Lefty stock market mavens around here...

[Lukey]

Keep crowing about their "fantastic" gains under Obamanomics. But here's the dirty little secret behind these gains, and why they are quite likely to wake up some morning to the news that much of their equity holdings have evaporated:

The way to wealth in a bull market is debt. The way to oblivion in a bear market is also debt, and nobody rings a bell.” – James Grant

Much of these gains is simply "leverage" based stock repurchases:


The larger problem with repurchases is that debt-financed buybacks effectively put investors on margin. As corporations have borrowed in order to aggressively buy back their stock near the highest market valuations in history, existing stockholders have quietly become heavily leveraged, without even realizing it.

Over the completion of this cycle, we fully expect that many companies and private-equity firms will be forced to reverse this activity through involuntary debt-equity swaps, with a corresponding dilution in the ownership stakes of existing shareholders. Indeed, the group that led the largest leveraged buyout in the oil and gas sector in 2011 announced last week that its ownership stake would be handed over to lenders.

http://www.hussman.net/wmc/wmc150817.htm

 

[Bugsy McGurk]

They search, and they search, and they search - how to spin tripled markets under Obama as bad news?

But they always fail, and sane people just snicker at them.

;-)

 

[as seen on tv]

actually, the do ring a bell. economists have been warning about excessive market valuations for several years now.

the political left remains in denial, and celebrates each new trillion in federal debt, as the number of people out of the workforce hits records each year.

 

[bdtex]

They search, and they search, and they search - how to spin tripled markets under Obama as bad news?

So much so that it's hardly worth the time it takes to read it,much less respond to it.

 

[Bugsy McGurk]

actually, the do ring a bell. economists have been warning about excessive market valuations for several years now.

the political left remains in denial, and celebrates each new trillion in federal debt, as the number of people out of the workforce hits records each year.

Fear not - Obama haters have been predicting a market plunge for 6 years, and they have been wrong for 6 years, but markets never rise forever.

So, one day the markets will fall, and Obama haters will finally be "right."

;-)

 

[Bugsy McGurk]

So much so that it's hardly worth the time it takes to read it,much less respond to it.

True. Such gibberish deserves a skim - no more.

I wonder if they ever wish that they could simply enjoy good news for America, even if we do have a Dem president?

 

[Lukey]

So much so that it's hardly worth the time it takes to read it,much less respond to it.

Yeah, nothing to see here - move along.

Stockman shows in detail how it worked in the retail sector:

...during the 10 years between 2005 and 2014, these four retailers spent $34 billion on stock buybacks and dividends. But, alas, their cumulative net income during the period was only $13 billion.

http://www.jstor.org/stable/447406?seq=1#page_scan_tab_contents

 

[Arkady]

Keep crowing about their "fantastic" gains under Obamanomics. But here's the dirty little secret behind these gains, and why they are quite likely to wake up some morning to the news that much of their equity holdings have evaporated:

The way to wealth in a bull market is debt. The way to oblivion in a bear market is also debt, and nobody rings a bell.” – James Grant

Much of these gains is simply "leverage" based stock repurchases:

View attachment 27908
The larger problem with repurchases is that debt-financed buybacks effectively put investors on margin. As corporations have borrowed in order to aggressively buy back their stock near the highest market valuations in history, existing stockholders have quietly become heavily leveraged, without even realizing it.

Over the completion of this cycle, we fully expect that many companies and private-equity firms will be forced to reverse this activity through involuntary debt-equity swaps, with a corresponding dilution in the ownership stakes of existing shareholders. Indeed, the group that led the largest leveraged buyout in the oil and gas sector in 2011 announced last week that its ownership stake would be handed over to lenders.

http://www.hussman.net/wmc/wmc150817.htm

The relevant metric wouldn't be debt issuance but rather total debt. If my company had old debt at a high rate, and issued new debt at a low rate to pay that off, that shows up as a debt issuance, but doesn't increase debt. Anyway, credit market debt for nonfinancial corporate businesses has fallen relative to both the equity value of those businesses and relative to their net worth:

 

[Lukey]

The relevant metric wouldn't be debt issuance but rather total debt. If my company had old debt at a high rate, and issued new debt at a low rate to pay that off, that shows up as a debt issuance, but doesn't increase debt. Anyway, credit market debt for nonfinancial corporate businesses has fallen relative to both the equity value of those businesses and relative to their net worth:

That might give you assurance, but it's based on valuations derived from overly high p/e ratios which are driven up by ZIRP. Not a good idea to base your entire investing scenario on the continued "success" of ZIRP.

Hussman explains:

We’ve emphasized that the most reliable valuation metrics we identify are based not on earnings but on measures such as revenue, GDP and corporate gross value added, all of which essentially suppress the cyclical impact of profit margin fluctuations. Among these, the single most reliable variant is Market Cap/GVA, which has a correlation of roughly 92% with actual subsequent S&P 500 10-year total returns. Over the long term, it is gross value added that provides the fundamental basis for cash flows that will be delivered to stockholders and bondholders over time. Comparing both equity market capitalization and corporate debt obligations to GVA offers a reasonable indication as to how leveraged corporate securities have become, relative to the top-line driver that is ultimately responsible for providing long-term returns to investors.


