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3 Charts On The 'Real' Deteriorating State Of Corporate Balance Sheets

Tyler Durden's picture


If you spend your day listening to mainstream financial media you could be forgiven for believing that things have never been better for corporate balance sheets - exceptionally high levels of cash and fortress-like conservatism for example. However, in the trenches of reality, from a high-yield and investment grade credit market perspective (and perhaps this is why credit markets are expressing considerably more concern than equities still) there are three trends that point to deterioration and far-from-Nirvana cash-flow protection that should be paid close attention to.

1) Leverage has stopped falling and in fact has started to tick higher

2) Cash/Debt is trending down rapidly and is far less supportive than it was (once again focusing on justthe cash- asset side of the balance sheet misses the fact that firms have raised debt at cheap levels too - this is clear in this chart. There remains corporate conservatism but it is far less supportive of cyclical low spreads now than at any time since the crisis began).

3) Margin Improvement is no longer broad-based (as we noted recently, costs are increasing faster than revenues which compresses margins rapidly and in the worst case chews throiugh that stickpile of cash - hence the other two charts).

Perhaps this weakening trend in fundamentals - as cash-flow is king - is why credit markets have been sounding some warnings for a month...

Charts: Morgan Stanley

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Thu, 04/05/2012 - 10:10 | 2319269 Dr. Engali
Dr. Engali's picture

I wonder how Apple's balance sheet skews this report since they have more money than God.

Thu, 04/05/2012 - 10:15 | 2319282 CvlDobd
CvlDobd's picture

God doesn't have much money. He's always short by about 10% of yours.

Thu, 04/05/2012 - 10:19 | 2319290 ratso
ratso's picture

Perhaps the increase in corporate debt is due to the low cost.  It has never been cheaper for companies to borrow than it is today.  If they expect inflation in the long run, than this borrowing is not a sign of weakness but of intelligent money management.

Thu, 04/05/2012 - 10:39 | 2319327 whstlblwr
whstlblwr's picture

Let's help them out.


"The mainstream media is completely out of control and nothing more than a big government (big bank, big war, big pharma, big prison, big police state, big agribusiness and so on) propaganda machine. ...Their lies have certainly placed our nation in the jeopardy it is in today.

We can do something about it and boycott the mainstream media's advertisers (their advertisers keep them in operation). Certainly if we do nothing, nothing will change.

If you agree please like any or all of the facebook pages (below) and help the effort to boycott mainstream media grow. "



Guess what fucked up media, 10,000 people showed up to hear RP speak last night in LA, looks like media black out his HELPING his campaign. Romney gets how many people to hear him? 100? And you think we believe your corrupt election?

Thu, 04/05/2012 - 10:35 | 2319338 AssFire
AssFire's picture

God created everything, but he needs your cash

George carlin



Thu, 04/05/2012 - 10:25 | 2319308 4realmoney
Thu, 04/05/2012 - 15:22 | 2320174 pslater
pslater's picture

Sobering article on the EU.  Thanks for the link!

Thu, 04/05/2012 - 10:27 | 2319315 slaughterer
slaughterer's picture

I have seen Q/Q profit growth as low as 0.8% for next quarter.  Everybody inside the evil empire knows this and has their finger on the SELL button for next earnings season.  Even AAPL will be sold off if they miss even slightly 

Thu, 04/05/2012 - 11:17 | 2319508 rosiescenario
rosiescenario's picture

Good point...likewise, pull the .5% richest assets out of the U.S. reports to see how folks are really doing...

Thu, 04/05/2012 - 10:12 | 2319273 Oh regional Indian
Oh regional Indian's picture

I'll tell you what, balance sheets can look like sheet in one country and smell like flowers in another.

India is clearly a destination for funds currently. Companies are spending hand over fist here.

Even GM, doing very very well.

It's a snapshot, not a picture you see up there.



Thu, 04/05/2012 - 10:16 | 2319285 disabledvet
disabledvet's picture

I imagine the silver jewelry makers in Jogjakarta Indonesia are still doing a brisk business as well.

