Don't Ever Underestimate What Central Bankers & Government Will Do.
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23 Pages, 34 Graphics
Falling Progits and Weakening Markets
The full report explores falling corporate profits, slowing cash-flow levels and weakening market breadth.
Liquidity Again a Problem
We have been witnessing the disturbing trend of falling Fund Flows and slowing Private Credit growth.
The rolling 3 month asset purchases by the global central banks gives us some insight into another development going on below the surface. Having become addicted to liquidity injections by the central banks in the post financial crisis period, the liquidity growth decline (since the US TAPER program was implemented) is clearly being felt globally. Particularly so in the Emerging Markets. The forced selling by the Emerging Markets due to negative current account balances and currency pressures has significantly aggravating a tenuous situation. Richard Duncan at Macro Watch does a stellar and unique job of analyzing global liquidity pressures (shown to the right).
Credit Cycle Has Turned
Falling Cash Flows and EBITDA coupled with high corporate debt levels, are a central reason for the recent credit cycle reversal. This trend reversal is not about to be reversed as credit cycle reversals are normally infrequent and can be expected to take years to reverse again. It is a process that is about resetting debt to manageable and serviceable levels. It normally forces out the mal-investment created by easy credit. It is extremely worrisome in this particular credit cycle reversal because of the size of debt & mal-investment, leverage outstanding and the degree of collateral impairment underpinning the debt pyramid.
Reduced corporate dividend payouts are a sure sign that the credit cycle has reversed which we are now witnessing. The number of dividend reductions has now far surpassed 2008. It is almost 100 more than at the outset of the Great Recession, a time when the implosion of Lehman caused equity markets to plummet in the later stages of the third quarter.
We see reduced corporate cash-flows as a central driver in the current environment - an Energy & Commodity Collapse with attendant soaring global risk and "Risk Off" as the new approach to hedging because of the current degree of high market correlation.
What We Expect
We are watching closely the 200-400 DMA Death Cross for confirmation of an Intermediate term top and of lower lows ahead.
