US corporations are sitting on a gigantic PILE of cash
September 29, 2021
Despite what the beautiful lyrics might say, it’s money and not love that makes the world go ‘round. Cash drives everything: investment, hiring, capital expenditure, stock buybacks, dividends, M&A activity etc. etc. etc. It’s all about cash, who’s got it and how are they going to use it. Cash truly is king.
Publicly traded US companies ended the 2Q 2021 with a record amount of cash on hand: $6.75 trillion to be exact. It’s never, ever, ever been higher. Available cash at corporations was already accelerating prior to the pandemic but has just exploded in the midst of the past 20 months.
Please ignore the debt ceiling noise, the Washington drama, and the finger pointing and finger wagging: it has always and will always add up to nothing. What drives markets and the direction of markets is cash and investment and credit and growth and earnings. And corporate America has the former and is going to use it in this next leg of this ongoing bull market to drive the latter.
Debt ceiling – here we go again…
September 24, 2021
Well, here we go again – the dreaded issue of the “debt ceiling” has returned. What should be a fairly routine matter of increasing the Treasury’s ability to issue more debt to fund previously authorized spending by Congress has turned into a political hot potato in recent years. On various occasions, both parties have threatened to withhold their support for increasing the debt limit in order to gain political leverage. Each time this resurfaces, investors are left to contemplate the very scary scenario of the U.S. government defaulting on its obligations if the ceiling isn’t raised in time.
While there isn’t a large sample size of these events, we have taken a look at how the stock market behaved in the month leading up to and following the past five debt limit deadlines, which is shown in the chart below. Focusing on the dashed line, which is the average of the five events, what’s apparent is that stocks typically take this in stride. Although there can be some short-term volatility around the deadline and shortly thereafter, the good news is that stocks are usually higher a month later. In fact, in four out of the five instances, stocks were either flat or higher by the following month. The lone exception was in 2011 when U.S. debt was downgraded from AAA to AA, causing a nasty correction. However, that took place in the aftermath of the Global Financial Crisis when Europe was mired in a sovereign debt crisis with Greece on the verge of default. In other words, global conditions were very grim at the time to begin with. This time around, the economy is growing above-trend, the Fed is still supplying plenty of liquidity, and corporate earnings are soaring. Therefore, despite all of the worrying headlines that will be printed until this gets resolved, we tend to believe that this is likely to be an “average” type of event again.
“The wall of worry”
September 16, 2021
Major market and, more importantly, major cycle tops have four things in common: significant deterioration in economic fundamentals, corporate earnings growth and nominal earnings having peaked, an aggressive (and too late) Fed rate hiking cycle, and investor euphoria (envision a punch bowl on the table and well organized and somewhat reckless dancing taking place). I don’t see any of this right now.
As for the last point, the good news for a market which is currently trading near all-time highs is that the bears just showed up. The most recent Bull/Bear ratio data noted a spike in bearishness only really seen at market bottom, not tops. The latest reading is in the bottom 2% of all observed readings for the past 15 yrs. The market needs to often climb the “wall of worry” and when you have an accelerating economy, accelerating earnings, a Fed on indefinite hold with regards to rate hikes, and a healthy dose of worry, the trend and path of least resistance for a bull market in stocks is higher. Embrace fear, don’t fear fear.
Can a correction occur? ABSOLUTELY. And they often do. Equity markets usually go down by -10% once a year, and they usually retreat 4-6x at least -5% over the past 50 yrs. We’re overdue for a correction so please carry an umbrella and be ready for when it rains volatility. But “walls of worry” are very healthy and constructive within the broader construct of a bull market. And we have got exactly that right now.
Source: MacroCharts and JonesTrading LLC
The most overpriced asset class I know: US High Yield
September 7, 2021
One of the themes we have been talking about for a long time now is the global shortage of yield that currently exists in the capital markets. Excess global savings, belief in long-term deflation, coordinated quantitative easing by global central banks etc., etc. have all accounted for lower global bond yields. Savings accounts pay next to nothing, the UST 10y yields just 1.35%. Those needing yield see it and feel it most.
What’s going on in the high yield bond market, however, has never been seen before. The US high yield market trades at a yield of just 3.87% today. Single B rated credit yields just 4.5% and CCC rated bond yield an average of approximately 7%. (Over the past 30yrs roughly 1/3 of CCC rated bonds have defaulted – when they talk about “junk bonds”, CCC rated debt has more than earned that moniker.) With CPI inflation temporarily elevated, about 85% of the US high yield bond market now has a negative real yield (yield after inflation). That very high percentage will come down as some of the inflationary pressures recede, but even if CPI inflation normalizes down to 3%, more than 30% of the US high yield market will have a negative real yield (after inflation).
The high yield market today isn’t “high yield”; it’s just “yield”. Bonds aren’t like stocks that can remain elevated in nominal terms; bonds have a time and place and date when they mature, and if everything goes right, the holder of debt gets back principal and coupons along the way. Negative real yields have never looked so dangerous before. And in a world of loose monetary policy and higher-than historical-average valuation levels in many asset classes, the high yield bond market stands out as being the over overpriced asset I know.
Source: DB Research
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