Not a bad time for me to clear out and sit on the sidelines. Timing was pretty good I think :)
I wouldn't count on a rate hike personally. There is a fiscal put in place which is basically going against monetary policy. Fiscal side has Janet Yellen issuing bills, student loan forgiveness & memorandum, talks of housing credit & tax breaks to make housing affordable, infrastructure spending, there's a lot going on that goes against what the fed is doing. A rate hike isn't going to fix any of that.
Assuming inflation does not rocket, I would also challenge perhaps some are content with a higher inflation (4-5%). Why? With debt/GDP this high there is not many options to reduce and perhaps they may try a risky move and erode the debt with inflation. In 1946 US public debt/GDP was 108% and due to an expanding economy & inflation it was eventually brought down to 25% by 1975. From 1946 to 1955 the debt/GDP ratio dropped by almost 40%. Now to really make this work you need to see control of the deficit which is looking unlikely, but could flip post elections. By mid seventies the debt/GDP stopped declining when fiscal deficit got bad and the oil shock and today we have already poor fiscal deficit and a possible oil shock.
<< But what we really need to see is inflation/interest rates affecting corporations for a correction to take place.>>
Look at the white collar job loss that is starting. This quarter there has been a ton of cost cutting and role elimination. This will feed into consumers having less spending power as it continues which will effect corporate income in due time. Do not just look at debt that a company is holding, it's the cycle as a whole. I mean tech alone one can look at where do many get their revenue from? Advertising. If consumer is at a flipping point here then advertising dollars will decline and even those with acceptable debt will see declines as revenue drops.
April 10th, 2023 META was trading at $214.75 and is now at $516.87. Risk of bankruptcy? Nope. Overvalued? I would say so.
<< My take - stay away from leverage because both inflation/rate hikes will result in pain for equityholders, UNLESS the company can get away without refinancing and can buy back debt aggressively.>>
Depends here too. If a company is leveraged but the debt is termed out that's another thing to consider. Many companies have debt that is going out to 2030+, but if you just screen for high D/E ratios then you may miss some value. Depends on the details.
FCF generation is key here so if a company is generating consistent cash then I also am not too worried about leverage. Key here is to look for industries where the consumer needs to buy no matter what.
Inflation is a friend to debt holders, but deflation is an enemy.
All that said, I am not a strong in commodities at all, but it is looking like oil is not a bad investment today given the global landscape.
-Sean |
