Bossman
Footballguy
and I'm back in .... bouncing around between 1695 and 1705 was making me nervous.
bought back the same amount. Seems this amzn thing is not to be fooled with.
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Stock Thread (10 Viewers)
- Thread starter St. Louis Bob
- Start date
bought back the same amount. Seems this amzn thing is not to be fooled with.
Sand
Footballguy
WARNING: This post has no content about Facebook, Apple, Amazon, or Micron.
Ok, so there are a few sectors that have been pummeled lately. One of those is pipelines, mostly on interest rate and oil price concerns. I have money both in funds and individual stocks there. Learned something new today. Most of the MLP funds aren't funds, but C-Corps. So they pay craploads of taxes on dividends and stock sales. AMLP going forward (previously it had carried over losses to stay out of this tax nightmare) will have an effective 8-9% fee due to taxes. Oof.
So I've sold AMLP and will stick with the class of the sector (EPD and MMP).
Ok, so there are a few sectors that have been pummeled lately. One of those is pipelines, mostly on interest rate and oil price concerns. I have money both in funds and individual stocks there. Learned something new today. Most of the MLP funds aren't funds, but C-Corps. So they pay craploads of taxes on dividends and stock sales. AMLP going forward (previously it had carried over losses to stay out of this tax nightmare) will have an effective 8-9% fee due to taxes. Oof.
So I've sold AMLP and will stick with the class of the sector (EPD and MMP).
Mystery Achiever
Footballguy
Trading around a stock is a great way to retain exposure but lock in some gains, too. But you have to make peace (before selling) with losing those shares if it keeps running. And since it looks like you only gave it four hours to correct (and bought back higher?),maybe you weren't okay with being without those shares. If cash flow permits, this might work better for you since you have a positive long-term view: Instead of selling and hoping you hit the short-term top, wait for the correction you expect and buy another 72 shares. Then sell that lot when it rebounds. This allows you to retain the full amount you want for your core position and still benefit from short-term moves. Just my
ETA- @Bossman I didn't previously do the math on the cost of 72 shares - so let's just say add another lot of however many shares - and apologies if I incorrectly assumed you only sold part of your shares.
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Bossman
Footballguy
proteus126
Footballguy
Still got it.
I'd love to sell it all, but my wife loves Elon. So I buy her a share now and then for special occasions, b'day or anniversary. Its just fun money. The April purchase was me catching the falling knife.
fantasycurse42
Footballguy Jr.
Think TSLA is getting ready for the mother of all short squeezes - might buy a few upside lotto calls.
At some point Musk is going to tweet they just did their 5000th Model 3 of the week, you are not going to want to be on wrong side of that.
At some point Musk is going to tweet they just did their 5000th Model 3 of the week, you are not going to want to be on wrong side of that.
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skycriesmary
Climbing up the Walls
I'm going to go to the salvation army, looking for specials on turd sandwiches. Apparently, there is no crystal ball regarding the market (well, duh). Sold all short positions for total loss of $7,430 after all transactions good and bad. *confetti* :X
:X I'll now be looking for alternate investment options for the funds I'm leaving in my Roth.
Bossman
Footballguy
DANGIT!
No patience. Why do I doubt myself. This was the "shark" move and I was a coward and beached out like a possy.
So mad at myself for not hanging in there for a day or two.
I see no post addressing the IRS / tax issue. Seems to me that selling $144K of a stock at what I assume is a significant gain is the opposite of a shark move unless you’ve already worked out the tax implications. I hope it’s in an IRA or better yet a Roth but if you’re paying taxes on that gain, well then sir, I cannot “like” that post.
Bossman
Footballguy
IRA is where I keep the real money. I don't touch that. This is overage.
I see no way of avoiding paying taxes on this ... either now or in the future.
My income is and will always be on the positive side so pay taxes now or pay taxes later. In fact, probably better off paying some now so not such a hit later.
Not sure why so many are scared to make money because of "taxes". My thought is that I'd rather pay taxes on a profit ... than not make a profit.
Maybe I'm missing something?
I'd be up $1000 had I held my ground and bought back in today. Maybe more if the dip continues (which it probably will) <_<
I'll pick up more amzn at the bottom of this dip I guess.
All I will say is that there are better strategies in locking in gains other than selling a stock and then repurchasing at basically the same price.
It's your money, you earned it, you do with it what you please. If you don't see the implications of taxes and how to look up strategies to at the very least minimize your tax exposure, well, that's on you. But, as it's in your IRA, this is money you will be depending on to fund your retirement. At the very least, you should be a bit more prudent rather than trading on whims.
