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Is The Post-Crisis Corporate Re-Leveraging Rally Over?

Tyler Durden's picture


Last week we pointed out the cognitive dissonance between the 'belief' that advanced economies are gradually (and rightly) deleveraging  - as central banks maintain the status quo by kicking the can - and the reality of no actual deleveraging. Today, we look at the global corporate re-leveraging cycle that, as UBS notes, has struggled to gain traction after the initial recovery phase following the 2008/9 crisis. The corporate re-leveraging is broadly defined as trends in the use of cash as well as more active capital structure dynamics - a cycle that has ebbed and flowed over the last three years.

UBS Investment Research: Is that it for the re-leveraging cycle?

In 2011 we witnessed some encouraging trends: the corporate sector grew both dividends and capex by 15% and repurchased nearly 200% more stock versus 2010. In addition, net leverage increased on a global basis for the first time in several years – a positive given current low levels. This year, however, these trends are all set to weaken fairly significantly. Our latest edition of World Inc. shows forecasts for dividend growth slowing to just 5% and capex to 8%. Further, share buybacks are expected to shrink by over 30% and net leverage to drop.

The rolling crisis in Europe and continued uncertainty about the overall strength of the global economy has certainly played a role here insofar as these issues have impacted corporate confidence with regard to capital outlays and have also limited investment opportunities. Further, as our Asset Allocation team noted in a recent analysis, the opportunity cost of conservative cash management for the corporate sector has been minimal.

Given all of this then, it’s probably no surprise we’re seeing an apparent stalling out of the re-leveraging cycle. But while current opportunity costs may be low, a reluctance/inability for corporates to invest and/or return cash to shareholders is not without consequences.

Returns on capital are set to decline this year – the first time since before the financial crisis. RoE is being squeezed from all sides: asset turns, profit margins, and leverage. We continue to believe that leverage will be the most effective mechanism to support RoE in this environment. Increasing dividend payouts and repurchasing more stock would certainly help here.

With the corporate sector struggling to maintain aggregate earnings growth, it will be imperative – for both growth and returns – that the broader releveraging cycle not completely fade away (see illustrative charts below).




Charts: UBS

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Mon, 08/20/2012 - 15:22 | 2721358 Careless Whisper
Careless Whisper's picture

The Careless Whisper News Update & Threadjacking


QUOTE OF THE DAY: "LIBOR rate fixing was a consequence of not charging for bank accounts." (Sir) David Walker, Chairman, Barclays Bank


Revealed: Eduardo Savarin's Personal Media Kit From "TheFacebook" 2004; Outlines Advertising Pitch


The Honorable "Matty The Horse" Dead At 92


1968 Ford Sells For $11 Million At Pebble Beach Concours d'Elegance






Mon, 08/20/2012 - 16:03 | 2721490 bank guy in Brussels
bank guy in Brussels's picture

Very interesting about what was the most ever paid in history for an American car.

Think that part of the reason, is that as America sinks into tyranny, there is a great fierce nostalgia for America's 'golden age', when America really meant something wonderful.

For the decade 1968-1976, America even did not have a death penalty! - almost European! - until Jimmy Carter allowed it to come back.

That 1968 Ford GT40 was used by Steve McQueen to help make the film 'Le Mans', and was driven by the racing driver David Hobbs, who has more recently been an announcer for North America's Speed Channel.

Here is a photo of the most expensive car in American history ... not really a Duesenberg, but a 'doozy' nonetheless


Mon, 08/20/2012 - 15:24 | 2721362 fonzannoon
fonzannoon's picture

Is the stock market open today?

Mon, 08/20/2012 - 15:27 | 2721371 Haager
Haager's picture

It's dead, Jim.

Mon, 08/20/2012 - 15:37 | 2721411 Cognitive Dissonance
Cognitive Dissonance's picture

But Silver definitely has a pulse.

<...and a woody as well...>

Mon, 08/20/2012 - 15:39 | 2721419 Manthong
Manthong's picture

Hey, here’s an idea for deleveraging.. I know first-hand how it applies to corporate and housing debt, but I just heard the term used for the first time in respect to municipal bonds.

“STRATEGIC DEFAULT”,  as in ways to get out of union contract obligations and other local government overreaches.

Maybe it’s the municipalities that will swoop in on the Ponzi like a big black bird.

Mon, 08/20/2012 - 15:44 | 2721433 Careless Whisper
Careless Whisper's picture

you want a reservation for when? bwahahaha


Mon, 08/20/2012 - 15:34 | 2721396 ACP
ACP's picture

After causing 2 crashes, The Bernank is going to be careful about continuing the manipulation indefinitely. There will never be a time, while the Federal Reserve exists, that there will not be manipulation, going forward.

Mon, 08/20/2012 - 15:37 | 2721410 Everybodys All ...
Everybodys All American's picture

I have literally never seen such weak non holiday volume.

Mon, 08/20/2012 - 15:27 | 2721370 Meesohaawnee
Meesohaawnee's picture

not until after the election. Ben has his orders from the bat phone.

