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Beware The Distressed Credit "Canary In The Coalmine"

Tyler Durden's picture




 

The credit cycle is called a "cycle" because, unlike the business cycle (which the Fed has convinced investors no longer exists), it 'cycles'. At some point the re-leveraging of the balance sheet - remember more cash on the balance sheet but even morerer debt (as we noted here) - requires risk premia that outweigh even the biggest avalanche of yield-chasing free money. It appears, as Bloomberg's James Crombie notes, that point may be approaching as yield premiums for U.S. distressed debt hit a five-year high on March 25, according to Bank of America Merrill Lynch.

 

h/t @jtcrombie

BAML’s distressed debt index was at a spread of 2,483 basis points — the highest level since March 18, 2009 when it was at a spread of 2,609 basis points.

Of course we have explained this won't end well...

 
 

US corporates saw profit growth slow to almost zero last year and on an EBIT basis it has been flat for some time now. Earnings quality, rather than improving is actually deteriorating, as indicated by the increasing gap between official and pro-forma EPS numbers. As a consequence, following a long period of overspending and in the absence of a strong pick-up in demand, corporates will have to spend less and not more.

 

Finally, as a consequence of such anemic growth, corporates have been gearing up their balance sheets in an effort to sustain EPS momentum via the continuing use of share buybacks. With markets up substantially in 2013 executing those share buybacks has become increasingly expensive. Little wonder companies have to borrow so much to continue executing them.

 

 

This won't end well...

 

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Wed, 03/26/2014 - 20:23 | 4596533 bubblemania
bubblemania's picture

Bullish!

Wed, 03/26/2014 - 20:31 | 4596568 NotApplicable
NotApplicable's picture

Paging Mr. Corzine...

Wed, 03/26/2014 - 21:16 | 4596750 drinkin koolaid
drinkin koolaid's picture

How about 3x leveraged Bull ETF bullish  --  Yippee!

Wed, 03/26/2014 - 20:23 | 4596534 bubblemania
bubblemania's picture

Bullish!

Wed, 03/26/2014 - 20:46 | 4596625 THX 1178
THX 1178's picture

Double bullish? Damn, thats bullish!

Wed, 03/26/2014 - 21:26 | 4596799 El Vaquero
El Vaquero's picture

It's bearish.  Which is bullish these days.  BTFD!

Wed, 03/26/2014 - 20:28 | 4596555 FieldingMellish
FieldingMellish's picture

I thought all credit was AAA in the New Normal?

Wed, 03/26/2014 - 21:19 | 4596762 drinkin koolaid
drinkin koolaid's picture

The new AAA used to be  ZZZ.

Wed, 03/26/2014 - 21:31 | 4596820 disabledvet
disabledvet's picture

I've become your little "angry dinosoar toy" you used to have as a kid so you might want to get used to that. Obviously you're pretty bright or I wouldn't bother...and as usual this is a good comment...and while I have pretty much disagreed for many years with pretty much everything financial on this site (they're looking good on the Battlefront however) te one area that has been dispositive is "views on credit to be taken seriously."

So, yes...this is far from a totally meaningless screed as is so often th case in what passes for journalism these days. but we need a correction before we "Sally forth to our financial doom" here.

"Ot was te Fed that popped this bubble." Apple called the top "to the minute" pretty much and this is beginning to get noted over at SA. In short...despite te total extinction of short sellers oh these many years "we do have some forensic evidence that at one time they did exist."

So to answer what I take as a question ("all credit is triple aaa" --insert hardy har-har here) well, indeed...according to WALL STREET it is...but not according to the Fed. in ZH parlance "they monkey hammered that bitch a year ago."

in short "don't think you phucking credit risk...phucker...is We the People's credit risk anymore." The fact of the matter is...it is not...nor even if it was could it be since interest rates are already super low...and sure look to me like they're about to head a lot lower.

In other words..."you're god damn right that's triple AAA credit. start buying." Good luck managing the risk.

Wed, 03/26/2014 - 20:32 | 4596567 Dr. Engali
Dr. Engali's picture

It's a wonder we can accomplish anything in this country with such short term thinkers. We must borrow moar money to prop up our stock price and kick a little cash to the shareholders instead of investing for the future. What a bunch of idiots.

Wed, 03/26/2014 - 21:30 | 4596814 Gypsyducks
Gypsyducks's picture

A wise Japanese man once asked me how many times US companies filed earnings reports in a century.  It was obvious he wasn't actually looking for an answer.

Wed, 03/26/2014 - 20:40 | 4596603 rosiescenario
rosiescenario's picture

Agree this will not end well....but when?

Wed, 03/26/2014 - 20:47 | 4596632 NYPoke
NYPoke's picture

Ruh Ro Raggy

Wed, 03/26/2014 - 20:57 | 4596670 buzzsaw99
buzzsaw99's picture

old yeller will buy them

Wed, 03/26/2014 - 21:09 | 4596721 drinkin koolaid
drinkin koolaid's picture

Mr. Yeller to you sir!

Wed, 03/26/2014 - 21:08 | 4596716 drinkin koolaid
drinkin koolaid's picture

It must be the weather!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Wed, 03/26/2014 - 22:49 | 4597118 Luckhasit
Luckhasit's picture

Why not just get a capital one card? What's inyour wallet?  

Wed, 03/26/2014 - 22:54 | 4597137 holdbuysell
holdbuysell's picture

Does anyone know why, in 2009, C rated spreads went much higher than Distressed spreads?

Wed, 03/26/2014 - 23:25 | 4597211 Unnatural Selection
Unnatural Selection's picture

My guess is that in this distressed benchmark, the companies are already in bk.  This means the amount of assets and liabilities are generally known, and the spread is largley a question of discounting the known variables.  For C rated assets in 2009, the future was very unkown -- how long would a company burn through liquidity before it filed, and what would its assetes and liabilities look like at that point was unkown.  The market charges (rightfully) for uncertainty.  Anyway, that's my guess. 

Wed, 03/26/2014 - 23:56 | 4597306 Dead Canary
Dead Canary's picture

Canary in the coal mine?

UNCLE LENNY!

Thu, 03/27/2014 - 03:00 | 4597580 q99x2
q99x2's picture

The old credit cycles of times gone by are now a cycle of FRAUD backed by the NATO military industrial complex. 

It ain't the same. This time is really different. Much much worse.

Thu, 03/27/2014 - 07:58 | 4597843 lucyvp
lucyvp's picture

You know, comparing spreads to treasuries will lead to distortians when the benchmark is falling in credit quality too.  :-)  maybe we should compare to Johnson and Johnson bonds, or some other bond that does not have a negative cash flow.

Thu, 03/27/2014 - 12:27 | 4598995 ItsDanger
ItsDanger's picture

You lost me at morerer.  Is that even a word?  Paging GWB.

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