A definition: "Eminence" means a lofty or distinguished position, "Front" in this context means a facade or a false impression. So "Eminence Front" is about someone or something pretending to be more than they are?
Put it in perspective: Eurodollars $15tr; Mutual funds $30tr; shadow banking $75-100tr; bond market $100tr; derivatives $550tr. And there's a lot of interest rate sensitive tinder in there. This time, it may not take a Bear Stearns blow up to ignite things, perhaps like a child playing with matches in a pile of kerosene soaked tinder, just a few debt defaults (energy or oil, Eurodollar based EM or offshore debt, HY junk and or sovereign such as Greece) and a corresponding widening of credit spreads. Despite being awash in "dollars", we may witness a large dearth of "moneyness", which amongst other things, would cause a sudden sharp increase in interest rates, which could cascade into something much, much worse, like under The Midnight Sun where the days are longer, hotter and few in number. - The Midnight Sun Part 3
That is a lot of tinder or "white powder" out there. We Nattered again about that "dearth of moneyness" in Davos: Black Swan Lake?
Leveraged High-Yield Contagion?
Half the HY universe by market value today trades at 310bps, while the other half is at 1050bps. The distressed list has a disproportionate representation of commodities (33%). However, this dispersion doesn't bode well for US as HY, default and distress ratios are increasing, even outside commodities. The higher the "distressed glut", the lower will be the recovery rate. As well, the number of distressed bonds is rising in Europe... CCC issuance has plummeted. - Martin at Macronomics.
Martin would say that canary in the coal mine CCC is singing that financial conditions are tightening, distress is spreading and it is NOT limited to energy and commodities. For more pertinent info on debt spreads and the ongoing contraction of credit liquidity in Europe, Asia and the US, we recommend you read Macronomics' latest missive.
Want proof that the well of liquidity is drying up? YoY corporate gross issuance high yield -40%; YoY 3mo MA investment grade -20%; muni issuance -42%.
At this moment, companies in HY that cannot roll or obtain bond financing or leveraged loans are left with few choices. Previously available "liquidity" in the form of cheap "dollar" credit has kept many a weak hand afloat that might have otherwise already folded to the insufficient economic expansion and contraction currently underway.
With the dollar getting squeezed by global economic contraction, less petrodollars and ED (eurodollars), those "dollars are not so cheap or available these days. As leveraged HY debt firms start to default and layoff, they will do so in an exponential fashion which is what the crash in CCC suggests for the short and intermediate term. This is not limited to just energy and oil, but also in commodities exporters, EMs, and countless NFCs in China.
Market Is In Transition?
Regarding market transitions feeding the current malaise...
"One of the market transitions involves liquidity, and a move away from counter-cyclical balance sheets. Facing tighter regulation and sharply reduced market appetite for short-term earnings deviations, broker-dealers are a lot less willing to take on inventory when the market overshoots. Other pools of capital, including sovereign wealth funds, also face constraints in increasing their risk-taking." - Mohammed El-Erian
We Nattered about those SWFs here. More from Mo, regarding a resolution to the current sell off...
"A much better resolution would be if improving fundamentals could support and validate financial asset prices, which also would provide the context for the productive engagement of the large amounts of cash now held on the sidelines, whether on companies' balance sheets or in excess household savings."
As to the former, liquidity transition, Mo is spot on, as to the latter, improving fundamentals supporting and validating financial asset prices, not gonna happen anytime soon and here is why: the facade or "eminence front" of stock buybacks which have pumped the stock bubble higher have become a lead ball and chain. One must take into account that leverage is higher than it was in 2008 and earnings have been falling faster in terms of EBITDA YoY changes.
Buybacks And Dividends
Above note, S&P 500 buybacks and dividends surpassed 100% of earnings in Q1 2015 for the first time since shares began rising in 2009. - Bloomberg
Since 2010, almost 60% of the 3,297 publicly traded non-financial U.S. companies have bought back their shares. In fiscal 2014, spending on buybacks and dividends surpassed the companies' combined net income for the first time outside of a recessionary period.
In the most recent reporting year, share purchases reached a record $520 billion. Throw in the most recent year's $365 billion in dividends, and the total amount returned to shareholders reaches $885 billion, more than the companies' combined net income of $847 billion.
Among the 1,900 companies that have repurchased their shares since 2010, buybacks and dividends amounted to 113% of their capital spending, compared with 60% in 2000 and 38 % in 1990.
And among the approximately 1,000 firms that buy back shares and report R&D spending, the proportion of net income spent on innovation has averaged less than 50% since 2009. It had been over 60% during the 1990s. - The Cannibalized Company
Reversal Of Fortune?
Another definition of "eminence front": the facade one erects, or the pose one assumes, whether from pride, arrogance, insecurity or some other motive, in order to conceal their identity or essential self.
"Last year, the corporations in the Russell 3000, a broad U.S. stock index, repurchased $567.6 billion worth of their own shares-a 21% increase over 2012, calculates Rob Leiphart, an analyst at Birinyi Associates, a research firm in Westport, Conn. That brings total buybacks since the beginning of 2005 to $4.21 trillion-or nearly one-fifth of the total value of all U.S. stocks today." - WSJ
In The Who's song Eminence Front, Pete Townshend sings about the delusions and drug use of the wealthy and hedonistic. The lyrics describe a party in which people hide from their problems behind a facade. Townshend has introduced the song in live performances with: "This song is about what happens when you take too much white powder; it's called 'Eminence Front'".
