Author Topic: Wilshire 5000 market cap / GDP exceeds dot-com peak  (Read 5652 times)

thepupil

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #10 on: January 10, 2020, 10:32:14 AM »
I see little credit risk in the entirety of the S&P 500. I'm not talking just the top 10, not talking about my holdings, I'm talking all of it.

In the S&P 500 ex financials (439 companies), 263 have 5 yr CDS  spreads below 56 basis points, and a further 138 ar between 56-106 bps, so 400 / 439 have credit spreads below 106 bps.

There are like 3 companies above 200 bps: Apache, Occidental and L Brands.

Now we are on COBF so we don't believe in perfect market efficiency and that low credit spreads is necessarily evidence of low credit risk, so let's take a look at some fundamentals.

247 of those companies are less than 2x levered using trailing EBITDA. Only 80 are above 4x. the median is 1.7x levered. Even at higher borrowing rates, these companies will be fine.

Listed below are the scary companies that are over 5x levered and that's just using bloomberg dumb data, not adjusted or anything.
I see a bunch of well covered real estate companies and some onese that actually carry a fair bit of leverage (TDG for example).

I'm not trying to completely dismiss the macro risk. But the data is the data. I see a bunch of very healthy credits in publicly traded corporate america; i see a bunch of highly levered private equity portcos where the lenders are CLO's and private debt funds that themselves aren't levered and comprise a small portfion of various institutional investors portfolios. Perhaps the risk of LBO, CLO, etc. will bleed into the economy there'll be a recession and stocks go down. But don't look to big publcily traded corporate america to start experiencing credit events.

fear not the all time high corporate debt ratios if you hold broad indices. if you hold individual stocks you can avoid that too. I happen to have a large position in the 4th most levered company on this list. I think it has virtually no net corporate debt.

Equifax Inc
Newell Brands Inc
Edison International
Vornado Realty Trust
Alliance Data Systems Corp
CarMax Inc
Williams Cos Inc/The
Zimmer Biomet Holdings Inc
SL Green Realty Corp
Campbell Soup Co
General Electric Co
Digital Realty Trust Inc
Hologic Inc
Harley-Davidson Inc
Apartment Investment & Management Co
Dominion Energy Inc
TransDigm Group Inc
Western Digital Corp
Kimco Realty Corp
Healthpeak Properties Inc
Boston Properties Inc
Molson Coors Beverage Co
Welltower Inc
Noble Energy Inc
Dollar Tree Inc
SBA Communications Corp
NiSource Inc
Essex Property Trust Inc
Ventas Inc
American Airlines Group Inc
Entergy Corp
Alexandria Real Estate Equities Inc
Conagra Brands Inc
Extra Space Storage Inc
AES Corp/VA
CMS Energy Corp
Federal Realty Investment Trust
Duke Energy Corp
Simon Property Group Inc
PPL Corp
Realty Income Corp
Constellation Brands Inc
Kinder Morgan Inc/DE
Sempra Energy
Eversource Energy
Duke Realty Corp
MGM Resorts International
Microchip Technology Inc
Equity Residential
Prologis Inc
TechnipFMC PLC

« Last Edit: January 10, 2020, 10:44:54 AM by thepupil »


thepupil

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #11 on: January 10, 2020, 10:42:25 AM »
Quote
If GDP-weighted inflation is found to be above 2%, the pile of debt will catch fire. Poof!

Why? If inflation goes to say 3% and rates back up 100 bps, then the investment grade bonds which comprise the bulk of corporate debt might sell off by...wait for it...7 or 8 points, and they yield 2.8%.

So that "poof" may be more like a -4 or -5% total return.

What kind of inflation are you talking about? 10%?

stahleyp

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #12 on: January 10, 2020, 10:52:09 AM »
stahleyp, I am mostly cash today, but i might get back into the market any time. We have a very weak Fed Chairman - no courage, no credibility, no confidence, easily bullied by the likes of Trump/Bullard/Cramer.

Greenspan raised rates to 6% and inverted the yield curve at a lower level for the Wilshire 5000/GNP ratio (and higher unemployment). Paul Volcker said if you don't want deflation, don't blow bubbles. Volcker also thought the obsession over 2% inflation was ridiculous. This is either in Volcker's latest book or some WSJ/FT op-ed he wrote before he died.

This is a special bubble, one so big that central banks are too scared to pop it and are doing everything they can to preserve the bubble. Europe is worse off than it was in 2007-2008. The debt to GDP in US+Europe is higher than 2008. US corporate debt ratios are at all-time highs.

The Wilshire 5000/GNP first exceeded the dot-com peak in Q3 2018. The Fed has only lowered rates since then.


If you're so bearish, why be 100% stock?

You went from fully invested to mostly cash in about a month? What's changed?

Paul

thepupil

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #13 on: January 10, 2020, 11:04:23 AM »
I’m also sort of confused as to why the “debt bubble” = don’t own stocks. If corporate debt is a bubble, the biggest beneficiaries of that bubble popping could be  healthy corporate borrowers, who could presumably buy back that bubble era debt at good prices or pay very low rates on that bubble era debt for in some cases 30 or more years until maturity.

