Credit Crunch: Will This Time Be For Real? / Richard Berner

Some interesting details what is happening especially at the lower end of the credit quality. Overall Richard Berner is still optimistic that there won´t be a credit crunch in general.(click on headline). But it is clear that the times are getting tougher......And with the junk market being the dominant issuer the last few years i won´t rule out a crunch in the junk market. We have already seen in the subprime market how quick the risk appetite can diminish.

Einige interessante Details was sich insbesondere im riskanteren Kreditbereich abspielt. Da verschlechtern sich einige Parameter doch bedenklich. Insgesamt ist Richerd Berner von Morgan Stanley aber immer noch optimistisch das es keinen Zusammenbruch der Kreditmärkte insgesamt gibt (Überschrift klicken). Klar ist jedoch das wir hier die besten Zeiten gesehen haben. Und wenn man bedenkt wie hoch der Anteil der Junk Finanzierungen in den letzten Jahren gewesen ist würde ich die Möglichkeit einer Kreditklemme in diesem Segment nicht so voreilig ausblenden. Wie schnell die Risikoneigung steigen kann hat man ja gerade im Subprimesegment bewündern können.

Nonetheless, the tails of the credit quality distribution are getting fatter. Look more closely at the high-yield market in the first quarter, and the picture is quite different from the aggregate.

As my colleagues Brian Arsenault and Jocelyn Chu noted recently, the fundamentals were already deteriorating significantly last quarter (see “1Q07 Fundamentals — Got Cash?” June 15, 2007).

• What had been a cash horde has dwindled; cash/debt has fallen a full percentage point over the past year to a below-average level.



• Leverage (debt to EBITDA) rose to 3.64x as debt outpaced earnings for the second quarter on a row. Slower economic growth and fading operating leverage hurt.



• In the high-yield universe, top-line growth has turned negative for the first time since 2002,



• and half the sectors saw margin compression.



• Finally, these companies are reinvesting aggressively in their businesses, with capex budgets rising by 20%. Such expansion augurs further erosion of returns and margin compression.

That deterioration in fundamentals has yet to show up in delinquencies and chargeoffs at banks. They are still close to record lows despite a deceleration in lending, while junk and leveraged-loan default rates are at eight-year lows.

Yet Morgan Stanley bank analyst Betsy Graseck and I agree that corporate credit quality has begun to weaken.

She is expecting chargeoffs to remain flat this year, but loan provisions to rise 30% as falling recoveries spell the end to the long previous improvement in credit quality. For their part, lenders may now back further away from extending credit for buyout deals. In part, that’s because even a slight reduction in market liquidity will make it more difficult for lenders and underwriters efficiently to lay off risk, so lending standards will likely tighten.

$ Impact on Corporate Profits / Berner

this report from Richard Berner gives a good estimate how us profits benefit from the weaker greenback. it also shows that the big multinationals are almost the only big profiteers. in the meantime import prices are driving inflation ..... and unfortunately the theory that a weaker us$ should boost exports hasn´t worked out yet. and that despite a quite significant decline in the currency over the past years...... the opposite is true for germany. despite a very strong € exports are soaring to new records......maybe it´s related to the product mix ........click on the headline to read the entire good report.

dieser bericht von Richard Berner zeigt eindrucksvoll wie sehr sich der verfall des greenback auf die gewinne der unternehmen auswirken. es zeigt auch das hier im wesentlichen die großen multis den rahm abschöpfen. dummerweiwse hat die therorie das eine schwächere währung zu höheren exporten führen wird sich für die usa nicht bewahrheitet. und das bei einem wahern rutsch der währung....da es deutschland trotz starkem € gelungen ist neue exportrekorde aufzustellen liegt es evtl aber an so unwichtigen sachen wie den zu exportierenden produkten...... klickt bitte auf die überschrift um den ganzen bericht zu lesen.

