Here Comes The Inevitable Tsunami Of Corporate Defaults & Bankruptcies
We have obviously talked of record corporate debt issuance and stock market valuations being in bubble territory. That compares to the general consensus on Wall Street that has been perpetrated over the last four years. That being corporate balance sheets are in great shape, profits are high and valuations are cheap. We see the first outcome of this fallacy with bank stocks falling more than at any time since the Great Depression. It's important for people to understand bank stocks are not reacting to economics of today but they are discounting economics over a period of the past decade or longer. The implications for this are very serious. But, of course we are told the "rest of the economy" or "non US markets" are safe(r). Anyone espousing these views clearly are deluded at best.
I wrote at the peak of the private equity buyout & merger mania that boom was based on extremely unsound business practices and nonexistent bank risk management practices. And that it really shouldn't be called private equity because those deals were done with massive amounts of debt. And, with deflation that debt was high risk. But, what do I know? Evidently more than the CEOs of banks or any of these private equity firms. Of course, all this really involves is balancing our check books and saving for a rainy day. Nearly all of us are capable of this if we have the capital to do so, something banks and corporations surely had the luxury of yet something they seem incapable of doing. But they get to run off with our cash and we get to pay the bill for their stupidity. So, in the end I guess they are smarter than all of us. They have gamed society and many probably knew exactly what they were doing.
There were days I would turn on the television and see prognosticators pumping stocks based on the buyout or private equity rumor of the week or the Goldman private equity takeover list. Total insanity. No surprise since one of the prognosticators used to work for Goldman and was just helping out his buddies while giving us great tips from the geniuses on Wall Street. Now, you get to eat that takeover list without any French fries. And, it's doused in cyanide. Many of these private equity deals are going to crumble.
Corporate debt is far from the domain of banks and mergers. Insurance companies, pensions, hedge funds, mutual funds and retirement funds choked down a lot of this garbage. Then, alot of insurance companies have strayed significantly with their own investments. Of course, these firms didn't choke down all of that debt with French fries. They did so with champagne and caviar that Wall Street fed them at sales meetings while convincing them to put your retirement at risk. Actually, that is based on factual accounts rather than my standard sarcasm.
Then we have corporation debt outside of the finance industry. We even had many companies that were "underleveraged" (a term used by a particular Fortune 500 clown, er, I mean CFO) and took out loans to buy back shares. This particular Fortune 500 company is still a darling of the investment community and has borrowed about $20 billion to buy back shares. Maybe it's more by now. Wall Street cheered with glee as this company and others followed them down the rabbit hole. Me? I sold all of my positions in this company for obvious reasons - a deteriorating balance sheet, a massive hit to shareholder equity, weakening fundamentals, silly management decisions and a rising stock price. But, hey the PE is only 15. I'll see this stock 50-70% lower at some point.
Do you think Warren Buffett buys into companies where CFOs load up the balance sheet with debt for a stock buyback? I simply can't believe some of the things companies give me to write about. I can assure you systemic incompetence in the board room plays a substantial role in this crisis.
On this topic, just as many on Wall Street run for the safety of the fixed income markets, here comes the inevitable tsunami of record amounts of distressed corporate debt soon to be followed by a tsunami of corporate defaults and bankruptcies. Ah, but this is a consumer-led recession. Not. More grist for the mill. As I've said before, cash is king. I'll have an order of fries with my cyanide.
I wrote at the peak of the private equity buyout & merger mania that boom was based on extremely unsound business practices and nonexistent bank risk management practices. And that it really shouldn't be called private equity because those deals were done with massive amounts of debt. And, with deflation that debt was high risk. But, what do I know? Evidently more than the CEOs of banks or any of these private equity firms. Of course, all this really involves is balancing our check books and saving for a rainy day. Nearly all of us are capable of this if we have the capital to do so, something banks and corporations surely had the luxury of yet something they seem incapable of doing. But they get to run off with our cash and we get to pay the bill for their stupidity. So, in the end I guess they are smarter than all of us. They have gamed society and many probably knew exactly what they were doing.
There were days I would turn on the television and see prognosticators pumping stocks based on the buyout or private equity rumor of the week or the Goldman private equity takeover list. Total insanity. No surprise since one of the prognosticators used to work for Goldman and was just helping out his buddies while giving us great tips from the geniuses on Wall Street. Now, you get to eat that takeover list without any French fries. And, it's doused in cyanide. Many of these private equity deals are going to crumble.
Corporate debt is far from the domain of banks and mergers. Insurance companies, pensions, hedge funds, mutual funds and retirement funds choked down a lot of this garbage. Then, alot of insurance companies have strayed significantly with their own investments. Of course, these firms didn't choke down all of that debt with French fries. They did so with champagne and caviar that Wall Street fed them at sales meetings while convincing them to put your retirement at risk. Actually, that is based on factual accounts rather than my standard sarcasm.
Then we have corporation debt outside of the finance industry. We even had many companies that were "underleveraged" (a term used by a particular Fortune 500 clown, er, I mean CFO) and took out loans to buy back shares. This particular Fortune 500 company is still a darling of the investment community and has borrowed about $20 billion to buy back shares. Maybe it's more by now. Wall Street cheered with glee as this company and others followed them down the rabbit hole. Me? I sold all of my positions in this company for obvious reasons - a deteriorating balance sheet, a massive hit to shareholder equity, weakening fundamentals, silly management decisions and a rising stock price. But, hey the PE is only 15. I'll see this stock 50-70% lower at some point.
Do you think Warren Buffett buys into companies where CFOs load up the balance sheet with debt for a stock buyback? I simply can't believe some of the things companies give me to write about. I can assure you systemic incompetence in the board room plays a substantial role in this crisis.
On this topic, just as many on Wall Street run for the safety of the fixed income markets, here comes the inevitable tsunami of record amounts of distressed corporate debt soon to be followed by a tsunami of corporate defaults and bankruptcies. Ah, but this is a consumer-led recession. Not. More grist for the mill. As I've said before, cash is king. I'll have an order of fries with my cyanide.
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