Wanted: Debt or alive. What you need to know about financial markets today
The stock market was on track for its strongest week in five years, as attention shifts from equities to the turbulent debt markets.
A 4.4% weekly gain through Friday’s market open meant the S&P 500 had clawed back about half of what it lost in the previous week’s correction.
The real action, though, is in debt, where $14.1 billion was pulled from bond funds in the week through Feb. 14, according to data collected by EPFR Global. Most of it came from high-yield or “junk” bonds, as investors grappled with the impact of rising inflation and interest rates on the riskiest corporate borrowing.
With less money coming from central banks and yield-seeking “tourist” investors, some of the most leveraged companies could have trouble refinancing their debt. That’s not an insignificant issue, with corporate debt as a percentage of gross domestic product running at an all-time high.
As Bloomberg notes:
“Derivatives tied to corporate bonds moved more than the underlying cash debt last week — another sign that investors sold more liquid holdings during the equity turmoil rather than offload harder-to-sell debt, according to JPMorgan Chase & Co. Meanwhile, options on an index of derivatives tied to corporate credit — typically used to hedge against a broad correction — also saw a pick-up in volumes, according to market participants.”
Put it on the card
Regular folks also are loading up on debt. Total consumer borrowing was up 5.5% to a record $3.8 trillion at the end of 2017, according to the Federal Reserve Bank of New York, reports the Wall Street Journal (subscription required). But it’s different than the debt that blew up so spectacularly for so many people during the financial crisis. Then, the borrowings were heavily weighted toward housing. Now, credit cards, auto loans and student loans account for 29% of the total — another record, and rather astounding if you think about the relative size of those loans versus the typical mortgage.
That’s not to say homebuilding is lagging. Residential starts jumped nearly 10% in January, and apartments and other multi-family projects grew even more impressively, by 23%. It’s unclear whether the prospect of higher mortgage rates will slow the industry’s roll.
Of chickens and trucks
Besides houses, know what else is selling like crazy? Cardboard boxes. The New York Times explains how demand is heating up for such crucial economic ingredients, and how that filters down in the form of higher household prices. Spot rates for freight delivery rose 20% last year, and hourly wages for truck drivers were up 4% in the fall, the fastest pace in four years. Tyson, the meat giant, recently said freight would cost it $200 million more this year. For you, a non-truck-driving consumer, that might mean a 3-cent price hike on a chicken breast, one analyst concluded.
Long arm of the law reaches out to short seller
Speaking of chickens, a short seller who dabbles in pastured poultry was recently paid a visit by FBI agents. They warned Marc Cohodes about his aggressive tweets regarding a company he’s targeted, MiMedx Group, including one from October in which he says of MiMedx CEO Parker “Pete” Petit: “I will bury the little fella in a shoe box.”
Short sellers bet on the shares of a target company falling, and often follow up with elaborate and colorful arguments for why that should happen. Their targets often use similar tactics. (See Bill Ackman vs. Herbalife.) Still, it is unusual for the FBI to be called in. Cohodes isn’t backing off, though, claiming the agents were acting at the behest of Petit, a top GOP fundraiser in Georgia.
At least one lawyer not connected to the fight tells Bloomberg that the FBI’s role does seem unusual, “more like private investigators trying to get people to shut up.” It comes as companies and stock exchanges are trying once again to curb short sellers. The latest effort is to force them to disclose large stock positions, which sounds fine but Bloomberg’s Joe Nocera argues is a back-door way to cut off shorts’ access to funds.
Divorces could get even nastier
Another unpopular branch of the service economy, divorce lawyers, is warning that a provision in the recently passed tax law will make breakup negotiations even more acrimonious. The law eliminates a deduction for paying alimony with divorces finalized starting next year. A poll conducted by the American Academy of Matrimonial Lawyers found that two-thirds of respondents believe that will lead higher-earning spouses to dig in and be less generous in settlement talks. The lawyers also expect more business as the 2019 change looms. “Starting in the latter half of the year, people are going to get pretty hysterical to get their divorces done,” divorce attorney Alyssa Rower told Bloomberg.
