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Carl iCahn's Nightmare (Or The Credit Bubble In 4 Simple Charts)

Tyler Durden's picture




 

This morning's media blitz by Carl iCahn - demanding that AAPL's Tim Cook, borrow money cheap, lever-up, and gift it all back to shareholders through buybacks - reminded us of our previous post on the record high levels of leverage in US corporations. To a point, firms can add debt as earnings and equity value increase - leaving leverage and credit risk somewhat constant. However, the last few years, in spite of Maria Bartiromo's constant drivel of cash on the balance sheets, companies have increased debt faster than EBITDA, leverage is at record levels, and credit markets appear to have peaked (as they did in 2007).

U.S. equities have made new highs in the past 10 months while IG corporate credit has not rallied past 130bp (despite all the liquidity provision)...

The inverse relationship between equity prices and credit spreads has broken down - as additional debt has risen faster than EBITDA

Leading to pre-crisis levels of leverage (and implicitly credit risk) - which should mean wider spreads but thanks to the liquidity (for now) is being held at merely record low "stable" levels...

But we have seen this "credit cycle end, equities ramp" before - in 2007 - where leverage (both firm-wise (debt/EBITDA) and instrument-wise (CDOs)) provided the extra oomph to send stocks higher on the back of credit fueled extrapolation of earnings trends.

(charts: Barclays)

In the end we know this is unsustainable - the question is when (in 2007 it last 10 months or so...).

We already see 30Y Apple bonds trading at 5% yields - admittedly low still but notably higher than when they issued previously. The Verizon deal recently now trades at around 5.7% yield and is considerably worse financially pro forma. Of course, just as in 2007, things change very quickly once collateral chains start to shrink.

Perhaps this is why Carl iCahn said the Apple CFO/CEO shunned him - iCahn's worst nightmare is simply the inability to proxy-LBO each and every firm...

Given these charts - which market do you think is in a bubble - equity or credit? Bear in mind that the Fed's Jeremy Stein has already made his case that the latter is a bubble for sure... and the fragility that reaching for yield creates...

 

Full Stein paper here:

Stein 20130926 A

 

 

Of course, we discussed this previously and as a bonus here are a few extra charts as a bonus...

...pretty much every other credit metric is deteriorating...

 

and the credit cycle is getting long in the tooth...

 

 

We suspect we are in Stage 13 of the 14-Stage credit cycle from credit expansion to speculative bust...

1. "Boost Phase" of Credit Expansion
2. Overextended Credit Expansion and Over Capacity
3. Financialization and Collateral
4. Era of Financialization
5. Growing Malinvestment
6. Phantom Collateral from Asset Bubbles
7. Bubble Implosions
8. Impaired Debt and Policy Decisions
9. Stalled Consumption
10. Cheap Money Offered
11. Shrinking Loans and Bank Speculation
12. Search for Yield from Shrinking Pool of Productive Assets
13. Increasingly Speculative Investments with high Risk <---- YOU ARE HERE
14. Stagnation: Over-indebted, overcapacity with limited growth
 

The key dynamics here are debt saturation and diminishing returns...

It seems to us that the corporate bond market (now absent the underpinning of a dominating retail technical flow) has reverted back to the macro background reality.... the question is - what happens when the equity market 'admits' that perhaps things are not so rosy...

 

 

Remember corporate credit risk reflects just as much on the underlying business volatility and cashflow outlook as the equity part of the capital structure. There are periods in the credit cycle when credit will underperform as management relevers (i.e. buybacks/dividends) but that always only lasts a brief time as credit begins to penalize those actions, making the re-levering non-economic, and an over-expectant equity market reverts back to a less-levered reality.

 

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Tue, 10/01/2013 - 21:02 | 4012392 strannick
strannick's picture

IChan is a gangster without the charisama, class and code. The Jackman interview unmasked Ichan for the low brow A-hole he is.

Tue, 10/01/2013 - 21:16 | 4012458 DaddyO
DaddyO's picture

The key dynamics here are debt saturation and diminishing returns...

