US Credit Conditions Drop to Worst Level since Q3 2009, Markets Soar

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The Noose Tightens one by one.

You wouldn’t know it from the boom in stocks that hit new highs after tottering for over a year, and from the surge in junk bonds, even the riskiest ones, whose prices have soared and whose yields have plunged: At the riskiest end of the spectrum, the average yield of CCC-and-below rated junk bonds went from 21.5% on February 12 to 14.2% now, as if all credit problems, defaults, and bankruptcies had suddenly disappeared after the latest Fed flip-flop or whatever.

But in reality, companies are buckling under their load of debts in an environment of slack demand and declining sales. The Standard & Poor’s default rate has been rising relentlessly, and in June, following a number of new defaults, hit 4.3%, the highest rate since the Financial Crisis.

And now Fitch Ratings chimes in with its Fitch Fundamentals Index (FFI). “As a pattern of weakening credit quality, mostly in the corporate finance space, took its toll,” the index dropped to -3 in the second quarter, the lowest since the third quarter of 2009, when the Financial Crisis was in full swing.

The FFI, which ranges from +10 to -10, serves as a gauge of “credit fundamentals” across the US economy, as Fitch says. These include the performance of mortgages and credit cards, corporate defaults, recoveries after high-yield debt defaults, rating actions and Outlooks, forecasts of EBITDA and CapEx, the health of the banking sector, the CDS outlook, and transportation trends. Fitch:

Analyzing the relative strength or weakness of the index or its sub-components can provide insight into how conducive conditions in the US are towards economic growth.

And they’re not very conducive: six of the 10 components in the index are now “in negative territory, three of those strongly so.”

The mortgage performance component is the only score “in strongly positive territory as prime mortgage delinquencies remain low.” And that is a logical function of home prices that have been soaring beyond prior bubble highs in most places. Even if borrowers can’t make the payment in an environment of rising home prices, they can sell the home and pay off most or all of the mortgage. Mortgages don’t curdle until home prices decline sharply.

As for the remaining nine components? Three are at the lowest possible level of -10:

  • CDS outlook
  • Corporate defaults
  • High-yield recoveries. This is when bondholders find out what’s left for them after a default. Recoveries have dropped to an average of $0.20 on the dollar, which is, as the report says, “among the lowest that Fitch has seen.”

And there was more deterioration in other components:

Concerns over global growth and commodity prices persisted, pushing the corporate capex forecast indicator into negative territory while the corporate EBITDA forecast indicator [Earnings before Interest, Taxes, Depreciation, and Amortization is a measure of cash flow], although still positive, was less so than the prior quarter. Average corporate capex growth stands at just 2%, as companies weigh the costs and benefits of new investment.

This dearth of “new investment” has been one of the weakest points in this Fed-designed economy. Companies simply don’t use the funds that they can borrow so cheaply to invest in productive activities, in part because they don’t see enough demand, and in part because they’re more interested in propping up their share price via share buybacks, aggrandizing their reach and power, and eliminating competition via mergers and acquisitions.

They’ve been borrowing to buy back their own shares, and to acquire other companies by overpaying and then downsizing the company to deliver the “efficiencies” they hyped when they announced the deal. That isn’t an investment in the future, but capital evaporation. Left behind is the debt incurred to do this. And what they’ve not been doing enough of is, as the capex component points out: investing for the long term and moving their business forward. Now the fruits of these efforts are ripening.

What keeps these companies and their debt afloat for as long as it has been the case is the tsunami of global central-bank-created money and zero- or negative-interest-rate policies. The markets have been playing along. They’re focused only on the marching orders issued by central banks, and those orders have been simple: buy, buy, buy — and by the way, here’s some free money for leverage. It has created the biggest credit bubble in US history. But on a company by company basis, this debt that keeps piling up needs to be serviced. It doesn’t just go away. And the longer the unwind gets dragged out, the more there is to unwind.

For many American consumers, this credit bubble, however, hasn’t been helpful. On the contrary. Read…  Americans’ Economic Gloom Festers as Stocks Hit New High: Gallup Stumped

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  27 comments for “US Credit Conditions Drop to Worst Level since Q3 2009, Markets Soar

  1. VegasBob
    July 20, 2016 at 2:52 pm

    Ah, yes…

    The current recovery rate for unsecured creditors from the Caesars Entertainment bankruptcy (January 2015) is estimated at 44%.

    That’s if creditors approve the restructuring plan and the bankruptcy judge approves it in January 2017. And 44% is one of the better recovery rates going for a BK company.

    By the time Wall Street figures it out, it will be too late to get out of the casino.

