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Collapse In Commercial Paper Outstanding Bodes Ill For Corporate Growth
Investment grade bond issuance this year hit all time records, with the six-month moving average hitting an unprecedented $692 billion through May of 2009. And yet while government guaranteed Aaa financial company issues accounted for a major portion of this, IG-rated industrial companies issued a record $317 billion of new bonds this year. Yet, in many ways like the Cash for Clunkers subsidy, the government endorsed refi binge is coming to an end, and Moody's estimates that July and August will have a monthly IG issuance of $66 billion on average, which represents 57% of the monthly average through May.
The decline's primary implication is an indication of a muted business investment outlook, coupled with a much reduced need to refinance out of commercial paper. The later issue was exacerbated by liquidity concerns which forced companies to roll out of near-maturity and extend debt maturity profiles. In fact, CP outstanding dropped a record 37% in the year through July, according to Moody's: August outstanding CP was $696 billion, a substantial shrinkage from the $1.04 trillion in March 2008. Why is this notable - traditionally corporations flee short-term debt at the beginning of major downturns and ahead of a slide in bond issuance. The fact that the government was willing to "subsidize" the bond market implicitly only front-end loaded this practice by a significant degree. During the last recession CP outstanding fell at its sharpest rate in November 2001, a 13% yearly decline, while corresponding IG issuance did not decline until half a year later in May 2002, and bottomed only a year later in November of 2002 at a 31% annual decline. And, just like in 2001-2002, as the shift out of CP by most corporations (who could afford to do so) ends, the primary factor for IG issuance will be eliminated.
This is relevant when coupled with the perspective for the key business investment proxy - non-residential fixed investment, which is forecast to drop 18% in 2009 and another 1% in 2010. A secondary proxy for this is the record low recent capacity utilization print of 68.5% in July: the slack in the system is astonishing, which in itself throws a major wrench in the spokes of the pundits claiming for an inventory led bounce in GDP numbers. Moody's estimates that as a result of the continued recession, and the waning off of one-time, artificial stimulus spending, IG issuance will likely be significantly below $65 billion per month for many months to come.
The immediate consequence of this is that the core companies that make up the economy, those that are not too leveraged and actually generate more than nominal cash flow, will retrench expenditures, and will make the case for a revenue bounce in the coming quarters and years even more problematic, even as all the overhead fat has been eliminated, resulting in years of flat if not declining earnings.
Keep in mind that this has no bearing on debt issuance in the lower parts of the capital structure. As such, HY bond issuance will likely persist as long as the speculative mania of high beta-chasing continues, driven in major part by what happens in the equity markets. This is evident in the $88 billion of HY bonds issued from March until August, a record half year rolling number since October 2007 when the market was trading on comparable parabolic fumes. A shutdown in IG will likely incentivize more asset managers to chase yield in riskier places, thus indicating that more garbage companies will likely come to market with blue light specials, that have no sustainable cash flow coverage, only to default before even one interest payment is made. Credit PMs have our sympathies - chasing returns in a irrationally exuberant market never ends well.
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Echo bank lending in China.
Uh. Don't you have to make stuff to need commercial paper?
Yes silly... we make COMMERCIALS!
Manufacturing expands in August.
http://seekingalpha.com/article/159431-the-manufacturing-expansion
It should read, "What's left of US manufacturing expanded in August"
20% of the largest economy in the world really is not pocket change.
20%?? LOL! What Decade are you living in?
LOL all you want. Won't change the data.
My mistake - to correct myself, Gabriel is right. I was conflating all "industry" data with "manufacturing".
Manufacturing is now about 1.6 trillion, between 11-12% of US GDP, and about the size of Spain or Russia's entire GDP; if the US manufacturing sector were its own country, it would rank somewhere between 7th and 10th in terms of GDP.
Now that you corrected yourself, try backing out all manufacturing that is directly and indirectly subsidized via the US taxpayer to the military, medical and now the automobile industrial complex and you will have a real number as to the true "productive" capacity of, whats left of, our manufacturing sector.
Seriously doubt Wells. That put action could easily be neutral.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
This implies that credit spreads (to Treasuries) will increase for HY, but may decrease for IG (due to lack of product).
Pisani, at 2:05 pm, notes that "Market has case of Jitters" (wonder what brought that on?
http://www.cnbc.com/id/32645081
Running On Empty: How The Democratic and Republican Parties Are Bankrupting Our Future
Could a Viable Third Party Emerge in the U.S.?
Regardless, the status quo has been dealt the first body-blow of a long struggle to free Japan from the iron grip of a failed Elite of crony-capitalists and Central State managers.
Here in the U.S., young reformers gathered behind Barrack Obama, seeing in this young leader a future of “change.” But alas, the Obama administration is so riddled with Wall Street Elites and their lackeys that “change” has been less than empty: Obama’s administration has given the rentier-financial Elites they could possibly want, and masked the reality behind simulacrum “reforms” and various special-interest giveaways masked as “stimulus.”
http://tinyurl.com/px9xh8
#55261: Your link appears broken
Sorry..new link:
http://www.bearmarketinvestments.com/could-a-viable-third-party-emerge-i...
Watched CNBC this morning for the first time in quite awhile. It's all about personalities, who says what.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
i think most of that is still unwinding ABCP programs. most of the growth from 2000 on was from sec arb (mbs, cdo) programs which are pretty much toast. the rest of what is left is the working capital borrowings. if youre a cfo, if available, why not term out your ST borrowings? if that chart doesnt level out soon, you could prob read more into it.
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/id...
"The chatter from (some) hedge funds is that there is a bank default", said Jon Najarian, a founder of Web information site optionmonster.com.
There is also some chatter that the whole financial sector is still insolvent.
+1
ROTFLMAO
Also hearing something specifically about Cerberus. Good riddance.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
via Accross the Curve
Apparently the subject of the rumor is the Corus Bank in Chicago.I had never heard of the entity but apparently they are quite troubled institution.
The firm’s chief accounting officer quit today. There is also a story that the firm missed a regulatory filing several weeks ago and is in danger of stock market delisting.
The bank is a financial basket case and has been for quite some time. This should not be a market moving story.
Damn nice and damn informative.... have you guys read about China cancelling debts owed by state owned companies? Fun stuff.
Try this:
http://in.reuters.com/article/oilRpt/idINPEK33016020090829
Also:
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSSP47327420090831?pageNumber=2&virtualBrandChannel=11604