In the world of alcoholism, this is known as wet brain...just saying.

Icahn seems to be suffering the investment world's equivalent!

That's why he's poking AAPL's Big Kahuna.

DaddyO

Tue, 10/01/2013 - 21:25 | 4012489 Spastica Rex
Spastica Rex's picture

Apt analogy.

Tue, 10/01/2013 - 21:58 | 4012578 TwoShortPlanks
TwoShortPlanks's picture

Did someone say Debt...did someone say leverage????

Gold will rebalance the sum of all Fiat expansion

http://twoshortplanksunplugged.blogspot.com.au/2013/10/gold-will-rebalance-sum-of-all-fiat.html

Tue, 10/01/2013 - 22:19 | 4012664 quintago
quintago's picture

but it's cheap debt.

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For now

Tue, 10/01/2013 - 21:34 | 4012505 Grande Tetons
Grande Tetons's picture
Symptoms of wet brain:
  • Confabulation - remembering events that never happened
  • Inability to form new memories
  • Loss of memory--this can be severe

I concur, Dr. Daddy O

Tue, 10/01/2013 - 21:39 | 4012507 TruthInSunshine
TruthInSunshine's picture

I've been speaking about this for 3 years now - how the constant refrain of "record cash on balance sheets" is so incredibly misleading for numerous reasons, not the least of which is the fact that the simpletons making such declarations about such a wide array of corporations fail to offset said cash by the amount of debt held in a variety of forms by the very same corporations (as they piled deep into selling copious amounts of bond debt due to the very low rates made possible by ZIRP), as well as the massive stock buybacks undertaken to drive share prices (and executive compensation tied to share prices) as high as possible.

The vast pool of debt sold via such bond offerings will be only slightly less onerous (to the point of negligibly less onerous) at an interest rate of 1% or 2% than it would have been at 3% or 4% when the inevitable credit bubble bursts and the liquidity crisis begins anew, and those shares of stock bought back at nosebleed levels suck even more liquidity out of the corporations owning them when gravity inevitably reasserts itself, thusly.

But "noone could've been able to have predicted it" - just wait & see.

Tue, 10/01/2013 - 21:02 | 4012405 williambanzai7
williambanzai7's picture

Karl iCon has morphed from a stock picking greenmailer into a turbo Keynesian debt mongerer.

Fuck you Karl.

Tue, 10/01/2013 - 21:32 | 4012509 Stoploss
Stoploss's picture

iOS7 on the iPhone 5 is causing people to become nauseated, dizzy, head aches are also reported due to the screen following motion thing. Apparently it can't be turned off yet, only desensitized or something.  This can't be good, the iphone is literally making people sick, if this is factual.   Here is the link, 

iSICK

http://globaleconomicanalysis.blogspot.com/2013/10/your-new-iphone-can-c...

LOLOL!!!!

Tue, 10/01/2013 - 23:18 | 4012839 HL Shancken
HL Shancken's picture

The next OptiGrab?

Wed, 10/02/2013 - 08:26 | 4013308 earnyermoney
earnyermoney's picture

iBarf

Tue, 10/01/2013 - 21:10 | 4012408 fonzannoon
fonzannoon's picture

Bernanke has methodically shut off every asset class except equities. Bond holders are just the latest victim. Any bond investor is now frozen in place. They know they will get their balls cut off if they short them, and could easily get their balls cut off if they stay long them. Then they look over and see the PM guys just getting violently beaten with no mercy.....and then there is facebook and yelp and hotdogshit.com. The bernak will make sure that retail and everyone else gets in the equity pool. No matter how long it takes. As for the credit bubble, when the 10yr JGB pops I will sit up and take notice.

Wed, 10/02/2013 - 07:33 | 4013220 BigJim
BigJim's picture

+1

When the 10yr JGB pops it will be because the Yen has finally gone up in flames and been replaced by something new.... the iYen, perhaps, a currency backed by the full faith and credit of Apple, Everyone's Favorite Sovereign Corporation-Nation!