Mon, 08/20/2012 - 16:40 | 2721591 slewie the pi-rat
slewie the pi-rat's picture
Is The Post-Crisis Corporate Re-Leveraging Rally Over?...

here's dougNoland from his weekly wrap a few daze ago

Another week at the casino :>   Read more

  1. “Risk on” has seen 10-year Treasury yields jump 40 bps off July 24 lows to 1.81%.  The way things are unfolding, the placid Treasury market might turn into rather treacherous waters.
  2. Corporate bond spreads narrowed.  An index of investment grade bond risk declined 3 to 100 bps.  An index of junk bond risk fell 8 to 541 bps.
  3. Junk bond funds saw inflows slow to $378 million (from Lipper).  The bevy of junk issuers included Davita $1.25bn, General Motors $1.0bn, Tronox $900 million, Caesars $750 million, ServiceMaster $750 million, Concho Resources $700 million, Belden $700 million, Univision Communications $625 million, Penske Auto Group $550 million, Graton Economic Development Authority $450 million, Scientific Games International $300 million, Media Broadband $300 million, American Gilsonite $260 million, Legend $250 million, Live Nation Entertainment $225 million, Unisys $210 million, and Taylor Morrison $125 million.

so either a type-O or the "junkies" are rolling over TONS of debt and mebbe getting cash and/or "CPA-generated digits" too!  bot?  all tree?  fo? mofo?

what i find noteworthy is that the Ts are "losing value" to junqueBlondes?  risk w/ an election erection?  anyhow, this is riskOn till somebody starts slashing tires, apparently...

...hooligans everywhere...  freePussyRiot <: recent photo...

...it depends on the meaning of 'over' ?
Mon, 08/20/2012 - 15:32 | 2721391 e-man
e-man's picture

But what about Yahoo Finance's story?:

3 Reasons Why This Rally Is Real and Will Last


Every reader gets a free set of pom poms!

Mon, 08/20/2012 - 15:32 | 2721392 TheSilverJournal
TheSilverJournal's picture

Yes, the rally is probably over until another round of pumping starts. If any more wealth flows out of Treasuries, this cheap money addicted economy is going to be crushed by "high" borrowing costs.

Mon, 08/20/2012 - 15:34 | 2721397 chancee
chancee's picture

Fake, fake, fake price action in the ES as usual. In case everyone doesn't know, the goal here is to keep the market propped up through Sep expiration so the squid et al can rake in the profits from all the puts/protection bought  for August... Remember all the scary write-ups and proclamations made by the TBTFs in late Spring/early summer about how things were looking like a blueprint of last year... so BEWARE of August.  And now... Susprise!  market magiclally drifts higher thanks to the ES trade-bots  all through the month. 

Exact same playbook as Dec - Feb.  During another brutally low volume time period... Christmas, the market started magically floating higher, sticking it to everyone who had bought protection in the fall.  Rinse, wash, repeat.


So here are the ingredients needed for a phony rally:  A semi-scary selloff of maybe 8% or so.  Accompany that with some leaked white papers from the squid, telling of scary times ahead... herd everyone into protection. Then wait for a notoriously slow trading period - Christmas or August - and creep the ES higher.

Mon, 08/20/2012 - 15:51 | 2721469 Meesohaawnee
Meesohaawnee's picture

and you thought the internet bubble was a complete fraud. This trumps it big time!

Mon, 08/20/2012 - 15:35 | 2721401 Bankers R Wankers
Mon, 08/20/2012 - 15:35 | 2721402 Cognitive Dissonance
Cognitive Dissonance's picture

"Last week we pointed out the cognitive dissonance..."

Been seeing more and more cognitive dissonance lately. Must be a trend. Unfortunately peak Cognitive Dissonance is further away than you might think.

The first law of Cognitive Dissonance is......"A mind in denial tends to remain in denial."

Mon, 08/20/2012 - 15:38 | 2721417 magpie
magpie's picture

Like the tulip bubble, these dissimulations, machines and artifices aren't exactly new to mankind.

Mon, 08/20/2012 - 15:36 | 2721408 magpie
magpie's picture


Mon, 08/20/2012 - 15:43 | 2721429 Hype Alert
Hype Alert's picture

In other news, Lowe's misses and trims outlook.  Glad this has nothing to do with the stock market.

Mon, 08/20/2012 - 15:45 | 2721437 gunsmoke011
gunsmoke011's picture

WTF - why dio  they even bother opening this POS anymore? I didn't think it would be possible - but it looks like another record low volume day. won't be too long and a 500 contract day will be considered Heavy volume

Mon, 08/20/2012 - 15:46 | 2721441 mkhs
mkhs's picture

So, apparently, we need more debt? 

Mon, 08/20/2012 - 15:48 | 2721443 poor fella
poor fella's picture


**              *           *

A corporation reaches enlightenment when it fires ITS LAST employee and buys back THE ONLY SHARE left. 

It becomes global, omnipotent, and priceless...   

Algos will divide by zero and the stars will fall from the sky.   *    *

*   *

Mon, 08/20/2012 - 16:04 | 2721492 e-man
e-man's picture

What does that mean when the market closes and it says $SPX $Change -.04 in red?  I'm not sure I've ever seen anything like that before...

Mon, 08/20/2012 - 16:21 | 2721538 gunsmoke011
gunsmoke011's picture

It simply means that the fucking robots that are controlling this manipulated piece of shit are deathy afraid to let ANY selling gain a foot hold - bcause there is NO MARKET UNDER THIS MARKET - therefore - if and when the selling REALLY Starts - the CRASH that ensues will be of Biblical Proportions

Mon, 08/20/2012 - 16:22 | 2721541 magpie
magpie's picture

Yet it remains an arcane mystery why the market despite all manipulation has a habit of ending red on Mondays.

Mon, 08/20/2012 - 16:17 | 2721525 HaroldWang
HaroldWang's picture

Seriously, how can anyone look at Shanghai market and think "everything will be just fine"???

Mon, 08/20/2012 - 16:33 | 2721566 e-man
e-man's picture

In China, "everything will be just fine" is an order, not a suggestion.

Edit: Wait, did I say China?

Mon, 08/20/2012 - 17:10 | 2721718 adsanalytics
adsanalytics's picture

Though I am still waiting for it the real danger point will come (as it has before) when margins begin to diverge from EPS (i.e. EPS is made from leveraging eg share buybacks rather than sales). In particular, when EPS continues to decrease while margins compress, it is a sign that a bubble is probably forming (after the jump).







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