Sunday, September 21, 2014

John Hussman: "We View Corporate And Junk Yields As Insufficient To Justify Their Additional Credit Risk At Present Levels"

John Hussman, president of Hussman Investment Trust, shared his views on credit risk and the leveraged stock buyback cycle in this week's Weekly Market Comment titled "The Ponzi Economy". It's a good read. He said:
"In contrast, we view corporate and junk yields as insufficient to justify their additional credit risk at present levels, and we are particularly concerned at the increasing issuance of corporate debt to obtain what amounts to leveraged exposure to equities at historically extreme valuations (either through share buybacks or acquisitions). Buybacks are not a return of capital to shareholders – they are partly a leveraged speculation on shareholder’s behalf, partly a strategy to enhance per-share earnings by reducing share count, and partly a way to reduce the dilution from stock-based compensation to corporate insiders. Moreover, repurchases move in tandem with corporate debt issuance, which is another way of saying that the history of stock buybacks is one of companies using debt to buy their stock at overvalued prices.

Keep in mind also that corporate share repurchases have no tendency to concentrate at points of depressed valuation, and but have instead been disproportionately aggressive at points that have historically represented severe overvaluation. The chart below (h/t Thad Beversdorf) illustrates this regularity. See The Two Pillars of Full-Cycle Investing for additional data.

Read his full note at HussmanFunds.com

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