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SocGen: “Now We Know Why The Fed Desperately Wants To Avoid A Drop In Equity Markets”
SocGen: “Now We Know Why The Fed Desperately Wants To Avoid A Drop In Equity Markets”
With the ECB now unabashedly unleashing a bond bubble in Europe of which it has promised to be a buyer of last resort with the stronly implied hint that European IG companies should issue bonds and buy back shares, and promptly leading to the biggest junk bond issue in history courtesy of Numericable, it will come as no surprise that the world once again has a debt problem.
For the best description of just how bad said problem is we go to SocGen’s Andrew Lapthorne, one of last few sane analyzers of actual data, a person who first reveaked the stunning fact that every dollar in incremental debt in the 21st century has gone to fund stock buybacks, and who in a note today asks whether “central bank policies going to bankrupt corporate America?”
His answer is, unless something changes, a resounding yes.
Here are the key excerpts:
Sensationalist headlines such as the one above are there to grab the reader’s attention, but the question is nonetheless a serious one. Aggressive monetary policy in the form of QE and zero or negative interest rates is all about encouraging (forcing?) borrowers to take on more and more debt in an attempt to boost economic activity, effectively mortgaging future growth to compensate for the lack of demand today. These central bank policies are having some serious unintended consequences, particular on mid cap and smaller cap stocks.Aggressive central bank monetary policies have created artificial demand for corporate debt which we think companies are exploiting by issuing debt they do not actually need. The proceeds of this debt raising are then largely reinvested back into the equity market via M&A or share buybacks in an attempt to boost share prices in the absence of actual demand.
…click on the above link to read the rest of the article…
After The European Bank Bloodbath, Is Canada Next?
After The European Bank Bloodbath, Is Canada Next?
… the highest Canadian media instance, the Globe and Mail decided to take us to task. To wit:
Were the folks at Zerohedge.com looking at the best numbers when they argued that Canadian banks were just as levered as troubled European banks?In a simple analysis that generated a great deal of commentary, a blogger at Zerohedge.com, an oddball but widely followed financial site, suggested that Canadian banks were as leveraged as European banks because they have low ratios of tangible common equity to total assets.
But there’s an argument that looking at that ratio is the wrong way to judge a bank’s strength because it ignores the composition of the assets.
Sadly, the folks at Zerohedge.com were looking at the best numbers, and even more sadly, in the interim nearly 5 years, Canada’s banks took absolutely no action to bolster their capital ratios; in fact, these have only deteriorated.
The Globe and Mail, however, was right about one thing: the TC ratio did not capture the full risk embedded in Canadian bank balance sheets: it was merely a shorthand as to how much capital said banks have in case of a rainy day.
Sadly for Canada, it’s not only raining, it’s pouring for the country’s energy industry, a downpour which is about to migrate into its banking sector. Which is why it is indeed time to take a somewhat deeper dive into the Canadian banks’ balance sheets, where we find something very troubling, and something which prompts us to wonder if the time of freaking out about European banks is about to be replaced with comparable panic about Canadian banks.
The following chart from an analysis by RBC shows that when compared to US banks’ (artificially low) reserves for oil and gas exposure, Canadian banks are…not.
…click on the above link to read the rest of the article…
After Noble, Here Are The Next 18 US Energy Companies To Be Junked
After Noble, Here Are The Next 18 US Energy Companies To Be Junked
Following Noble Group’s downgrade to junk and “Enron moment,” we thought it worth considering who is next to be junked?
Judging by the market’s expectations, there are now 110 credits that are rated “investment grade” but trade like junk, and as Markit’s Neil Mehta notes, this is up from just 21 in November.
There are 18 US Energy names (and 23 globally) that are currently traded at CDS levels implying junk status, with Diamond Offshore, Nabors, and Encana top of the list.
* * *
And finally, away from the energy complex, we note that Freeport McMoran is at the top of the list of likely junk downgrades and today’s carnage has extended Carl Icahn’s losses…
as it seems FCX stockholders are getting the joke…
Freeport-McMoRan Inc
(1739bps; Av BBB; Imp CCC)
The US copper and gold producer has seen its 5-yr CDS spread trading at implied junk levels for the last six months. Troubles have intensified over the past month and credit spreads now imply a 79% chance of default within the next five years. Moody’s placed the $6bn company on review for a possible downgrade just last week.
The World Hits Its Credit Limit, And The Debt Market Is Starting To Realize That
The World Hits Its Credit Limit, And The Debt Market Is Starting To Realize That
One month ago, when looking at the dramatic change in the market landscape when the first cracks in the central planning facade became evident and it appeared that central banks are in the process of rapidly losing credibility, and the faith of an entire generation of traders whose only trading strategy is to “BTFD”, we presented a critical report by Citigroup’s Matt King, who asked “has the world reached its credit limit” summarized the two biggest financial issues facing the world at this stage.
The first is that even as central banks have continued pumping record amount of liquidity in the market, the market’s response has been increasingly shaky (in no small part due to the surge in the dollar and the resulting Emerging Market debt crisis), and in the case of Junk bonds, a downright disaster. As King summarized it “models linking QE to markets seem to have broken down.”
Needless to say this was bad news for everyone hoping that just a little more QE is all that is needed to return to all time S&P500 highs. And while this concern has faded somewhat in the past few weeks as the most violent short squeeze in history has lifted the market almost back to record highs even as Q3 earnings season is turning out just as bad, if not worse, as most had predicted, nothing has fundamentally changed and the fears over EM reserve drawdown will shortly re-emerge, once the punditry reads between the latest Chinese money creation and capital outflow lines.
The second, and far greater problem, facing the world is precisely what the Fed and its central bank peers have been fighting all along: too much global debt accumulating an ever faster pace, while global growth is stagnant and in fact declining.
…click on the above link to read the rest of the article…
