Off the top, Universa’s Mark Spitznagel explains that “high-frequency traders are making markets more jumpy” and the idea of HFT as a liquidity provider is a fallacy since as he notes “that liquidity won’t be there when they most need it,” especially when there is one-way order flow such as in the flash crash.
Spitznagel then crushes the ‘cash on the sidelines’ meme but explaining that while corporate cash balances have soared, net debt has actually gone up beyond the highs of 2008. As we have previously discussed, “the idea that corporate balance sheets are so strong right now is entirely wrong,” as investors are conveniently focusing in one piece of the balance sheet (assets not liabilities).
Maria B just can’t fathom it but Spitznagel’s words are clear – scale the cash on the balance sheet against debt and we are as bad as we were in 2008.
US companies are carrying far more net debt than in 2007
Another curiosity is this notion that US companies have substantially reduced their debt pile and are therefore cash rich. The latter is indeed true. Cash and equivalents are at historically high levels, but rarely do those who mention the mountains of corporate cash also discuss the massive increase in debt seen over the last couple of years.
In fact, debt levels have been growing to such an extent that net debt (i.e. excluding the massive cash pile) is 15% higher than it was prior to the financial crisis.
At 3:00 in the clip below, Spitzangel explains as succinctly as we have heard why the Fed’s actions are crushing the Capex growth hopes… when interest rates are so artificially low, “we get more impatient” and scramble “doing stupid things” to make what feels like a natural return (despite the Fed’s unnatural thumb on the scales).
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US corporates saw profit growth slow to almost zero last year and on an EBIT basis it has been flat for some time now. Earnings quality, rather than improving is actually deteriorating, as indicated by the increasing gap between official and pro-forma EPS numbers. As a consequence, following a long period of overspending and in the absence of a strong pick-up in demand, corporates will have to spend less and not more.
Finally, as a consequence of such anemic growth, corporates have been gearing up their balance sheets in an effort to sustain EPS momentum via the continuing use of share buybacks. With markets up substantially in 2013 executing those share buybacks has become increasingly expensive. Little wonder companies have to borrow so much to continue executing them.