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This Is How The Credit Crisis Spreads To Stocks
"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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Timber soon..But muppet milking first.
RIPS
Come on Janet! Get some, get some, get some!
I secret probation double dare ya' to rates rates!
Hell yeah! I'm retiring in 30 years and I need Janet to reassure me things are fine.
My mother used to call this phenomena 'the creeping crud', though she most often was talking about OPC (other people's cooties).
I'm retiring in 30 years too .. maybe 35.
The bad news is I'm 51 now.
Tell me about it...and I'm 57.
Well, you may be retiring to zombie land
I'm 58..and never going to retire...
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.
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.
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:
http://goo.gl/UjTdrR
If there is one thing that the Great Financial Crisis and its aftermath have made abundantly clear, it is that the common people never get a free lunch but the bankers always do.
Haha suckas...you 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'...by 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...
I just calculated what I need to retire and I figure I'll have enough about 15 years after I'm dead.
Ha...I just noticed that the iShares iBoxx Investment Grade Corporate Bond ETF ticker is LQD!! More like LOL
Only works if you 'double-dog dare her'!
Nope! Double secret probation double dare!! And Belusi knows that Germany bombed pearl harbor.
Not a problem... just print MOAR!
Debt doesn't matter. It's all about STAWKS!
Damm those small people!
Moar QE. QE4 will be bigger and Wall Street will rejoice!
Bigger bonuses for Wall Street!
"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
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.
yellen told me inflation has not hit target.
I relayed the information to my landlord
Obama care is consumer spending, despite being a tax.
http://www.zerohedge.com/news/2015-06-02/fed-mouthpiece-jon-hilsenrath-f...
Yeah. He can help us out...by raising your rent.
FUHWAHD MEN...OVUH DA CLIFF!!!
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.
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 Christmas...as VERY, VERY Merry Christmas as I get what I want this year...a Market Meltdown.
I learned a long,long time ago...Never underestimate the raw stupidity of the great Amerikan consumer!
Derivatives, Stock buy backs, Merger's & Acquisitions. That's the Ponzi summary.
How much longer? I cant hold this forever.
A month, at the end of January you will be looking at a completely different world <fingers crossed it doesn't glow>
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.
Tomorrow Skorzeny and the paratroops will own the airfield.
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?
Covert? Down right Criminal. Start using that word in your daily vocabulary.
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.
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.
All of the politiicians know that they will end up with a bullet in their skull if they go against the fed.
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!
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.
And folks think we won Independence from GB at the Treaty of Paris...
JRL? Is that you? LOL...
I would bet a wild set of tat's
* let me correct! Some wild ink.
*
Just collapse the social security program already. We must commit to rebuilding.
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?
Rich?
Money is just a problem and who needs to be burdened with that?
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)
Post your prediction here:
Approximate date for kick-off is..?
SHTF.
Tomorrow.
September 13, 2015 Shemitah.
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.
I was thinking November 21, 2012,
end of the Mayan calender, but memories don't go that far back, mine included.
i was thinking the beginning of the age of aquarius.
Lift off is scheduled for the 5th...of never
Kick off already happened on August 15, 1971.
We are in the 4th Quarter. They are well ahead...and they have the Ball.
Might be a better system if executives were not allowed to sell stocks they "earned" as part of their compensation package. Ever. They'd just get the dividends.
Where is the money for these stock buybacks coming from? Straight from the Feds' printing presses?
Issuance of junk bonds!
Who's buying the junk?
Your gated Hedge Fund.
I have sat at the YMCA for the last 8 Monday for my kids swimming lessons. All 8 weeks at 4 pm I sit here pissed off. Which must mean Gold has lost $80 the last 8 Mondays and the Dow ramped up 100 points at 330 the last 8 Mondays. It truly is Ground Hog day for me with water. Amazing!!!
The greatest .gov/corp shakedown of the anno domini period ... gotta hand it to the Fabians
If u think slightly higher I/R's will stop these greedy f^#ks from issuing more debt to get their options/stock prices higher
well i've got a bridge in Brooklyn u might wanna look at. the only thing that will stop them is shareholders/boards but
they hold the same stock/options. and the band plays on
it's different this time
These days, I just assume whatever is most illogical will come to pass.
So they will hike AND markets will rally.
So they will hike AND markets will rally.
The rally already started. New highs in QQQ by Xmas.
That's the idea.
Rev up those bonuses by burning the shorts and boosting stock prices.
Rinse and repeat with infinite fed money.
I'm making a new video, 'How to sharpern your pitch fork' .. lot of interest at the moment.
101 on the peninsula between San Jose and S.F. is still nightmarishly packed at nearly all hours. When the Twatter economy here burps up enough pink slips to lighten the traffic load, I'll be a buyer. 6 months...?
Look on the bright side! I just opened a mircobrewery off the Holly exit in San Carlos! Directly over the highway from the Aviation Museum. ;)
Congrats on a great biz plan.
When times are great, people celebrate and get drunk.
When times get hard people will drown their sorrows in booze.
That little ditti has kept our family in the green for 4 generations.
Do more advertising. I don't see it on Google Maps. How about a free beer for the first 10 ZH readers to visit? Bonus points for a dartboard with a Fed Res Chairman's face in the center. Good luck with your business.
J.P. Morgan analysts wrote that the three best leading indicators for recession have been credit spreads, the shape of the yield curve and profit margins.
Here are some signs of a coming recession.
