Thread by @dominic_w

Why do stocks keep rising? 2008 Redux? Crypto ponzi?!

1/ McDonalds Corp. is in serious decline:

Annual Revenues (Millions of US $)
2013 - $28,106
2014 - $27,441
2015 - $25,413
2016 - $24,622
2017 - $22,820
2018 - $21,025
2019 - $21,077
2020 - $14-17,000 (est./COVID)

2/ But, McDonalds Corp. stock price keeps on rising:

MCD, Price Per Share (US $):
2013 - $99.69
2014 - $98.03
2015 - $97.44
2016 - $125.68
2017 - $129.61
2018 - $156.38
2019 - $189.90
2020 - $188.50 (today)



Why…?

3/ Declining McDonalds can somehow buy billions and billions $ of its own stock (MCD) from the markets, driving the price higher and higher, while continuing to pay out nice steady dividends. Somehow they pay out far more to their shareholders than they ever make in profits….

4/ McDonalds Corp. purchases of its own stock/MCD:

Total Purchases (Billions of US$)
2013 - $1.78
2014 - $2.19
2015 - $6.10
2016 - $11.17
2017 - $4.69
2018 - $5.21
2019 - $4.98
2020 - $.903 (to March)

5/ McDonalds Corp. dividend payments to stockholders (total paid rising slightly):

Amount Per Share/MCD (US$)
2013 - $3.12
2014 - $3.28
2015 - $3.44
2016 - $3.61
2017 - $3.83
2018 - $4.19
2019 - $4.73
2020 - $5.25 (est.)

6/ How on earth is all this possible?…

Debt of course! McDonalds borrows the majority of the money used to fund its stock buy backs and dividend payments. This is of course reflected by its outstanding borrowings constantly going up…

7/ McDonalds Corp. total long-term debt:

Long Term Debt EoY (Billions of US$)
2013 - $14.13
2014 - $14.94
2015 - $24.12
2016 - $25.88
2017 - $29.54
2018 - $31.08
2019 - $46.88
2020 - $50.52 (by end March!)

8/ This dominant US corporate anti-pattern is being fueled by the Fed making debt incredibly cheap. Money is almost free:

Federal Funds Rate
2013 - 0.09%
2014 - 0.09%
2015 - 0.13%
2016 - 0.40%
2017 - 0.40%
2018 - 1.91%
2019 - 2.37%
2020 - 0.08%

9/ The less interest Fed pays to borrow, the cheaper corporations can borrow by selling bonds on corp. debt markets (buyers are paid coupons + principal on maturity). US corps borrow inexpensively to buy stock and pay out dividends, juicing their stock prices higher and higher…

10/ Who benefits?


- Politicians who claim economic success

- Executives whose incentives packages always rise

- Shareholders. Wait? This is surely a house of cards…

11/ A new phase. Investors were getting leery lending to indebted US corps by buying their bonds, and then along came COVID-19... So Fed stepped in, and started buying bonds through the Secondary Market Corporate Credit Facility i.e. Fed is now funding the juicing of stock prices

12/ Today, demand for US equities is largely driven by the corps buying their own stock, now directly funded by the Fed:

2019 (Billions of US$)
- Corporate buy backs - $480 !!!
- Foreign investors - $175
- Households - $145
- Mutual Fund - $150
- Pension Funds - $200

13/ Even Apple, with its huge cash pile, finds it too cheap not to borrow. They just sold 30-year bonds yielding only 2.72% and a 3 year bond yielding just 0.85%. The Fed was buying!!!



Since 2018, Apple has spent more than $200 billion on stock buy backs and dividends…

14/ In effect, by giving Apple incredibly cheap cash to fuel its stock buybacks, the Fed has almost been indirectly buying Apple stock, pumping the price higher, even though Apple is already a successful company.

So much for free markets. What if this stops!!???…

15/ If the Fed stopped buying corporate debt, and/or raised interest rates, corporate stock buybacks and dividends would dramatically decrease, and US equity prices would crash very quickly. Instead... prices climb ever higher. The fix is in, and it’s not clear how it can end.

16/ If you own US equities right now you are basically being given money by the Fed. You need to buy equities to get your share. But beware, the history of markets is that they eventually break free of government control in ugly ways. Nobody knows when, but a reckoning is coming.