The Market Bull – July 9, 2019
Financial contagion fears spread with Deutsche Banks troubles. British hedge funds freezing up and now growing earnings warnings, not pretty.
While the lamestream media, most pundits and central bankers couldn’t spot a credit bubble if they tripped over it. Loose credit conditions and near zero interest rates engenders these things. Along the way various data points suggest that trouble is brewing, the trick of course is to figure out when, no easy task. One of these data points is an inverted yield curve something we currently have. It is the dramatic reversal to a normalized curve that is the real warning sign, as recent history shows. Another good warning sign is an Initial Public Offering Market or IPO’s that feature large numbers of companies that aren’t profitable. Currently this level is over 80% and second only to the Dot-Com era in 2000. Valuations are also a real issue today as they were in 2000 and 2007. For those of you not around then, or perhaps you have simply forgotten. I’ll provide the following quote from Scott McNeally former CEO of Sun Microsystems, one of the “4-Horsemen” of the internet back in 2000. As he was famously quoted as saying, in the wake of the tech implosion, that it was nonsensical to pay anything like 10 times sales for a large company. This is a partial excerpt of his scathing comments from 2002: “At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends…What were you thinking?” Couldn’t have said it better myself. A number of other items also helped to create the current bubble besides cheap and easy money. First up is the 1995 tax law change that made executive compensation over a million non-tax deductible. This kicked off the era of stock or equity based compensation. When zero interest rates came along the debt funded corporate share buyback trend went into overdrive. This time around the crisis is primarily going to be driven by corporate debt, though record levels of student, auto and credit card debt will provide a generous assist I’m sure.
OECD (DEVELOPED ECONOMIES) COMPOSITE LEADING INDICATOR, 1962-2019
Source: John Kemp, June 12, 2019
NY Fed’s recession risk model continues to soar. As you can see in the modern era, once it hits the low 30s, a recession becomes highly probable.
There are other factors as well, but these are the highlights. Let’s hope it’s different this time.
Standard and Poors 500 Index closed at: 2,979.63 up 3.68
NASDAQ finished the day: 8,141.73 up 43.35
Gold ended trading at: $1,399.60 down $.40