The New Normal In One Sentence: "In The US Equity Market, The Worse A Company’s Finances, The Better It’s Doing"

Tyler Durden's picture


It was just last Friday when we updated our list of the most hated, i.e., most shorted, stocks which are so critical in the New Normal because as we have reported constantly since 2012, going long the most shorted names remains the best alpha-generating strategy, outperforming the broader market by orders of magnitude. Today, it is Bloomberg's turn to recap just how broken the market is with an article that highlights the "balance sheet bombs" rallying by 94%. The lede: "In the U.S. equity market, the worse a company’s finances, the better it’s doing." Because there is nothing like rewarding failure and capital misallocation to promote economic growth and employment recovery.

Here is what the outperformance of garbage companies looks like:

Regular readers will know the story but here it is once again because it somehow manages to get funnier with every read:

Stocks with the weakest balance sheets have climbed more than 8 percent in 2014 and 94 percent since the end of 2011, generating almost twice the gain in the Standard & Poor’s 500 Index (SPX) over that period, according to data compiled by Bloomberg and Goldman Sachs Group Inc. Shares in the category this year are beating those that most investors consider the bull market’s leaders, such as small caps and biotechnology, which tumbled in March.

Goldman, whose year end S&P price target is 1900 and which see the S&P at 1950 not on Friday but on June 30, 2015, adds the following value:

“Having a weaker balance sheet isn’t a liability or a drag on potential company performance at this point,” David Kostin, chief U.S. equity strategist at New York-based Goldman Sachs, said in a May 20 phone interview. “In an economy that’s getting better, you can operate perfectly fine with a little more leverage.”

And here is why we periodically update our list of 50 most shorted stocks:

A basket of 50 companies that rank lowest in measures comparing equity to total liabilities and earnings to assets, compiled in a gauge known as the Altman Z-Score, has increased 8.3 percent in 2014 after climbing 50 percent last year. The highest-rated group is up 3 percent since December after rallying 28 percent in 2013, according to data compiled by Goldman Sachs.

So what exactly are algos rewarding? Why the relentless releveraging of these companies with debt which once the rate cycle turns will promptly crush them all:

Junk-rated borrowers from Oklahoma City-based Chesapeake Energy Corp. to Netflix Inc. in Los Gatos, California, issued a record $380 billion of speculative-grade bonds in the U.S. last year, data compiled by Bloomberg show. While the pace has slowed in 2014, a monthly average of $29.5 billion is still 13 percent higher than during the previous four years.

But the real reason is simple: dash for trash, New Normal style, thanks to the Fed of course:

“There’s insatiable demand for high-yielding, lower-quality instruments, and companies are taking advantage of that to get money,” John Carey, a Boston-based fund manager at Pioneer Investment Management Inc., which oversees $220 billion worldwide, said in a May 22 phone interview. “The market is rewarding the kind of short-term behavior and earnings enhancement that this kind of financial strategy can provide in a low-interest-rate environment.”


Better returns from companies with the weakest balance sheets are also being aided by a shift in investor demand for stocks trading at lower valuations. Equities in the Goldman Sachs basket with the lowest Altman Z-scores, such as Natick, Massachusetts-based Boston Scientific Corp. and Time Warner Inc. in New York have an average price-earnings ratio of 21. That compares with 31 for the Facebook Inc.-led strong balance sheet category.

Not everyone is buying the Koolaid...

The outperformance of weak balance sheet companies “may be a head fake,” Mortimer, the Boston-based director of investment strategy for BNY Mellon Wealth Management, which oversees about $185 billion, said in a May 21 phone interview.

... But once the specter of losing out on his year end bonus rears its ugly head, because everyone else is outperforming BNY, it will be: Buy, Mortimer. Buy!

In the meantime, don't expect the dash for trash to end any time soon:

Fed Chair Janet Yellen suggested on March 19 that the central bank might raise U.S. interest rates by the middle of next year, six months after bond purchases end.


Relaxed lending standards have led to a reduction in corporate defaults. Eight U.S. companies failed to meet debt obligations through April 24, compared with 19 over the same period in 2013, according to a S&P Ratings Services report.