Sputnikv8
Footballguy
Can you give a generic example of your tax strategy on a stock thats has made big gains? I want to learn more. You don’t have to use his example, just generalize.
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Brony
Footballguy
If you're actively trading, then I agree, I wouldn't worry about the tax implication. Better to take a gain today at 25-28% tax hit, then hold it for 12+ months and have it turn in to a loser if that's what you think might happen.
Of course, in this situation, it is odd that you effectively took a hit on 2018 taxes with no position gained as a result.
There are a lot of variables in play here - the reason I replied to his example was he obviously wanted to continue owning AMZN. Selling all my shares and then using all those proceeds and re-buying the same stock seems to me like an attempt of market timing.
You could certainly use covered calls here.
Or if you were just looking to lock in some gains and use this money elsewhere, you could sell half your shares as it may be a bit easier to do some loss selling to offset some of those gains (obviously this would be in a taxable account).
When I was in my 20s and early 30's and routinely getting money back from taxes, I really paid little or no attention to the implications of taxes. Nowadays I'm routinely not only owing a lot in taxes, but I'm getting penalized every year (not enough for me though to start sending quarterly withholdings) so I try to pay a bit more attention to these things. Even in tax sheltered accounts, I'm really in no rush to trade too much anymore as it's a bulk of my assets. Tax rates are at historically low levels now, don't think they will not be going up in the future significantly. Reports out yesterday medicare will run out of any reserves in 8 years and start facing shortfalls. Social Security not too far behind this. Taxes, inflation, massive debt, these are things no one seems to want to talk all that much about when times are good.
Sand
Footballguy
While I agree with this I try to make darn sure I keep enough losses on the books to claim the -3k off of income every year. This adds up.
Covered calls would only work on AMZN if he owns 100 shares (or maybe if he has a margin account). They are not doing mini-options on AMZN anymore.
Reading the response post, sounds like this money is NOT in an IRA but I could be misconstruing his text. At any rate, if you are OK with paying taxes by selling 72 shares of AMZN, then it seems to me that the better choice is to roll those 72 shares into a Roth IRA and then sell. You will need to pay taxes on the gain if you roll it into a Roth but then any future gains will not be taxed. I'm sure there are other ways to handle the tax implications and Bossman seems to know this finance game much better than I do, considering the big numbers that are floating around. But timing the market and also taking that tax hit both seem to be sub-optimal to this neophyte.
Reading the response post, sounds like this money is NOT in an IRA but I could be misconstruing his text. At any rate, if you are OK with paying taxes by selling 72 shares of AMZN, then it seems to me that the better choice is to roll those 72 shares into a Roth IRA and then sell. You will need to pay taxes on the gain if you roll it into a Roth but then any future gains will not be taxed. I'm sure there are other ways to handle the tax implications and Bossman seems to know this finance game much better than I do, considering the big numbers that are floating around. But timing the market and also taking that tax hit both seem to be sub-optimal to this neophyte.
fantasycurse42
Footballguy Jr.
http://allstarcharts.com/ready-60-rally-tesla/
this chartist is saying the same thing. I’m looking for some options too
Bossman
Footballguy
Some people like to lock in profit ... I like to lock in tax burden.
Really no way to avoid tax on gains ...other than don't gain.
I've heard most of the angles ... show a loss, tax loss harvest, put it in the kids names, offshore account, donate it to charity, bla, bla, etc.
It's all a smoke show. Nobody is able to tell me a clear cut way to hide income from the IRS. I don't think there is one.
Give me my profit, I'll share with uncle sam and be on my way.
You said so yourself, taxes are due to go UP ... so pay them now while they're on sale no? (I do like the ROTH idea though .. but I've already got so much in IRA's)
... and yes, was a whim. Tried to time it fully expecting a $20-$30 drop. Would have made me a couple grand.
Would have got away with it too if it weren't for those meddling kids.
Don't Noonan
Footballguy
Holding at least 1 year provides you to sell as long term gain and avoid ordinary income rates. That would be my only advice.
skycriesmary
Climbing up the Walls
As well as now having to pay tax twice on the same amount amount of stock, instead of just holding it originally, and paying once when you finally sell.Don't Noonan said:
Not meant to pile on to Bossman, but here is a blurb from an article that might be worth a read:
"When you make contributions to a Roth, you do it with after-tax dollars. When you convert nondeductible IRA contributions to a Roth, you’re converting after-tax dollars, too. And once that conversion is complete, any investment growth within the account can be pulled out as a qualified distribution tax-free. The benefit of that can’t be overstated, particularly now when taxes are low: Unlike a traditional IRA, you’re not kicking taxes on investment growth down the road, when they are likely to be higher. You’re avoiding them completely.
