By Michael Lewitt
Editor, Sure Money
Money Map Press
What a shock – the Fed didn’t raise interest rates at its latest meeting. Their next chance is in December – we’ll see if they chicken out then, too.
Markets continue to obsess over whether Janet Yellen will raise interest rates this year. But when it comes to corporate credit quality, they are missing the big picture. Corporations are in bad shape. They are far more leveraged than they were on the cusp of the financial crisis. Their precarious condition is disguised by 8 years of zero interest rates. Now that the Fed is contemplating raising interest rates, their disguise could be ripped off.
But that isn’t their biggest problem. Because if the Fed chickens out and doesn’t raise rates, they are still in big trouble – maybe even bigger trouble. Because if the Fed doesn’t raise rates, it means that it believes the economy is too weak to handle even a tiny 25 basis point rate increase. And that’s downright pathetic.
Right now, there are a number of zombie companies that are still haunting the landscape solely because of low interest rates. These companies carry huge debt loads but the cost of servicing that debt is very low due to the fecklessness of the Federal Reserve. They are losing tons of money in their businesses but have been able to borrow (or extend their existing borrowings) due to complacent financial markets. Remember – bond and bank loan investors don’t want to report defaults to their investors if they don’t have to. So they are perfectly content to allow borrowers to “extend and pretend” their loans until some time in the future when they are forced to face the music.
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Thus far in 2016, 122 companies have defaulted around the world. The tally would be much higher if interest rates were anywhere near normalized. Here is a short list of companies that will join this list if interest rates begin to rise, either because the Fed gets aggressive (which is highly unlikely) or because investors wake up to the fact that their businesses are weak and incapable of repaying these debts.
No matter how you slice it, these four companies are headed for disaster…
Sears Holdings Corp. (NASDAQ: SHLD)
Sears reported net losses of $398 million in Q2 and is set to close 64 more Kmarts within the next year (in addition to the 68 that they announced they were closing back in April). Sears Holdings has about $3.5 billion in long-term debt, more than $2 billion of pension obligations, and is limping along propped up by loans from CEO Eddie Lampert’s hedge fund, ESL Investments. As Kmart employees follow orders to move all merchandise onto the sales floor, it would seem that their parent company is preparing for liquidation. The question is whether Sears will even live to see Christmas. If it does, it could be seeing its last visit from Santa Claus.
As a whole, the retail industry is in crisis. Buffeted by structural changes such as the explosion of ecommerce, weak consumers and an increasingly selective consumer base, there’s been an epidemic of mall-based retailer bankruptcies lately (Sports Authority, RadioShack, Aeropostale, American Apparel, Pacific Sunwear…) and it’s only going to get worse. I’ve recommended some profit opportunities here.
iHeartMedia Inc. (OTCMKTS: IHRT)
iHeartMedia Inc., formerly called Clear Channel Communications Inc., is the largest traditional radio station operator in America. The company was taken private in an ill-advised LBO by Bain Capital Partners LLC and Thomas H. Lee Partners LP in 2008 and has paid down no debt while paying huge fees to its private equity sponsors and investment bankers to keep it alive. (The way private equity firms loot these companies, as I’ve written before, is shameful). It has $20.6 billion of debt that it can never hope to repay and is struggling to keep its head above water in an era of streaming media. It hasn’t reported a profit since 2007, hemorrhaging between $219.5 million and $4 billion every year. iHeart has been holding on by a string: refinancing, restructuring, pushing back payments, and cannibalizing its healthier divisions to create more cash (a move Bloomberg Intelligence described as “burning up your sofa to heat your house”). But if rates go up, the jig will be up.
Valeant Pharmaceuticals International Inc. (NYSE: VRX)
Fund manager Bill Miller recently recommended VRX stock. Miller famously beat the S&P for the 15 years heading into the financial crisis by taking huge risks. Then he blew up and lost most of the money he made over the previous 15 years because he ignored the value of risk-adjusted returns. VRX is heavily leveraged, has negative tangible net worth, is under investigation by multiple government agencies, and offers far more risk than reward. The stock is overvalued and the company is not out of the woods. Ignore Bill Miller and go short. With $30 billion of debt, VRX can’t afford to pay higher interest costs and will suffer if rates rise.
Tesla Motors (NASDAQ: TSLA)
It’s been well documented why I think Tesla is a giant Ponzi scheme. In the last quarter, the company lost $19,059 for every car it sold despite a starting selling price of over $70,000. Its negative net margin was -24.6% compared to -16.4% a year ago. It promised to produce 200,000 cars in 2017, but only expects to manufacture 17,000 in the second quarter of this year. In order to boost cash, the company just sold $1.4 billion in new stock. And it routinely reports non-GAAP earnings numbers to create a false picture of financial health. I could go on, but my blood pressure is rising.
