Analysis Of The Markets

June 22, 2018

Credit Excess - US companies are gorging on debt. Never before has so much debt been issued by the corporate sector on such a consistent basis. Since 2011, US companies have accelerated their issuance of corporate bonds to over $1.3 trillion per annum. Record low bond yields have distorted the playing field. If US companies are raising capital for productive purposes, then issuing debt at record low yields makes a great deal of sense.

Record Junk Bond Issuance - Since 2011, US companies have accelerated their issuance of corporate bonds to over $1.3 trillion per annum. In the 1980's and 1990's, the majority of corporate bonds issued came from high quality, investment grade companies, while less than 5% of issues were considered high-yield or 'junk bonds'. Over the last decade, that trend has changed dramatically.

China Falling - China is the second largest economy in the world by GDP at $14 trillion according to the IMF, behind but catching the US at $20 trillion. The Chinese economy has been growing by 6% per annum, 4 percentage points ahead of US annual GDP growth. Chinese economic growth has been fueled by a massive expansion of government debt and this debt-fueled growth is starting to negatively impact the performance of Chinese companies trading on the stock market.

End Of An Era - On May 26th 1896, Charles Dow, then editor of the Wall Street Journal, constructed the first known index of US industrial stocks, which he named the Dow Jones Industrial Average (DJIA). The Index originally comprised just 12 industrial companies spanning sectors from sugar, tobacco, oil and gas to electricity, coal, iron, leather and rubber. The number of components in the DJIA later increased from 12 to 30 and in recent decades, the number of non-industrial stocks in the Index has risen sharply. Today, the DJIA includes many technology, financial and consumer discretionary brand names.

Tipping Over- “At height of the great tech stock bubble in 2000 (record US stock valuations), the market cap of five highest valued tech companies was slightly over $2 Trillion..... Today, the combined market cap of AAPL, AMZN, GOOGL, MSFT & FB is $3.96 trillion or nearly 2x..... In 2000, the top five were MSFT, CSCO, INTC, ORCL & NOK. CSCO had the highest P/E (120, or 100 points lower than AMZN today). Over next 2 yrs, stock declines ranged from -62% to -90%. Nortel just missed the top 5 cut. It’s stock lost 99%.” — Fred Hickey, The High Tech Strategist.

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Brian Delaney, CFA

Director, Secure Investments

Tel: +353 86 821 5911

Website: www.secureinvestments.ie

Email: brian@secureinvestments.ie

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