“If you put money into a nondeductible IRA and you don’t convert it, all the earnings are tax-deferred. Why would you want to pay taxes later?” Wirbick says. “In my practice, I would say 95% of the people I meet never retire to a lower tax bracket. So why not pay taxes today and live tax-free in retirement?”
https://www.nerdwallet.com/blog/investing/not-eligible-to-deduct-an-ira-contribute-anyway/?yptr=yahoo
"When you make contributions to a Roth, you do it with after-tax dollars. When you convert nondeductible IRA contributions to a Roth, you’re converting after-tax dollars, too. And once that conversion is complete, any investment growth within the account can be pulled out as a qualified distribution tax-free. The benefit of that can’t be overstated, particularly now when taxes are low: Unlike a traditional IRA, you’re not kicking taxes on investment growth down the road, when they are likely to be higher. You’re avoiding them completely.
“If you put money into a nondeductible IRA and you don’t convert it, all the earnings are tax-deferred. Why would you want to pay taxes later?” Wirbick says. “In my practice, I would say 95% of the people I meet never retire to a lower tax bracket. So why not pay taxes today and live tax-free in retirement?”
https://www.nerdwallet.com/blog/investing/not-eligible-to-deduct-an-ira-contribute-anyway/?yptr=yahoo
cosjobs
Footballguy
Beware the ‘mother of all credit bubbles’
By Steven Pearlstein
(Cameron Cottrill/for The Washington Post)
By Steven Pearlstein
(Cameron Cottrill/for The Washington Post)
Let’s recall those heady days of 2006 when home prices were rising 10, 15, even 20 percent a year, allowing millions of homeowners to refinance mortgages and collectively take out more than $300 billion in cash from the increased value of their properties. Some spent the money on furniture, appliances, cars and vacations, adding fuel to an already roaring economy. Others reinvested it in the already booming real estate and stock markets. When it finally occurred to everyone that those houses and those stocks weren’t really worth what the debt-fueled market said they were, markets crashed, banks flirted with insolvency, and the economy sank into a deep global recession.
Now, 12 years later, it’s happening again. This time, however, it’s not households using cheap debt to take cash out of their overvalued homes. Rather, it is giant corporations using cheap debt — and a one-time tax windfall — to take cash from their balance sheets and send it to shareholders in the form of increased dividends and, in particular, stock buybacks. As before, the cash-outs are helping to drive debt — corporate debt — to record levels. As before, they are adding a short-term sugar high to an already booming economy. And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble — this one in corporate stocks and bonds — that, when it bursts, will send the economy into another recession.
Welcome to the Buyback Economy. Today’s economic boom is driven not by any great burst of innovation or growth in productivity. Rather, it is driven by another round of financial engineering that converts equity into debt. It sacrifices future growth for present consumption. And it redistributes even more of the nation’s wealth to corporate executives, wealthy investors and Wall Street financiers.
Corporate executives and directors are apparently bereft of ideas and the confidence to make long-term investments. Rather than using record profits, and record amounts of borrowed money, to invest in new plants and equipment, develop new products, improve service, lower prices or raise the wages and skills of their employees, they are “returning” that money to shareholders. Corporate America, in effect, has transformed itself into one giant leveraged buyout.
Consider Apple, the world’s most valuable enterprise. As a result of a $100 billion share buyback announced last month, Apple will have returned $210 billion to shareholders since 2012. How much is $210 billion? As Robin Wigglesworth of the Financial Times reminded his Twitter followers, that’s enough to buy up the bottom 480 companies of the S&P 500.
And Apple is not alone. Last year, public companies spent more than $800 billion buying back their own shares and, thanks to all the cash freed up by the recent tax bill, Goldman Sachs estimates that share buybacks will surge to $1.2 trillion this year. That comes at a time when share prices are at an all-time high — so companies are buying at the top — and when a growing global economy offers the best opportunity to expand into new products and new markets. This is nothing short of corporate malpractice.
The best recent research on the folly of buybacks is by two professors at Europe’s top business school, INSEAD. Looking at the 60 percent of companies that have bought back their stock between 2010 and 2015, Robert Ayres and Michael Olenick calculated that the firms, as a group, spent more than 100 percent of their net profits on dividends and share repurchases. They also found that the more a company spent on buybacks, relatively speaking, the less good it did for the stock price.
