There are two things going on in the corporate world that are fascinating. One was in play before the initial crash, which was the fashion to borrow money to do stock buybacks in a roaring bull market. This was doomed and now the compulsion is to maintain an absurd dividend payout - at any cost. And "Stock Buybacks 101" notes that one of the reasons was that the gambit avoided larger payouts that at some time may have to be reduced. The first attached chart places the current mania to maintain dividends in perspective.
Perhaps some of the high-yield paper being floated now is funding dividends that should be derived from earnings. The second chart represents another pending disaster. Corporate bonds were expected to enjoy an outstanding rally out to late spring. Continuation of the rally is becoming reckless, and the chart on the High-Yield will give us the big exit.
We will leave it to accountants and CFAs to calculate the cost of raising funds to maintain senseless dividend payouts, when not generating earnings.
Typically, ordinary bull markets top about 12 months before the business cycle, but at the end of a great mania stocks and the economy virtually peak together. Perhaps something similar, but on a smaller scale happens with the vigorous initial rebound in stocks, corporate bonds and commodities. In which case the stock rally is not anticipating a recovery late in the year. Whatever it amounts to the improvement in business could be coincidental.
For decades S&P earnings have gone up and down with commodities, and this held with the high for the CRB at 473 in early July last year. The low in the panic was 200 and the rebound made it to 266 on June 11. The decline was to 227 and so far the rebound has been to 251. This is likely a test of the July high.
After September, commodities - and earnings - could resume their post bubble bear. No earnings - no ability to service debt - down go the ratings. Down go dividends, or perhaps earnings will quickly triple to meet the payout ratio?
This requires no editorial.
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