| Editor's note: Over the next few days, we're sharing some words of caution from our friends at Stansberry Research... Stansberry's Credit Opportunities editor Mike DiBiase spent nearly two decades in finance and accounting, serving as VP of finance and planning for a large, publicly traded software company. He also spent several years in public accounting, including auditing companies for one of the "Big Four" international accounting firms. In short, Mike is an expert at analyzing vast amounts of data and understands complex accounting issues and how to read and interpret SEC documents. That's why he has grown extremely worried about a crisis he views as inevitable. Read on for the details...
How to Prepare for the Coming Credit CollapseBy Mike DiBiase  It started out like a normal video interview...
Adam Aron – the CEO of troubled movie-theater chain AMC Entertainment (AMC) – appeared on camera from his home in a shirt and tie to answer questions from popular investment YouTuber Trey Collins. It was all very professional. That is, until Aron's camera accidentally fell off his computer while he was talking... showing everyone watching that he wasn't wearing any pants. Aron quickly grabbed the camera and put it back into place. He kept going as if nothing had happened, hoping that no one noticed the brief but shocking view of his bare thighs. Of course, people did notice... The video instantly became an Internet meme. But instead of being ridiculed, Aron became even more loved by his legion of followers – investors who call themselves "Apes." The hashtag "ApesDontWearPants" went viral. This ridiculous moment perfectly captures the current state of the markets... AMC was just weeks away from filing for bankruptcy when members of the "Ape Army" – armed with stimulus checks and unemployment cash burning holes in their pockets – came to its rescue. Retail investors are at the forefront of the "meme stock" craze. They join together to buy heavily shorted, left-for-dead stocks, aiming to drive up the share price by causing a "short squeeze" – forcing short-sellers to buy shares to cover their positions at much higher prices. The COVID-19 pandemic crushed AMC's business. Attendance was down 91%, and the company had burned through nearly all of its cash. AMC's stock traded for less than $2 at the beginning of January and was headed for zero when the Apes began targeting it. They pushed up the stock price 10-fold to $20 per share on January 27, valuing the company at $8 billion, AMC's highest-ever valuation at the time. The Apes continued to pile into the stock. The day before Aron sat down pants-less for his YouTube interview, AMC's stock traded as high as $72 per share, valuing the company at $36 billion. AMC is no longer in danger of bankruptcy. Aron used the lunacy of retail investors to line his company's coffers with cash by selling new shares of stock. AMC's stock has come back down since then, but it still has a market cap around 40 times larger than it did prior to the pandemic. Take a look at the run up and the beginning of the slide lower... Most of the Apes paid extravagant prices for shares of AMC as it surged to record highs. Odds are that their foray into the movie-theater business will end poorly. But that's the point we've reached in the markets... It's not just meme stocks. Thanks to the Federal Reserve and the U.S. Treasury, we're seeing a liquidity-driven speculative frenzy in almost everything – from a cryptocurrency that started as a joke (dogecoin) to video clips of flying babies and digital cats (non-fungible tokens) selling for millions of dollars. Folks have gotten greedy, and they're losing discipline. It's going to end badly for them. What most people don't realize is that there is tremendous risk in the market today. With the economic downturn caused by the COVID-19 pandemic, corporate debt piles have grown fatter than ever... The pandemic caused corporate debt to increase $1 trillion last year to more than $11 trillion today – the highest it has ever been. It has nearly doubled since the last financial crisis. The only reason companies can afford this record debt is because of the Fed's near-zero interest rate policy over the past decade. But debt has grown so large now that even with near-zero interest rates, many companies are choking on their debt... Companies that don't earn enough profits to pay for their interest costs are called "zombies." They have no hope of ever paying off their debt. Today, one out of every four public companies is considered a "zombie." Corporate credit quality is at an all-time low... The percentage of corporate borrowers who have credit ratings below investment grade – in other words, "'junk" credit – is now at an all-time high of 58%. Put another way, nearly six out of every 10 borrowers in the U.S. have dubious credit ratings. That's up from 43% in 2004. Here's why that's important... The default rate increases dramatically the further you go down the credit ladder. These are the borrowers who are much more likely to default. To put it simply, corporate debt has never been larger or more burdensome than it is right now. The truth is... many companies have only been able to keep paying their bills during the pandemic by borrowing. But you can't borrow yourself out of a crisis... Eventually, all of this record-setting debt must be repaid or refinanced. For many companies, the shift to a remote and digital economy means sales and profits will never recover to pre-pandemic levels. And with lower sales and profits for many companies, the prospect of repaying or refinancing this debt is looking less likely with every passing day. That leads me to a simple conclusion: Much of this debt won't ever be repaid... The only way it will be cleared off the books is through bankruptcy. We're certain to see a massive wave of bankruptcies in the coming months and years. Last year, 146 U.S. companies defaulted on their debt, according to credit-ratings agency Standard & Poor's ("S&P"). That's the highest number of defaults since 195 companies defaulted in 2009 during the last financial crisis. In a normal credit cycle bottom, all of the bad debt from the excesses of the cycle gets wiped away, leaving corporations with less leverage. That's what we saw during the last financial crisis. But that didn't happen this time. Corporate debt hasn't fallen... as I said, it has grown even higher than ever before. Excessive debt balances can only continue to rise for so long. Eventually – and in most cases, suddenly – companies will collapse. We are approaching a new credit crisis where many companies will fail and bond prices will plummet. Unsuspecting investors will be wiped out. The credit collapse will be devastating for investors who don't know it's coming... But for those who do, one investing technique could help you make once-in-a-lifetime gains while nearly everybody else is losing money. It's a type of investment that's more predictable than stocks... and it's backed by legal protections that all but guarantee you'll get paid. When the crisis takes hold, I expect it to create a slew of 100%-plus opportunities. In fact, the last time the setup was this good, some investors who knew what to do saw gains as high as 772%. Learn more about this strategy right here. Regards, Mike DiBiase
July 29, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply sign up here. |
| 
Post a Comment
Post a Comment