Quote of the Day

Not to continue to sound so dang gloomy amid a bull market that is now threatening new highs, but it’s the kind of stuff referenced below bubbling under the surface, along with an on-balance waning macro backdrop, that is so dang troubling!

In this morning’s video I said expansions don’t die of old age, but they do die of excesses, over-stimulus and stupidity. At some point, who knows when, we’ll undoubtedly be characterizing the following as excessive and, yes, stupid:

From Reuters this morning:   emphasis mine…

“Several private equity-backed companies have issued bonds backing “dividend recapitalizations” in recent weeks — a term that refers to the contentious practice of a companies issuing debt to pay dividends to the owner.”

“The deal structure has courted controversy in the past, with critics accusing private equity firms of piling debt onto their subsidiaries for personal gain and making them more vulnerable in the future.”

“The jump in debt-funded dividend recapitalizations offer warnings that the fixed income cycle might be about to turn.

Firstly, investors are turning to such risky instruments because yield is so hard to find elsewhere. However, the fact that yields have been squeezed so much — in some cases into negative territory — is a sign that the next move may be downward for fixed income prices, which move inversely with yields.

Such a warning light flashed in the run-up to the financial crisis. In 2007 dividend recaps were booming – with more than 20 billion euros worth in Europe that year, mainly issued through loans, according to S&P Global Intelligence.

A year later the crisis exploded and the structure lost traction, slowing re-emerging only in 2011.”


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