes financials leverage may be rising due to a shift in mix toward financials not that non financial America became overleveraged, at least to the degree shown here.
If the financials were excluded, my apologies my comment is moot but if they are included you may want to exclude to assess the trend in non-financial corporate America.
When you've got zirp and long bonds at 3.5%, you've got to realize that ROE will not be staying around 10% with so many investors out there chasing yield.
But I wonder how many stock investors would jump on stocks if managements were telling them that from now on they should expect 6% ROE or lower?
What makes it even scarier is that everyone looks at the average or median debt/equity ratio without looking at total debt per industry. Something tells me there is a lot more debt out there than the ratios let us think. Maybe there are just too many companies out there. It's like when they were telling us at the peak of the real estate bubble that there was an udersupply of homes when home sales were in the stratosphere.
this article was outstanding - the very basics of financial analysis is music to dance by - cash flow, roe, roi, roa, and subsidiary ratios will always do you well....
regarding the question of stupid americans...yes americans are incredibily stupid and brainwashed.....as a group:
1. they believe the warren commission which even lbj ridiculed in private
2. they believe that al-qaeda destroyed the wtc when ae911truth.org has convincingly proven widespread nanothermite all over the crime scene which inculpates usa intelligence
3. they believe that hiv causes aids
4. they believe that obama was born in hawaii
and the list goes on....the cia-controlled newsfaking press has been a spectacular success....
i recently had a dumbfounding exchange between an otherwise fine gentleman who refused to believe that the top 10% of american income earners paid 71% of all income taxes even when the full of shit irs' own figures and the all-worshipful nyt reported similar findings in its cia-controlled news stories....
americans are in love with the legends in their own minds - the truth be damned...the cia-fed nexus is indestructible because the great american boob protects it....
An interesting analysis, but I'm not sure that 2005-2009 Q3 is the right time series for the analysis. For years, people have downplayed liquidity risk until it reared its ugly head in 2008. Companies are clearly focused on improving their liquidity by increasing cash balances through additional borrowings. Leverage has increased dramatically resulting in signficantly higher leverage ratios. However, this is not totally shocking given the 16.5% decline in LTM EBITDA since it peaked in Q3 08 prior to the implosion of the economy. It would be more interesting to look at leverage ratios, debt & cash outstanding going back to 2000 so the 2000-2002 downturn would be included.
Still, it's shocking that Total Debt / EBITDA at the economic peak in 2007 was 4.25-4.50x. The S&P 500 is thought to be comprised of large, well-capitalized companies (think median credit rating mid-single A?). To Tyler's point, 4.25x total debt / EBITDA makes me think crossover credit at best.
It seems like BS to me...
Here is cached commentary from November -
http://74.125.155.132/search?q=cache:xoRm7phzMuEJ:www.farmandranchguide....
Comments called the author out indicating a doomer ag prediction last year.
Such is the groundwork for deflation. Many companies are inflicted with unprofitability, inefficiency, and indebtedness. Until March, markets were pricing such companies for death by natural cause. That is, until the Fed's liquidity injections to - and the government's strong arming of - the banks. Since March, unhealthy companies have rebounded from their near death experience – they have gained even more than healthy companies. The Fed's liquidity injection has kept alive companies that investors and consumers had prepared to place on the junk heap of history. Without government intervention, such companies would have disappeared, leaving healthy survivors to gain pricing power from disappearance of competition. Surviving companies would raise prices, and inflation would rise. It is this point of the cycle that the Fed would raise rates to slow growth. Ironically, what the Fed and the visible hand of government has done is to set the conditions for deflation. Price based competition will persist as long as artificial life is given to unhealthy companies. Such comatose companies cannot compete on quality – they must compete on price, and will do so as long as life support is given to them. Deflation will persist until comatose companies are allowed to pass peacefully by natural cause.
The broad, sweeping conclusions about how this data "shows" that US companies are increasing their leverage substantially, etc, etc, are somewhat appalling.
If we start out with the premise that the fall in GDP starting in Q4 2008 through the end of the data set shown was not the effect of the companies deliberately decreasing EBITDA, and we remember that during that same period, companies' ability to issue stock was somewhat limited, the fact that debt and liabilities climbed during that period is not surprising in and of itself.
Substantially all of the rise in net and total leverage ratios cited on the table arrive AFTER Sep 2008.
Otherwise, by my cocktail napkin calculations, the claims about goodwill rising substantially or that cash has not risen are puzzling. Sure, the absolute levels of those numbers has risen, but that means nothing in and of itself. Cash as a percentage of assets, and cash as a percentage of total debt have risen. Goodwill as a percentage of total assets is almost exactly the same now as it was at the beginning of the sample, but that is as it should be as well (companies which want to grow externally and can use their own stock in a time of economic strife rather than using their cash should be applauded for doing so).
The only comments which really make sense here are the comments about the absolute level of Debt/EBITDA - 4x is high. But then again, so is tax-normalized ROE implied by the LTM EBITDA/Equity... Will it stay that high? I expect not...
GeoffreyT,
It may be a little late, but I would have to say there really were only a few great things to EVER come out of Great Britan. Number 1 is the USA, period! Numbers 2 and 3 can be interchanged with either the Rolling Stones or the Beatles. So, in the Queen's best English, "GO FUCK YOURSELF!!!" Have a good one.
Cheerio
x10
His idiotic posts are downright hilarious.
After a lifetime of being slapped around the trailer park, his only recourse is to lash out through the safety and anonymity of the internet. It’s just his sad little way of being “somebody”, and getting even with the world for making him the trailer park bitch.
If I close my eyes, I can almost picture the pimply-faced little twerp...sitting on the edge of his momma's bed…watching Jerry Springer…sucking on a buttplug while gurgling “Allahu Akbar!”...
Just too fuckin’ funny.
So happens that U2 is the highest-grossing rock band since The Beatles- and for good reason. Led Zeppelin is a great "import" because they studied the music of early Alabama and Mississippi blues and basically gypped the songs.
Look it up.
Squeeze My Lemon...perfect example.
Just spit-ballin Bernake style...how about the govt leases some of their printing presses for a nominal fee to S&P 500 companies...they can just start printing their own cash flow.
I guess I need to take a remedial Reading Comprehension course, as I thought the post was on financial matters.
I would note that EBITDA/Shareholders' Equity is a weird measure to use, since it relates a debt- or asset-related measure (EBITDA) to an equity-related measure (uh, equity). It's like the bogus "Price/EBITDA" measures being thrown around on CNBC (and, to be fair, most of the street) back in the internet bubble days.