At the 535 firms that spent the least, relatively speaking, on stock repurchases (less than 5 percent of the company’s market value), market value grew by an average of 248 percent. These companies included Facebook, Amazon.com, Google, Netflix and Washington-based Danaher, all of which mainly used the buybacks as compensation for employees. (Amazon chief executive Jeffrey P. Bezos owns The Washington Post.)
By contrast, the 64 firms that spent the most repurchasing shares (the equivalent of 100 percent of market value) saw an average 22 percent decline in the firm’s market value. These include Sears, J.C. Penney, Hewlett-Packard, Macy’s, Xerox and Viacom, for all of which the primary purpose of the buybacks was to prop up the stock price in the face of disappointing operating results.
Corporate buybacks don’t just affect individual companies, however. At this scale, buybacks are also a factor in the performance of the overall economy.
Consider that $1.2 trillion is the equivalent of more than 6 percent of the annual output — or gross domestic product — of the United States, the world’s largest economy. It is larger than the GDP of all but the 15 largest countries in the world. And it is a sum that will likely far exceed the amount of money raised by the corporate sector’s issuing new stock, meaning that for another year, more equity capital is flowing out of publicly traded corporations than flowing in.
As the accompanying chart indicates, over the past decade, net issuance of public stock — new issues minus buybacks — has been a negative $3 trillion. This reduction in the supply of public shares in American companies, coupled with an increased global demand for them, goes a long way toward explaining why stocks are now priced at 25 times earnings, well above their historical average.
ADVERTISING
The most significant and troubling aspect of this buyback boom, however, is that despite record corporate profits and cash flow, at least a third of the shares are being repurchased with borrowed money, bringing the corporate debt to an all-time high, not only in an absolute sense but also in relation to profits, assets and the overall size of the economy.
It used to be that issuing bonds was the most common way for corporations to borrow money. A decade ago, in 2008, there was $2.8 trillion in outstanding bonds from U.S. corporations. Today, it’s $5.3 trillion, after the record $1.7 trillion of new bonds issued last year, according to Dealogic, and $500 billion more issued this year.
In recent years, at least half of those new bonds have been either “junk” bonds, the riskiest, or BBB, the lowest rating for “investment-grade” bonds. And investor demand for riskier bonds has largely been driven by the growth of bond ETFs — or exchange traded funds — securities that trade like stocks but are really just pools of different corporate bonds. ETFs have made it easier for individual investors to participate in the corporate bond market. A decade ago, about $15 billion worth of bond ETFs were being traded. Today, that market has grown to $300 billion.
In recent years, moreover, a greater part of corporate borrowing has come in the form of bank loans that are quickly packaged into securities known as CLOs, or collateralized loan obligations, which are sliced and diced and sold off to sophisticated investors just as home loans were during the mortgage bubble. Bloomberg News recently reported that pension funds and insurance companies, particularly those in Japan, can’t get enough of the CLOs because of the higher yields that they offer. Wells Fargo estimates that a record $150 billion will be issued this year, roughly double last year’s issuance. And as happened with the late-cycle home mortgages in 2007 and 2008, analysts are noticing a marked decline in the quality of loans in the CLO packages, with three-quarters of them now without the standard covenants designed to reduce the chance of default.
As a result of all this corporate borrowing, Daniel Arbess of Xerion Investments calculates that more than a third of the largest global companies now are highly leveraged — that is, they have at least $5 of debt for every $1 in earnings — which makes them vulnerable to any downturn in profits or increase in interest rates. And 1 in 5 companies have debt-service obligations that already exceed cash flow — “zombies,” in the felicitous argot of Wall Street.
“A new cycle of distressed corporate credit looks to be just around the corner,” Arbess warned in February in an article published in Fortune.
Mariarosa Verde, senior credit officer at Moody’s, the rating agency, warned in May that “the record number of highly-leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.”
“Flashing red” is how this buildup of corporate debt was characterized by the U.S. Treasury’s Office of Financial Research in its latest annual report on the stability of the financial system. The International Monetary Fund recently issued a similar warning.
What concerns these regulators is not simply the growth of the corporate debt market but also the change in its structure and how it will perform during a sell-off.
In the past, most corporate loans were made and held by banks, while corporate bonds were held by pension funds, insurance companies and mutual funds that held them to maturity, keeping bond prices stable.
But with the rise of ETFs, some market analysts and observers have begun to worry about what would happen if, in response to a sudden spike in interest rates or defaults, large numbers of individual investors rushed to sell at a time when nobody is interested in buying, sending ETF prices into a tailspin.