Tue, 10/01/2013 - 21:10 | 4012437 pragmatic hobo
pragmatic hobo's picture

icahn owns not even 0.5% of appl stocks ... what makes him think he can make these demands?

Tue, 10/01/2013 - 21:58 | 4012577 TruthInSunshine
TruthInSunshine's picture

Because he claims Tim Cook is his bestest butt buddy, ever, according to his cute tweets.

Wed, 10/02/2013 - 07:35 | 4013222 BigJim
BigJim's picture

Because he is a wise and all-seeing fellow?

Tue, 10/01/2013 - 21:20 | 4012447 RichardENixon
RichardENixon's picture

Duplicate post

 

Tue, 10/01/2013 - 21:14 | 4012448 RichardENixon
RichardENixon's picture

Any of these "cash on the balance sheet" clowns know that A-L=E?

Tue, 10/01/2013 - 21:25 | 4012484 tarsubil
tarsubil's picture

KA-...!!!

Tue, 10/01/2013 - 21:24 | 4012487 Everyman
Everyman's picture

PLease God, send us a nice margin call on these debt levered assholes.

Wed, 10/02/2013 - 07:35 | 4013223 BigJim
BigJim's picture

The Fed doesn't do margin calls.

Tue, 10/01/2013 - 21:29 | 4012500 mrpxsytin
mrpxsytin's picture

In the end we know this is unsustainable - the question is when (in 2007 it last 10 months or so...)

 

In 2007 wealth seemed to be a lot more spread out. So yes, back then it was unsustainable for almost every business venture to enjoy endless growth and prosperity. However, now is different. Now the wealth is continually being concentrated into a smaller and smaller number of corporations. That being the case, I do not see anything unsustainable about that on an economic level. It can theoretically continue happening until the cartel owns everything. 

So I think we need to be analysing things on other levels to see whether what is occuring now is sustainable or not. Is it sustainable on a social level? Well if the governments continue expanding their defences against 'terrorism', then they can probably just crush any social resistance. 

It's nice to tell ourselves that what is happening is unsustainable. You might even believe it to be true if you choose to analyse things in the 'traditional' way, such as the author of this article. However, if you look at the fact that wealth and power is only getting more and more concentrated then you start to see a much bleaker picture emerging.

The current developments may seem unsustainable assuming a free market and liberty. However, the reality is that we have neither of those things.  

Wed, 10/02/2013 - 07:53 | 4013253 BigJim
BigJim's picture

Keeping interest rates below the real rate of interest (ie, what savers would demand) must eventually lead to more and more capital being allocated to investments that only produce a yield at artificially low rates. If rates are allowed to rise these businesses go bust, and asset prices being propped up by cheap money (ie, practically everything except PMs) in general must collapse. But if rates are kept low then eventually inflation starts picking up, and, with the USD being held in large part internationally, inflation could easily flip into hyperinflation as those dollars come home. There is a limit to how much 'controlling' central planners can exercise over reality.

Now it's true that they can just keep cranking up the repression if the populace becomes seriously restive. But as long as the bread and circuses keep being delivered I can't see the people in the lower echelons revolting. And the middle-classes are too stupified by MSM programming to even begin to see where the underlying problem is, so we won't be seeing them voting differently any time soon.

So it seems to me the future is either an enormous financial bust if rates are allowed to rise, or hyperinflation and more Statist repression and propaganda if they aren't.

Hmmm. What an attractive future.

Tue, 10/01/2013 - 21:30 | 4012502 HowardBeale
HowardBeale's picture

America has arrived! We are Rome! It is time for lions and meat; things with teeth. And I could think of nothing more appropriate and fair than the ChainSaw Games; victims of Wall Street (pretty much everybody) are armed with chainssaws in every arena/stadium/superdome in the country; Maria Bartiromo and the other whores--inlcuding Joe Kernan--are dumped from a helicopter above the venue--not high enough to immediately kill them--and The Games Begin!

