When Jeremy Stein warned in February of "froth" in the credit markets [6], it was much discussed but little action'ed. However, today we start to see some actions:
- *FED SAID TO ISSUE WARNING ON LAX LEVERAGED LOAN UNDERWRITING
With cov-lite issuance at all-time record highs (as we explained here most recently [7] and Moody's tried to ignore [8]), Stein's bubble is even bigger and whether or not the Fed 'tapers' it is clear now by this signal that their concerns over bubbles are growing day by day.
Of course, as we warned here [9], this is Carl iCahn's worst nightmare...
...But we have seen this "credit cycle end, equities ramp" before - in 2007 - where leverage (both firm-wise (debt/EBITDA) and instrument-wise (CDOs)) provided the extra oomph to send stocks higher on the back of credit fueled extrapolation of earnings trends.
(charts: Barclays)
In the end we know this is unsustainable - the question is when (in 2007 it last 10 months or so...).
We already see 30Y Apple bonds trading at 5% yields - admittedly low still but notably higher than when they issued previously. The Verizon deal recently now trades at around 5.7% yield and is considerably worse financially pro forma. Of course, just as in 2007, things change very quickly once collateral chains start to shrink.
Perhaps this is why Carl iCahn said the Apple CFO/CEO shunned him - iCahn's worst nightmare is simply the inability to proxy-LBO each and every firm...
Given these charts - which market do you think is in a bubble - equity or credit? Bear in mind that the Fed's Jeremy Stein has already made his case that the latter is a bubble for sure... and the fragility that reaching for yield creates...
and here is Stein's most recent warning...
Stein 20130926 A [10]