Finally, what is the overarching objective of the central planners:

The Fed is “trying to allow otherwise shell-shocked or risk-avoidant investors to participate in this economic expansion,” Stephen Wood, the New York-based chief market strategist at Russell Investments, which oversees more than $259 billion, said in a May 21 phone interview. “We’re not approaching a credit-constrained environment, at least from a policy perspective.”

What expansion: that of the Fed's balance sheet? But yes, the Fed would certainly want everyone to participate in this late stage ponzi scheme: after all the banks, which are the entities doing the bulk of the buying, need to sell to someone before even the most optimistic permabulls who confuse 5+ years of Fed intervention and micromanagement with actual sustainable growth pull a "nervous" Tepper and just admit the market is too manipulated and rigged even for them.

To summarize: the Old Normal had GARP - Growth At A Reasonable Price. The New Normal has CAAP: Crap At Any Price.

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Tue, 05/27/2014 - 11:02 | 4798362 Aknownymouse
Aknownymouse's picture

The George Castanza market

Tue, 05/27/2014 - 11:05 | 4798377 Headbanger
Headbanger's picture

The "Atlas Shrugged" market is moar like it.

Tue, 05/27/2014 - 11:13 | 4798408 derek_vineyard
derek_vineyard's picture

when zero hedge postings get to zero, then the market is in trouble


Tue, 05/27/2014 - 11:14 | 4798414 MillionDollarBonus_
MillionDollarBonus_'s picture

There's a simple explanation for this. The short positions in these stocks are frequently covered and recycled among dumb-money retail traders (not unlike many of the doomers on this site). The reason the most shorted stocks are yielding the best returns is that they offer the best execution for large institutional traders. Weak handed shorts with a few measly shares at risk, act as shock absorbers for real traders, savvily moving hundreds of millions of dollars into equities.

Tue, 05/27/2014 - 11:22 | 4798444 Bryan
Bryan's picture

"savvily moving hundreds of millions of dollars into equities."


Do you really think that new money is coming into the equity market?  From where?  What could possibly be a more risky place to put cash than into company equity when companies are losing traction and running out of accounting tricks, and the world economy looks like it's on the edge of financial armageddon?

Tue, 05/27/2014 - 11:32 | 4798486 TheReplacement
TheReplacement's picture

It is MDB.  Take everything he types and think the opposite to realize his truth.

Tue, 05/27/2014 - 11:28 | 4798466 The Limerick King
The Limerick King's picture

I hate to say it...but some of this makes sense. Algos on a dumb-money short hunt until dumb-money stops shorting these dogs, and the dumber-money steps in to buy at the new rigged top. All coordinated of course among the members of the Elite.

Tue, 05/27/2014 - 11:20 | 4798436 The Limerick King
The Limerick King's picture



When will insanity halt?

This Atlas Shrugged market's at fault

Everyone's buying

The corps that are dying

Our common-sense must have gone Galt

Tue, 05/27/2014 - 11:30 | 4798478 DaveyJones
DaveyJones's picture

why do these idiots buy

can't figure out though I try

counting my lentils

they tell me I'm mental

but one day the market will die 

Tue, 05/27/2014 - 12:23 | 4798705 locklimit
locklimit's picture

Corporations are buying back stock

Short sellers are loading the glock

But when cash becomes needed

With credit depleted

Futures will certainly lock

Tue, 05/27/2014 - 11:14 | 4798419 eclectic syncretist
eclectic syncretist's picture

"A job with the New York Yankees! This has been the dream of my life ever since I was a child, and it's all happening because I'm completely ignoring every urge towards common sense and good judgement I've ever had. This is no longer just some crazy notion, Elaine, Jerry. This is my religion." "So I guess your messiah would be the Anti-Christ." - George and Jerry, in "The Opposite"

Tue, 05/27/2014 - 11:03 | 4798363 Bryan
Bryan's picture

Is anyone else sick and tired of reading and watching this 'spin charade' over and over like a bad dream?

