Longest Bull Market in History

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Personally I think the markets aren't let's say as buoyant as we see. I can see the Dow at 30,000 pretty soon, however from there it's hard to call.
The Fed yesterday piled over $400bn into the "repo market " as since September liquidity has dried up, and they were worried about another spike in the repo rate, normally its about 2% but spiked to 12%.
This is money that companies big and bigger essentially borrow overnight to fund outstanding liabilities like Corporate tax and other liabilities.
Got me to ask the question, if corporate America needs trillions of overnight dollars to keep going and pay things like taxes, why are they reporting profits every quarter?
And let's be honest here US companies report EBITA, a company could report a billion dollars in profits under ebita but have 2 billion in interest and taxes, is that a profitable company?
Just my thoughts....
 

Companies are not using the repo market to borrow to pay tax liabilities. That's not how it works. Nobody is 100% sure what happened in September but it could have been a perfect storm of large amount of US treasuries entering the system with dealers looking to repo them, increased cash demands from corporates to pay tax bills etc which meant large withdrawals from the financial system and also the issues around the bombings in Saudia Arabia are rumoured to have impacted as they withdrew billions of dollars from the market to repair the damage (No idea if that is true or not though). This meant there was a cash shortage in the banking system and hence why the FED has stepped in. They got past year end without another spike so they seem to have managed it but it is still going to be something to watch this year if and when the FED steps away again.
 
I made a mistake in understanding the corporate tax, it did however reduce liquidity in the market, a market of approximately $4trn , and that did as we saw a spike to 12% overnight rates from the norm of 2% plus.

Even we categorise it as an exception it still begs the question why the $400bn pump at year end?
It's now believed, again "rumours " that the FED won't disentangle until April and will still pump $60bn plus monthly as it did from October.

Dimon would like not to have his $120bn parked in the FED and no doubt neither does any other money maker, he believes that him Goldman et al will save the day if the Fed repeals its insistence of having an insurance against another 2008 deposited to "provide " liquidity.

Now I'm no economics expert, not even a banking one, but it really does ask a question as to why the US economy is still living on false credit?

Credit is fine once it can be paid for, but corporate America are "profitable " on a ebita basis to satisfy Wall Street on Eps and stuff....

In fact Corporate America has more debt now than it did in 2008 and is " profitable " and the USAs debt is now approximately$22trn.....and rising.

These are just my simple thoughts, but it doesn't make sense to me.
 
@Paul O Mahoney
There are a huge number of nuances around debt and capital structures, particularly in the US. Just because a corporate is borrowing money doesn't mean it isn't profitable. In fact it doesn't even mean that they don't have cash! Take a look at Apple as an example - they were issuing bonds, although they had 200bn in cash on their balance sheet!
There is a lot going on.

The lack of short term funds in such a liquid market will be studied as part of college degrees in future once economists agree on the cause!
 
RedOnion said:
Take a look at Apple as an example - they were issuing bonds, although they had 200bn in cash on their balance sheet!
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Were they not issuing mainly eurobonds to take advantage of the madness that is negative interest rates in europe, sure Berkshire Hathaway did the same thing and they are stuffed with cash.
 
joe sod said:
Were they not issuing mainly eurobonds to take advantage of the madness that is negative interest rates in europe
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They issued USD bonds. They may have issued Euro debt as well. But regardless they are also long Euro funds (on which they are earning negative interest).
 
joe sod said:
Were they not issuing mainly eurobonds to take advantage of the madness that is negative interest rates in europe, sure Berkshire Hathaway did the same thing and they are stuffed with cash.
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No - they were borrowing on their US entities. A lot of their cash was offshore - at the time, repatriating would have triggered a significant tax liability. It has probably changed now with the new US repatriation tax
 

In the example of Apple, wasn't most of their money outside the US thus it was cheaper to raise capital by issuing bonds than briging the money back into the US and paying tax.

The low interest rates have created a large amount of corporate debt issuance over the last number of year, see the following link https://www.spglobal.com/en/researc...rporate-debt-market-the-state-of-play-in-2019

oh sorry @EmmDee already made the same point.
 
Andrew365 said:
In the example of Apple, wasn't most of their money outside the US thus it was cheaper to raise capital by issuing bonds than briging the money back into the US and paying tax.
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Pre 2018, yes. But they started issuing debt again towards the end of 2019, after repatriating billions back to US (in USD and Euro).
I'm not getting into the specifics of why certain companies issue debt - I was pointing out complexity to a poster who questioned why profitable companies have debt at all.
 
No I understand why companies have debt and why they issue debt and yes companies have cash and issue debt long term.
But this issue is short term debt and liquidity, liquidity is massively important to the US economy it simply runs on credit, when something like this happens it, to me anyway, points to something not right, it maybe nothing but the Fed seems to be concerned enough to plug the hole for now. I'm not trying to be chicken lickin here but many many articles have been written about this and each article seems to point to a fundamental problem.......either it's the fed or something else.
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If CGT wasn't such a ridiculous rate people might cash in more , I wonder how much extra tax the government could take in if they reduced CGT to say 12.5% . Just from talking to a friend the other day who is reluctant to sell shares to fund a house deposit it really is a ridiculously high rate. If the stock market crashes the government make nothing , 12.5% is better than 0%.
 
Paul O Mahoney said:
Are you saying that liabilities don't have to be paid?
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Once they are paid, they no longer exist as liabilities. I think the point being made is that having a liability implies you have additional liquidity than if you paid it off.

It's the old story of creditors being a cheap form of cash flow (or they used be) - "leaning on the trade" I believe was the phrase
 
Well in 30 years plus I never heard of that. What next having negative working capital is also good financial planning?

In the modern world most long/medium term liabilities aren't really paid off anyway, they are simply replaced by new debt sometimes at more favourable interest rates but the underlying debt structure is still the same and in some cases increases.
To me it looks as if we have learned nothing and I know the world has moved on from my time, but every major financial crash, or corporate collapse was helped along with massive amounts of debt.
I'm old enough to remember Polly Peck declaring profits of £130m only to be bankrupt a few weeks/months later, I think it lead to FRS1 .
And Polly Peck was a pebble in comparison to Enron, WorldCom, Lehmans to name a few.
Anyhoo my view is that any disruption in the credit markets is not going to turn out well , it might be solved but I have my concerns.
 

There are a lot of things not right but as Red Onion says, this will be debated for years by economists. Of course there has to be concern when repo markets react like that but there are numerous technical factors at play from Central Bank activity, new regulations, Government bond issuance etc etc. I don't think anyone is saying that the banks didn't have liquidity but there are obviously constraints with that liquidity that need to be looked at. The world is in a new place now after QE and attempts to unwind it.
 
Well it will be interesting to see how it all pans out.
 
Is this thread now being taken completely off topic, I mean I got scolded much earlier for even discussing the performance of European equities, I was told the thread was specifically about the S and P 500. Now the discussion is about Apple issuing bonds, there are other threads discussing the bond markets.
 
I was also thinking that the bond / debt discussion warranted a separate thread.

But in terms of being off topic, and specifically Apple, there is a direct correlation between the bonds mentioned above, and their share price. Apple are using a lot of the debt they've issued to buy back their own shares, leading to a higher individuals share price. (And they are a constituent of the S&P 500).
 
Don't know how you can discuss the US market and its bull run without at least discussing what is driving it and what might stop it.
Corporate Debt is an important factor in valuation of shares, Wall Street might look at EPS , Revenue, missing consensus blah blah blah but it is a little more complex than that.
 
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