This page has been archived and commenting is disabled.

Take A Dive In The "Dash For Trash" Waterfall With Goldman Sachs

Tyler Durden's picture




 

As we have discussed numerous times, the dash-for-trash in US equities has been insatiable as any and every consequence of screwing up is slowly removed from capitalism (and capital markets). As Goldman's David Kostin notes, companies with weak balance sheets have outperformed peers with strong balance sheets by 49 percentage points during the past two years (89% vs. 40%) with realized volatility of just 7%.

 

 

Although the trend is daunting - to say the least - Goldman believes it will continue for three reasons...

(1) our economic outlook calls for strengthening growth and modest inflation;

 

(2) corporate leverage remains low; and

 

(3) the current outperformance is consistent with past episodes of leadership by weak balance sheet companies.

 

However, all 3 of these reasons are entirely ridiculous...

(1) Goldman itself has been dramatically downgrading its GDP expectations over the past few weeks and consensus for the year is also fading...

 

 

(2) Corporate leverage is at record highs and credit spreads are well off cycle tights...

US companies are carrying far more net debt than in 2007

 

Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.

 


 

In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.

And Credit spreads are not exactly supportive of equity risk right now...

 

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 lasted 10 months or so...).

 

Of course, just as in 2007, things change very quickly once collateral chains start to shrink.

 

Perhaps this is why Carl iCahn called the top - because he knows the ability to re-leverage (his bread and butter trade) is over...

(3) This is the 5th (was 6th 6 months ago) longest business cycle on record!!

The curveball for 2014 – A US recession

 

One topic no-one is really discussing is a US recession in 2014. We should start to at least consider the risk given the maturity of this cycle. By the end of May 2014 this expansion will be 59 months old which is longer than the average of 39 months (median 30) since data started to be compiled on US business cycles in 1854. The average in the 100 years since the Fed was formed in 1913 is 50 months (median 42). This cycle is now the sixth-longest of the 34 cycles since 1854. Economists will explain that recessions don’t die of old age but because of imbalances that they might argue are not yet present. However consensus never forecasts a recession in advance so one has to find other ways to help us identify the end of the cycle. Across most other regions, business cycles have shortened post the GFC with many economies experiencing a dip into negative territory again sometime between 2011 and 2013 after the recovery in 2009 and 2010. A lack of policy flexibility (fiscal and monetary) post crisis is our main explanation. The US has just about escaped this due to extraordinary monetary and fiscal stimulus. However with both likely on the retreat at the same time in 2014 it’s prudent to acknowledge the already mature length of this cycle.

 

 

So the most obvious driver of financial markets in 2014 does seem likely to be how the Fed, the global economy and the market manage to handle the question of the QE taper. Whether the ECB need to implement negative deposit rates or introduce QE will also be a big driver. However experience teaches us that it’s not usually the obvious theme that ends up dominating in the following 12 months.

So apart from all 3 of the reasons for a continued dash-for-trash outperformance being rubbish - we can only imagine Goldman telling its clients to take a dive in the dash-for-trash waterfall is designed to help Goldman build a "strong balance sheet" company position.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 05/18/2014 - 18:36 | 4772025 SmilinJoeFizzion
SmilinJoeFizzion's picture

You mean twtr shouldn't be worth as much as Boeing? You don't say

Sun, 05/18/2014 - 18:46 | 4772055 kaiserhoff
kaiserhoff's picture

Trees do not grow to the sky.

    Charles Dow

Sun, 05/18/2014 - 18:53 | 4772072 observer007
observer007's picture

MH370 FILM HERE - "the untold story"

Mystery solved ? MH370 outrageous movie trailer for The Vanishing Act board and hints AFFAIR promises to reveal the " untold story " behind the disappearance tickets.

The Vanishing Act says "untold story" behind the disappearance of flight.

The 90 - second trailer casts suspicion on passengers and crew. Associate Director denies parallels between the film and the disaster in real life.

Information for the film comes from the theory of a Malaysian journalist.

A new trailer for a movie about missing Malaysian Airlines flight MH370 has hit the internet just 10 weeks after the plane disappeared .

