17/05/2017 The Sovereign Investor: Simon Black
There’s something completely ridiculous happening around the world right now.
We can start in the United Kingdom, where the FTSE-100 stock market index hit an all-time high yesterday of 7454.
Simultaneously the British government released statistics yesterday showing that debt judgments and bankruptcy filings across the UK soared 35% in the first quarter of 2017 to the highest level in a decade.
British consumers are on a debt binge, borrowing (and now defaulting) at record levels.
This all sounds pretty sustainable.
Across the pond in the Land of the Free, the US stock market also hit a record high yesterday.
Simultaneously, consumer credit (i.e. DEBT) in the US is also at an all-time high of $3.8 trillion.
Even more specifically, margin debt, which is the amount of money that investors borrow to buy stocks, is at an all-time high.
Think about that: investors are borrowing record amounts of money to buy stocks at all-time highs.
This sounds like a fantastic trend!
If you look deeper, the numbers become even more bizarre; let’s go back in time a few years and I’ll show you.
In 2012, Coca Cola reported $48 billion in revenue for the year, and $9 billion in profit. That was as pretty good year for Coca Cola shareholders.
For 2016, however, Coca Cola reported revenue of $41.8 billion, and $6.5 billion in profit.
So when you compare 2016 to 2012, revenue declined 13%, and profit declined 28%.
Given those dismal figures you’d think that Coke’s stock price would be a LOT lower today than it was back then.
After Coca Cola reported its 2012 earnings on February 12, 2013, its stock price was around $37.50.
When Coca Cola reported its 2016 earnings earlier this year, its stock price was $41.25. And today it’s even higher at $43.50.
Even more curious is that Coke’s 2012 report shows long-term debt of $14.7 billion. By 2016, long-term debt had more than doubled to $29.6 billion.
So Coca Cola is basically telling the world that its business is declining and they’re going deeper into debt. Yet investors continue to push the stock higher.
Makes perfect sense, right?
Now let’s look at ExxonMobil, whose 2010 annual report showed $383 billion in revenue, $30 billion in profit, and $12 billion in debt.
The company’s most recent annual report from 2016 posted $226 billion in revenue (42% decline), $7.7 billion in profit (74% decline), and $28 billion in debt (133% increase)!
Once again a rational person would think that the price of ExxonMobil’s stock (XOM) would be dramatically lower.
Wrong again. XOM is up from $78 to $83 over that period.
Then there’s Netflix, which has been one of the top-performing stocks over the last several years.
Bear in mind that Netflix actually LOSES money; it’s operating business lost nearly $1.5 billion in 2016, and the company continues to pile on more and more debt.
Earlier this month Netflix closed another $1.4 billion in debt financing, which is the third time in two years that the company has raised more than a billion in debt.
Netflix’s total long-term debt and content liabilities (the amount of money they’re legally required to pay to content owners) is approaching $20 billion, and rising.
Lose money, go into debt. Not exactly a recipe for success.
Yet curiously the stock price is at an all-time high.
Then there’s Apple, a company so hallowed and consecrated that it’s almost sacrilegious to question the business.
But if you compare Apple to its own performance just two years ago, both revenue and profit are lower.
A few weeks ago Apple reported $39.6 billion in operating cash flow for the first three months of this year.
That’s a full 25% LOWER than the $52.8 billion the company reported for the same quarter in 2015.
Over the same period, Apple’s DEBT more than DOUBLED from $40 billion to $84.5 billion.
Again, it seems obvious that Apple stock should be LOWER in 2017 than it was in 2015.
But it’s not.
Apple stock has climbed 19% in the last two years from $130 to $155, and its price is also now at an all-time high.
Something in these markets is obviously broken.
A lot of companies are posting falling revenues, falling profits, and falling operating cashflow.
Yet simultaneously the stock prices are soaring… right along with both business and consumer debt.
It doesn’t take a rocket scientist to spot the connection.
Look, I’m not suggesting that stocks are going to crash tomorrow or that this is the top of the market. No one has a crystal ball.
But it seems pretty obvious that investors who buy these asset are taking on significant risks relative to prospective returns.
Sure, maybe stocks keep rising. But the bubble could just as easily burst and cause a 40% decline.
The risk vs. reward doesn’t stack up. And it certainly seems worth considering safer assets that still provide strong returns.