Time To Die, Zombies

⚡ The Spark
Time To Die, Zombies

Will the debt finally get them?

OK. Here’s the thing. Every couple of years, markets worry about zombie firms.

Those companies who don’t make enough money to repay their debts, and exist primarily to service the interest cost of that burden.

You get stats like these doing the rounds:

Nobody knows what it means, but it’s provocative. Gets the people going.

And commentators will say things like “this isn’t sustainable”, how it’s madness and all the rest of it.

And it IS kinda mad.

So are lots of things that none of us understand.

The more important question is if it matters…

And the answer is usually “it depends”.

See, interest rates have been in a pretty permanent downtrend for the past four decades.

So these businesses could get away with rolling the debt, and the interest (servicing cost) would usually fall each time they did.

The falling rate environment actually incentivised the accumulation and rolling of debt.

So, if rates are genuinely going to stay higher than they have historically, there’s definitely an adjustment coming.

But it probably won’t be immediate…

2024 looks entirely manageable, 2025 gets a bit trickier, and if rates are higher in 2026, we could see a default bonanza, or cost-cutting so ruthless that even the mafia would be like “eehhhh take it easy”.

For now, the dispersion of spreads in the high yield market is rising, which means credit markets are starting to get more selective. Figuring out who’s a bigger risk and adjusting their prices accordingly.

🧠 The Big Brain
The 2024 Pain Trade

Hard landing, soft landing, bro please stop talking, just let me off

There’s two very clear camps for 2024.

The soft landing bro’s (aka the optimists)

The hard landing bro’s (aka the pessimists)

They’re both lovely stories, but that’s all they are.

Neat, tidy stories pushed by Wall Street’s narrative machine, carefully designed to satisfy our human desire for certainty.

We have a different view 👇

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💡 The Lightbulb
How to solve a problem like the Mag Seven

Some problems don’t need solving.

John Authers sends out good, thought-provoking stuff more often than not.

Today, his note struck a nerve.

Here’s the opener:

John’s not the only person to point this out. Far from it

But that first line was just too juicy to ignore.

How do we solve a problem like the Magnificent Seven? 

Show me on this chart what the problem is:

Listen, it’s really simple. If you’re picking a Fantasy Football team, you pick the best players.

The ‘problem’ is that everyone wants to own Messi, Mbappe, Haaland, Saka, Ronaldo & Bellingham.

Because they’re the best.

Who’s getting excited about some mid-table cloggers that consistently put in a decent (but rarely exceptional) performance?

Nobody.

So what is there to solve?

Over time, individual stocks get bid up, then they lose value (Meta was cut in half not that long ago), and some other company becomes flavour of the month.

Or in Microsoft’s case, the decade(s).

Yes, it can be problematic IF these companies run into problems (as Meta did), and theoretically they can drag down the entire stock index down in much the same way as they dragged it up.

Does that mean…

They’ll never be good companies again?

Or that people won’t buy the stock at a much cheaper valuation (as long as the business hasn’t fundamentally changed)?

Course not.

There are always arguments for people to pay lower earnings multiples for stocks.

And there are always reasons to ignore those arguments.