Wednesday, February 3, 2016

Turning Point?!

The Monday QBs of the pundit world will all claim to have known the exact moment which caused a turn in the stock market and the economy too. They just never stated it publicly. I have. I see some serious buildup over the last eight years, especially in credit which the media forgets to remind you, is debt.
$29 Trillion
is the present total in corporate bonds. For example, Netflix will be adding to this total as they owe $4.7-billion due this year for payment for content. I surmise that because the company only brings in $6+b and the liability is two-thirds the amount. All the borrowing is reaching a debt overload point and it must be repaid. The strains of all this borrowing is starting to show. The first signs have been in all the downgrades by the rating services. These quiet notices are the highest since crash of 2008. The reason behind the downgrades in some US and some global entities is because they are failing to earn enough revenues to fund their respective companies and cover their liabilities.
Things Are Connected
Then, there is the connection of this risky debt to the bond market. Borrowing spreads reveal this risk. Spreads have widened to 1.84 percentage points from the 1.18 back in March of 2015. This change has not gone unnoticed by investors or the market. It snapped the winning streak of six years of investing in corporate bonds. Investors took a small loss of .02%, however this could be the turning point. I have long opposed the Fed in general and especially, their zero rate policy. Global and US companies are on the hook for $29 T and if rates rise, the value of these bonds declines which only makes their debt exponentially more costly. Peter Schiff predicted the other day that he sees a recession and the Fed turning to negative interest rates. His call on the Fed in 2015 was perfect and if he is correct again, he should have his own talk show.
Standard and Poor's
said the downgrades of global companies is because there debt is 3x earnings before adjustments like taxes and depreciation. This negative aspect is why S & P downgraded 863 corporate issuers last year. Yes, many of these companies are commodity in nature if that is what you are thinking, but the misleading of CEOs of the value of shares is high on the list.
Usual Suspects
Most of the borrowing went for share buybacks, dividends and merger activity. On the bright side of Standard and Poor's report is that the global outlook is stable. Sorry, dear reader I don't see it that way. For example, the same rating services said that Lehman was secure the day before it exploded. In other related aspects global companies borrowed $9.6 T in US denominated issues in 2015 and since their currencies have declined in value the payment becomes much more costly. Japan just realized this aspect and the BOJ just joined the negative interest rate for fools of fiat money. Just think my Japanese brothers, now you have to pay the bank to hold your money. This was one of the arguments against gold as it doesn't pay interest and by the way, gold is growing in value against the Yen...against the Yuan...against the Rand...against the Euro...against the Ruble, Rupee and on and on.
End the Fed!