According to a recent paper by Kevin Pan of Harvard and Yao Zeng of the University of Washington, this lack of “liquidity” in the bond market could send prices down sharply, trigger waves of panic selling and cause the market price of the ETFs to fall far below the price of the underlying bonds.
The ETF industry has mounted a concerted PR campaign to convince regulators and investors that the market will be able to cope with a rush of sell orders. But because these products are relatively new, nobody really knows how they will perform in a crisis. Certainly the experience with complex mortgage securities and credit default swaps during the 2008 crisis does not inspire confidence. There is also the danger of contagion — that panic selling and falling prices of corporate bonds and ETFs will spread to other credit markets.
For the bigger reality is that the global economy is now awash in debt — not just corporate debt but also record amounts of government debt, household debt and investor debt — at a time when interest rates are rising from historically low levels.
Here in the United States, as a result of a misguided and irresponsible tax cut, the federal budget deficit is expected to top $1 trillion a year in 2019, on top of the $20 trillion of outstanding debt, crowding out other borrowing and putting upward pressure on interest rates. The Congressional Budget Office projects that interest payments on the federal debt will grow from $316 billion this year to $915 billion by 2028. Not only does the new debt need to be financed, but trillions of dollars in old debt will also need to be refinanced when it comes due.
And then there is household debt. After the last financial crisis, American consumers made a concerted effort to save more, borrow less and pay off credit card and auto loan debt. But memories are short, and a decade later, mortgage debt, credit card debt, student loan debt, and car loan debt are all, once again, at record levels and growing briskly. Among the 38 percent of households with credit card debt, the average balance is nearly $11,000, according to ValuePenguin, based on data from the Federal Reserve. The Consumer Financial Protection Bureau recently reported that, among subprime borrowers, credit card debt is up 26 percent in just the past two years.
Finally, there is the debt that investors large and small take on to buy stocks, bonds, derivatives and other securities. That’s also at an all-time high.
As Stephen Blumenthal of CMG Capital sees it, this is the “mother of all credit bubbles.” And with the Federal Reserve and central banks now bringing the supply and cost of credit back to normal levels, and with demand for credit continuing to soar, heavily indebted businesses, governments and households will soon be hit with big increases in interest payments. As interest payments begin to crowd out spending on other things, the economy will slow. We’ve seen this self-reinforcing downward cycle before, and it invariably leads to market sell-offs, loan defaults, bankruptcies, layoffs and, quite likely, recession.
Although banks are in better shape than in 2008 to withstand the increase in default rates and the decline in the market price of their financial assets, they are hardly immune.
“Banks will reap what they have sowed in having created all this debt,” said James Millstein, an expert in corporate and government debt who oversaw the restructuring of insurance giant AIG for the treasury during the 2008 financial crisis. “Banks are still the most highly leveraged financial institutions in the economy. They remain vulnerable to a recession-driven increase in delinquencies and defaults in their corporate, real estate and household loan books.”
It’s hard to say what will cause this giant credit bubble to finally pop. A Turkish lira crisis. Oil prices topping $100 a barrel. A default on a large BBB bond. A rush to the exits by panicked ETF investors. Trying to figure out which is a fool’s errand. Pretending it won’t happen is folly.
Now, 12 years later, it’s happening again. This time, however, it’s not households using cheap debt to take cash out of their overvalued homes. Rather, it is giant corporations using cheap debt — and a one-time tax windfall — to take cash from their balance sheets and send it to shareholders in the form of increased dividends and, in particular, stock buybacks. As before, the cash-outs are helping to drive debt — corporate debt — to record levels. As before, they are adding a short-term sugar high to an already booming economy. And once again, they are diverting capital from productive long-term investment to further inflate a financial bubble — this one in corporate stocks and bonds — that, when it bursts, will send the economy into another recession.
Welcome to the Buyback Economy. Today’s economic boom is driven not by any great burst of innovation or growth in productivity. Rather, it is driven by another round of financial engineering that converts equity into debt. It sacrifices future growth for present consumption. And it redistributes even more of the nation’s wealth to corporate executives, wealthy investors and Wall Street financiers.
Corporate executives and directors are apparently bereft of ideas and the confidence to make long-term investments. Rather than using record profits, and record amounts of borrowed money, to invest in new plants and equipment, develop new products, improve service, lower prices or raise the wages and skills of their employees, they are “returning” that money to shareholders. Corporate America, in effect, has transformed itself into one giant leveraged buyout.
Consider Apple, the world’s most valuable enterprise. As a result of a $100 billion share buyback announced last month, Apple will have returned $210 billion to shareholders since 2012. How much is $210 billion? As Robin Wigglesworth of the Financial Times reminded his Twitter followers, that’s enough to buy up the bottom 480 companies of the S&P 500.