But globalization means that global factors now matter relatively more than in the past. Indeed, according to our US equity strategy team, the top 25 companies in the S&P 500 derive more than half of their sales from overseas operations, and S&P 500 companies as a whole obtain 27% or more of their sales from abroad. Thus, a weaker dollar and stronger growth abroad could be powerful offsets to fading domestic support for margins.
A weaker dollar, if sustained, could support earnings through three channels. First, it is already translating US companies’ overseas results in euros or yen into more dollars. On a trade-weighted basis, the dollar has declined by 3.4% from a year ago, and our empirical work suggests that a 10% decline would boost US earnings from abroad by at least 3% and as much as 6%, boosting overall earnings by 150 bp. So the 3.4% decline in the dollar may have boosted overall earnings by 50 bp. But the effect could be larger, because the fixed weights in the trade-weighted dollar may mask regional shifts in the currency’s impact.

Notably, half of US foreign affiliate income originates in Europe, and the dollar has declined by 10.4% against the euro over the past year. It’s reasonable to expect those effects to continue over the remainder of 2007.

A weaker dollar is also helping the top and bottom lines by combining with domestic factors to promote stronger pricing power for US companies (see for example, “The Dollar and Inflation,” Global Economic Forum, May 5, 2006). The effect of a weaker dollar has begun to show up in US import prices; excluding fuels, such prices rose by 2.7% in the year ended in April.

The effect on domestic prices is less visible. But because there is comparatively little slack in the economy, I’m confident that, while it likely will be modest, it is on the way. Finally, a weaker dollar at the margin will help US companies recapture market share. The recent deceleration in real US exports, which rose by 5.2% in the year ending in March, is not encouraging in that regard, but I think that improvement in market share will come soon.

Of course, stronger global growth is also a factor lifting both US exports and US earnings; in fact, in my judgment, global growth is more important for both than the slide in the dollar. Empirical work has long supported the idea that improving growth is several times more powerful for exports than a similar-sized percentage-point change in relative prices. And earnings are increasingly leveraged to global growth as US direct investment spreads abroad. Our work suggests that the leverage factor could be 5 to 1 or more; that is, a percentage point improvement in global growth would yield an extra 5 percentage points of US earnings growth.

The outcome of this tug of war between domestic factors restraining earnings and global factors boosting them is obviously critical for financial markets. Yet many investors aren’t worried about the earnings slowdown. They believe that a slower US economy will ultimately bring about declines in longer-term yields, which would permit earnings multiples to expand. But they seem to forget that the same global factors that are a cushion for earnings are also driving up global, and to a lesser extent, US yields (see “The Conundrum Unwinds,” Investment Perspectives, May 24, 2007). For US equity markets, the global boom is thus a mixed blessing.

To be sure, equity-market valuations aren’t stretched, but my colleague Henry McVey’s COV analysis underscores that stocks aren’t as cheap as they were in February. And what about the risks to growth? It’s certainly possible that non-US growth could remain healthy even if the pace of US economic activity slowed significantly. But what are the risks to earnings if it does not? That would expose the downside of operating leverage: Simultaneously slower growth in both the US and overseas economies would promote a significant deceleration in US earnings.

Some of the risks associated with this scenario have to do with the character of these global factors. The combination of a rebound in US growth and still-strong global business conditions implies clear-cut upside risks to earnings growth. In that context, however, there are also upside risks to both inflation and interest rates, both of which could pressure risky assets. A benign decline in the dollar will likely be a boost to earnings and a plus for US equities. But a decline in the currency associated with escalating inflation expectations, a loss of confidence in US policies, or protectionism would make US assets less attractive to global investors. And of course, threats to growth, such as supply-induced energy shocks, would promote concern over future earnings gains.

>lets hope that the us gains the long promised export momentum very soon. i doubt it...

>bleibt zu hoffen das die usa bald die seit jahren versprochene exportdynamik entwickeln. ich habe da meine leichten zweifel....