Is the Stock Market Reflecting the Real Economy?- By: NEIL S. SISKIND

By: Neil S. Siskind

The intuitive answer to this question, the obvious answer, as asset prices continue to climb while many businesses and job growth and GDP decline, as certain economic data points show an increasingly challenged economy, as no known virus vaccine is on the horizon, and as flu season looms, would seem to be “no”, that the significant rise in large-cap company stock prices is due, primarily, to a Fed put, excessive liquidity, a low discount rate, temporary behaviors due to the pandemic, and a temporary flight to quality due to fear and uncertainty. And five years ago, I may have agreed.

But the Internet, the low cost of capital, and the rapid acceleration of behavioral changes, secular growth trends, and structural change1 (with the structural change having been, and continuing to be due, in large part, to the Internet, the low cost of capital, misallocated capital, and the pandemic) over the last five years- and the last five months- have changed things.

It’s not only the stock prices of the largest public companies that are growing (referring mostly, though not exclusively, to technology stocks)- it’s their revenues, and earnings, and market shares- to the detriments of most of their smaller competitors, public and private.

As smaller competitors struggle through the pandemic, and dwindle, and as the Internet and a low cost of bank capital and inexpensive public market financing options allow the largest companies to easily and affordably borrow money and scale ever-larger through a combination of price wars, loss-leaders, advertising blitzes, talent acquisitions, research and development, patent acquisitions and protections, stock buybacks, business acquisitions, and online marketing programs, to dominate their respective industries and sectors, fundamentally, the few survivors are more and more valuable, especially those survivors that are participants, and leaders, in industries experiencing secular growth (offering them the opportunity to vastly scale their respective businesses)- such as certain areas of technology- and, particularly, where that secular growth is part of the cause of structural change1 in and to the overall economy.

With large companies getting larger and smaller competitors failing, the ever-higher stock prices of certain large public companies probably are a direct reflection of the economy; they reflect the economy as it evolves to one based on “maximum scale”, where a, relatively, small number of well-funded large companies are using capital and technology to grab all of their respective industry’s or sector’s market share- leaving just a few remaining players in every industry or sector. Among other things, great “scale” in industries or sectors means less competition for (and, thus, lower costs of) labor and more price leverage over suppliers and distributors, and, thus, the potential for higher than presently-expected earnings (and, of course, it can potentially create exposure to antitrust investigations and actions).

So, while many thousands of businesses’ fundamentals and the overall economy may be weak, with wage growth, GDP growth, and job growth all weak, and many large-cap companies’ stock prices (referring, mostly, to technology companies) may be slightly out of whack with either their own fundamentals (based on their own historical price-to-earnings and/or price-to-sales ratios) or with price-to-earnings and/or price-to-sales ratios of smaller public companies in their respective sectors, this does not, per se, mean that the stock market is divorced (or, decoupled) from the economy. In fact, it’s just the opposite- the stock market is explaining the functioning and transition of the economy. Rising large-cap company stock prices are about more than monetary stimulus, the discount rate, the real yield, and the pandemic; those stock prices, at present levels, in many cases, are also justified by, and correlated with, sustainable economic evolution and secular trends and structural change1 in and to the real economy from which such companies are, and, in many cases, will continue to be great beneficiaries.

 

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ENDNOTE

  1. I use the term “structural change” in this article. The context determines the kind of structural change to which I am referring. One kind of structural change we are experiencing, and to which I refer, is to our behaviors- long-term changes in and to the way we work, shop, socialize, and get entertained, with the expansion of, and our growing reliance on, digital services and related hardware. The other kind of structural change we are experiencing, and to which I refer herein, is change to the overall structure and operation of the economy, where we have winners and losers in industries, such that large companies survive and control prices and labor in their respective markets while smaller businesses are less and less prevalent or relevant in any given industry. Having just a few large companies in each industry changes the structure of the economy from one based on small businesses and competition to one grounded in large corporations, less competition, fewer employment options in any given industry for labor, and fewer retail options for consumers (and fewer supply sources for businesses). This latter structure has developed over the past decade, and continues to develop, and will continue to develop to an even greater degree moving forward because of the Internet, inexpensive debt capital, investor hunt for yield, low inflation and disinflation, and the pandemic.

