Thursday, December 22, 2016

Today's links

1--Wall Street's 2017 Forecasts Are Doomed If Trump Doesn't Follow Through On Campaign Promises

Trump's presidency thru rose colored glasses

Bank of America Merrill Lynch: "The U.S. election was a game-changing development for markets, with single-party rule likely leading to significant fiscal stimulus. We look for a stronger U.S. dollar and higher U.S. yields in 2017," the analysts write, adding that they are targeting a U.S. 10-year rate of 2.65 percent for the end of next year...

Deutsche Bank: "If the corporate tax rate is cut to 25 percent, all else the same, it would boost S&P earnings by $10 and support an S&P rally to 2,300 and 2,400 by 2017 end."
  • JPMorgan Chase & Co.: "We estimate that Trump’s corporate tax plan, which incorporates a 15 percent statutory federal tax rate, would add roughly $15 to S&P 500 earnings.
  • 2--Wall Street likes Trump's repatriation holiday idea

    (Special one-time 10% rate for tax dodgers)
    Levkovich said there is approximately $1.2 trillion held overseas that can't be brought back to the U.S. without getting hit with the 35 percent corporate tax rate. Democrats are fine with taxing it at a lower rate, but the funds must be used for infrastructure spending, according to the strategist

    3--U.S. Economy: No Recovery

    4--Spike in consumer confidence

    The Thomson Reuters/Ipsos Primary Consumer Sentiment Index (PCSI) hit a new post-recession high point. The holiday shopping season is in full swing, and consumers are feeling upbeat about their future economic situation.

    5--The  $29 Trillion Corporate Debt Hangover That Could Spark a Recession

    Strains are emerging in just about every corner of the global credit market. Credit-rating downgrades account for the biggest chunk of ratings actions since 2009; corporate leverage is at a 12-year high; and perhaps most worrisome, growing numbers of companies -- one third globally -- are failing to generate high enough returns on investments to cover their cost of funding. Pooled together into a single snapshot, the data points show how the seven-year-old global growth model based on cheap credit from central banks is running out of steam.

    6--Corporate debt since the recession; Corporate America Is Drowning in Debt

    7--Stock Buybacks Are Driving Companies Into Debt--Corporate debt is now near record levels, due in part to borrowing to buy back stock. It isn’t a situation that can last

    The bond market should be concerned about stock buybacks, but not because of their bullish effect on share prices. Instead, bondholders should be anxious about where the cash to pay for them comes from. It isn’t widely appreciated that the money has been borrowed in the credit markets, and that the borrowers have taken on a large amount of debt to support the buybacks. That’s cause for worry on several fronts.

    The first is simply that outstanding corporate debt is now at a record high. Many pooh-pooh this, arguing that the debt was issued when rates were low and corporate borrowing was cheaper than usual relative to government borrowing, which carries less credit risk. That’s fair.

    But what happens in a recession or a recession for earnings? Those tight spreads between corporate and government rates will widen and, given the level of corporate indebtedness, could cause credit downgrades. That will put further pressure on the debtors. According to the Federal Reserve’s flow of funds data, outstanding nonfinancial corporate debt is 45.3% of GDP. That nearly matches the level seen in the first quarter of 2009 (45.4%) and exceeds the prior peak of 44.9% achieved in the third quarter of 2001

    The result of the buybacks is that net equity issuance has been negative for the last several years and bears a striking resemblance to the period leading up to the 2008 financial crisis. The sheer level of buybacks is staggering. A Deutsche Bank report notes that Standard & Poor’s 500 companies pay out two-thirds of their earnings through buybacks and dividends. FactSet further notes that those same companies spent $166.3 billion on share buybacks in the first quarter, a post-recession high and one only surpassed by $178.5 billion in the third quarter of 2007. Keep the latter date in mind.

    Buyback activity correlates well with the performance of the S&P 500, which shouldn’t be surprising; we’ve seen it in the run-up to the last two recessions. But what has been overlooked is that this activity was financed and shows a strong inverse correlation with nonfinancial corporate borrowing. In other words, companies are issuing massive amounts of debt to buy stocks in a market whose outstanding supply of shares is shrinking. This can’t last.

    In the first quarter, nonfinancial corporate borrowing hit $724 billion. That’s the second-highest on record and is surpassed only by, again, the third quarter of 2007 with $807 billion. The similarities should give pause.

    Managers of big bond portfolios have taken on added credit risk in the last few years to gain incremental yield. Now these investors are overweight corporate bonds and concerned about performance. As long as the rate differential between creditworthy and less-creditworthy borrowers remains tight, all is well. But if the Fed tightens, or if a slowdown in earnings or the economy unfolds, a lot of investors will rush to rebalance.
    Closely related to our worry about borrowing to buy back stock is concern about what it isn’t being used for, with rates so low. The latest report on gross domestic product provides insight. There we see that total private domestic investment fell for the third quarter in a row, and it was soft in the preceding three quarters. Contrast that with the low unemployment and recent acceleration in the Employment Cost Index, and you have a recipe for softening productivity gains.

    We should be paying more attention; if Corporate America doesn’t have confidence in growth and isn’t investing to improve productivity (with repercussions for profits and hiring), then those overly invested for current credit conditions should consider shifting to higher-rated corporate bonds with short durations or to Treasury bonds of like durations

    8--Russia, Iran and Turkey issue joint declaration on Syrian settlement

    9--U.S. Economic Confidence Inches Up to New High

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