Beware the Rise of Corporate Zombies
My son-in-law Ron is a fan of George Romero zombie movies and over the past weekend he coaxed me into watching a few. They’re not my favorite genre but the films put a thought into my head: we’re witnessing the dawn of the corporate dead.
To prop up the stock market, the Federal Reserve has pledged to indefinitely print money to buy corporate debt, much of it toxic and unsustainable. In the process, the central bank is creating a slew of “undead companies” that will eventually eat the economy.
With the Fed’s cash pouring into the junk bond market and the central bank functioning as an underwriter for shaky corporate debt, investors are making risky bets that they might not have contemplated during the pandemic-induced recession.
In the final reel, expect financial carnage. Consider the beleaguered energy sector, which has gotten clobbered because of lower crude oil prices. A tsunami of bankruptcies is building in the U.S. energy sector, especially among shale producers.
But for now, despite surging coronavirus cases throughout the country, stocks continue rising. Markets ended the past week in positive territory, with technology equities leading the charge (see chart). Below in this article, I pinpoint an appealing investment opportunity in the thriving tech sector.
Good economic news helped fuel last week’s stock market gains. The Non-manufacturing Purchasing Managers’ Index (NMI), a gauge of business conditions, last week posted its biggest monthly gain and returned to expansion mode. The NMI registered 57.1%, which is 11.7 percentage points higher than the May reading of 45.4%. This reading represents growth in the non-manufacturing sector after a two-month period of contraction.
The NMI is based on data compiled from purchasing and supply executives nationwide. Respondents to the survey of purchasing managers expressed cautious optimism. An indicative comment:
“Businesses are starting to reopen and the economy seems to be on the road to recovery, but let’s not get too complacent, [as] COVID-19 is still a pandemic, [and] a vaccine has not been developed. Economics is the reason for the push for businesses to reopen. Utmost care and awareness still need to be cautiously and religiously followed.”
The persistent disconnect…
I continue to be amazed at the disconnect between the rising death toll of the pandemic (with its concomitant economic damage and Depression-era levels of unemployment) and the sanguine outlook of Wall Street.
In pre-market futures trading Monday morning, the three main U.S. stock market indices were poised to open higher, despite the exponential increase in coronavirus cases and a second-quarter corporate earnings season that’s projected to be dismal.
Part of the market’s bullishness is based on hopes for the imminent development of a COVID-19 vaccine, which in previous articles I’ve dismissed as “magical thinking.”
To be sure, the stock market is forward looking and investors envision prosperity once the pandemic is over, especially for the technology companies that provide the tools that make interconnectivity possible. Hence the torrid performance of the NASDAQ in recent weeks.
However, without functioning small businesses and confident consumers, the economic machine will eventually grind to a halt and drag down stocks. For anyone who pays attention to the facts, the course of the pandemic does not inspire confidence.
The Centers for Disease Control last week projected that coronavirus cases and deaths will soar in several states over the summer. The pandemic has taken a turn for the worse in the U.S., especially in the South and West.
On Sunday, Florida alone reported a record increase of more than 15,000 new cases of coronavirus in 24 hours. As new COVID-19 cases rise and several states roll back reopening measures, the economic recovery probably will lose steam.
The political uncertainty of the presidential election year is another headwind. Low interest rates and the Federal Reserve’s aggressive bond-buying are keeping stocks afloat for now, but disappointing Q2 earnings results are likely to trigger dips along the way.
The stock market fell 4% in the first six months of 2020, but that deceptively modest number entails historic volatility. Buckle up, because the roller-coaster ride isn’t over.
Federalism to the rescue…
During the coronavirus pandemic, a major factor keeping our society and economy functioning has been federalism. We often take federalism for granted but it’s a major reason for America’s success as a nation.
Federalism is the mixed form of government that combines the federal with separate state governments into a single political system. Federalism represents a division of powers between two levels of government of equal status.
During the COVID-19 crisis, many state governors have stepped into the breach. Accordingly, it should alarm you that states and localities face an unprecedented crisis. Take a look at the following chart:
* data released by BLS on July 2
Sources: Bureau of Labor Statistics, Mind Over Markets
The Center on Budget and Policy Priorities estimates that the severe recession caused by the coronavirus outbreak will generate a $615 billion shortfall among the states over this fiscal year and the next. The most difficult year will be 2021, as states face a $315 billion deficit. That’s worse than in 2010, during the tail end of the Great Recession, when states contended with a $230 billion loss.
In many U.S. states, infrastructure and social services are in shoddy condition. Wall Street and Main Street have diverged in recent years, but over the long haul, the traders in lower Manhattan still require a functioning country to make investment profits.
The crumbling infrastructure of the U.S. presents a litany of woes that are unworthy of a superpower: unreliable mass transit; collapsing bridges; exploding tanker cars; leaking pipelines; pockmarked roads and highways…the list goes on.
A tech-oriented infrastructure play…
On the bright side, the wretched state of U.S. infrastructure presents a huge moneymaking opportunity for investors. The right infrastructure stocks and funds could soar if money is devoted to fixing these problems.
However, don’t expect an infrastructure bill to emerge this year from a paralyzed Congress.
One infrastructure theme, though, doesn’t need Congress. It’s the global implementation of 5G (“fifth generation”) wireless technology.
The roll-out of 5G is a mega-trend that will maintain powerful momentum despite the coronavirus and its related economic damage. The companies developing and leveraging 5G infrastructure are positioned for market-beating gains.
We’ve pinpointed one small technology company instrumental to 5G. This largely unknown innovator is set to explode on the upside. You should act now, before the investment herd catches on and drives up its share price. Click here for details.
John Persinos is the editorial director of Investing Daily. You can reach him at: firstname.lastname@example.org