The "white powder" of financialism, abundant credit liquidity, cheap financing, promises of lofty future earnings multiples, all have their affects. Leaving to question, the exuberance, indulgence and math on the part of asset investors and speculators who have pushed equities valuations to new heights while spinning the indices ever upward.
Unfortunately, an upward spiral based on an "eminence front" can work in reverse. In a reversion to the mean, as earnings disappointments, declining forward EPS and cash flow downgrades would work concomitant with the ongoing global contractions in credit based liquidity and economic conditions. In this reversal, the spiral accelerates with less spending and the choking off of credit and liquidity vis. future funding of buybacks and needed cash infusions or bailouts on the way back down to reality.
Many companies have borrowed to achieve an eminence front of "financial re-engineering" and the illusory valuations that come with it. What happens when things take a turn for the worse, and those who have put up this "eminence front" no longer have ready and steady access to cheap funding, liquidity or the "white powder" of financialism?
Newton observed that gravity also has its effects, what goes up must come down, and those previously lofty valuations might undergo an appropriate reassessment. Me thinks, this is the order of the day or what is currently in action, as in a much larger "market transition" than El-Erian alludes to. IMHO, this party is just getting started... TBD.
"The shares crash,
hopes are dashed.
Forget they're hiding.
Behind an eminence front.
It's a "put" on, it's a put on".
Come on join the party
Dress to kill" - The Who - Eminence Front
This is the eleventh in a series of thematically-related missives which will attempt to identify the macroeconomic forces with potential to adversely affect capital, commodity, equity, bond and asset markets.
I wish to dedicate this missive to one of my mentor's Salmo Trutta, who is a prolific commenter on SA. Without Salmo's tutelage, and insistence in not masticating and spoon feeding the baby ducks, as in learning the hard way, by doing the leg work and earning it, this missive would not have been possible. To you "Proximo"... "win the crowd and win your freedom" - Spaniard
Since the market potential is broad in both scope and scale, our conclusion could not be more specific than the discussion already had. Again, more grief in the dollar "short" or squeeze and its associated liquidity issues, with the potential to adversely affect capital, commodity, equity, bond and asset markets. Will it happen? TBD, and forewarned is forearmed.
As for how all of the above ties into the potential and partial list of market plays below... the market as a whole could be influenced, and this would tie into any list of investments or assets. Those listed below happen to influence the indices more than most.
Would like to thank you folks fer kindly droppin in. You're all invited back again to this locality. To have a heapin helpin of Nattering hospitality. Naybob that is. Set a spell, take your shoes off. Y'all come back now, y'hear!
Investing is an inherently risky activity, and investors must always be prepared to potentially lose some or all of an investment's value. Past performance is, of course, no guarantee of future results.
Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of an investment vehicle. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from the principal or a financial advisor. Prospective investors should read the prospectus carefully before investing.
Below, recommended reading for those invested in mutual and bond funds, ETFs, REITs, HY, leveraged, EM, oil, energy, bonds and the broader markets. Why? There are many macroeconomic cross sector and market asset correlations involved that affect your investments. Economic conditions, the eurodollar, global dollar debt and monetary policy all influence the valuation of the above and market plays below, via King Dollar's value, credit spreads, swap spread pricing, market making, liquidity, monetary supply and velocity, just to name a few.
Market Warning: Reading not only those listed below, but also every installment of these multi-part missives could lead to a better understanding of the market forces in play and how to profit from them.
- Davos: Black Swan Lake?
- Run On Yuan? RMB
- Bull Economy Part 2
- HIBOR, LIBOR And TED... Oh My
- Is The TED Spread Yellen?
- Petrodollars And Sovereign Wealth Funds
- Swap Spreads For Dummies?
- A Dollar Melt Up?
- Mission Impossible: Correlations In Action?
- Oil: Shale Disrupts The Cost Paradigm? Part 3
- Oil: Shale Production Breakeven And Marginal Costs, Moving The Goalposts?
- New Paradigm For ETF, Mutual Fund, Bond Fund And mREITs
- Contractions In Money Flows And Market Liquidity Part 7
- The Emperor's New Clothes Or Econometric Misperception
- The Temple Grandin of Shadow Banking, Part 1
- Connecting the Dots, Part 6
- More Dollar Hegemony, In The Land Of OZ, Part 6
- Peak What? Christmastime in Hell, Part 6
- Peak What? The Quadruple D, The End
- The Feds Quandry With Uncle ED (Eurodollar)
For a complete missive series listing, click here.
These global economic developments could affect numerous capital and asset markets, sectors, indexes, commodities, forex, bonds, mutual funds, ETFs and stocks.
A List of Potential Market Plays (Long or Short?):
- Apple Computer (AAPL) 1.4M
- Google (GOOG) (NASDAQ:GOOGL) 714K
- Facebook (FB) 412K
- Microsoft (MSFT) 387K
- Citigroup (C) 350K
- General Electric (GE) 339K
- Cisco (CSCO) 333K
- Bank of America (BAC) 306K
- Amazon (AMZN) 290K
- Tesla (TSLA) 284K
- S&P 500 Trust ETF (NYSEARCA:SPY) 263K
- Ford (F) 260K
- Starbucks (SBUX) 248K
- Intel (INTC) 242K
- ATT (T) 241K
- IBM (IBM) 221K
- Exxon/Mobil (XOM) 218K
- Netflix (NFLX) 172K
- Johnson & Johnson (JNJ) 171K
- Walt Disney (DIS) 161K
- Verizon (VZ) 159K
- Chevron (CVX) 145K
- Yahoo (YHOO) 143K
- Gilead (GILD) 143K
- Coca-Cola (KO) 138K
- JPMorgan (JPM) 136K
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.