Gundlach: Debt-Financed Share Buybacks Turned Stock Market Into High-Risk CDO

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Jeffrey Gundlach, CEO of DoubleLine Capital LP, has some interesting thoughts on debt, stock buybacks, and leverage.

Please consider Gundlach's Slideshow on Debt Financed Buybacks.

Corporate Credit as Percentage of GDP

Investment Grade Has Shorter Maturity Than High Yield

US Corporate BBB Debt

BBB debt is one step above junk.

Rise of the Zombie

In the US, 15% of the companies in the S&P 500 are Zombie Corporations.

Zombie firms are those that are unable to cover debt servicing costs from current profits over an extended period.

If they cannot refinance, they go under.

Junk Rated Bonds

On December 28, I noted Suddenly There's No Appetite for Bond Deals as Spreads Widen.

Never before have there been so many bonds this close to junk.

Bond Market Breakdown (August 2018)

  1. AAA $0.11 Trillion
  2. AA $0.59 Trillion
  3. A $2.60 Trillion
  4. BBB $3.15 Trillion
  5. BB $0.57 Trillion
  6. B $0.52 Trillion
  7. C $0.16 Trillion

Fed on Hold

The Powell Fed is now on hold. It cannot possibly matter one bit. It's simply Too Late to Matter.

Mike "Mish" Shedlock

Comments (14)
No. 1-6
2banana
2banana

Can we see the list of companies that make up the zombie 14.6% of the S&P 1500?

Which, I assume, has expanded greatly since 12/17.


"Zombie firms are those that are unable to cover debt servicing costs from current profits over an extended period."

AWC
AWC

Could ERISA have had a bit to do with turning markets into casinos, as well? Or should I say, Ponzi schemes? What happens when these "Retirement" accounts hit net redemption?

AWC
AWC

Something tells me buybacks will pale in comparison to the IRA/401 etc. bubble, which will be an ongoing phenomena for years to come, as the baby boomers retire en mass.

(Glass Steagall aside)

Roger_Ramjet
Roger_Ramjet

I wonder how long it will take for the credit rating agencies to mentally grasp this situation? And then how much longer after that for them to actually downgrade something?

Sechel
Sechel

Never really thought about it quite this way, but I can't believe this degree of corporate financial engineering is a good thing. IBM for years seemingly improved their earnings per share simply by buying back their stock. Judging from the stock price is was clear this was not done because management was an astute value buyer. It took a Jim Chanos to convince me that IBM was a sucker's stock as they really haven't been growing their revenues.