Cheap Debt is Good News for Stocks

The eventual return of leveraged buy-outs (LBOs) and an uptick in mergers and acquisitions (M&A) should give investors further reason to be bullish on stocks.

October 23, 2012

Global CIO Commentary by Scott Minerd

The liquidity preference theory, originally described by John Maynard Keynes in his General Theory, suggests that interest rate levels are determined by the demand for money. During times of high uncertainty, individuals and businesses exhibit greater demand for liquid assets, primarily cash and cash equivalents.

As uncertainty comes out of the system, pent-up cash balances need to be deployed. Considering how cheap some stocks are, the size of companies’ cash balances, and the impressive performance of the below-investment grade lending market, there is now a possibility of a resurgence in buy-outs and M&A-driven consolidation as private equity investors and corporate entities “put their money to work.”

The recent increase in the issuance of covenant-line loans – that is, loans with less stringent restrictions on collateral and payment terms for borrowers – can be interpreted as a harbinger for higher volumes of leveraged buy-outs, in particular. The history of covenant-lite loans is traceable to investments by private equity groups. The return of LBOs and M&A activity would generally provide support for equity prices, which is something for all investors to note.

Economic Data Releases

The Recovery in U.S. Housing Continues and Leading Indicators Grow at the Fastest Pace in Seven Months

U.S. data released last week indicated further recovery in the housing market. In September, housing starts were up 15% from August and both housing starts and permits reached their highest levels since July 2008. Existing home sales were 4.75 million in September, down from 4.83 million in August, but still the second highest monthly reading since June 2010.

Initial jobless claims increased to 388,000 last week, in line with the recent trend following the previous week’s surprising low of 342,000. The Philadelphia regional manufacturing index was 5.7 in October, the first positive reading (indicating expansion) after five consecutive negative prints in the previous months. The Leading Economic Index grew by 0.6% MoM in September, the strongest growth since February, led by robust gains in building permits, interest rate spreads, and equity prices.

Spanish Housing Woes Plod on While China’s Reported Data is Better Than Expected

Last week’s data from Europe was mixed. Spanish home prices fell 2.4% QoQ in 3Q, the 18th consecutive quarter of decline. U.K. retail sales grew at the fastest pace in four months. The U.K.’s unemployment rate also decreased to 7.9% in August, a 14-month low. Both industrial orders and industrial sales in Italy rose in August, the second consecutive month of increase for both.

In Asia, China reported that its economy grew 7.4% YoY in 3Q, the seventh consecutive quarter of slowing growth. However, on a quarterly basis the economy grew 2.2% from 2Q, the fastest pace in four quarters. Both Chinese industrial production and retail sales rose faster than expected in September. Meanwhile, fixed asset investment in China grew 20.5% YoY in the first nine months of this year, the strongest cumulative growth in half a year. In Japan, September’s trade balance reached -¥558.6 billion, the third consecutive month of deficit, driven by a 10.3% YoY plunge in exports.

Chart of the Week

The NYSE Cumulative Advance/Decline Line vs. Dow Jones Industrial Average Index

The New York Stock Exchange (NYSE) Cumulative Advance / Decline Line (Breadth) is one of the best leading indicators for the stock market. The indicator is built by taking the difference between the number of advancing and declining stocks. It has historically tracked closely with the Dow Jones Industrial Average Index and successfully predicted the bottom of the stock market in March 2009.

In the past week, the Cumulative Advance / Decline Line for the NYSE has reached an all time high surpassing the previous peak set in September 2012. In contrast, U.S. equities have lagged in their recovery from their recent bottom. This suggests that there is momentum for equities to rise further, indicating they may make new highs over the next 3-6 months.


The NYSE Cumulative Advance/Decline Line vs. Dow Jones Industrial Average Index


October 29, 2018

Forecasting the Next Recession: The Yield Curve Doesn’t Lie

Our Recession Probability Model and Recession Dashboard continue to suggest a recession is likely to begin in early 2020. Investors ignore the yield curve’s signal at their peril.

October 15, 2018

Beneath the Tide of Rising Earnings

Factors that have contributed to strong earnings growth this year will fade in 2019 and turn into headwinds in 2020, exposing leveraged corporate borrowers.

August 20, 2018

Tail Risks Are Getting Fatter

While the U.S. economy remains on solid footing, exogenous risks threaten asset values, market confidence, and the strength of the U.S. economy.


Forecasting the Next Recession 

Forecating the Next Recession

Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”

Macro Themes to Watch in 2018 

Macro Themes to Watch in 2018

In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”

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