This Is How The Credit Crisis Spreads To Stocks

Tyler Durden's picture

"Yeah but it's junk credit... who cares! I am invested in solid megacaps and even solider FANGs - what can go wrong?"

The biggest buyer of stocks in 2016, will be, according to Goldman Sachs, the same as it was in 2015 - corporate management teams buying back their own stock in near record quantities. But there is a problem with this thesis... the cost of funding these epic buybacks is surging, making the un-economic actions of the CFO (if very economical for their own bank accounts as they sell record amounts of their own personal stock to their company) even more irrational.

Here is Goldman's David Kostin explaining who the biggest buyer of stocks is (and will be) - as a reminder, it's not "mom(o) and pop".

We expect corporations will continue to be the largest source of demand for stocks, with net purchases by US companies totaling $450 billion, equal to about 2% of public equity cap. We forecast equity inflows from equity-related ETFs ($225 billion), equity mutual funds ($200 billion), life insurance ($50 billion), and foreign investors ($25 billion). We forecast net outflows from households ($25 billion) and pensions ($150 billion).



Well, the cost of funding that carnival of financial engineering and artifice (just ask Nordstrom, Macy's, IBM and so on) is soaring, as high-yield decompression pukes over into investment grade markets, spiking the cost of funding and crushing the 'economic feasibility' of debt-funded shareholder-friendliness:

Charts: Bloomberg

And, in case you thought "well, cost of funding has only gone up 30-40bps in IG, they can handle that," you are wrong! To all those who claim US corporate balance sheets are in great shape - they are not! Leverage is at record highs and interest coverage near record lows for the IG universe. And judging by today's collapse in Investment Grade bond prices, the market just woke up to this reality. 

Simply put, the Fed's policies enabled massive releveraging and now corporations are stuck with few options to escape a vicious circle - which by the way, is why it's called the credit 'cycle'.

And this is why the contagion to IG matters:  the biggest buyer of stocks of the last few years is about to priced away as its (cheap debt) funding dries up, removing the biggest pillar of delusion from current equity valuations.

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Deathrips's picture

Timber soon..But muppet milking first.



knukles's picture

Come on Janet!  Get some, get some, get some!
I secret probation double dare ya' to rates rates!

MrTouchdown's picture

Hell yeah! I'm retiring in 30 years and I need Janet to reassure me things are fine.

Cognitive Dissonance's picture

My mother used to call this phenomena 'the creeping crud', though she most often was talking about OPC (other people's cooties).

Not My Real Name's picture

I'm retiring in 30 years too .. maybe 35.

The bad news is I'm 51 now.

OldPhart's picture

Tell me about it...and I'm 57.

SuperRay's picture

Well, you may be retiring to zombie land

willwork4food's picture

I'm 58..and never going to retire...

ebworthen's picture

Yukon Cornelius says "Gold and Silver!  Silver and Gold!"

I plan to milk the system and cheat the hell out of it; Wall Street is my example.

Muh Raf's picture

I don't see much drama here. Some of that stock is bought back with surplus cash rather than paying divies, the remaining equity/debt swap will most likely be fixed rate or at least insured. There is an undercurrent that would be more serious, equity payback for capital downsizing, leading to reduced investment for all you Keynesians.

Tyler Durderian's picture
Tyler Durderian (not verified) Muh Raf Dec 15, 2015 2:45 AM

Could that mean that the Wall Street hacks won't get Christmas bonuses? Let's hope to see them begging for food stamps by the next year's end.

I'll even open up a soup kitchen for them:

jerry_theking_lawler's picture

Haha got me beat by about 15-20 years in age....but my retirement plan is simple. In about 5 years I will have enough assets to 'retire' that, I mean buy a liveaboard sailboat, become a part time dive instructor/part time masseur (all cash), then let you guys pick up my EBT/Snap bill, my obamacare insurance bill, and my unlimited unemployment and or disability check.  Thanks for continue to work to pay into this system so I can enjoy your fruits...

Arthur Schopenhauer's picture

I just calculated what I need to retire and I figure I'll have enough about 15 years after I'm dead.

johnvallo's picture

Ha...I just noticed that the iShares iBoxx Investment Grade Corporate Bond ETF ticker is LQD!! More like LOL

gmak's picture

Only works if you 'double-dog dare her'!

MrPalladium's picture

Nope! Double secret probation double dare!! And Belusi knows that Germany bombed pearl harbor.

wmbz's picture

Not a problem... just print MOAR!

Debt doesn't matter. It's all about STAWKS!

yogibear's picture

Damm those small people!

Moar QE. QE4 will be bigger and Wall Street will rejoice!

Bigger bonuses for Wall Street!

vq1's picture

"He said several factors bode well for the health of American consumers, including an uptick in wages and cheap gas prices. "Consumers are 70 percent of the economy and I think they will keep us from a recession.""


you're welcome

1033eruth's picture

vq1  The consumer USED to be 70% of the economy.  Uncle Fraud has been infringing on that figure more and more and as consumer is backed into an unemployed corner filled with inflation.

vq1's picture

yellen told me inflation has not hit target.