Of course that is simply the pre-season opener. After that successful debut, every living person to have ever worked on Wall Street--or to have known such vermin--are equally distributed across the nation to the Scum Eradiction Centers (SECs), where A Good Time Will Be Had By...US..

Face it, it's either that or something far worse.

Tue, 10/01/2013 - 21:53 | 4012563 Everybodys All ...
Everybodys All American's picture

Tim Cook would have to be the biggest idiot in Silicon valley if he listens to ICon.

Tue, 10/01/2013 - 22:07 | 4012612 WTFUD
WTFUD's picture

Ichan remember you, your that slimey greasy fucking j--, boohoo.

Tue, 10/01/2013 - 22:33 | 4012703 ebworthen
ebworthen's picture

Can't wait for Icahn to have a stroke and not be able open his obnoxious maw.

One of the poster children for what is wrong with Wall Street and U.S.S.A.

Greedy arrogant sycophants don't create value or jobs.

Wed, 10/02/2013 - 00:13 | 4012944 CheapBastard
CheapBastard's picture

70% of the GDP is consumer spending they say. So where is this consumer money coming from? Massive credit with zero down almost everything from cars to education, from houses to plastic surgery. No one pays for anything any more up front. It's all swirling in an Uber Debt Ball in the cloud somewhere along side the $200 trillion unpaid gov liabilites Kotlikoff talks about.

Today at the post office some woman in front of me with three kids hanging off her rather Rubinesque body asked the clerk if she could borrow 8 cents from him to buy a stamp. She said she was "short this month."

 

 

 

Wed, 10/02/2013 - 00:59 | 4013000 delivered
delivered's picture

Debt in the current enviornment is always cheap - until it has to be repaid! It's all shits and giggles until then so why worry about and let's rocket the market higher.

I believe what you are really looking at is a complete and total breakdown in what debt is and why it is used. Does the market really think that the debt will be repaid from cash flow? Why no as when the debt goes bad, the Fed or Washington will be there to act as a secondary repayment source (remember AIG's bail out went to cover CDS obligations which ended up right in GS's pockets). Does the market really believe that adequate collateral is supporting the debt and if needed, can be liquidated to repay the debt? Again, no as most of this debt is going to quickly turn into junk when the next correction occurs. 

What's absolutely amazing to me is the complete lack of respect for the simplest of concepts with debt. The more leverage used results in higher returns but also much greater risk. So when these over in-debted companies stumble or the economy even enters into a mild recession (assuming it is even expanding), the pressure to decrease expenses in order to cover debt service payments (P&I) will be extreme to say the least with large job cuts soon to follow (of course amplying the downturn even further). 

And how crazy has the environment gotten, well on a day that Carl the Barbarian is trying to persued Apple to take on a massive amount of debt (making Verizon's deal a couple of weeks ago look like child's play) to simply transfer this wealth to the shareholders at the expense of so many, we're reminded that the USPS defaulted on its pension payment obligation, Detroit defaulted on certain GO bonds, Merck is dumping some 15k jobs (of course don't worry as Amazon and Wal-Mart are hiring this holiday season), CMBS sales are accelerating (can't locate the link but it was based in high end hotels raising debt for properties and then dumping the debt in CMBS), and new car sales have hit a wall (as I guess all of the channels are stuffed full now). 

It's a race now plain and simple. Raise as much cash through debt as possible at the cheapest rate possible without giving a second thought to what the long-term implications are. Could you imagine what that $150 billion would do to the real economy if it found its way to Main Street businesses (that could actually put the money to work)? I guess we'll never find out as the raiders have only one objective and that is to transfer as much wealth as possible to the select few before it all falls apart. And to think, the raiders have actually had to target the most valuable brand in the world to extort money. That should really tell us how close the end game is and how deep the problems really are. 

Wed, 10/02/2013 - 16:37 | 4015468 zipit
zipit's picture

Next time can you include a graph with of the leverage ratio itself along with (or even instead of) the grow breaking out its components.  Thks.

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