2020-03-18

Buying bad corporate debt

James O'Beirne

Mar 18, 2020

Archillect @archillect

Hi, good morning.

Outlook

Will it surprise you if I say that I remain bearish?

As I type this, S&P futures are locked limit down. Going to bed last night, I more-than-half thought I’d wake up to pump and have a chance to go short more. Not so.

The One, True Hope of a fiscal stimulus looks grim in terms of paring market terror. Along the lines of what I predicted in yesterday’s mail, it looks like even in the best case, checks won’t hit bank accounts for at least a few months.

"It’s quickest and simplest for Congress to send the same amount to every individual person, but still will take months to happen,” Marc Gerson, a former tax counsel for the House Ways and Means Committee, said. “If lawmakers decide to give more money to lower-income workers, it becomes even more complicated."
- Bloomberg

Meanwhile, Bernanke and Yellen have published a piece in the FT corroborating something I’ve been soapboxing about to anyone who’ll listen: the Fed will be compelled to buy troubled corporate debt.

Finally, as Eric Rosengren, president of the Federal Reserve Bank of Boston recently suggested, the Fed could ask Congress for the authority to buy limited amounts of investment-grade corporate debt.
- Bernanke and Yellen, FT

The significance of why this is a bad thing will probably be lost on most people. And I’m not debating the apparent necessity of doing *some things* to combat what is a terrific exogenous shock from mother nature.

But measures like these calcify capital markets in America. They entrench large and in many cases irresponsible incumbents. Now everyone in the S&P500 is too big to fail and the healthy pruning of inefficient businesses that is essentially the silver lining of a tragedy like this can’t happen.

Everything is nationalized just a little bit, and long-term growth, dynamism, and prosperity lose out as a result.

The operating assumption for businesses shifts from “you’d better fortify your balance sheet against the unknown,” to “lever up and do buybacks. If anything crazy happens Daddy’s gotcha (as long as you’re a big company).”

Sven Henrich @NorthmanTrader

Airlines spent $45B on buybacks and now are asking for a $50B bailout.

If these companies go bankrupt, they don’t necessarily stop operating. If there’s no bailout, it’s not like we’ll wake up tomorrow without air travel. It just means there will be consequences for inept (and admittedly somewhat unlucky) leadership. No bailout sets an important tone: businesses need to get their head in the game and weaned off cheap-money schemes to goose executive comp.

Christopher Cole @vol_christopher

Corporate share buybacks financed by debt on the way up.... corporate bail-outs on the way down.

Self-righteous digressions aside…

Here’re some tidbits for color.

As one astute tweep pointed out, RIP gasoline demand in America:

Dave Dildine @DildineWTOP

Remarkable... Tuesday at 5 p.m. on the East Coast, rush hour was over before it started #coronaviruspandemic #dctraffic #nyctraffic #phillytraffic

China might be coming back to life?

Jonathan Ferro @FerroTV

China getting back to work FedEx says... -Demand rebounded more than expected -65-70% of small business operating again -90-95% of large manufacturers operating

Buckle up, kiddos. We’re in the early innings of this.

Lance Roberts @LanceRoberts

We are ONE MONTH into a recession that has historically averages 18. Button up #risk, we have a ways to go yet.

Trading

I’ve been getting messages from people asking me if I think it’s time to buy, and what I’d buy.

No, I don’t think it’s time to buy.

There is nothing I would buy right now.

Dip-buying will wreck you.

(3… 2… 1…, everybody now: this is not financial advice.)

Allow me to refer you once again to what is the single, crude epitome of bearhaus for this cycle.

(Editor’s note: the actual, non-crude epitome of bearhaus in this cycle would be a nice infograph of the corporate debt market, but unfortunately we mauled both our graphic designer and junior analyst.)

We have a long way to go.

Anyway, I made some money scalping futures yesterday. I didn’t keep my promise to just hold onto a short position. I know I’m inviting my own demise, but there’s so much vol…

Which is making options almost unaffordable. I’m still inclined to price out some puts, but not on SPY. I want to figure out what a good proxy for SPY downside might be but without such high implied volatility (in other words, cheaper options).

The point is: I am short everything. Ev. ery. thing. Even and especially Bitcoin.

This isn’t going to be a V-bounced recovery; there’ll be plenty of time to buy good companies at low prices when we’re rebuilding the real economy brick by brick.

Sven Henrich @NorthmanTrader

Bears have moved in and own the place.