EC Stocks Rise As Zombie Companies Proliferate

All this largesse offered by the Fed at record low rates has indeed led to its desired effect. Corporations rushed to sell $69 billion in investment-grade (IG) corporate debt during the first full week of 2020, the second-highest amount ever in a one-week period, according to Bank of America Securities. The rate on the ICE/Bank of America investment-grade corporate bond index has plunged to a paltry 2.87%, as investors chase risk in a desperate search for any kind of yield. The BBB tranche of IG debt, which is just one notch above junk and comprises 50% of all IG debt, is yielding just 3.18%. That record low yield is a full 300 bps lower than it was prior to the Great Recession.

The truth is, there's a record amount of corporate debt, which has the lowest quality of composition and trades at the lowest yields ever. Around the world, there is a half-trillion dollars' worth of negative-yielding corporate bonds that are held by individuals that hope to sell it at a higher price—and fast—because holding a bond to maturity that pays less than the principal guarantees a loss in nominal terms and with a much fatter minus sign attached to it when inflation is factored into the equation.

Nevertheless, corporate bond prices continue to climb along with share prices even though earnings growth has absconded. According to FactSet, the Q4 2019 S&P 500 y/y earnings will be negative 2%. If the Q4 earnings season turns out to be a negative number at all, it marks four straight quarters of y/y negative EPS growth. But, falling earnings doesn’t seem to matter to stock investors much at all when the Fed keeps the confetti machine blowing at full speed--and deteriorating credit quality of corporation doesn’t seem to faze them either.

While the stock market surges to new highs, the credit quality of the U.S. government is faltering as fast as corporate debt. The budget deficit reached $1.02 trillion for the 12-month calendar year ending in December. And, the deficit increased to $357 billion in the first three months of this fiscal year 2020 (Oct., Nov., and Dec.). This deficit is the largest in seven years. It was only higher during the aftermath of the Great Recession. But remember, this is supposed to be the best economy ever. However, it is not; and when the economy starts to contract the annual budget deficits should spike north of $2.5 trillion due to automatic economic stabilizers, just as corporate bond yields become completely unglued.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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Moon Kil Woong 4 months ago Contributor's comment

Stocks aren't overvalued if rates and inflation remain very low, especially if the Federal Reserve eases more. That said, what is bad is the fact we have artificially low rates and rates are going lower not higher. When we do hit a recession, it will get nasty fast.

Leslie Miriam 4 months ago Member's comment

So sure a recession is coming? I feel like people always say that. Seems like fear mongering to me.

Moon Kil Woong 1 month ago Contributor's comment

It is not fear mongering. It is inevitable like winter time if the world spins around the sun. It is an economic fact. The issue is that this can be artificially delayed by a variety of means, monetary stimulus, fiscal stimulus, regulatory measures, etc. The problem is, if you already used up these measures you are left with little to fight the downturn when it comes.

What is sad is we are already hitting the bottom of the barrel even though we weren't in a recession. This is why we are playing with zirp and quantitive easing. It is despicable. Such measures should be used for us when we are in an actual downturn.

Gary Anderson 4 months ago Contributor's comment

The Fed is trying to engineer a recession proof economy. If nominal interest rates go negative it may be more difficult to do so. And real interest rates are negative and may be starting to lose ground.

Gary Anderson 4 months ago Contributor's comment

And this is a sober warning, the biggest bubble is the corporate debt of zombie companies.

Beating Buffett 4 months ago Member's comment

Yes, very sobering.

Gary Anderson 4 months ago Contributor's comment

Jamie Dimon said he would not buy a negative interest bond unless forced to! The Fed has to stand its ground against Trump's negative nightmare.