DailyDAC readers know that we try to confine ourselves to publishing “evergreen” thought leadership—general education for business owners and investors about business bankruptcy, its alternatives, and related subjects.
There isn’t a stark line between the news of the day about the Markets and the Economy, on the one hand, and the world that is our stock and trade.
We have, in the past few weeks, had a number of conversations with some of our regular authors who report a sharp increase in activity since the new year began and who, consequently, have become more focused on recruiting. They (corporate restructuring professionals, every one of them) seem to see a wave coming into shore.
Since DailyDAC’s revenue depends on robust M&A activity in the distressed asset space, we have more than a passing interest.
The excerpts below are a product of our editorial staff’s review of recent news, with an eye toward piecing together what the future may hold for the restructuring industry and distressed asset space.
According to the Wall Street Journal:
Markets are signaling that an economy that plunged into its deepest recession in decades just a year ago is ready to roar. Major U.S. stock indexes have set 32 record highs in 2021, including Wednesday’s 424-point surge by the Dow industrials to 31962. Long-term bond yields are rising, showing increasing demand for funds from consumers and businesses, and inflation expectations are at multiyear highs. The price of everything in markets, from a barrel of oil to a share of mall retailer GameStop Corp. to a bitcoin, seems to be going up.
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The everything rally shows that investors believe the fun is just getting started. They believe that a combination of more fiscal stimulus, more-extensive Covid-19 vaccinations and pent-up demand for consumption, on a background of near record-low interest rates, will at last kick-start economic growth and inflation that have been elusive in recent years.
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Why is the market so vehemently optimistic right now? For one, the Federal Reserve has repeatedly signaled it won’t raise interest rates soon, most recently in Fed Chairman Jerome Powell’s testimony before Congress on Wednesday. That promise alone is a powerful elixir for investor risk appetite, as the market action of the past two days shows.”
In Forbes, the talk of the day was asset prices:
“Everything that is going on in the market and asset prices is coming from the Federal Reserve liquidity programs. That ascending line is all you need to watch. This is where money is born, stuffed into assets and then trickles down until it reaches the “stonks go boom” brigade that say stock only go up.
That has been true since the “credit crunch”/GFC or whatever you want to call it but like bitcoin it can’t be true forever.
But while that balance sheet line rises, so will asset prices (not necessary their “real” value). Subject to an unpredictable piece of terrible news, this is the line to watch. A bigger Fed balance sheet means higher asset prices. It is set to keep ascending for a long time yet, so you must be very brave indeed to want to fight nose-bleed stocks and crypto prices.
So on we go on the long side, damned if you do, cursed if you don’t. As long as the “Fed go Brrrrr” as the young’uns say, I’m holding.”
Finally, the Federal Reserve’s Semi-Annual Monetary Policy Report to Congress reported on the current situation for financial institutions, businesses and consumers:
Although government programs have supported business and household incomes, some businesses and households have become more vulnerable to shocks, as earnings have fallen and borrowing has risen. Strong capital positions before the pandemic helped banks absorb large losses related to the pandemic. Financial institutions, however, may experience additional losses as a result of rising defaults in the coming years, and long-standing vulnerabilities at money market mutual funds and open-end investment funds remain unaddressed. Although some facilities established by the Federal Reserve in the wake of the pandemic have expired, those remaining continue to serve as important backstops against further stress.1
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Overall, [consumer] loan defaults have remained low despite the weak labor market, supported by various forbearance programs.2
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Financing conditions for nonfinancial firms through capital markets have improved notably since June. In particular, interest rates have remained very low and corporate bond spreads have narrowed. Gross issuance of nonfinancial corporate bonds was solid in the second half of the year, although it slowed from the exceptional pace in the second quarter (figure 22). In contrast, aggregate bank lending to businesses contracted in the second half, reflecting lower demand for new loans, the repayment of outsized draws on credit lines earlier this year, the forgiveness of some loans under the Paycheck Protection Program, and tighter bank credit standards. In part because of policy actions to foster smooth market functioning, corporations have been able to take advantage of favorable funding conditions in capital markets to refinance debt and bolster their balance sheets; as a result, corporate cash holdings are at record levels. In the small business sector, privately financed lending also picked up over the summer, and loan performance improved, supported by the Paycheck Protection Program. Nevertheless, credit availability for small businesses remains fairly tight, demand for such credit is weak, and default risk is still elevated.3
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Equity prices have more than recovered from the steep declines at the onset of the pandemic, with investor appetite broadly rebounding across most sectors. Equity market volatility remains high, indicating persistent uncertainty regarding the pandemic and the related course of economic activity. Yields on corporate bonds over comparable-maturity Treasury securities have narrowed considerably. Treasury yields across the maturity spectrum declined at the onset of the pandemic and remain near historical lows. The credit quality of outstanding leveraged loans deteriorated early this year, but investor appetite remains strong and new issuance has increased in the second half of 2020. RRE prices also rose rapidly in the second half of 2020, outpacing rent increases. Commercial real estate prices remain at historically high levels despite high vacancy rates and appear susceptible to sharp declines, particularly if the pace of distressed transactions picks up or, in the longer term, the pandemic leads to permanent changes in demand.
Vulnerabilities associated with business and household debt increased over the course of 2020. Business debt has risen from levels that were already elevated before the outbreak of the pandemic. Business leverage now stands near historical highs. While near term risks associated with debt service may be limited by large cash balances at large firms, low interest rates, and recently improved earnings prospects, insolvency risks at small and medium-sized firms, as well as at some large firms, remain considerable. The household sector entered the downturn with relatively low debt but experienced significant financial strains because of the unprecedented spike in unemployment and business closures. Government programs—including expanded unemployment insurance and direct stimulus payments in the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act—and a rebound in economic activity in the second half of 2020 reduced economic hardship for households and mitigated the deterioration in household credit quality.4
©All Rights Reserved. February, 2021. DailyDACTM, LLC
Michele has been a director with Financial Poise since 2012. View her LinkedIn profile here: https://www.linkedin.com/in/michele-schechter-46b9824a/
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