Given the stock market’s central bank induced runup the last couple of days, a return to reality might be helpful. From Wolf Richter at wolfstreet.com:
The third quarter was tough for US corporations. Worse than the prior two quarters. They got waylaid by weak global demand and lack of pricing power. The easiest way to increase revenues and profits is to raise prices, so via inflation, but that strategy isn’t working when consumers don’t have the additional income to pay for higher prices.
Then there’s the “strong dollar.” On Thursday, Draghi evoked more QE and even more negative deposit rates, which eviscerated the euro and made the dollar a heck of a lot stronger. And so many US corporations are now reporting declining revenues.
It isn’t just the energy sector. For the 142 non-energy companies that have reported Q3 earnings so far, revenues dropped 3.0% year-over-year, according to Moody’s Credit Markets Review and Outlook. Operating income of these non-energy companies fell 2.7%. In this environment, companies try to maintain their bottom line by cutting costs.
“Results such as these weigh against expecting much of a pick-up by either hiring activity or capital expenditures,” Moody’s warns gloomily. Both have been dreary recently.
Cheap money is no longer readily available to riskier borrowers. In the third quarter, bond issuance by junk-rated companies plunged 38% from a year ago. Yields rose as the spread between high-yield bonds and Treasuries soared. And in October, according to S&P Capital IQ’s LCD, it has been even worse: just seven junk-bond deals through Thursday, for a measly total of $3.7 billion.
Leveraged loans are in a similar quandary. These loans issued by junk-rated companies, often for special dividends to their private equity owners or for M&A, are so risky for banks that regulators have been cracking down on them for two years. Banks usually sell them, either directly to funds or repackaged as Collateralized Loan Obligations (CLO). But during the Financial Crisis, banks got stuck with them. And now leveraged loan issuance is petering out.
Total high-yield borrowing (junk bonds and leveraged loans combined) plunged 37% in the third quarter from a year ago, according to Moody’s. And for the 12-month period, total issuance is down 29% from the 12-month all-time record in Q4 2013.
But here is the thing: within 15 months of the three prior peaks of total high-yield borrowing – the all-too-familiar periods of Q3 2007, Q4 1999, and Q4 1989 – recessions occurred.
To continue reading: This Is Why It’s Going to Get Even Tougher