And Apple is not alone. Last year, public companies spent more than $800 billion buying back their own shares and, thanks to all the cash freed up by the recent tax bill, Goldman Sachs estimates that share buybacks will surge to $1.2 trillion this year. That comes at a time when share prices are at an all-time high — so companies are buying at the top — and when a growing global economy offers the best opportunity to expand into new products and new markets. This is nothing short of corporate malpractice.
The best recent research on the folly of buybacks is by two professors at Europe’s top business school, INSEAD. Looking at the 60 percent of companies that have bought back their stock between 2010 and 2015, Robert Ayres and Michael Olenick calculated that the firms, as a group, spent more than 100 percent of their net profits on dividends and share repurchases. They also found that the more a company spent on buybacks, relatively speaking, the less good it did for the stock price.
At the 535 firms that spent the least, relatively speaking, on stock repurchases (less than 5 percent of the company’s market value), market value grew by an average of 248 percent. These companies included Facebook, Amazon.com, Google, Netflix and Washington-based Danaher, all of which mainly used the buybacks as compensation for employees. (Amazon chief executive Jeffrey P. Bezos owns The Washington Post.)
By contrast, the 64 firms that spent the most repurchasing shares (the equivalent of 100 percent of market value) saw an average 22 percent decline in the firm’s market value. These include Sears, J.C. Penney, Hewlett-Packard, Macy’s, Xerox and Viacom, for all of which the primary purpose of the buybacks was to prop up the stock price in the face of disappointing operating results.
Corporate buybacks don’t just affect individual companies, however. At this scale, buybacks are also a factor in the performance of the overall economy.
Consider that $1.2 trillion is the equivalent of more than 6 percent of the annual output — or gross domestic product — of the United States, the world’s largest economy. It is larger than the GDP of all but the 15 largest countries in the world. And it is a sum that will likely far exceed the amount of money raised by the corporate sector’s issuing new stock, meaning that for another year, more equity capital is flowing out of publicly traded corporations than flowing in.
As the accompanying chart indicates, over the past decade, net issuance of public stock — new issues minus buybacks — has been a negative $3 trillion. This reduction in the supply of public shares in American companies, coupled with an increased global demand for them, goes a long way toward explaining why stocks are now priced at 25 times earnings, well above their historical average.
ADVERTISING
The most significant and troubling aspect of this buyback boom, however, is that despite record corporate profits and cash flow, at least a third of the shares are being repurchased with borrowed money, bringing the corporate debt to an all-time high, not only in an absolute sense but also in relation to profits, assets and the overall size of the economy.
It used to be that issuing bonds was the most common way for corporations to borrow money. A decade ago, in 2008, there was $2.8 trillion in outstanding bonds from U.S. corporations. Today, it’s $5.3 trillion, after the record $1.7 trillion of new bonds issued last year, according to Dealogic, and $500 billion more issued this year.
In recent years, at least half of those new bonds have been either “junk” bonds, the riskiest, or BBB, the lowest rating for “investment-grade” bonds. And investor demand for riskier bonds has largely been driven by the growth of bond ETFs — or exchange traded funds — securities that trade like stocks but are really just pools of different corporate bonds. ETFs have made it easier for individual investors to participate in the corporate bond market. A decade ago, about $15 billion worth of bond ETFs were being traded. Today, that market has grown to $300 billion.
In recent years, moreover, a greater part of corporate borrowing has come in the form of bank loans that are quickly packaged into securities known as CLOs, or collateralized loan obligations, which are sliced and diced and sold off to sophisticated investors just as home loans were during the mortgage bubble. Bloomberg News recently reported that pension funds and insurance companies, particularly those in Japan, can’t get enough of the CLOs because of the higher yields that they offer. Wells Fargo estimates that a record $150 billion will be issued this year, roughly double last year’s issuance. And as happened with the late-cycle home mortgages in 2007 and 2008, analysts are noticing a marked decline in the quality of loans in the CLO packages, with three-quarters of them now without the standard covenants designed to reduce the chance of default.
As a result of all this corporate borrowing, Daniel Arbess of Xerion Investments calculates that more than a third of the largest global companies now are highly leveraged — that is, they have at least $5 of debt for every $1 in earnings — which makes them vulnerable to any downturn in profits or increase in interest rates. And 1 in 5 companies have debt-service obligations that already exceed cash flow — “zombies,” in the felicitous argot of Wall Street.
