A feebler bull market
EDITOR'S NOTE
Here we go: companies are frantically raising money to make it through this pandemic, and that doesn't bode well longer-term for the stock market.
I first wrote about this on Friday ("A new type of buyback boom is coming"), and now we're seeing it all over the place. United Airlines is issuing 39 million more shares to raise money. Darden Restaurants (owner of Olive Garden and Red Lobster) yesterday said it would issue nearly eight million shares, following Carnival cruise line's 62-million-share secondary announced March 31. (Thanks to Robert Hum for compiling all this.)
Then there's Shake Shack, floating a little over three million shares to raise about $140 million last week after returning its $10 million small-biz loan.
It's not so much about the immediate reaction to these moves; United and Darden priced their secondaries about 5% below where shares were trading, which isn't great, but also isn't disastrous. Investors may not like being diluted, but they really don't like going out of business.
The larger issue, as Brian Reynolds has outlined, is that we've switched gears entirely from a boom in stock buybacks that was a hallmark of the last two bull markets to a boom in stock issuance. That will likely mean a feebler bull market this time around, even if it helps companies weather the crisis for now.
We've also switched from stock buybacks to what are soon going to have to be debt buybacks in order to pay off all the borrowing companies have had to do. Bank balance sheets have surged in size--a headache for banks who need to hold capital against that increase--because of a massive surge in use of corporate lines of credit
(Side note: now we finally have the long-awaited boom in commercial and industrial loans that was missing for the past decade, and it's for all the wrong reasons.)
(Other side note: these bank loans also push equity and credit investors further down the capital structure, leaving them less of the pie in bankruptcy. Another headwind for equities.)
It's no coincidence J.P. Morgan has stopped authorizing new home equity lines of credit. It doesn't need its balance sheet to surge even further. It's why bank earnings were pretty awful this quarter ("earnings hell," as Mike Mayo called it on Power Lunch yesterday), because so much of their activity right now is just setting aside capital and reserves.
We'll actually be discussing all this with Brian Reynolds near the end of the show today. I'll ask to what extent other ways of raising capital (like Expedia possibly selling a stake to private equity, as Cheesecake Factory did) could keep debt levels from spiking further. Then again, private equity isn't exactly known for being a low-debt kind of industry.
For more on the macro implications of all this debt, check out last week's piece. Bottom line: it's not inflationary.
See you at 1 p.m!
Kelly
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