Tue, 05/27/2014 - 11:03 | 4798366 JRobby
JRobby's picture


Tue, 05/27/2014 - 11:08 | 4798384 Headbanger
Headbanger's picture

Yeah but I'd like to start seeing the charade frauds spinning on the end of a rope!

Tue, 05/27/2014 - 11:46 | 4798554 dontgoforit
dontgoforit's picture

I am no financial genius, but it seems to me this thing is kind of like a dog with rabies.

Tue, 05/27/2014 - 15:14 | 4799218 larz
larz's picture

well apparently my personal finances arent that bad after all - bullish

Tue, 05/27/2014 - 12:38 | 4798751 JRobby
JRobby's picture

There will never be prosecution one for any act that led up to the 2008 horrors.

This is financial terrorism sanctioned by the owners of the world systems of politics (government tools boxes) and finance.

They fear our numbers. They fear us eating their food supply and drinking their water.

Tue, 05/27/2014 - 11:06 | 4798379 Winston Churchill
Winston Churchill's picture

The more I watch this ,the more I think we are on the terminal meltup before

a total implosion.

Tue, 05/27/2014 - 11:12 | 4798401 LawsofPhysics
LawsofPhysics's picture

Yes, Zimbabwe wants their "market" back...

Tue, 05/27/2014 - 11:13 | 4798411 onewayticket2
onewayticket2's picture

yup.  followed by new, global currency....and the management to go w it.

Tue, 05/27/2014 - 11:17 | 4798428 eclectic syncretist
eclectic syncretist's picture

Looks and feels like December 1999.

Tue, 05/27/2014 - 11:14 | 4798416 Bryan
Bryan's picture

I remember thinking in 2009-2010 that it was crazy to hear "green shoots" and all the "recovery" memes that were going around in the press and politics.  I thought "What??  Are we all looking at the same economy?"  I bought shares of SDS back then, thinking at least we'd get a double dip back near S&P 700 or so... then MAYBE a slow recovery.  But no, we're all heading at Ludicrous Speed right into the abyss, and clueless people all the way are cheering about their green IRA balances and listening to what CNBC and Cramer and Bernanke and Draghi tell them to believe.  What a bunch of dolts we've become.  I think we deserve what's waiting at the end of this party.

Tue, 05/27/2014 - 11:34 | 4798496 TheReplacement
TheReplacement's picture

We?  You gotta banana in your pocket or something?

Tue, 05/27/2014 - 11:34 | 4798498 astoriajoe
astoriajoe's picture

Unfortunately, not much else is on.

Tue, 05/27/2014 - 11:04 | 4798370 oklaboy
oklaboy's picture

boy this sounds like  fun

Tue, 05/27/2014 - 11:05 | 4798371 JustObserving
JustObserving's picture
In The US Equity Market, The Worse A Company’s Finances, The Better It’s Doing

Because it is a microcosm of America

Tue, 05/27/2014 - 11:20 | 4798438 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

'Merican Exceptionalism at its finest.

Tue, 05/27/2014 - 13:56 | 4798978 CrazyCatLady
CrazyCatLady's picture

Reminds me how one needs debt in order to gain credit

Tue, 05/27/2014 - 11:06 | 4798381 bagehot99
bagehot99's picture

And when it goes over a cliff, it will do so 'unexpectedly'.

Tue, 05/27/2014 - 11:12 | 4798382 Dr. Engali
Dr. Engali's picture

"So what exactly are algos rewarding? Why the relentless releveraging of these companies with debt which once the rate cycle turns will promptly crush them all:"


It's going to be a long wait:


"No Rate Normalization During My Lifetime"


~The Bernank

Tue, 05/27/2014 - 11:29 | 4798470 Hippocratic Oaf
Hippocratic Oaf's picture

"No Rate Normalization During My Lifetime"


I wish someone would artificially raise rates by taking bernanke out. Maybe his 'lifetime' clock is ticking.

Tue, 05/27/2014 - 11:35 | 4798502 TheReplacement
TheReplacement's picture

He wasn't explicit about his lifetime ending naturally was he?

