I'm still working on analyzing where we are in the Great Corporate Debt Bubble and if it's about to pop. Ironically, I don't think it's the Fed raising rates or not that eventually will pop the Great Corporate Debt Bubble. It's going to happen more naturally as overleveraged companies run into problems funding their debt and their dividends, as we've seen many commodity companies such as Freeport-McMoRan (FCX), Kinder Morgan (KMI) and others stumble and likely will need to reorganize if commodities don't rebound strongly soon. Higher rates from the Fed likely would exacerbate the problem, but I don't think the Fed is going to raise rates in the midst of this commodity meltdown.
Longtime readers know I've repeatedly looked past the seemingly endless economic/financial/geopolitical crises that dominate the headlines every time the stock markets sell-off and people start panicking in the midst of what has indeed been exactly the "Bubble-Blowing Bull Market" I've been positioned for since I returned to investing/trading. See, for example:
Thinking it through ¿ the case for a bull market, Sept. 1, 2009
A couple ideas on how to trade the Money Supply Bubble, Nov. 5, 2009
Get ready for the new tech bubble, the biggest bubble of all time (UPDATED) April 7, 2011
The great inflating bubble, June 14, 2011
I've certainly been looking for a Black Swan type of event that could crash our markets and the Bubble- Blowing Bull Market mode we've been in, but I've rightly found nothing to catalyze such an event for the last seven years since I flipped from bear to bull.
Before that, I'd turned from bull to bear in 2007 having closed my hedge fund and taken a job as a TV anchor at Fox Business.
In 2007, I repeatedly wrote and talked about how real estate was about to crash and take the financial industry and stock markets along with it. At any rate, my point is that for the first time in a long time I can see a real risk to the Bubble-Blowing Bull Market that we've ridden to such big gains in our Googles (GOOGL), Apples (AAPL), Facebooks (FB), SanDisks (SNDK), Sonys (SNE) and so on ... and that threat is the fact that we're getting close to seeing the Great Corporate Debt Bubble start to pop, and if it did, it likely would take the financial industry and the stock market down along with it.
Now I'm not about to panic or anything, but would you believe that energy-related corporate debt makes up 15% of the market according to the Bank of International Settlements?
"The greater willingness of investors to lend against oil reserves and revenue has enabled oil firms to borrow large amounts in a period when debt levels have increased more broadly due to easy monetary policy. Since 2008, companies in the oil sector have borrowed both from banks and in bond markets. Issuance of debt securities by oil and other energy companies has far outpaced the substantial overall issuance by other sectors (see graph below, left-hand panel). Oil and gas companies' bonds outstanding increased from $455 billion in 2006 to $1.4 trillion in 2014, a growth rate of 15% per annum. Energy companies have also borrowed heavily from banks. Syndicated loans to the oil and gas sector in 2014 amounted to an estimated $1.6 trillion, an annual increase of 13% from $600 billion in 2006.
"Overall, the stock of debt of energy firms has risen even faster than that of other sectors. Debt issued by oil and other energy firms accounts for about 15% of both investment grade and high-yield major U.S. debt indices, up from less than 10% just five years earlier."
Read on to this other key bit here:
"U.S. oil companies have also borrowed heavily. They account for around 40% of both syndicated loans and debt securities outstanding. Much of this debt has been issued by smaller companies, in particular those engaged in shale oil exploration and production. Annual capital expenditure by oil and gas companies has more than doubled in real terms since 2000, to almost $900 billion in 2013 (IEA, 2014)."
So we're talking about trillions of dollars in debt in the U.S. energy sector alone. And there's probably another trillion or so in debt that other commodity-related corporations owe to lenders, bondholders and other investors. There also is a few trillion of inter-corporate obligations and promises to each other inside the energy and commodity complex and a collapse in capital expenditures in the industry. And all that is in question and getting increasingly risky as a catalyst for some panicky market action in the next few quarters ahead.
More on this next week as I'll be doing more work on this subject and trying to get ahead of its possible ramifications and figure out the best way to profit from this coming implosion of trillions of dollars of commodity and energy-related corporate debt. This whole analysis underscores my approach to avoiding highly leveraged balance sheets and finding stocks that have lots of financial flexibility and net cash on the balance sheet. See the stock picks that meet these criteria and that I think are the best in the world to invest in.