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Commentary on The Capital Markets- Category [Market Musings]

Heard just now on Continual New Bull ****

"We put a 4.5% 10 year into our models to stress test the market and it is still cheap because earnings are growing at 10-12%."

Uh huh.

His model is ****ed, to be polite, yet nobody called him on it.

The reason "earnings" are "growing" like that is that companies are buying back stock and otherwise funding operations with debt.  This "gooses" EPS but it adds deferred costs to their balance sheets at the same time.  How do we know this is going on?  Because C&I debt (non-financial) has gone from $11.2 to $13.9 trillion, an increase of $2.7 trillion dollars, from 2008 to today.

That borrowed money is levered up at ridiculous ratios through this sort of game to produce the so-called "results."  The problem with goosing EPS with buybacks is that each dollar of earnings produces more EPS, but at the same time if there is a loss the same multiplication of that loss in EPS will occur!

Further, this game only makes sense (and only works) so long as rates are extremely low.  Said debt has a term structure, and when that term structure expires it either must be paid back (the principal!) or it must be rolled over.  That liability is real; someone else owns the other side of it as an asset and it cannot be made to "disappear."

If rates rise then that entire term structure becomes untenable to maintain; as the expiration date comes if the debt is rolled the interest expense becomes punitive and destroys EPS; if not then the capital hit required to pay off the debt destroys EPS and, again, the lower share count means the impact is multiplied exactly as it was on the way up!

If you program your "model" to ignore that then there's no scenario under which anything can go wrong.

How did that work out for you in 2008?

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2014-08-08 14:56 by Karl Denninger
in Market Musings , 276 references

Gonna hold a "crazy Ivan" over the weekend?

'Cause, you know, that's exactly what you're doing.

PS: If you think Putin is going to relinquish what has been gained thus far you really need to rethink your premise.  The question doesn't lie there -- it lies in whether what has been done thus far is stable.  The rest of the argument is academic.


If you're bullish you never like to see what we've seen Tuesday and Wednesday.

First, the market sold off Tuesday around 10:30 into an extreme low tick, bounced a bit for an hour or so and then went down hard into a series of additional low tick readings.  The end-of-day recovery was minor.

Then, Wednesday, we saw a big buying spike at the open and into the mid-day on high ticks (lots of extreme buying pressure.)  But -- it didn't hold, and about half of that range came back off.

This is a pretty bad pattern and doesn't inspire much confidence.  It comes on the back of a lot of individual stock blow-ups too.

It's important to note that we've lost all of the ground gained since the beginning of June in just a few days, and that the internals had been deteriorating on the entire last push higher from June 1st.

Are we due for a big dump?

Maybe.  There's an awful lot of folks buying back into the big tech names that have gotten hit, but I'd be careful with that.  They're also, in relative valuation terms, still extremely expensive.  Yes, they've worked the last couple of years, but narrowing advances are dangerous, especially with valuations as nasty as they are in those names.

I wouldn't be surprised to see the S&P peel off another 100 handles from here in a big hurry, which STILL wouldn't mean much.  We could drop all the way under 1,700 without hitting the long term trend-line off the lows -- a mark that hasn't been seen since 2012, and which most people think will never be seen again.

Uh huh.....

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That is all....


When you decide to slam two big pieces of something together you probably ought not do so if they're both about 2/3rds of a critical fissile mass.

If you're dumb enough to do that you get what we saw two of:


I have to chuckle at the detonation of Time/Warner and Fox's merger -- specifically given the price action on Fox since the deal was announced.  Obviously shareholders thought it sucked, and finally Murdoch said well, you know, they may be right.

Sucks to be you Time-Warner, which gave back most, but not all, of its take-over premium.

Then there's the Sprint/T-Mobile:Lajere ****show.  This is what I said at the time the rumors started back in December of last year:

This has been rumored before, and is no more-intelligent now than it was the last time.

The problem is that Sprint has a metric ton of legacy operating CDMA spectrum and customers that are entirely incompatible with what T-Mobile has for their customers (GSM and HSPA.)

Before Sprint got taken out by Softbank I had a big position in their stock, which I bought fairly close to the bottom -- I simply didn't believe they were going under, although everyone else seemed to.  I sold it after that deal into the ramp for a huge gain, and a big part of the reason was that I just didn't have enough knowledge of Softbank to analyze how intelligent they were, or where they'd go as a company.

It looked like I left a lot of money on the table by selling out of that position, but now.... not so much.  Sprint has been sliding bad since the turn of the year, and given where it's trading now it looks like it was all hype.  That the blowup announcement came with another piece of news, Hesse leaving, just points to the danger of blindly believing in an acquirer when you simply can't back up your opinion with research you've done.

The interesting piece of this particular detonation is that T-Mobile got monkey-hammered in the aftermarket as well, which bodes very ill for the future there.  The good news is that it has (so far) held critical support.  The bad news is that it may not tomorrow morning, and the reaction certainly isn't positive.

That's two.  If the bloom is off the rose in the M&A area, leaving only thorns, that's yet another stone on the "watch your back!" side of the scale when it comes to equities and the current market.

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