No One on Wall Street Has the Guts to Say This

By Michael E. Lewitt, Global Credit Strategist, Money Morning 


Markets moved lower for the fourth straight week after the Fed kept open the possibility that it will raise rates again in June.

My money is still on a single rate hike later in the year and not next month,  but the 12-headed Hydra known as the Federal Open Market Committee (aka The Committee to Destroy the World) said just enough to keep markets worried last week, thus the Dow Jones Industrial Average and S&P 500 are both up a mere 0.4% on the year.

But, considering that these indexes are trading at nearly 20 times GAAP earnings, (and that GAAP earnings are complete bull because they are inflated by billions of dollars of bogus non-GAAP adjustments (see Valeant Pharmaceuticals Int'l Inc. [NYSE: VRX,] and Sunedison Inc. [OTC: SUNEQ]), this is better than investors deserve.

What's more, have no illusions about the "vast cash hoard" Corporate America is thought to have on hand. As you'll see, that's a fairy tale…

The "Great American Cash Pile" Is a Myth

The truth is, U.S. companies are dangerously leveraged after surrendering to their own greed and that of activist investors whining for share buybacks and dividend hikes in lieu of investing money back in their businesses.

Moody's and Standard & Poor's are finally catching on to what I've been warning about for a couple of years: U.S. corporations are more highly leveraged now than before the 2008 financial crisis.

This leverage is disguised by low interest rates, but all of this debt has to be repaid and many companies are generating insufficient cash flow to do so.

In fact, the so-called vast cash hoard of Corporate America is highly concentrated among a small group of just five companies: Apple Inc. (Nasdaq: AAPL), Microsoft Corp. (Nasdaq: MSFT), Alphabet, Inc. (Nasdaq: GOOG),  Cisco Systems Inc. (Nasdaq: CSCO), and Oracle  Corp. (NYSE: ORCL) – holding more than a third of it.

The average junk-rated company has little cash, too much debt and no free cash flow to repay its debt and is only being kept afloat by low interest rates. This is the real story that Wall Street and its prostituted analysts won't tell.

Speaking of that…

I Can't Believe This Is Legal

Last week Goldman Sachs Group Inc. (NYSE: GS) – in a mindless research report that said nothing new or interesting – upgraded the stock of Tesla Motors Inc. (Nasdaq: TSLA) one day before the company hired it to sell $2 billion of stock (including $600 million for founder Elon Musk to pay taxes on egregious stock option grants).

To think that Goldman didn't know that the order to sell stock was coming when it issued the report pumping up the stock price is ridiculous.

Where is Elliot Spitzer when we need him?

The U.S. Securities and Exchange Commission (SEC) will have no choice but to look into the matter, but, in a world where Hillary Clinton can break the law with impunity (so far, we can always hope) we should not expect Goldman to be held to account for blatant stock manipulation.

Cheap Money Only Gets You So Far

Markets will continue to obsess about the Fed's next move through the middle of June and there is an important message in that. Markets are running on fumes and only easy money is holding them up – that, and the Wall Street "Cheerleading Corps" and financial media that treats every bullish utterance as news rather than the guttersnipe that it is.

For example, Tony Dwyer of Canaccord Equity told CNBC last week that we should expect a 20% rally and multiple expansion in the S&P 500.

While Mr. Dwyer is paid to be bullish, I don't think he is paid to be an idiot. There is no intellectual justification for such a call, which is simply designed to suck his firm's retail investors back into the market to lose money.

The lack of intellectual and moral integrity on Wall Street never ceases to amaze (and disgust) me. But idiocy is not an excuse either for its purveyors or its victims.

People need to listen to honest voices, not carnival barkers. The market is overpriced, central bankers are out of ammunition, and investors should protect themselves against the coming storm.

It won't be long – especially if the Fed finds its long overdue courage and finally hikes rates.

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