CNN Money reports the good news that the bull market isn’t over just yet: “Dow soars 432 points. The bull market’s not over yet.” So says Fake News CNN. However, personally I’m still thinking the advance that began in March 2009, ten years ago is getting pretty long in the tooth.
Take this news from General Electric. It’s not enough GE in the past year was removed from the Dow Jones, where it’s been since horses pulled taxis down Wall Street, a time when high-tech was steam-powered locomotives; in the past year its dividend has been cut from $0.24 to $0.01. That plus now in October 2018 the SEC and Justice Department are conducting investigations into GE’s accounting.
I’m no accountant. But I’m not ignorant of the ways basic economics affect human beings, including people with degrees in business.
How many times have you heard promotors of real estate advise people to buy now while mortgage rates “are still cheap?” I’m sure quite a few times in the past decades, as real estate prices for the most part have done nothing but go up.
In a world where money is no longer gold or silver, but whatever that engine-of-inflation the Federal Reserve says it is, finance (not price), the old: “can we afford the monthly payments” has become all. And like prospective working-class homeowners, GE and you can bet many other famous American corporations over the past ten years have taken on acquisitions not because the deals were actually good, but because the money from the Federal Reserve was so cheap they simply couldn’t say no if they wanted to “grow” and stay competitive.
Well, who could have guessed this was to happen; interest rates are now rising, and the underlying asset purchased with this debt is deflating. The following chart of a US Treasury bond provides us with maybe an imperfect example, but I believe a valid one as many corporate assets have been collateralized in their M&A (Mergers & Acquisitions) activities.
I imagine GE management’s situation is something like this: they’re trapped like rats holding assets they paid too much for, assets that have done nothing but lose money, assets they now can’t sell.
And sell to who? The entire global-corporate structure in November 2018 is now dangerously overleveraged. In the coming year corporations are going to discover how scheduled payment of the debts they’ve taken on these past ten years is getting harder all the time. And with rates and bond yields rising; everything is becoming “too expensive” fast, even as collateral valuations deflate.
GE’s management must have attempted to hide the details of their self-inflicted wounds in their accounting, which ultimately led to investigations by the SEC and DOJ. So who’s next is the question in my mind. Watching to see which blue-chip company wants to drastically cut their dividend, as GE did in November 2017 seems to be key in knowing who’s in trouble.
After all, for a corporation to cut their dividend payout, even to nothing only upsets their shareholders. However, failure to make even a single coupon payment to their bondholders is in fact declaring the corporation is bankrupt. So keeping an eye on reductions in dividend payouts will prove to be key in identifying exactly who is having cash flow problems in the near-term future.
Currently the Dow Jones is paying out a record dividend, and since October 2010 it just goes up and up. It will be interesting seeing how much longer this can continue. During the Great Depression Crash dividend payments from the Dow Jones were reduced by 77.5%.