 

 

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About the Writer

Restructure and reduce business and personal debts; distressed debt investments and transactions: https://www.debt-solutions-attorney.com/distressed-asset-investments

Neil Siskind is: President of The Siskind Law Firm, https://www.debt-solutions-attorney.com/, focused on debt negotiation and restructuring, debt collection, debt investing, product investments, trademark licensing, and product distribution; Founder & Chairman of The Fatherhood Assignment™, a think tank and advocate for children with absentee fathers; Founder of the global charity marketing initiative, Caring is Free®; Founder of National Fatherhood Day™; Owner & Conservator of The Neil S. Siskind Nature Preserve, over 9 acres of conserved waterfront land along New York’s majestic Hudson River; and author of The Complete Guide To The Ways To Manufacture & Sell Your Products. On December 11, 2017, in his article The Yield Curve Speaketh: Why Stocks Might Crash in Early 2018, Neil Siskind accurately predicted the February, 2018 stock crash, the largest single-day point drop in the Dow Jones Industrial Average’s history. All the stock indices are down approximately 6% for 2018. In his September 26, 2018 article, Lots of “Bull” In The Bull Market: Let’s Look At What’s “Really” Growing, Neil Siskind explained that, despite Wall Street’s bullishness, the economic data and stock market underpinnings were in decline, and the economy and stocks were at imminent risk. By the closing of markets on October 23, 2018, the S&P 500 had fallen approximately 7%, with October being the S&P’s worst month since August 2015 (and December being the S&P’s worst month ever), the Nasdaq continues to have its worst month since 2016, and is down approximately 8% from article publication, and the DJIA is having its worst monthly performance since 2008. In 2018, Neil Siskind coined the phrase “synchronized global slowth™” (or “synchronous slowth™”) to describe the occurrence or condition of multiple emerging market and developed market economies commencing a downward trajectory of economic and GDP growth, or actually contracting to a point of slow, stagnant, or negative economic and GDP growth, simultaneously. If you are in need of office space in South Florida, contact Neil Siskind about space availability at The Siskind Executive Office Complex in Boca Raton, FL.

Other Recent Articles by Neil S. Siskind:

Neil-Siskind-Pic

“Managed Globalization”​ Through Mandated “Onshoring”​ is a Necessary Pandemic Response- But, That’s Only Half the Battle

By: Neil S. Siskind

“Managed globalization” (or “nationalism”, or “protectionism”, or “partial-autarky”, or whatever term you prefer) as a response to a pandemic (in this case, the COVID-19 pandemic), and for the purposes of preventing and managing future diseases and pandemics, requires two entirely separate elements. Congress’s establishment of a federal mandate requiring the “onshoring” or “reshoring” of all manufacturing, production, and distribution of all “essential products” (or “critical products”) is a necessary measure towards the country being prepared to efficiently manage future emergencies as they arise and create demand for essential/critical products by hospitals, law enforcement, firefighters, the military, local businesses, and the general public, allowing for manufacturers and government agencies to more effectively prevent raw material and production limitations, and to rapidly solve supply chain constraints. We’ve learned, and are learning, a harsh lesson about the importance of this strategy and structure.

But, in terms of preventing or minimizing widespread infection and disease from pathogen outbreaks, in the first instance, inbound-travel restrictions and protocols are the main control valves.

A person brought this novel coronavirus to the United States; that happened through air travel- and not through trade. If we fail to properly and perpetually manage inbound travel from foreign nations (including by Americans returning home from business and pleasure trips), then, the next pandemic- notwithstanding manufacturing, production, and total supply chain autarky for essential/critical products- may not be far off (not to suggest that this pandemic is, even, nearly over).

Without inbound-travel restrictions and protocols, including health checks and quarantines for inbound travelers from overseas (with such protocols conducted at the travelers’ expenses), we will always be reactive- and not proactive.

Diseases (and pandemics) can certainly start in the United States; zoonoses can, potentially, be transmitted from animals to humans in U.S. forests, in U.S. rural areas, on U.S. farms, and in U.S. zoos. But, our modern and efficient health systems and standards, combined with our national interest and self-interest, would lead to an immediate and complete response, which would include mass and vast notices to the American public. We have laws and standards and protocols designed to protect the nation. Certain other countries may not have the same, or equivalent, health-management resources, emergency management systems, and legal obligations, or, they may have different standards of what is “concerning” or “problematic”, or they may have different interests, values, or food and sanitation practices. A nation’s financial resources, and limitations on such, play a role in its ability to detect and respond to emergencies. A nation’s self-interest in not creating a panic or not being blamed for a pandemic may outweigh its interest in our safety- as we have, now, witnessed.

Manufacturing, production, and complete supply chain autarky for all essential/critical products (including for the raw materials used in such products) through strictly domestic raw material sourcing/growing/development and essential/critical product manufacturing and production is a necessary national policy towards effectively responding to future state and national emergencies, of all kinds. But, when it comes to protection from diseases, at the borders and at customs is where versions of protectionism or managed globalization related to human cross-border mobility and movement must be implemented- otherwise our national health standards, health and hygiene practices, and disease emergency measures, will, increasingly, be rendered impotent.

Surely this would change the nature of travel as we know it. But, I’d rather see America change the nature of travel than see another country change the nature of America– again (and not even feel remorseful about it).