Suffice it to say that each of these stocks is toxic and headed for disaster no matter when (or if) Janet Yellen raises rates. But when (or if) she does, that day of reckoning may come a little sooner.
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as I see it. If we make it past nov. 2016 without the dollar crashing and the u.s.a. loosing our reserve status it will be an act of God. I believe the stock market is set to loose at least 80% of its value. Credit… Credit.. Credit…look at the chart… Its off the chart. Total debt including the banks crap-shoot…and our 20 trillion… a sum total of 575 trillion dollars give or take a billion or two. Its about 13-14 times the GDP of the entire planet. So, will be default??? do we have any choice??? Welcome to the third world economy… AND our new way of living/existing. If you didn’t plan for this happening..
With 8 years of Obama and a future under the Clinton’s nothing will change as both are focused on there own financial future not this nations. Their business acumen is zero, as they are all bought and paid for, have no real plans of their own for the future.
Their words are empty and full of lies. The democrats may scoff at Trump but he is our only way out, he is an America first savvy world business man more than a word twisting lieing money grubbing politician, nobody owns Trump. China has and is building hundreds of coal power plants, but have little coal. Trump will negotiate a deal that will put thousands of US miners back to work with intelligent safer ways of extracting the product. The is a tiny co under another name in CT that has invented a never before seen generator, the Obama DOE has deemed it a dangerous invention and denied funding, because there is no money for politicians or hedge fund robbers.Disasters that leave millions out of power will be a thing of the past, every home and building will be independent but also supply the grid with excess energy creating thousands of manufacturing jobs for this device in every state. Now average cost is $220, a month will cost only $20 dollars a month creating Trillions in disposable income.
The scam of massive Gov, subsidies for building and buying pre-historic wind and solar energy will end, no wind no power, no sun no power. Co’s that went abroad for the cheap labour are tired of paying tariffs on raw material, exports and bribes in lawless countries, they will be standing in line to repatriate their Trillions into American banks with no consequences and low operation taxes, shipping cost, hiring millions. Right now we have a second chance for prisoners, however they go out with the same skills they came in with. NONE. I see the wall being built by prisoners, every day worked reduces there sentence by one day, however in the end they leave with a marketable skill and proud work ethic needed for rebuilding Americas infrastructure.
American Gov is like a tree with branches. Under the democrats we have thousands of more branches mostly doing nothing or duplicate jobs creating millions of pages of new Hypocrisy. Exports require a team of lawyers to be in compliance, foreign exporters to the US of the same Item require none. that adds to the cost of US exporting. All this will end. Hiring illegals will become a major crime not a misdemeanour, this will create thousands of illegals to self deport. Trillions will be saved on illegal welfare. Those politicians that use the words (I take full responsibility) that means nothing, will mean something as they go to jail and all their millions in ill gotten assets confiscated & re-repatriated including over seas bank accounts for use in child care for working single moms and poor families. There is so much work to be done to make America great again, the #1 job is to vote for Trump to make it happen.
I agree with you wholeheartedly. Let’s pray the rest of the country figures it out too. Otherwise, we’re done.
Trumps non payment of taxes is a national disgrace due to non-paying taxes for 18 years for his loses of close to a billion dollars. Also what kind of a developer has loses close to a billion dollars. He is worst than any politician in Congress. HE IS LOOKING OUT FOR HIMSELF, NOT AMERICANS. THE NO.! CON MAN.
Our congress men and women voted for the tax loopholes that Trump used and he has every right to do that. My own step father got paid by the government not t plant wheat and he was not going to plant wheat so he did not and the money he got paid for his home in SC. He had 108 acres of land and he was a attorney my mother a school teacher so sent the “dump kids” out to beat the erasers when she was teaching the “smart kids” WE all work the system not just Trump
TRUMPS BUDGET WILL CREATE A $5 BILLION DEFICIT IN 4 YEARS. THE MAN HAS NO BRAINS JUST A BIG MOUTH. WATCH HIM EXPLODE IN THE NEXT DEBATE WHEN HE WON”T BE ABLE TO HANDLE THE MORE DIFFICULT QUESTIONS. WAKE UP & OPEN YOUR EYES.
Do you believe Pence or the other idiot who interrupted Pence the whole time on air. The facts are that both plans will raise taxes or it will not. We have to wait to see. Take it with a grain of salt.