So not only is the equity market at the second most overvalued point in U.S. history, it is also more leveraged against probable long-term corporate cash flows than at any previous point in history. As we observed during the housing bubble, yield-seeking by investors opens the door to every form of malinvestment. The best way to create a debt-financed wave of speculative and unproductive activity is to starve investors of safe return. In 2000 that wave of speculation focused on technology. The next Fed-induced wave of speculation focused on mortgage securities, which financed a housing bubble. In our view, the primary avenue of speculation in the current cycle has been debt-financed corporate equity purchases.

In a recession, your happy thoughts about all the "equity" backing the debt will have nothing to fall back on. You've been warned.

 

[Drumcollie]

They search, and they search, and they search - how to spin tripled markets under Obama as bad news?

But they always fail, and sane people just snicker at them.

;-)

naturally the greed monger for Obama Bugsy would show up to tell us how Obama is responsible for the market place... he is going to say we are not in a recession because Rich people are ok and how Corporate wealth at the expense of the poor and middle class is a good thing. Obama has never done anything for the people the right way...and has not prepared for market corrections

 

[RickWA]

Yeah, nothing to see here - move along.

Stockman shows in detail how it worked in the retail sector:

...during the 10 years between 2005 and 2014, these four retailers spent $34 billion on stock buybacks and dividends. But, alas, their cumulative net income during the period was only $13 billion.

http://www.jstor.org/stable/447406?seq=1#page_scan_tab_contents

Only Obamapraise is worthy of reading. If it is not dutifully pious and glowing, delivered upon bender knee -- then we must avert our eyes.

 

[Arkady]

That might give you assurance, but it's based on valuations derived from overly high p/e ratios which are driven up by ZIRP. Not a good idea to base your entire investing scenario on the continued "success" of ZIRP.

Hussman explains:

We’ve emphasized that the most reliable valuation metrics we identify are based not on earnings but on measures such as revenue, GDP and corporate gross value added, all of which essentially suppress the cyclical impact of profit margin fluctuations. Among these, the single most reliable variant is Market Cap/GVA, which has a correlation of roughly 92% with actual subsequent S&P 500 10-year total returns. Over the long term, it is gross value added that provides the fundamental basis for cash flows that will be delivered to stockholders and bondholders over time. Comparing both equity market capitalization and corporate debt obligations to GVA offers a reasonable indication as to how leveraged corporate securities have become, relative to the top-line driver that is ultimately responsible for providing long-term returns to investors.

View attachment 27909
So not only is the equity market at the second most overvalued point in U.S. history, it is also more leveraged against probable long-term corporate cash flows than at any previous point in history. As we observed during the housing bubble, yield-seeking by investors opens the door to every form of malinvestment. The best way to create a debt-financed wave of speculative and unproductive activity is to starve investors of safe return. In 2000 that wave of speculation focused on technology. The next Fed-induced wave of speculation focused on mortgage securities, which financed a housing bubble. In our view, the primary avenue of speculation in the current cycle has been debt-financed corporate equity purchases.

In a recession, your happy thoughts about all the "equity" backing the debt will have nothing to fall back on. You've been warned.

That's an odd graph. The blue line divides total debt liability by 1000 times gross value added. That seems like an arbitrary metric to me. On the one side you have total accumulated debt, without even considering what the annual cost of that debt is, and on the other side you have an annual value figure, based on goods and services produced. If you're going to measure a total value on one side, it ought to be divided by total value on the other (total debt versus total equity); or, instead, you can measure an annual cost on one side, against an annual value on the other (annual debt service versus annual income). But measuring a total value on one side against an annual value on the other seems odd. I mean, it's politically useful, if your goal is to alarm people at a time when corporations have been able to borrow at low fixed interest rates, meaning low annual costs. But for a real metric about the financial condition of companies, it leaves a lot to be desired.

 

[Lukey]

That's an odd graph. The blue line divides total debt liability by 1000 times gross value added. That seems like an arbitrary metric to me. On the one side you have total accumulated debt, without even considering what the annual cost of that debt is, and on the other side you have an annual value figure, based on goods and services produced. If you're going to measure a total value on one side, it ought to be divided by total value on the other (total debt versus total equity); or, instead, you can measure an annual cost on one side, against an annual value on the other (annual debt service versus annual income). But measuring a total value on one side against an annual value on the other seems odd. I mean, it's politically useful, if your goal is to alarm people at a time when corporations have been able to borrow at low fixed interest rates, meaning low annual costs. But for a real metric about the financial condition of companies, it leaves a lot to be desired.

Yeah, you or Hussman? Who am I gonna believe?

https://en.wikipedia.org/wiki/John_Hussman

I think I'll go with Hussman (no offense). As long as the entire series is multiplied by the same number the relative positions are not altered. And the fact remains that corporations have never been more leveraged against probable long term cash flows, and at the second highest point of over-valuation. It's a ticking time bomb.