 

FILM HERE

Sun, 05/18/2014 - 19:03 | 4772100 medium giraffe
medium giraffe's picture

moar circus

Sun, 05/18/2014 - 19:48 | 4772186 Pure Evil
Pure Evil's picture

Does malware get downloaded on my computer after I click on the link?

Sun, 05/18/2014 - 20:23 | 4772287 g speed
g speed's picture

no-- it happens instantly as you click on the link--

Sun, 05/18/2014 - 18:38 | 4772033 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

Glad to see that the NASDAQ e-mini is already up .20 percent...on its way to its required .30 percent or so pre-market elevation. 

Sun, 05/18/2014 - 18:44 | 4772045 Cattender
Cattender's picture

i hope the stock market goes down a LOT Soon!

Sun, 05/18/2014 - 19:42 | 4772166 BrosephStiglitz
BrosephStiglitz's picture

I guess they haven't invented time travel in the future yet.  Otherwise the T-900 would have gone back in time and capped Nixon before he could end Bretton-Woods.

Sun, 05/18/2014 - 20:00 | 4772213 FreeMktFisherMN
FreeMktFisherMN's picture

Bretton Woods was not a real gold standard. Bureaucrats determining prices out of thin air and decreeing them as law is not a market. A real gold standard is simply a free market for money with no 'legal tender' and monopolies like the FRN, and people have always chosen gold and silver and always will. Issuing sovereign coins out of PMs is better than pure fiat obviously, but it still is statist and always will be prone to things like what the communist FDR did.

Sun, 05/18/2014 - 20:09 | 4772238 AbelCatalyst
AbelCatalyst's picture

They did! The only problem is by capping Nixon all the free money went away, which was used to finance the time machine, so there was no time machine, which means Nixon was never capped, so there was enough money, which means there was a time machine, then Nixon was capped, which killed the time machine...

Basically, we're in a perpetual loop, which is why this market will never correct... Real world Groundhog Day - we wake up every morning to green spoos forevah!!!

Sun, 05/18/2014 - 20:23 | 4772288 BrosephStiglitz
BrosephStiglitz's picture

+1 for the temporal paradox.

Sun, 05/18/2014 - 18:48 | 4772059 medium giraffe
medium giraffe's picture

they've been out picking those mushrooms again.

Sun, 05/18/2014 - 18:55 | 4772080 infinity8
infinity8's picture

Well, Fuck Me and, Fuck Golden Sack. Rot in hell. I said it before and I'll say it again: My kingdom for a massive fucking flash-crash!

Sun, 05/18/2014 - 19:00 | 4772087 I Write Code
I Write Code's picture

So they're valued basically on cash flow.

Just another consequence of ZIRP and QE: risk means nothing, the Fed shall provide.

Also debt means nothing - and in many cases it *does* mean nothing, as it's at negative real interest rates.

Sun, 05/18/2014 - 19:37 | 4772156 BrosephStiglitz
BrosephStiglitz's picture

Debt means nothing until it means something.  It's a pie in the sky ponzi that has just about run its course.  Bullish prospects for release of excess reserves and QE infinity^4 Jan '16: rebranded and coming to a town near you.

Sun, 05/18/2014 - 19:58 | 4772208 TheFourthStooge-ing
TheFourthStooge-ing's picture

It's no surprise that GS is encouraging its clients to go dumpster diving. It's a way to get them to pay for the privilege of hauling off Goldman's rotting garbage.

Although the trend is daunting - to say the least - Goldman pretends to believe it will continue for one reason: it has a huge rubbish heap to unload on its most gullible marks.

Yes, that's GS innovation alright.

Sun, 05/18/2014 - 20:18 | 4772272 ATG
ATG's picture

The P Card

Another possible reason for new market highs this week:

http://bit.ly/1oFQGPG

Mon, 05/19/2014 - 06:16 | 4772938 buzzsaw99
buzzsaw99's picture

corporate leverage remains low? wtf?

Mon, 05/19/2014 - 06:29 | 4772948 Robinhood
Robinhood's picture

We watched The Wolf of Wall Street this weekend and at the end of the movie I was left wondering what was so different from how GS, JPM, etc. operate their pump and dump, market manipulating, muppet slaying, money laundering, corruption, etc. enterpises. 

Oh yeah, they own the Fed, the MIC, and washington.

Do NOT follow this link or you will be banned from the site!