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About the Writer

Restructure and reduce business and personal debts; collect debts owed; monetize receivables by selling your invoices: https://www.debt-solutions-attorney.com/

Monetize your accounts receivables today with Receivable Advance™

Neil Siskind is: President of The Siskind Law Firm, https://www.debt-solutions-attorney.com/, focused on debt negotiation and restructuring, debt collection, debt investing, product investments, trademark licensing, and product distribution; Founder & Chairman of The Fatherhood Assignment™, a think tank and advocate for children with absentee fathers; Founder of the global charity marketing initiative, Caring is Free®; Founder of National Fatherhood Day™; Owner & Conservator of The Neil S. Siskind Nature Preserve, over 9 acres of conserved waterfront land along New York’s majestic Hudson River; and author of The Complete Guide To The Ways To Manufacture & Sell Your Products. On December 11, 2017, in his article The Yield Curve Speaketh: Why Stocks Might Crash in Early 2018, Neil Siskind accurately predicted the February, 2018 stock crash, the largest single-day point drop in the Dow Jones Industrial Average’s history. All the stock indices are down approximately 6% for 2018. In his September 26, 2018 article, Lots of “Bull” In The Bull Market: Let’s Look At What’s “Really” Growing, Neil Siskind explained that, despite Wall Street’s bullishness, the economic data and stock market underpinnings were in decline, and the economy and stocks were at imminent risk. By the closing of markets on October 23, 2018, the S&P 500 had fallen approximately 7%, with October being the S&P’s worst month since August 2015 (and December being the S&P’s worst month ever), the Nasdaq continues to have its worst month since 2016, and is down approximately 8% from article publication, and the DJIA is having its worst monthly performance since 2008. In 2018, Neil Siskind coined the phrase “synchronized global slowth™” (or “synchronous slowth™”) to describe the occurrence or condition of multiple emerging market and developed market economies commencing a downward trajectory of economic and GDP growth, or actually contracting to a point of slow, stagnant, or negative economic and GDP growth, simultaneously. If you are in need of office space in South Florida, contact Neil Siskind about space availability at The Siskind Executive Office Complex in Boca Raton, FL.

Other Recent Articles by Neil S. Siskind:

Settle Debts, Restructure Debts, Collect Debts, Sell Receivables: Debt Solutions From The Siskind Law Firm- https://www.debt-solutions-attorney.com/ 

Types of Debt Investments- By: NEIL SISKIND

Types of Debt Investments:

– Purchase of a distressed or defaulted credit instrument (such as a non-performing note), secured by business assets or real estate, at a discount to face value & to collateral value (foreclosure would be required)
– Purchase of unpaid invoices from a company that has provided a product or service (a collection action with a settlement or a judgment would be required)
– Purchase of charged-off credit card debts (a collection action with a settlement or judgment would be required)
– Purchase of foreclosed business assets at auction, or inventories & equipment at a U.C.C. sale
– Purchase of foreclosed real estate at auction
– Purchase of business equipment or real estate at a bankruptcy auction
– Purchase of a seized asset at a govt. auction
– Purchase of bank-owned real estate (REO)
– Purchase of a tax lien at a county auction (foreclosure would be required)
– Purchase of real or personal property at an estate sale
– Purchase of credit instruments & assignment of lawsuit during a foreclosure case in progress

· Collection actions may or may not include a lawsuit.
· In any case where a judgment is obtained, actions are required to collect on the judgment.

Distressed Credit Investing Includes … By: NEIL S. SISKIND

Distressed Credit Investing Includes:

Buying and collecting or foreclosing on a non-performing credit instrument, such as a promissory note, for a profitable ROI upon collection or upon monetizing collateral;
and
Buying and restructuring a non-performing credit instrument so that the borrower can continue operating, with the investor receiving an acceptable yield;
and
Investing/lending capital into a company that is in arrears on a credit instrument to bring it into compliance, with the investor receiving acceptable security and yield, and/or a big future profit potential through equity.

Buying or Investing in a Distressed Business is Not, Necessarily, the Same as Buying Distressed Credit- By: NEIL S. SISKIND

Buying or Investing in a Distressed Business is Not, Necessarily, the Same as Buying Distressed Credit.

A business can be distressed for reasons other than being in arrears on a credit obligation.

A business could be in good standing on a loan, while failing to pay its expenses, including its rent, vendors, and/or payroll, as they come do- or a company may have no debt, at all.

Investing in this kind of distressed situation would require debt or equity capital being put towards operations improvements, or to marketing and sales initiatives and personnel, with either option being designed to move the company to profitability through operations changes, as opposed to through buying and restructuring or paying-down credit obligations.

Neil-Siskind-lawyer-picture

Narrow Credit Spreads, Low Interest Rates, and Distressed Debt- By: NEIL SISKIND

Narrow Credit Spreads, Low Interest Rates, and Distressed Debt

Narrow credit spreads (in times of low bond yields) mean that financing operations with corporate bonds is inexpensive, and capital is pretty freely available for public companies. Low interest rates mean that there’s a low cost of capital and low debt service costs for public and private businesses.

