A recent Goldman Sachs report explains where this year's stock market profits
(should there be any) will come from:
(Bloomberg) -- The $1 trillion that U.S. companies are on track to return to
shareholders this year will constitute the market's entire return in 2015,
according to Goldman Sachs Group Inc.
Dividends and buybacks will be responsible for supporting a market where
the median stock in the Standard & Poor's 500 Index is trading at 18.2
times earnings, putting it in the 99th percentile of historical valuation,
the firm said in a note to clients. Goldman Sachs forecasts that the S&P
500 will rise to 2,150 by mid-year before fading to 2,100 by the end of 2015.
S&P 500 stock values "have limited scope for further upward expansion," a
group of Goldman Sachs analysts including Kostin, the firm's chief U.S. equity
strategist, wrote in a May 15 client note. "Dividend yield will be the sole
contributor to total return during the next 12 months," they said.
This would be fine (or at least not outrageous) if corporate cash flows supplied
the necessary cash. But they don't:
(Wall Street Journal) -- U.S. corporate-debt issuance is running at its fastest
clip ever in 2015 after three consecutive record years. Borrowing by investors
against their stockbrokerage accounts has risen to fresh records. And household
borrowing has picked up after plunging during the "Great Recession."
The increased borrowing is a sign that companies and individuals are feeling
more confident about taking risks as a strengthening economy makes the debt
more manageable, according to experts who say that the level of indebtedness
isn't yet a cause of concern the way that it was before the financial crisis.
Net leverage for highly rated U.S. nonfinancial companies, a measure that
tracks debt less cash as a multiple of annual earnings, was 1.88 times at
the end of 2014, according to Morgan Stanley data. That is up from 1.63 times
at the end of 2007, on the eve of the financial crisis.
U.S. corporate-debt issuance so far this year has jumped to $609 billion,
from $568 billion in the same period last year, according to recent figures
from Dealogic.
Junk-rated firms, with ratings double-B-plus or below, are borrowing at
an elevated pace, sometimes a warning sign for analysts who track market
cycles. But defaults remain low and few analysts expect to see a sharp rise
in defaults until the economy falls into recession, something that isn't
widely expected in the coming year.
The trailing 12-month default rate for junk-rated U.S. companies was 1.9%
at the end of March, Moody's Investors Service said, compared with nearly
15% during the financial crisis.
Aggregates, of course, contain a lot of variation. Some companies are maintaining
rock-solid balance sheets while some others are borrowing amounts that used
to be characteristic of entire countries:
(UT San Diego) -- Qualcomm took on $10 billion in corporate debt on Wednesday
to fund share buybacks and return some of its $29.5 billion cash stockpile
to shareholders. The San Diego wireless giant's share price is down 11 percent
over the past 12 months. It issued a combination of longer term, fixed interest
corporate bonds and shorter term, floating interest rate debt.
The company said it would use the proceeds for general corporate purposes,
including share buybacks and acquisitions. At its annual shareholders' meeting
in March, Qualcomm committed to buying back $10 billion in stock over the
next 12 months. At the time, the company said it would use available cash
and debt to do it.
A majority of Qualcomm's cash is overseas and can't be used to buy back
shares without tax consequences. So the company is taking on debt instead.
At the peak of each bubble, market participants start doing extreme things
in order to keep the party going. And each time analysts rationalize the debauchery
by citing differences between their bubble and its predecessors. Today's rationalizations
include the usual suspects of fat corporate profit margins, low interest rates
and ultra-low default rates on risky loans.
These didn't save the previous bubble and won't save the current one. All
bubbles eventually burst, and when they do their dominant rationalizations
are revealed to be mere wishful thinking. Corporate profits plunge, interest
rates spike, junk bonds default en mass. And the valuations those things supported
evaporate.
But this time around there actually is one big difference: Governments are
actively buying stocks and bonds, apparently without regard for price or implied
future returns. So when (not if) the current bubble rationalizations blow up,
there may be one final buyer to keep the party going for a little while longer.
At taxpayers' expense.