Thu, 04/05/2012 - 10:26 | 2319312 silverdragon
silverdragon's picture

Probably a good time to buy some physical silver

Thu, 04/05/2012 - 10:13 | 2319276 Northeaster
Northeaster's picture

I tried putting this in perspective in another thread that was 4 pages long, but no one reads the details that far in. We have to remember that these balance sheets since 2009 don't have to be accurate, thanks to FASB 157. The example I used was in the GM "channel stuffing" thread. Look closely, as this is just a small example:


Note 9. Equipment on Operating Leases, net

Level 3 (the FASB 157 rule change of "unobservable assets")

Period July 10, 2009 through December 31, 2009 - $543-$567

Year ended December 31, 2010 - $537-$668

Year ended December 31, 2011 - $200-$922

Look at the YoY amounts AND the spread, that to me is unicorn accounting. If someone with more expertise that can elaborate more finely, please do.

Thu, 04/05/2012 - 12:09 | 2319661 Widowmaker
Widowmaker's picture

Fraud 157 about sums it up for the peasants

"Mark it whatever you want duuuuude."


Disclosure, long LVLT.

Thu, 04/05/2012 - 10:20 | 2319293 SheepDog-One
SheepDog-One's picture

Its like living in a Salvadore Dali painting.

Thu, 04/05/2012 - 10:36 | 2319344 TuesdayBen
TuesdayBen's picture

It really is, the primary difference being that one has value and is easily convertible into PMs.

Thu, 04/05/2012 - 10:46 | 2319380 Silveramada
Silveramada's picture

YEAH DOG1! this economy is like the elephants walking on skinny skinny legs on "the temptations of s. anthony" painting... and the time for the final act is passing by us slowly like that melted watch in the" Persistence of memory"... LOL

Thu, 04/05/2012 - 10:21 | 2319298 BlandJoe24
BlandJoe24's picture

In the event of big-time widespread margin calls, it seems historically gold has tended to - temporarily - fall as gold investments are cashed in to meet margin requirements. 

I'm wondering what happens to US Treasuries yeilds when the margin calls come in.  I wonder if historically there is mass Treasuries selling (ie: yeilds go up) or if Treasuries stay stable or actually go up (yeilds down)?


Thu, 04/05/2012 - 10:24 | 2319306 BlandJoe24
BlandJoe24's picture

Also wondering what you think will likely to happen to US Treasuries, USD, Gold, and Equity if, as ZH has predicted, NFP is a big miss tomorrow?  Thanks!

Thu, 04/05/2012 - 10:30 | 2319323 SheepDog-One
SheepDog-One's picture

All just depends on what the Maniacal Monetizers decide to do. I think theyre more stuck then they let on, and they need to stop just moving a pawn piece back and forth and need to move a major piece. But I think theyre scared to. Its not 2008 anymore with lots of wiggle room, now they want QE, but if they do, they also get gas over $5 at least. 

Thu, 04/05/2012 - 10:42 | 2319363 BlandJoe24
BlandJoe24's picture

Thanks, SheepDog, but I'm not sure how that specifically addresses my questions re: what tends to happen when widespread margin calls come in and what tends to happen with a big NFP drop.

ZH has indicated high likelihood of widespread margin calls and also high likelihood of big NFP drop tomorrow.  Just trying to position intelligently realitve to both these possibilities  :-)

I understand there are some historical patterns (like gold dropping big late last summer as it was cashed in to pay for margin calls).  Wondering if any folks here know what the trends are for USD and US Treasuries with margin calls and with big NFP drops.


Thu, 04/05/2012 - 10:32 | 2319309 AssFire
AssFire's picture

"Give me a place to stand and with a lever I will leverage the whole world.”


Ben Archimedes Bernanke


"Now, pull the plug on the forclosure market (again), Ive got the pool flooded again."




