UBS strategist Matthew Mish simply asks ‘Is there a US corporate credit bubble?’, he then proceeds to look at the bullish and bearish cases.
The bullish case argues that fundamentals remain healthy and profits will not not decline materially in the intermediate term.
“Corporate fundamentals are deteriorating incrementally and from a relatively healthy position. US corporate debt to profits, assets and net worth do not appear extreme. While US corporate profit margins are elevated, they will not decline materially in the intermediate term – particularly if inflation remains sluggish and the Fed stands pat. Low government bond yields reduce the cost of interest payments, limiting refinancing risks and renewing the bid for yield.”
Meanwhile, the bearish case shows that issuance is way down and commodity-related issues will push default rates sharply higher. Further, leverage is at late 1990s levels.
Credit fundamentals, particularly in US speculative grade, are in a more dire state. HY issuance is down 53% in 2016, indicative of a substantial tightening in credit conditions. Commodity-related stress will increase default rates to 5.5%, and the broader universe is more leveraged than in the late 1990s. This leaves firms more vulnerable to peaking profit margins, rising interest costs, tighter capital markets and a slowdown in US growth. Market illiquidity and the zero bound create significant uncertainty around valuations in a downside scenario.
Overall, Mish believes there is a bubble in speculative grade credit. He said easy money from central banks limited credit losses in the last cycle, which kept many ‘zombie’ firms afloat. In addition, QE triggered substantial inflows into credit funds, igniting a material reach for yield. He said this translated into “elevated competition, easing credit standards, and massive issuance.”
Commenting on what is priced in, he said given the recent rally in HY bonds and leveraged loans they believe market implied pricing is largely consistent with the bullish view.
Sterne Agee CRT analyst, Tim Rezvan, spent much of last week in Houston and Dallas meeting with companies and clients in the E&P sector. Takeaways were grim for the companies in the sector but cutbacks could be helpful to the underlying commodity price. That said, the analyst said they expect WTI and Brent to retreat back to $30/bbl in the near term. They remain cautious.
Key takeaways from the trip are as follows:
1) all companies/investors the firm spoke with expect to see a higher oil by y/e 2016, and a subsequently higher price by y/e 2017, given the sharp decrease in capital spending since late ’14,
2) more operators are citing a shortage of pressure-pumping capacity across the industry as a real concern in ’17 that may exacerbate a future rally in oil prices, and
3) operators continue to see efficiencies and lower well costs driving down cost structures.
On this, the analyst said:
“With that backdrop, we expect an aimless, range-bound market for E&P equities to persist through 1Q earnings. Greenshoots for a rally are emerging, but near-term data points reinforce our caution.”
The analyst believes hope is (still) not a near-term investment thesis and they have little optimism we will see a materially bullish event emerge out of the Doha meetings planned for April 17. They believe we could see WTI and Brent retreat back to $30/b in the near term. They would argue this final capitulation would force U.S. producers to adhere to their lower spending/production forecasts, and could an important driver that brings global oil markets back into equilibrium in 2017. This dynamic reinforces their current WTI price deck of $40/b in ’16 and $49/b in ’17.
They believe there will be a time later this year when adding oil exposure will be prudent for long-only investors, but they do not believe that moment is today.
Barclays came out negative on the U.S. Retail Broadlines/Hardlines sector in a report Thursday entitled “It’s About to Get a lot Harder.”
Analyst Matthew McClintock sees an asymmetric risk profile for investors at this stage of the economic cycle. They highlighted that revolving consumer credit has accelerated at the same time retails sales have decelerated. This, according to the analyst, suggests we are at the later stages of the economic cycle. Continue reading “Retailers Dead Money as Economic Cycle in Later Stages – Barclays”
Tesla’s (NASDAQ: TSLA) stock has seen a tremendous bounce of nearly 60% since early February. Now one analyst is warning clients that the ramp was not based on anything fundamental and only downside exists from here.
UBS analyst Colin Langan thinks the run-up is related to a calming of liquidity fears after the company drew down the rest of a $1 billion asset-based loan (ABL). Excitement ahead of the Model 3 reveal and a recovery in gas prices also helped, he said.
Now, however, three items keep them at Sell:
- fundamental headwinds that persist with regards to TSLA’s storage business
- the upcoming Model 3 reveal could be a potential negative catalyst given high expectations and new competitors. Of note, TSLA traded down 14% one month after Model X reveals
- UBS forecasts TSLA to draw down the rest of their ABL by the end of this year. Given what they see as accelerated capex needs into the back half of this year and 2017, a raise could come sooner rather than later.
The analyst sees the stock dropping to $140, or 40% below yesterday’s close.
BlackRock’s Global Chief Investment Strategist, Richard Turnill, warned that markets have become eerily quiet recently. Now the firm is preparing portfolios for higher volatility.
U.S. equity market volatility is hovering around its lowest level since August 2015 and is well below its long-term average. This unusual calm follows declining market concerns about sliding oil prices, and the health of China’s economy and European banks. We do not expect this to last, and see a return to the higher-volatility regime that was the norm prior to QE.
The firm views Gold as a effective hedge if volatility spikes due to rising U.S. inflation fears. They also like TIPS and similar instruments. Foreign-currency exposure can act as a diversifier as well.
With WTI crude prices up 51% since early February, Macquarie Capital’s Vikas Dwivedi is calling for a short term correction back to the back to mid-$30 to low $30 range.
Dwivedi sees several short term factors impacting the price:
Continue reading “Crude Could Fall Back to $30s Short Term”
UBS thinks some gold buyers have gotten ahead of themselves and some near-term price consolidation could be in store. That said, downside will likely be contained and could present a buying opportunity.
In the firm’s view, the price of gold is dictated primarily by safe-haven investment demand and inflation hedging. They believe the direction of the gold price will be a function of investor belief in the two dominant opposing narratives that we see in the market today: Continue reading “Gold Near-Term Weakness Could Present Buying Opportunity – UBS”
Deutsche Bank equity strategist David Bianco sees the S&P 500 range bound between 1925 to 2100 until after the US general presidential election on November 8, 2016 (which more and more looks like a Donald Trump/Hilary Clinton showdown).
He does not expect the S&P to fall back into correction territory as a double-dip correction already happened. He said it would likely take clear signs of an impending US recession or a new global shock to cause renewed investor panic. Continue reading “Stocks to Remain Range Bound Until After Trump v Clinton – Strategist”
Live by the sword… die by the sword.
The robust subprime-laced auto lending market helped drive strong profits at regional banks, now cracks pose a threat to the banks most involved, according to a deep dive into the industry by analysts at Piper Jaffray.
Analysts led by Kevin Barker came away with three conclusions following their deep dive:
Continue reading “Cracks in Auto Lending Pose Threat to Regional Banks”
It’s always interesting to see how bank analysts feel about other banks – they are usually pretty blunt. Today we have a new bank opinion on Wells Fargo (NYSE: WFC)… and it’s not pretty.
UBS analyst Brennan Hawken launched coverage on Wells Fargo with a ‘Sell’ rating and a price target of $45, or 10% below the current price.
Hawken sees risks to Wells Fargo’s revenue growth and credit performance. The analyst said given the limited upside from rates, they see fee revenues as the greatest component of uncertainty in WFC’s revenue forecasts.
Continue reading “Bank-on-Bank ‘Sell’ Rating for Wells Fargo”