“A new cycle of distressed corporate credit looks to be just around the corner,” Arbess warned in February in an article published in Fortune.
Mariarosa Verde, senior credit officer at Moody’s, the rating agency, warned in May that “the record number of highly-leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives.”
“Flashing red” is how this buildup of corporate debt was characterized by the U.S. Treasury’s Office of Financial Research in its latest annual report on the stability of the financial system. The International Monetary Fund recently issued a similar warning.
What concerns these regulators is not simply the growth of the corporate debt market but also the change in its structure and how it will perform during a sell-off.
In the past, most corporate loans were made and held by banks, while corporate bonds were held by pension funds, insurance companies and mutual funds that held them to maturity, keeping bond prices stable.
But with the rise of ETFs, some market analysts and observers have begun to worry about what would happen if, in response to a sudden spike in interest rates or defaults, large numbers of individual investors rushed to sell at a time when nobody is interested in buying, sending ETF prices into a tailspin.
According to a recent paper by Kevin Pan of Harvard and Yao Zeng of the University of Washington, this lack of “liquidity” in the bond market could send prices down sharply, trigger waves of panic selling and cause the market price of the ETFs to fall far below the price of the underlying bonds.
The ETF industry has mounted a concerted PR campaign to convince regulators and investors that the market will be able to cope with a rush of sell orders. But because these products are relatively new, nobody really knows how they will perform in a crisis. Certainly the experience with complex mortgage securities and credit default swaps during the 2008 crisis does not inspire confidence. There is also the danger of contagion — that panic selling and falling prices of corporate bonds and ETFs will spread to other credit markets.
For the bigger reality is that the global economy is now awash in debt — not just corporate debt but also record amounts of government debt, household debt and investor debt — at a time when interest rates are rising from historically low levels.
Here in the United States, as a result of a misguided and irresponsible tax cut, the federal budget deficit is expected to top $1 trillion a year in 2019, on top of the $20 trillion of outstanding debt, crowding out other borrowing and putting upward pressure on interest rates. The Congressional Budget Office projects that interest payments on the federal debt will grow from $316 billion this year to $915 billion by 2028. Not only does the new debt need to be financed, but trillions of dollars in old debt will also need to be refinanced when it comes due.
And then there is household debt. After the last financial crisis, American consumers made a concerted effort to save more, borrow less and pay off credit card and auto loan debt. But memories are short, and a decade later, mortgage debt, credit card debt, student loan debt, and car loan debt are all, once again, at record levels and growing briskly. Among the 38 percent of households with credit card debt, the average balance is nearly $11,000, according to ValuePenguin, based on data from the Federal Reserve. The Consumer Financial Protection Bureau recently reported that, among subprime borrowers, credit card debt is up 26 percent in just the past two years.
Finally, there is the debt that investors large and small take on to buy stocks, bonds, derivatives and other securities. That’s also at an all-time high.
As Stephen Blumenthal of CMG Capital sees it, this is the “mother of all credit bubbles.” And with the Federal Reserve and central banks now bringing the supply and cost of credit back to normal levels, and with demand for credit continuing to soar, heavily indebted businesses, governments and households will soon be hit with big increases in interest payments. As interest payments begin to crowd out spending on other things, the economy will slow. We’ve seen this self-reinforcing downward cycle before, and it invariably leads to market sell-offs, loan defaults, bankruptcies, layoffs and, quite likely, recession.
Although banks are in better shape than in 2008 to withstand the increase in default rates and the decline in the market price of their financial assets, they are hardly immune.
“Banks will reap what they have sowed in having created all this debt,” said James Millstein, an expert in corporate and government debt who oversaw the restructuring of insurance giant AIG for the treasury during the 2008 financial crisis. “Banks are still the most highly leveraged financial institutions in the economy. They remain vulnerable to a recession-driven increase in delinquencies and defaults in their corporate, real estate and household loan books.”
It’s hard to say what will cause this giant credit bubble to finally pop. A Turkish lira crisis. Oil prices topping $100 a barrel. A default on a large BBB bond. A rush to the exits by panicked ETF investors. Trying to figure out which is a fool’s errand. Pretending it won’t happen is folly.
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Bossman
Footballguy
Realized gains. Taxes paid. Start over at new buy in amount.
How am I paying taxes "twice on the same amount"? ... I'm definitely missing something here.
at final sale I would be paying taxes gained from the NEW shares owned / new buy in amount ... so not sure I follow your logic.
Bossman
Footballguy
Good info.
In the case that maybe I didn't make myself clear, this money is not an IRA.
I completely understand the tax bennies of a ROTH ... but because I already have so much put in IRA's, was not looking to have this money tied up for retirement.
