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Fund Manager Einhorn Bets Against U.S. Corporate Credit

Posted: 29 Jul 2019 03:00 AM PDT

Einhorn cites relative weakness and slowing economy.

David Einhorn, founder of Greenlight Capital, is making an unusual macroeconomic bet: He's betting that U.S. corporate debt will go lower.

Einhorn cites the relative low rates on the debt, the rise of total corporate debt in recent years, and a weakness in bondholder protections such as covenant protections by complacent ratings agencies. Investors in corporate bonds, as opposed to common stocks, are seeking a safer return with steady income payments.

In recent years, many companies have issued debt to make strategic acquisitions, buy back common stock, or otherwise increase their leverage on the balance sheet without necessarily improving the performance of the underlying business.

Action to take: We agree with the core thesis that many companies have overextended themselves. In a slowing economy, more and more capital may need to go to debt payments that could be put to better use.

While we may see a few corporate defaults in the coming years stemming from this practice, investors today can protect themselves.

First, they can go through their holdings and look at a company's total debt. Companies with high debt should be analyzed for any large bond issuances due soon. Companies with rising debt and a share buyback program should be avoided, as the buybacks may stop on a dime and reverse any gains in the share price.

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GDP Growth Slows to 2.1 Percent

Posted: 29 Jul 2019 03:00 AM PDT

Still tops estimates of 1.9 percent.

In the second quarter of 2019, America's Gross Domestic Product came in at 2.1 percent. While that was substantially below the 3.1 percent growth rate reported in the first quarter, it still beat expectations of 1.9 percent.

While it is the strongest sign yet that the economy is starting to slow, the growth rate still indicates that the economy is faring relatively well.

That may make it difficult for the Federal Reserve to justify cutting interest rates by the end of the year. Typically, the Fed looks to cut interest rates when the economy's growth has slowed to the point where a recession seems likely. This latest macro data suggests a slowdown.

The data also showed that consumers helped the economy grow. Personal Consumption saw growth of 4.3 percent, the highest rate of consumer consumption since 2014. As long as consumption continues to grow, it will be difficult to see the overall economy hitting a decline.

The trade war also showed up in the data as well, as exports subtracted 0.63 percent from the bottom line. This is the largest drop since the first quarter of 2009, amidst a global recession.

While the market has often shrugged off trade war fears, there is clearly an impact that could boost growth once resolved.

Insider Activity: Cadence Bancorporation (CADE)

Posted: 29 Jul 2019 03:00 AM PDT

Director makes $50,000 buy.

Last week, Richard Fredericks bought 3,105 shares of Cadence Bancorp (CADE), increasing his stake by 3 percent. He paid nearly $50,000. This brings his total stake in the company to nearly 108,000 shares.

Other directors have been buyers, largely back in May. Insiders have been sellers of shares at prices at least 20-25 percent higher than where they currently trade.

Cadence is a Houston-based bank that operates 66 offices in Texas, Alabama, Florida, Mississippi, Tennessee and Georgia. The bank was founded in 1885, and offers traditional banking products such as loans to customers and businesses, deposit services and other financial products as needed.

In the past year, shares have traded between $15 and $29, and currently trade around $17, showing a 41 percent decline in the past year as fears of an interest rate cut have lowered profit expectations for the bank.

Action to take: Shares are ay up to $18.00. Currently, shares trade for 0.89 percent of book value, meaning the bank could cash in its loans, shut down operations, and be worth more per share than where they're currently trading.

What's more, smaller banks tend to make acquisition targets by larger banks at a premium to book value, and a bank like Cadence looks attractive here.

Thanks to a dividend boost to $0.70 per share annually, the bank also yields over 4 percent here.

Unusual Options Activity: Caterpillar (CAT)

Posted: 29 Jul 2019 03:00 AM PDT

Big bet on shares declining in the next month.

On Friday, a bearish bet on Caterpillar (CAT)led the options market for the size of unusual activity. Over 7,700 contracts traded on the August $128 put options, against an open interest of 123. That is a 62-fold surge in volume.

With the share price around $134, shares will need to fall at least 4.5 percent for the option to trade in-the-money before the option expires on August 16th.

Caterpillar is a global leader in farm, mining, and construction equipment, with over 104,000 employees around the world. Best known for tractors and loaders, the company also manufactures engines and turbines, gas compressors, trucks, and other components.

Action to take: This trade comes after shares posted a big earnings miss in the most recent quarter. However, shares trade at 10 times forward earnings, and the company is still making a sizeable profit with a high return on equity. Despite a 5 percent drop in earnings, the company has managed to grow revenue.

Investors could make a modest profit buying this option and following the trade down, should shares and the market trend down in recent months. At $0.88, or $88 per contract, it makes a great market hedge. Longer-term, we see shares as a buy at or under $125.
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