The Outlook for American Businesses is Grim
$DIA, $SPY, $QQQ, $VXX
The Big Q: Are investors in denial about grim outlook for American businesses?
That’s the question Société Générale’s Andrew Lapthorne, global head of quantitative strategy, posed to his bank’s clients in a note Friday.
“Asset valuations are extreme; returns are poor, the probability of losses is high and the ability to recover any losses quickly is low,” he wrote.
In particular, he sounded an alarm over the state of corporate America’s balance sheet.
Company spending exceeds cash flow by a near-record amount, this is a fundamentally unsustainable situation, as net debt continues to increase quickly.
In many cases, companies have used debt to repurchase their own stock, dressing their bottom-line financial performance. While not all buybacks are financed by debt, Mr. Lapthorne noted a correlation between net repurchases and the change in corporate indebtedness.
“US corporate balance sheets are a major risk going forward,” he says. “US corporates are massively overspending.”
To be fair, servicing this debt load isn’t as onerous as it might appear, because of low interest rates. And despite the recent steepening of corporations’ yield curve, companies have continued to extend duration, which offers them more certainty about what their interest payments will be over the long term.
For corporate credit, there is little concern about short-term coverage from the market. Notably, maturities continue to creep up, despite higher spread costs, corporates are generally borrowing further out the curve and ‘locking’ low rates.”
But, long term, the performance of stock markets will be primarily driven by earnings increase, and the level of corporate indebtedness implies that any latitude to boost earnings per share by shrinking the denominator is limited.
Corporate profits in the US have declined for 5 straight Quarters. And the combo of near-record corporate debt-to-GDP, record low return on equity, ever-higher labor costs, and subdued pricing power does not augur an inspiring picture for growth.
US profitability is on a “cyclical downtrend,” Mr. Lapthorne concluded
Friday, the major US stock market indexes finished at: DJIA-16.71 at 18145.64, NAS Comp +15.57 at 5257.41, S&P 500 -0.18 at 2141.16
Volume: Trade was moderate with 853-M/shares exchanged on the NYSE
- Russell 2000 +7.2% YTD
- NAS Comp +5.0% YTD
- S&P 500 +4.8% YTD
- DJIA +4.1% YTD
|HeffX-LTN Analysis for DIA:||Overall||Short||Intermediate||Long|
|Neutral (-0.12)||Neutral (-0.12)||Bearish (-0.35)||Neutral (0.11)|
|HeffX-LTN Analysis for SPY:||Overall||Short||Intermediate||Long|
|Neutral (-0.15)||Neutral (-0.24)||Bearish (-0.31)||Neutral (0.10)|
|HeffX-LTN Analysis for QQQ:||Overall||Short||Intermediate||Long|
|Neutral (0.20)||Neutral (0.02)||Bullish (0.29)||Bullish (0.29)|
|HeffX-LTN Analysis for VXX:||Overall||Short||Intermediate||Long|
|Bearish (-0.47)||Very Bearish (-0.65)||Bearish (-0.40)||Bearish (-0.38)|
Have a terrific weekend.
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