In times of low rates, low yields, and narrow spreads, companies take on debt- sometimes, or often, too much debt- which can turn against them as interest rates rise, or as growth and earnings slow.

This puts companies, and their credit obligations, under pressure, and can push companies’ loans into default. When the number of non-performing loans (“NPLs”) rise, it creates distressed debt and distressed credit opportunities for investors.

Of course, a buyer of a distressed credit instrument has to understand the underlying business, industry, and sector of the subject company and have a proper business plan in order to improve performance and ensure a successful distressed credit investment.

The terms “distressed asset”, “distressed debt”, and “distressed credit” can be used, and “are” used, interchangeably- By: NEIL SISKIND

The terms “distressed asset”, “distressed debt”, and “distressed credit” can be used, and “are” used, interchangeably. But, “distressed assets” not only include distressed equity (where liabilities exceed assets) or a distressed credit instrument (due to a past due underlying debt obligation, i.e. a distressed debt), but also include actual personal property and real property, such as property being sold for below its market value in order to pay-off a debt secured by that property. So, the term “distressed asset” is a bit of a broader catch-all term to include assets that go beyond “instruments” evidencing past due debt, and beyond insolvent company equity (for companies not able to pay debts as they come due).

All distressed assets, including collateral already foreclosed-on and owned by a commercial creditor following a default, or an asset seized by a government agency pursuant to a tax lien, result from a distressed credit and distressed debt situation (save for an asset seized by law enforcement due to criminal activity- though it could be said that such seizure was for a debt owed to society).

Collateral Caution for Lenders- by: NEIL SISKIND

Collateral Caution for Lenders

The value of business loan collateral (besides real estate) in this fast-moving, fast-changing world, can, also, be fast-changing.

Hard business assets have, heretofore, always provided good security for business loans. But, while once considered good loan collateral, hard assets now become quickly outdated & lose value because industries & technologies rapidly evolve, and because entire ways of life, shopping, and work, are changing. Thus, hard business assets are less reliable loan security.

In the modern economy, used machinery and other used equipment are often more valuable as scrap than in their present forms due to rapid technological changes, economic changes, & disinflation, resulting from technology & globalization- while product inventories quickly lose value due to technology’s & globalization’s influences on disinflation, making new products nearly as inexpensive as are aged or excess products.

In the digital age, goodwill, existing direct to consumer distribution, cash flows, & IP, may be the best forms of (non-real estate) business loan collateral- versus machinery, equipment, existing wholesale distribution channels, & inventory.

Things once considered to be tried-and-true & measurable loan security- are no longer that, at all.

Non-Performing Mortgage Loans- by: NEIL SISKIND

Non-Performing Mortgage Loans

Non-performing loans, or NPLs, have, historically, referred to mortgage notes. NPL investors can buy one NPL, or, more often, a portfolio of NPLs from a lender.

Banks, which historically were the main source of mortgages, sell portfolios of NPLs b/c banks are not in the business of managing real estate. Loans in default are best monetized early-on, when a portion of the principal can be realized w/o the bank going through the foreclosure process & then selling the property.

But, more than half of all mortgages issued last year came from non-bank lenders, up from 9 % in 2009, so, NPL portfolios will be available from such lenders in the future (both of mortgage & business NPLs).

Investors in NPLs have 1 of 2 goals, depending on the investor: (i) Purchase the loan at a discount-to-principal, then work w/ the borrower to restructure the loan so that the borrower can perform- b/c the loan was bought at a discount to principal, the interest rate can be rather favorable to the investor; or (ii) foreclose & take back the property at auction.

If a portfolio of NPLs is bought, some mortgage loans will end up one way, some will end up the other. Investors should have a plan when buying an NPL, but, also be flexible on options to maximize ROI and/or yield.

Unsecured Debt & Unsecured Credit- By: NEIL SISKIND

Unsecured Debt & Unsecured Credit

Unsecured debt and credit means debts and obligations where the creditor has no security for credit extended to the debtor, beyond the ability to obtain a judgment on the debtor. No particular asset can be secured, or foreclosed on, or seized upon default to pay the outstanding debt. But- such a creditor can get a judgment on a debtor (whether the debtor be a legal entity or an individual), and then freeze, seize, and/or sell the debtor’s assets (and put liens and garnishments on income) to pay the debt.

Unsecured debt includes trade receivables for products and services provided to other businesses; trade receivables for products or services provided to consumers; bills for medical services for people without insurance who visit emergency rooms; medical services not covered by insurance that are not paid for at the time of service; bad checks that don’t clear; lawsuit judgments; past due rent that results in eviction; unpaid utility bills.

Unsecured credit includes personal loans without collateral, and credit provided and received through credit cards.