Wanted to keep this money fluid ... but seeing that I likely wouldn't need this money until after retirement, does make sense to ROTH it.
Is it possible to have a ROTH and still move it's funds around .... buying and selling stocks (amzn) and ETF's? My experience with IRA's is mutual fund only.
Bossman
Footballguy
skycriesmary
Climbing up the Walls
You're right, you've just payed taxes on the profit thus far, and will pay on the next leg up from your new level. Don't pay attention to me, I haven't been thinking too clearly since I'm on my new diet of turd sandwiches.
Realized gains. Taxes paid. Start over at new buy in amount.
How am I paying taxes "twice on the same amount"? ... I'm definitely missing something here.
at final sale I would be paying taxes gained from the NEW shares owned / new buy in amount ... so not sure I follow your logic.
skycriesmary
Climbing up the Walls
@General Malaise Any idea on what's pushing CBLLF down hard? I'm looking to stay in this long term. Just curious about the latest price movement.
General Malaise
Footballguy
I dunno. Up 3 pennies in Canada. I don't know anything anymore and I'm rightly certain I never really knew anything at all.
skycriesmary
Climbing up the Walls
fantasycurse42
Footballguy Jr.
General Malaise
Footballguy
I hate everything cobalt and blockchain related. I hope they all get swallowed up by cryptopenis monsters.
Capella
Footballguy
fantasycurse42
Footballguy Jr.
Really? I haven't looked at it in a long time, feels like it is right where I last looked.
fantasycurse42
Footballguy Jr.
Feels like the last thing you mentioned was about this was someone traveling somewhere to check something, that's about as specific as I remember. Anything materialize from this?
Anyways, assume you're still holding?
Capella
Footballguy
sbonomo
Footballguy
Bought 5 mid August Tesla puts with a 290 strike price. Complete gamble but I really hate that company. If anything negative happens in the economy I can’t imagine this pig doesn’t die. Realistically I probably just threw 5 racks away.
eta - luckily I missed the Bell last night and got them this am after the run up in Lee market trading. Still like the bet here.
eta - luckily I missed the Bell last night and got them this am after the run up in Lee market trading. Still like the bet here.
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skycriesmary
Climbing up the Walls
Sorry guys, I bought about 10k worth of CBLLF a couple of weeks ago. Hence the huge run down this week. :(
Bob Sacamano
Footballguy
Cobalt price down 10% in the last week+ and TSLA claiming their batteries will use less cobalt than most probably not helping.
skycriesmary
Climbing up the Walls
kevzilla
Footballguy
skycriesmary
Climbing up the Walls
Seriously, I have THE anti-midas touch. I'm thinking about putting most of my Roth money into REIT's, but then I'd crash the real estate market.Please let me know when you sell, I want in.
kevzilla
Footballguy
I hope your time horizon is long. REITs are going to suck for the foreseeable future as interest rates rise.
I would never invest in it. The point of it <> an investment. So many issues and as far as I can tell if a crypto currency is meant to be transactional so that it can save on fees then what does it matter if a BTC is $10k or $1. If I buy a $2 lightbulb then I’ll send 0.0002 btc or 2 btc but the buyer and seller start and end with $2 minus the supposedly smaller than Visa fee. I know that’s simplistic but seeing articles on offline storage vaults to maintain security and not lose you bitcoins makes me laugh. It’s akin to hiding dollar bills in your mattress. Pretty sure that doesn’t make you more money later on.
I’ll add one more note. I believe the technology and use of crypto currencies/blockchain/smart contracts/etc. but I don’t think that equates to coins as an investment. Coins are payments to the miners who process the transactions which will be borne out of transaction fees on the exchanges. The people saying that bitcoin is going to $100k are just loons. If that happened there’d be no actual transactions occurring outside of the “stock” sales, which defeats the purpose.
fantasycurse42
Footballguy Jr.
fantasycurse42
Footballguy Jr.
I bought Tesla when it was around $315 just days ago, think it needs some pullback... Might take a nice profit, tbd...
If any stock can just defy everything it is Tesla, but I'd rather lock it in, $290-$342 in 3 sessions... Prob time for some profit taking. They laid off about 9% of their labor force today - while the market sold the news, I think it is actually bullish, idk - anyone have any opinions here?
If any stock can just defy everything it is Tesla, but I'd rather lock it in, $290-$342 in 3 sessions... Prob time for some profit taking. They laid off about 9% of their labor force today - while the market sold the news, I think it is actually bullish, idk - anyone have any opinions here?
