Displaying items by tag: debt

(Chicago)

There is an enormous asset bubble that has engulfed much of the US, yet you probably haven’t even heard of it. That bubble is threatening a meltdown that has not occurred since the 1980s. Where is the bubble? In debt linked to farm land values. Despite falling grain prices for years, Midwest farm land has held its value very well. This has led to debt levels that hve not been seen since the farm debt crisis of the 1980s. Farm income has fallen by half since its peak in 2013, yet farm equity has only dropped 5%. According to the FT, “Farmers remain creditworthy in the eyes of banks, even as their incomes fall, because the collateral value of land remains high”.

FINSUM: That last sentence is very dangerous because it sets the stage for a doom loop of dropping values and high rates, and foreclosures, leading to even worse values. Many big lenders have a lot of money tied up here, and there are likely implications for muni bonds as well.

(Washington)

Don’t look know, but market could be facing a big risk in September. Investors will remember that Congress voted to suspend the debt limit until March 1st. That date has come and passed and now the Treasury is using extraordinary measures to meet the US’ payment obligations. However, it says it will exhaust those options by September, meaning the US could end up in a major cash crunch.

FINSUM: Get ready for another early autumn political crisis over the budget, deficit, and debt ceiling.

(New York)

Small caps are having a great year so far, but there are increasing worries that the good times might not last. The Russell 2000 is outperforming the S&P 500 by 3% (13% vs 10%) this year, but has tumbled in recent days, a troubling sign. What could be driving the losses is that the big gains in price have not corresponding to improving fundamentals. For instance, small cap performance is very tied to purchasing managers index data (PMI), but the rise in price has not been tied to changes in the PMI. Additionally, small cap companies tend to have the most floating rate debt, which puts them at a higher risk of rising rates. They also tend to have much lower credit quality, meaning they are the most susceptible to shifting rates. More than half the debt issued by small companies is rated as junk.

FINSUM: There is no reason to think the bottom is going to fall out here. However, a sense check seems necessary for small cap investors as there are significant risks.

(New York)

With the market still facing some volatility after last month’s beating, some investors might be inclined to seek out stocks that may stay relatively safe from big moves. One strategy for doing so could be to look for companies with low debt. Low debt brings greater financial flexibility to companies and generally makes investors much less worried about their ability to meet their obligations. According to Barron’s “Stocks of firms with low debt have outperformed those with higher debt by about one percentage point a year for the past 25 years … Low debt companies are also less volatile than the overall market, on average”.

FINSUM: This seems like a good parameter by which to carve out a safer portion of a portfolio, though as our readers will know, we generally don’t like using historical returns alone as a guide.

(New York)

While the stock market is getting all of the attention, the bond market is experiencing a lot of turbulence as well. The riskiest corners of the debt market, including junk bonds and loans, are on pace for their worst month since the US downgrade in August 2011. High yield’s spread to Treasuries has surged a whopping 110 basis points since the start of the month, and unlike in stocks, there aren’t signs of a rebound. The average yield on the index is 8%.

FINSUM: It is reasonable to be nervous about credit right now given the huge volume of issuance in recent years and the pending threat of a recession and accompanying earnings slowdown.