1. Investors in high-yield bonds are expecting to see their first negative return since the start of the credit crisis in 2008.
http://www.marketwatch.com/story/deteriorating-junk-bonds-flash-warning-signs-for-stocks-2015-12-07?dist=afterbell
2. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
3. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
4. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
5. Iron ore prices tumble
http://www.marketwatch.com/story/iron-ore-prices-keep-crashing-adding-to-global-growth-fears-2015-11-30
6. Baltic dry shipping index tumbles
http://www.marketwatch.com/story/shipping-index-falls-to-all-time-low-stoking-fears-about-global-growth-2015-11-19
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
7 years later......The whole system will collapse any day! Do you know the phrase "broken record"!
The devil always come to collect.
One of my first lessons in economics was there's no such thing as a free lunch. Arrogant market manipulators.
Antal Fekete wrote some interesting posts a few years back when interest rates were going down spectacularly. He suggested looking at the rate decreases as a halving process. That is, rates were getting cut in half, then cut in half again, and so on. Every halving represented a doubling of a bond's selling price.
Seen this way, it's easier to understand why the Fed's tiny proposed rate increase will be so hard for the market to survive. When interest rates head up from effectively zero, even a small increase represents a significant percentage move, and a big decline in the bond's price.
AH yes grasshopper you learn well.
That's essetially it and of course the FED knows this. That's why raising now makes no sense at all.
NONE!
When people say if not now when don't talk to me talk to the FED who built this debt contraption I'm not the one you need to tell anything.
The FED built all this over years leaving rates at zero and NOW of all times it wants to exit something that has no exit ever.
If they go ahead and do this then it's a con job and a hit being put out on the market. There is no way in hell they can't know what raising rates will do.
There is no exit from here there is no way back to sane rates that window was closed years and years ago. I agree they should never have gone here but here we are just the same and I'd prefer it all blew up and reset but you have to wonder why the FED would knowingly do this?
hmmm.
Annnnnd, there goes what few pensions those folks thought they'd get.
Since we have been riding on gravy since the 80's technically, from whatever it was 20% interest down to nothing, people are going to become complacent and it when it hits it will probably surprise us all.
Holy shit it's really happening! Fuck! I don't even have anything in the freezer! I just traded in some gold to make the down payment on an overpriced car! I have no damn popcorn!
Yeah, but it's a DRY heat !
Those CFOs better learn how crowdfunding works since the smart money is now pulling back/
So everyone who got suckered into buying junk bonds in the past two years are fucked? lol
ZH owns the story. Run with it: CCC, and junk bonds linked to those who blew up the world financial system in 07/08, and didn't go to jail, so they have done worse.
Can someone explain in simple layman's terms what all this shit means and why it's a big deal?
The action is simple, the consequences go fractal instantly.
@Jerky Miester ... Heh. That's ... kewl, dude. Did you jus' say "unicorn tales" and "fraud asses"? Heh heh.
The money spigot that was bond ETFs has been turned OFF.
I think this is a lying article because Apple and Google, for example, can borrow at a rate lower than the US government. Still.
All 1oz Silver coins are €12 @ EurGold
https://www.eurgold.de/silver/silver-coins/
Massive inflows of funds from abroad will be the liquidity provider to keep the IG Bonds at yield for CEOs to tap and buy back shares. Illiquidity will form in the equity space that you can worry about later. It is all about liquidity now.
Only thing that frees the Fed's manipulation is a currency crisis.
We at the Fed are monitoring developments in all markets and all economic indicators, and we see no cause for panic or concern.
Afterall, as long as foreign central banks keep buying our wall paper, and as long as we are unaudited, we can pretty much
manipulate any market we want, by as much as we want. If we are ever caught, we will claim that our actions were in the best interest of the public, and if it were'nt for our actions, the country would have already gone into depression. So BTFD because one way or another, I will have the S&P 500 at new highs, so I can keep the illusion that the economy is functioning.
This evening, I just looked at the NAV calculations for the mutual funds comprising my 401(k), which generally follow the "indexes", more or less.
Very interesting: The "indexes" closed green today, but most of those mutual fund's asses got kicked today, some of them down as much as two and three quarters percent (2 3/4%). The only conclusion to be drawn is there must be a lot of junk bonds floating around somewhere in those funds.
0.25% raise is very little. If they are scared of that minimal raise, than the camel is loaded to the sky.
How high is high? When asking this question it would also be wise to ponder the following, How low is low? Markets can make extreme or wild moves that charts often are unable to predict. This means it is both dangerous and difficult to pick a market top or bottom.
The idea that the central banks coupled with the too big to fail financial institutions will keep these distorted markets elevated has become entrenched in the minds of many investors and has lessened the importance of economic fundamentals and the question of how sustainable this market is.
While the "buy the dip mantra"is has worked since 2009 it is no guarantee that it will continue to produce positive results in the future. This will prove very costly when a real drop in the market does occur an old saying often used cautions traders they should never try to catch a falling knife. More on this subject in the article below.
http://brucewilds.blogspot.com/2015/12/how-high-is-high-how-low-is-low.html
The financial industry is driven by GREED and will continue Stock buybacks and other risky financial deals until the FED’s (read US taxpayers) cheap money spigot runs dry. Going back to 2007 (just prior to 2008 economic crash), former Citigroup CEO, Chuck Price made the following statement regarding Citi’s role as a major provider of financing for leveraged buyouts. “As long as the music is playing, you’ve got to get up and dance,” he told The FT on Monday, adding, “We’re still dancing.” See: Citi Chief on Buyouts: ‘We’re Still Dancing’;
Link: dealbook.nytimes.com/2007/07/10/citi-chief-on-buyout-loans-were-still-dancing/?_r=0
The people piloting the ship change, but the economic interests and goals remain the same- make as money as possible, the consequences be damned (i.e., - hope you can get your functionaries in Government to offload any losses onto taxpayers).