Thursday October 1

Stocks were little changed ahead of Friday’s jobs report. The S&P 500 increases marginally to 1,923 and the Dow fell fractionally to 16,272. Economic data today was firm and indicated the strength of the US economy. Motor vehicle sales both domestic and total beat expectations, and both the PMI and the ISM manufacturing indexes were right in line with expectations. Construction spending was also very firm. This data reflects the view that the domestic US economy is strong and trending in the right direction. However what remains to be seen is how much the international landscape will derail US progress. Treasury yields were once again firm ahead of Friday’s report. The two year yield remained at 0.64% and the ten year yield at 2.05%.

US corporations have taken out large amounts of debt in recent years amid low interest rates. The US corporate debt market has expanded to $7.8tn amid low borrowing costs, M&A activity, and shareholder activism. $2.5tn of the total is junk bonds and $1.5tn of that group is due within 5 years. It will be difficult for companies particularly with speculative grade ratings to refinance debt with corporate profits expected to fall and interest rates expected to rise. A high yield index was down 2.5% year to date and is expected to fall in the first time since the financial crisis. The yield on a BAML high yield fund has increased from 6.52% to nearly 8% over the past year and has experienced $14bn of outflows. There have been 47 corporate defaults so far in 2015, which is the most since 2009. Notable defaulters include Radioshack, Quiksilver and Patriot Coal. This number is expected to increase through next year as companies continue to feel the stress from low commodity prices, the strong dollar, and low global growth. Analysts note a weak group of speculative grade companies that are especially susceptible to downturns. These include Sears, Getty Images, Advanced Micro Devices, California Pizza Kitchen, Ceasar’s Entertainment, and Goodrich Petro. These concerns are reflected in low demand for new high yield issues. EBITDA from US corporations in 2Q fell 39.3% which is the biggest drop in 15 years. On the other hand leverage is the highest it has been in 15 years. This is a dangerous combination for companies and debtholders alike.
Equities experience the worst quarter since 2011. China, uncertainty from the Fed, and pessimism for corporate earning all contribute to 7-8% losses for indexes. This is the largest decline since 3Q 2011. According to the IMF corporate defaults are likely to accelerate in developing countries. Reflecting these concerns global stocks have lost more than $10tn in value. In the US biotech and health stocks have been hit especially hard following Hilary Clinton’s comments. US earnings due in a few weeks will be a big indication of the direction in equity markets for the rest of the year. It is expected that corporate earnings are going to fall 4.6% from the previous year. Similarly revenue is expected to decline 3.3% for the third straight quarter of top line decreases. These losses are largely due to global concerns and commodity markets.
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Thursday October 1

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