  2. Petunia
    July 20, 2016 at 3:55 pm

    Every leveraged buyout I can remember has been nothing more than a liquidation of the acquired company. They liquidate the pensions, the employees, the best assets, use the money for bonuses and walk away. I don’t understand why these people are not in prison. When the mob did this to a small business the FBI couldn’t wait to lock them up for fraud.

    • VegasBob
      July 20, 2016 at 4:08 pm

      How many high profile banksters were prosecuted for crimes that led to the 2008-2009 financial crisis? None.

      The only high profile prosecution was Bernie Madoff – a rich person who was ripping off other rich people.

      In this country, the chance of going to prison for mega million dollar financial crimes is approximately zero.

    • illumined
      July 20, 2016 at 5:45 pm

      Because being short sighted and dumb isn’t a crime. If it was nearly everyone on the planet would be in jail.

      • Better World
        July 21, 2016 at 6:50 am

        And, if that were the case, the world may have been a much better place.

  3. r cohn
    July 20, 2016 at 4:06 pm

    Let me preface my comments by stating that I respect Wolf for presenting the ideas on this blog and agree with almost all of the underlying ideas in the posts on this blog.I would go a step further in saying that I am aghast as to the market’s acceptance of the Central banks insanity.

    I have been a professional trader for over 45 years . I “eat what I kill”.But as long as the markets buy into the idea of Central bank infallibility,it will continue to be unprofitable to buck the trend,even if it is illogical or even silly..A prime example of this would have been if you shorted the 10y German Bund at %0.Sounds logical but it was an unprofitable trade.
    It seems as though we are in Never-Never Land when oil is declining declining while oil stocks keep on going up.
    Some day rationality is going to prevail.But who knows when?

    • TheShadow
      July 20, 2016 at 5:53 pm

      Agree. Investing is not solely based upon fundamentals (never has been). It is about sentiment …group psychology as well.

      If the great unwashed masses believe we are in a bull market, or the Fed is “doing whatever it takes” to pump up the market…. it behooves you to be long. Your insistence on bucking the market, or the Fed, will result in a pyrrhic moral victory and your becoming an intransigent pauper.

      • Gary
        July 20, 2016 at 9:18 pm

        r cohn and TheShadow: It seems clear to me that the ONLY thing that will break this market is when a loaf of bread goes for fifty bucks. (figure of speech, you get my point)

    • Robin Crawford
      July 21, 2016 at 5:41 pm

      The old saying: you don’t fight the Fed. Even more so, you don’t go against all the major central banks. As long as they are pumping money into the markets that prop up assets it will continue. At some point the markets will pop and revert to the mean. That pop will only occur when nearly all shorts have given up and financial publications are all talking about ever higher markets without end.
      Good luck with your trades.

  4. r cohn
    July 20, 2016 at 4:22 pm

    Here are some interesting stats
    According to a June 6,2016 article in Forbes
    As of the end of 2015 Moody’s made the following estimates

    Total cash on the books of US non-financial compnaies=1.68 trillion
    Total debt on the books of Us non-financial companies=5.08 trillion

    Of the 1.68 trillion in cash a good deal is horded overseas to avoid the higher taxes in the US vs overseas
    The top 50 companies accounted for 1.14 trillion, of the 1.68 trillion while the top 4 accounted for 504 billion


    Only 1/8 of corporate borrowing was used for CAPEX + RESEARCH and DEVELOPMENT

  5. LG
    July 20, 2016 at 4:24 pm

    A casino is a casino! It’s gambling not investing!

    • ML
      July 24, 2016 at 1:19 am

      There isn’t any difference between gambling and investment. It is pretentious to think otherwise.

  6. Shawn
    July 20, 2016 at 5:42 pm

    JPY 20 Trillion stimulus is on its way,

    USD/JPY 107.1300 +0.9850 (0.93%)

    Which should be enough to get Hillary Clinton elected.

    • Petunia
      July 20, 2016 at 6:02 pm

      Hillary will never be president. Nobody wanted her last time and they still don’t want her.

      • nick kelly
        July 20, 2016 at 7:56 pm

        There is a difference between palatable and edible. You may not WANT Hillary but if you get the alternative you might wish you’d settled for her. Why do think 100 top Republicans aren’t attending the convention?
        There is a lot of ‘what if’ out there, and who knows.
        One thing we do know is that he is going on trial for civil fraud- the Attorney General of New York State has said ‘Trump University was fraud pure and simple, and we’re going to get those people their money back.’
        And I’ll bet he goes after punitive damages too. Note: this is not some ambulance chaser- this is a class action suit brought by the state.
        Now before replying: ‘Hillary this or that’, tell me the last time a presidential candidate was going on trial?

