The latest figures show that …
- Total debt surged to a record $6.6 trillion last year among 2,000 nonfinancial firms tracked by S&P. That was an $850 billion increase in just 12 months.
- Yes, total cash also hit a record $1.84 trillion. But that represented an annual increase of just $17 billion, meaning debt grew 50 times as much as cash!
- As a result, American companies are now carrying cash equal to just 28% of their debts – the lowest since the tail end of the Great Recession.
Here’s something else that has S&P worried: Most of Corporate America’s cash hoard is concentrated at the top. If you take out the top 1% of American companies, you find that the cash-to-debt ratio for everyone else is at a decade-low 15%. Cash actually dropped $38 billion, or 6%, last year for these lower-tier companies, even as debt soared by $535 billion.
Why do I focus so much on debt and the credit cycle? Because it holds the key to future stock market direction, whether Wall Street wants to admit it or not. I believe a huge wave of easy money worldwide funded the biggest, debt-fueled “Everything Bubble” between 2009 and mid-2015 in history, and that it’s now beginning to unwind.
Defaults are already rising sharply in sectors like energy, and as a new report from Deutsche Bank stresses, that default wave won’t stay confined to commodity-focused companies. Energy sector defaults are running around 24% in the past year, but they’re also rising well into the mid-single-digits for consumer products, capital goods, and other industries.
So while the markets flop and chop around … and we see if S&P 2,040-2,060 turns into, say, S&P 1,840-1,860 … keep a wary eye on corporate credit quality. The indicators I’m seeing are far from encouraging.
Now, I’d love to hear what you think of S&P’s analysis. Should we be more worried about record corporate debt … or encouraged about record corporate cash? Are corporate defaults going to hound the stock market in 2016 and beyond? Or are they just another background annoyance that investors can safely file away? Let me hear about it here at the website.
Auto dealers are out there flooding your inbox and mailbox with Memorial Day deals, and blanketing the airwaves with advertisements, too. But should you buy into that pitch? I guess it depends on whether you agree with my article from Friday about an unfolding auto-sector bust, which would argue for lower prices and better deals down the road.
Reader Jim said I was on target, writing: “I do expect the car market to crash. However, used cars will plummet in price, making it more affordable with fewer buyers of new cars. Also, I can see the auto parts companies more profitable as we drive our cars longer, and thus needing more repairs.”
Reader Thomas also sounded skeptical of the industry’s health, saying: “So the stats say we are looking at subprime motor vehicle debt. Wall Street will package these loans in bundles the same way that housing debts were converted into CDOs, and sell it into the markets.
“Who will create the similar credit default swaps and go ‘short’ on this bubble, and what will the leverage be? It’s déjà vu all over again with another bailout for the car manufacturers. They got it in 2008, why will they not get it again?”
Finally, Reader Jean said: “Investors will pile in wherever they can get returns, and subprime autos have become the latest venue for the Fed’s EZ money policy. This will cause a bubble in vehicle prices caused by EZ financing, similar to what we saw in the housing bubble.
“How many times do these games need to play out before the Fed realizes that doing the same thing over again and again and expecting different results is the definition of STUPID?”
But Reader Steve N. countered by saying: “I am not terribly worried about the ‘auto lending bubble disaster.’ After 2007, is it really possible all these washed-up, no-income-verification, real estate salesmen found a new area in which to be unethical? I think with interest rates so low, both auto manufacturers and consumers stretched to make more sales and purchases than might have been prudent.
“But what’s the backlash? A couple of years of repo inventory to work off? With wage and job growth still on the plus side, I don’t think this natural overindulgence merits the headline ‘Bubble Disaster.'”
And Reader Alfredo said: “I see this article more as an attempt to create a bearish exodus than anything else. Sure, there may be some issues with payments. But to claim that people are being put into cars they can’t afford because of leasing? That’s more than a bit of a stretch.
“I really hate this kind of propaganda. Car loans are not securitized and there is no bubble to burst there. Crises are created by bubbles, and as long as there isn’t one, no crash will happen. It isn’t like cars are going up in value anyway.”
Thanks for weighing in, whether you agree with me or not. I stand by my views, however. What has been happening in autos isn’t exactly the same as what happened in housing more than a decade ago. But it has enough similarities to make a credit-focused guy like me downright worried.
Please do keep the discussion going online. You’ll find the comment section below.
Bayer AG (BAYRY) is officially launching a bid to buy the genetically modified seed company Monsanto (MON) for $62 billion in cash, or $122 per share. But the German chemicals giant faced some skepticism from shareholders about the high price of the acquisition, and the amount of debt it would have to take on in order to finance the bid. Antitrust concerns could also scuttle the deal over time.
The leader of the Taliban, Mullah Akhtar Muhammad Mansoor, was assassinated in a U.S. drone strike over the weekend. The attack occurred in a part of Pakistan that the U.S. hasn’t previously targeted, perhaps reflecting U.S. frustration with Pakistan’s efforts to rein in the Taliban insurgency.
You can now ride a light rail train from Downtown Los Angeles all the way to Santa Monica on the Pacific Ocean. The mass transit expansion in a car-centric metropolitan area is just one of many underway, according to the Wall Street Journal, and could help relieve commuting stress while reducing pollution. The trade off? Higher taxes.
Do you think this Monsanto mega-merger will fly? Are you encouraged that another Taliban leader has been taken out? Any thoughts on the expansion of mass transit in cities like L.A.? Let me hear about it in the comment section below.
Until next time,