Thu, 04/05/2012 - 12:11 | 2319668 Widowmaker
Widowmaker's picture

That lever will be a trigger tied to lead-maxel-inversion mechanics.

Bank on it.

Thu, 04/05/2012 - 10:34 | 2319334 tony bonn
tony bonn's picture

some of these charts show the rise in the market over the past few years as quite rational - contrary to the ever blooming doom and gloom found in some quarters...it is interesting that the rent adjusted leverage has been declining for 2 decades...

Thu, 04/05/2012 - 10:38 | 2319348 gjp
gjp's picture

your US consumer bubble update: new highs in Starbucks and Home Depot.  Apple and Whole Foods not far behind.  Whatever trouble is resurfacing in Europe, whatever the outlook for QE, US consumers and investors in consumer bubble stocks remain undeterred.  What is going to stop them?

Thu, 04/05/2012 - 11:45 | 2319581 Schmuck Raker
Schmuck Raker's picture

Q: "What is going to stop them?"

A: Rationalization. A paradigm shift from the first definition to the second.

  1. -rationalization - (psychiatry) a defense mechanism by which your true motivation is concealed by explaining your actions and feelings in a way that is not threatening
  2. -rationalization - systematic organization; the act of organizing something according to a system or a rationale

Of course, the Trigger for this change is a lot harder to pinpoint. ;)

Thu, 04/05/2012 - 10:51 | 2319397 orangegeek
orangegeek's picture

Two key indicators that are diverging.  Not a sign of strength.


If governments have curbed spending, most/all large corps are going to be financially affected - lower sales.


Lower sales.  Lower earnings.


The last few months of upside in the Dow Jones have been accompanied by very low volume - another sign of weakness.


See for yourself:  http://www.bullandbearmash.com/latest/djia/weekly/

Thu, 04/05/2012 - 11:01 | 2319439 graymnzrc
graymnzrc's picture

AAPL never misses. They are quite good at managing the streets expectations and then beating those targets. If you watch the history of their earnings releases you will see a pattern of revised expectations prior to release.

Thu, 04/05/2012 - 11:05 | 2319456 HD
HD's picture

If I may add to Tyler's thought:

"However, in the trenches of reality..."

...the mustard gas of truth seeps in.

Thu, 04/05/2012 - 11:21 | 2319518 Dan Conway
Dan Conway's picture

Good post Tyler!

Here is another example of myth vs fact.  People are inclined to only look at assets and ignore liabilities.  Remember when everyone was house rich and never mentioned their debts?  Funny thing happened when the proverbial tide went out - their assets went down but their liabilites didn't go away.  Who can blame large companies for borrowing low-cost money and park it on the balance sheet while waiting for an accretive acquisition or the banks to pull everyone's credit lines in a cash crunch like '08 and '09.  Paying less than 3% for that flexibility is a small price to pay for some of these companies. 

Thu, 04/05/2012 - 11:28 | 2319533 rosiescenario
rosiescenario's picture

Just a contrary idea....what if China has a hard landing and their demand for oil and other resources takes a dramatic drop? Based on what Australia has recently reported, that may be unfolding. If that is the case, Ben will be free to really print.

Thu, 04/05/2012 - 11:50 | 2319603 Village Smithy
Village Smithy's picture

I think he is slowly realizing the folly in his printing excercise. Very little of it, if any, makes it through to wages. Prices may not rise without Chinese demand but neither would American demand increase without a rise in wages. At some point further currency devaluation has to cause yields to rise and that is where the shit storm starts.

Thu, 04/05/2012 - 11:27 | 2319534 Stock Tips Inve...
Stock Tips Investment's picture

Bernanke must have been very happy to see these charts. This is exactly what he wantedto see. At this point, companies are indebted chiefly for two reasonsThe first is because they need more working capital. This means that it is reviving the economy. The second is because they are investing. This means they begin to see the future with better perspective.
All this "artificial plan" is Fundament in increasing the prices of financial assets. If Europeor the smart money generates a fall on Wall Street, then, this whole house of cards would fall.
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