        • Petunia
          July 20, 2016 at 8:08 pm

          The Cuomos are a mob family and nobody knows it better than Trump. Mario Cuomo couldn’t run for president because his wife inherited $10M from her father, a plumber. Andrew Cuomo can hustle a lot of people but not those who know where the family money came from.

        • rich
          July 20, 2016 at 8:15 pm

          The Trump “University” is set for 24 days after the Presidential election. Democrats, who hate Hillary, will probably not vote for Trump, but they could very well stay home on Nov. 4. A Trump win would not surprise me.

        • ERG
          July 21, 2016 at 9:16 am

          Most- if not all – of those “100 ‘top’ Republicans” are the reasons why Trump is the nominee!

        • nick kelly
          July 21, 2016 at 3:11 pm

          The AG of New York State is Eric Schneiderman.

          BTW: the court had ordered an inquiry into Trump U to see if there were grounds to proceed. When it came time for the report. Trump tried to have its release blocked. The judge ordered it released- that’s when Trump said the US born judge was prejudiced because he was of Latino descent.

          Three days ago Manafort has to explain the obvious copying of Mrs. Obama’s speech by Mrs. Trump- he says its all in our minds. Them a professional writer with the campaign says ‘Ya, I did it’ which is impossible. Any pro writer ripping off stuff knows to change the wording. And of course Mrs. Trump had said she wrote it- which would be forgivable in someone whose first language isn’t English.

          Then in the last 24 Manafort has to clarify Trump’s statement that if you aren’t a paid up NATO member, the US won’t come to your aid if attacked. A really dangerous and stupid thing to say – according to senior Republicans.

          And it’s only July! Will Manafort have a breakdown by November?

        • Jerry Mael
          July 22, 2016 at 10:08 am

          ‘Top 100’ did not attend ‘cuz they are NeoCons… >_>

      • Shawn
        July 20, 2016 at 8:28 pm

        Dude, I don’t want Hilary either, but look at all the fricken money being created and spent to get her elected. There was more to Bernanke trip to Japan than meets the eye.

      • GSX
        July 21, 2016 at 6:18 am

        Oh and Trump is an alternative with good business sense. Stick to gardening please LOL. She leads the Trump by +5 points on most reasonable polls. She is an alternative not the best but the only one. Trumps wife is a loser who lied about having a degree. She bailed after year 1 in college here in Europe. She cant write. The cartoon that is Trump is priceless entertainment. His lack of knowledge about the basics of the world much less business are laughable. Please vote for him by all means. You are not nearly as serious as you post here. Move along and get a life.

        • ERG
          July 21, 2016 at 9:25 am

          The only poll that matters is the one in November.

          That will be after a few debates where Hilary will have to finally face the music in a mostly unscripted and uncontrolled setting with an opponent who will be as merciless with her as she was in dealing with the women her husband molested/raped.

          In the meantime, enjoy the Kool Aid.

        • Petunia
          July 21, 2016 at 11:03 am


          Mrs. Trump is a former model and we all know they are not rocket scientists. Your attack on a woman who stays home and takes care of her family is a low blow. You don’t even have to tell me you are a Hillary supporter. You are following her script. Hillary’s attacks on the women Bill abuses is one of the reasons I am a Clinton republican. The Clintons made me a republican.

        • nick kelly
          July 21, 2016 at 3:30 pm

          It remains to be seen if Trump CAN debate.

          Mr. Schwarz, the writer of Art of the Deal, says Trump’s attention span was so short, 2 -5 minutes, that he was impossible to interview for background. He was going to cancel when it occurred that he could just listen in on phone calls and get background elsewhere.
          Oh- this is PRICELESS- Trump now denies that Schwarz wrote the book- he says he wrote it!!!!!
          Then why is Schwarz’s name on the cover- did he give Trump
          real estate info for Trump to write up?
          (Schwarz doubts that Trump has ever read a book much less written one. Schwarz now regrets the book, which really created Trump as a celebrity)
          Reality is a fungible for Trump, you add sprinkles of it like a spice.

          But this is all trivia compared to the upcoming investigation into the 25 K paid to Pam Bondi, the Florida AG who dropped her probe into Trump U- three DAYS after the pay off.

          And you think using private email is a high crime or misdemeanor?

      • Chicken
        July 21, 2016 at 7:31 pm

        This never stopped her party from foisting their will upon us.

  7. Uncle Frank
    July 20, 2016 at 5:47 pm

    The VIX indicates there is no fear out there when it concerns risk. No one cares about consequences anymore.

Comments are closed.