Imagine the dollar prices of debt that these low spread long duration borrowers could get to if you’re right about inflation/ rates really picking up (at least that’s what I think you’re getting at)

Do you think there will be a deflationary depression when the bubble pops, therefore you cant own stocks? then why are you harping on inflation?
« Last Edit: January 10, 2020, 11:14:16 AM by thepupil »

Cigarbutt

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #14 on: January 10, 2020, 04:23:19 PM »
I see little credit risk in the entirety of the S&P 500. I'm not talking just the top 10, not talking about my holdings, I'm talking all of it.
...
That was very helpful.
A potential counter-argument is that looking under the hood may reveal more "vulnerability" and using the EBITDA to debt ratio comes with certain assumptions for the EBITDA part. The debt part tends to be more sticky. Of course, relatively optimistic assumptions may hold for long enough to negate any potential gain from an inability to climb the wall of worry for many specific names.

Some suggest that a conclusion from the debt to GDP graph found in the Dallas Fed link provided by RuleNumberOne is that high corporate leverage can induce recessions which, obviously is an over-stretched conclusion. A clear message though is that the relationship tends to be positive in good times and negative in bad times, whatever causes and whenever the recessionary transition occurs.

If interested, here are two links that discuss the corporate issue in a balanced way (except for the title of the first). The first link describes the increasing net debt to EBITDA for the largest 2000 companies and contains many other useful data points and analysis. The second link is a blog I regularly follow and the specific link discussed the Dallas Fed report, contemporary to its release. The author is not a "doom and gloom" type and, even if macro factors are considered, multiple sources from many angles are considered. In the blog, many interesting aspects of the corporate debt dynamics are discussed: debt to EBITDA for largest 2000 companies, interest coverage ratios etc.
https://www.whitehelmcapital.com/wp-content/uploads/2019/07/Thought-Leadership-June-2019-US-Corporat-Debt-1-1.pdf
https://www.edgeandodds.com/smart-investing/in-gods-we-trust/

As you mention, a receding tide may actually strengthen the survivors and, timing aside, the easiest way to deal with this is to pick the survivors. I just want to add though that all transitions have different flavors and the next one may be interesting from a liquidity point of view for the huge BBB tranche that exists now and the related spill-over effects on the market in general.

As a final note, I will use an example (possibly not relevant or useful for you or anybody in fact) that I think is a reflection of the relative complacency that has made its way into the corporate debt market (global). Recently, in the context of a specific name analysis, I came across a company that is an airline and that went to the debt market in order to buy back a minority interest in a loyalty business (contrary to the airline business, loyalty units are capital-lite, have high margins and are sources of free cash flows even during downturns). The purchase consideration was funded by debt and the free cash flow yield was below the interest coupon and the result is an extremely levered capital intensive airline. The coupon was 8% and the issue was massively oversubscribed. Maybe I look at the wrong places but covenants and terms that I see point to the possibility of complacency and wonder if credit spreads tell the whole story.

Spekulatius

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #15 on: January 10, 2020, 05:31:54 PM »
Almost any recession is closely related or caused by a credit even. The 2001 recession was not just the aftermath of a dot Comrades move forward! Bubble, there were a lot of telecom and independent power producers going bankrupt (Global Crossing, Worldcom,  Mirant, Enron, -  El Paso and Williams almost went bankrupt) The GFC was centered around the financial system, but eventually the credit crunch hit the whole economy.

I think it is reasonable to assume that the next recession will also be related or caused by a credit event.
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wabuffo

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #16 on: January 10, 2020, 06:01:19 PM »
Corporate debt to after-tax corporate profits currently at 5.42X  (average for the last 65 years = 5.43X)  Max was in 1990 = 9.08X, Min was in 1966 = 3.32X

In a recession, profit dips, so the ratio will increase, but it doesn't look like businesses would be starting from an overleveraged position (relative to history).



FWIW,
wabuffo
« Last Edit: January 10, 2020, 06:13:49 PM by wabuffo »

Spekulatius

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #17 on: January 10, 2020, 07:07:34 PM »
Corporate debt to after-tax corporate profits currently at 5.42X  (average for the last 65 years = 5.43X)  Max was in 1990 = 9.08X, Min was in 1966 = 3.32X

In a recession, profit dips, so the ratio will increase, but it doesn't look like businesses would be starting from an overleveraged position (relative to history).



FWIW,
wabuffo

Corporate debt/ Pretax ratio would be a better measure since interest is paid from $. Since the tax rates are at a historic low, using post tax numbers does skew the ratio a bit. but overall, the point is valid.
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RuleNumberOne

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #18 on: January 10, 2020, 07:10:00 PM »
Corporate debt is a minor issue. The main issue is the all-time high Market cap/ GNP and EV/GNP, higher than even the dot-com peak. I just prefer using GNP in the denominator because when people say "profits" it could mean anything. There is a wide spectrum full of bullshit in the area between GAAP and non-GAAP.

This bubble is so big, central bankers are going to prop it up with everything they have. Even if Eurocrats have to suppress democracy and central bankers have to turn into dictators:


https://www.euronews.com/2019/10/28/is-italy-s-ruling-coalition-at-risk-after-salvini-s-triumph-in-umbria

"Some newspapers have speculated that the outgoing European Central Bank President Mario Draghi might be asked to try to form a government of technocrats should the current administration fall.

Salvini dismissed such a prospect as "disrespectful" for Italians. "If this government falls, the only way forward would be new elections," he said."

Remember "will do whatever it takes to preserve the Euro"? The world would be better off without the Euro. The Euro has inflicted so much misery in Europe.

thepupil

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Re: Wilshire 5000 market cap / GDP exceeds dot-com peak
« Reply #19 on: January 11, 2020, 05:08:25 AM »
RuleNumberOne, which companies/sectors/etc. do you think are severely overvalued and/or overearning?

Cigarbutt, appreciate the feedback; I’ll have a look at the papers.