I relayed the information to my landlord

Tall Tom's picture

Yeah. He can help us raising your rent.



Jerky Miester's picture

Bob Doll is just another bankster trying to put a happy spin on this shit storm.  All these guys are coming up with unicorn tales to save their fraud asses.  Consumers now are smart enough to figure out when the shit is about to hit the fan.  Checked retail sales lately?   Here's another clue.  Check out first class airline ticket prices.  Lowest it's been in many years.

Tall Tom's picture

Consumers now are smart enough to figure out when the shit is about to hit the fan.  Checked retail sales lately?


No. They are not smart enough to figure this out.


They are broke, the Credit Cards are tapped out, and they already have been experiencing a lack of liquidity for the past Seven Years...or more.


There will be no great consumer recovery. They has not been a consumer recovery since 2008. There is currently not. And there, in all liklihood, never will be.


If this economy were doing so great, as they would want to have you believe, then the rates would have already been normalized and affairs contunued as they were in the past.


Well that did not happen, did it?


BTW...The muppets fly coach. Most have never sat in a First Class Cabin. That price decline is NOT INDICATIVE of anything which is consumer driven at all. But it does indicate that even the top 1% are beginning to feel pinched. And all of this is happening when Fuel Prices are collapsing which should lead to greater travel...if the people actually had money to spend.


LMAO and awaiting Friday's Options expiry. It is going to be a very Merry VERY, VERY Merry Christmas as I get what I want this year...a Market Meltdown.

wmbz's picture

I learned a long,long time ago...Never underestimate the raw stupidity of the great Amerikan consumer!

Chupacabra-322's picture

Derivatives, Stock buy backs, Merger's & Acquisitions. That's the Ponzi summary.

FreeShitter's picture

How much longer? I cant hold this forever.

DeadFred's picture

A month, at the end of January you will be looking at a completely different world <fingers crossed it doesn't glow>

Make_Mine_A_Double's picture

Hey Dow is up a 100 on the close - algos whistling past the grave yard.

The last plane out of Casablanca is on the tarmac warming up.

lakecity55's picture

Tomorrow Skorzeny and the paratroops will own the airfield.

lester1's picture

The Federal Reserve seriously needs to be audited. They are doing a covert stock buying operation, it's clearly obvious to people that study charts. There's no way all is buying is legit.


My other question is why is Janet Yellen terrified of an audit? What is she hiding?

Chupacabra-322's picture

Covert? Down right Criminal. Start using that word in your daily vocabulary.

DetectiveStern's picture

They can do what the fuck they want. No politician has got the balls to really stand up to them. If you go against the Fed the media will slaughter you and the sheep will carry on with no idea. The media will spin it so that the person going against the Fed is against 'Merica, Freedom and apple pie.

DontWorry's picture

Its worse than that - the deep state has everyone's cell phone and internet history - and obviously they're not using it to stop terroristm, because they haven't.  They use it to blackmail the Fed, the supreme court, congress, the senate - everyone.  No wonder no politician has the balls to stand up to them. 

RichardParker's picture

All of the politiicians know that they will end up with a bullet in their skull if they go against the fed.

wmbz's picture

Yep, and CON-GRESS can do it, but they will not.

The free wheeling criminal group known as Bansksters. Inc. Own the whole fucking rigged "market" and do as they please.

Now grab your ankles and enjoy!

Chupacabra-322's picture

Don't you mean The Criminal Board of Trustees aka CONgress who represent The City of London via The Criminal Fraud UNITED STATES, CORP. INC.

lakecity55's picture

And folks think we won Independence from GB at the Treaty of Paris...

agstacks's picture

JRL? Is that you? LOL...

agNau's picture

I would bet a wild set of tat's
* let me correct! Some wild ink.

ToSoft4Truth's picture

Just collapse the social security program already.  We must commit to rebuilding.  

Tall Tom's picture

Yeah. Let's bail in those 401 Ks, IRAs, and Government and Corporate Pension Accounts while we are at it.


Yeah. Who needs to retire anyway. There is just too much work to be done.


And as for compensation??? Each according to his need.


Nothing is too good for our Bankers...Nothing. They deserve it and their lifestyle in the Hamptons...for all of their contributions to our well being. Just where would we be without them?




Money is just a problem and who needs to be burdened with that?

I AM SULLY's picture
I AM SULLY (not verified) Dec 14, 2015 4:03 PM

When you consider the tepid trading volume on most "up days" in recent years?

Yeah - to get just 100 pts on 100 million in volume means lots and lots of sellers ...

(the PPT and FED must have maxed out the card today)

Lost in translation's picture

Post your prediction here:

Approximate date for kick-off is..?

Arnold's picture

September 13, 2015 Shemitah.

yogibear's picture

Was that shoe polish on Jonathan Cahn's face or real hair?

September 13, 2015 was the cheat-ah.

Ben Bernanke and Yellen are laughing at Jonathan Cahn.

Arnold's picture

I was thinking November 21, 2012,

end of the Mayan calender, but memories don't go that far back, mine included.

besnook's picture

i was thinking the beginning of the age of aquarius.