Tue, 05/27/2014 - 11:48 | 4798565 NoDebt
NoDebt's picture

Guy could go at any time.  I mean, he was old 20 years ago.  Even drinking the blood of infants to extend his life has it's limits.

Tue, 05/27/2014 - 11:07 | 4798383 Winston of Oceania
Winston of Oceania's picture

Chasing yield to cover for the lack of capital accumulation and real growth. Do yourselves a favor and decouple from the false economy now before it is too late.

Tue, 05/27/2014 - 11:10 | 4798392 The Most Intere...
The Most Interesting Frog in the World's picture

US Government finances suck to high heaven but they have minted more millionaires than Google, Apple, Amazon, Facebook, etc.... COMBINED!

Tue, 05/27/2014 - 11:11 | 4798398 youngman
youngman's picture

Yes its Chasing yield..plain and simple....and for the bigger lier...the one who lies the most about his company or IPO wins...

Tue, 05/27/2014 - 11:12 | 4798399 LawsofPhysics
LawsofPhysics's picture

All fine and good until someone takes profits...


We have been here before (with considerably "less-scary" margins).


hedge accordingly.

Tue, 05/27/2014 - 11:16 | 4798429 Winston Churchill
Winston Churchill's picture

Seen it all before too many times.

The depth of this coming collapse, will be different this time though,I'll give the pundits


Tue, 05/27/2014 - 11:12 | 4798402 orangegeek
orangegeek's picture

“Having a weaker balance sheet isn’t a liability or a drag on potential company performance at this point,” David Kostin, chief U.S. equity strategist at New York-based Goldman Sachs, said in a May 20 phone interview. “In an economy that’s getting better, you can operate perfectly fine with a little more leverage.”


This statement rocks!!!!  So I should buy some Sear and JC Penney stock???   DONE!!!

Tue, 05/27/2014 - 11:13 | 4798409 Smegley Wanxalot
Smegley Wanxalot's picture

War is Peace.  Freedom is Slavery. Ignorance is Strength.  Weak Balance Sheet is Good Performance.

Tue, 05/27/2014 - 11:14 | 4798415 LawsofPhysics
LawsofPhysics's picture

Yes, and for the insiders...

Knowledge is power.

Tue, 05/27/2014 - 11:16 | 4798424 Smegley Wanxalot
Smegley Wanxalot's picture

Printing is Power.

Ink is GDP.

Tue, 05/27/2014 - 11:30 | 4798481 Headbanger
Headbanger's picture

Insanity is Normal.

Tue, 05/27/2014 - 13:40 | 4798939 Nomatrix
Nomatrix's picture

Right on. 
Standardisation of insanities all over the place.

Tue, 05/27/2014 - 11:13 | 4798410 Winston Churchill
Winston Churchill's picture

Fraud seems to be the only true growth area left.

Tue, 05/27/2014 - 11:15 | 4798422 Lionhearted
Lionhearted's picture

SELL YOUR GOLD and buy stocks. Paper rules. LOL. The bubble is inflating and the walls are getting very thin.

Tue, 05/27/2014 - 11:15 | 4798425 Tinky
Tinky's picture

While frustration is unerstandable, bear in mind that the further divorced from reality the markets become, the closer we are to the end-game.

Tue, 05/27/2014 - 11:26 | 4798458 Al Huxley
Al Huxley's picture

Maybe this is th end game.  If the insiders can make 20%+ in equities, and real inflation is 10% (with reported at < 2% to keep the game going) that's a nice margin.

Tue, 05/27/2014 - 11:39 | 4798520 TheReplacement
TheReplacement's picture

Until eventually they cannot make 20% because they have more than 80% already.  At that point they will have to feed on their own.  Counting derivatives, I think we are close.  Just consider the lack of non-HFT volume in the markets. 

Tue, 05/27/2014 - 11:22 | 4798443 CheapBastard
CheapBastard's picture

How about those fine CEOs who run a company down?


Steinhafel could get $26 million in Target severance




Don't even get me started on that jcp CEO thingy.....

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