Tuesday, September 29, 2015

Carl Icahn Says Market "Way Overpriced"...........It's very dangerous and could be disastrous!

Carl Icahn Says Market "Way Overpriced"

Carl Icahn says the Fed is blowing it. 

Activist investor Carl Icahn released a new video titled "Danger Ahead," which warns that trouble is coming to the financial markets. Icahn believes the Fed got the US economy into this mess and that its zero-interest-rate policy has created an "earnings mirage." 

Icahn says companies are simply buying other companies to create the perception of growing earnings and that a lot of companies are buying back stock that shouldn't be. "A buyback is a short-term fix," Icahn said. "But it weakens the balance sheet."

Icahn offers a very straightforward and chilling summary of what he believes to be an unsustainable and fragile set of circumstances that are propping up the stock market. And in the end we're left wondering whether we could repeat what we saw during the financial crisis. Or worse. The core problem is the Federal Reserve and its ultra-easy, zero-interest-rate policy.

To be sure, no one ever accused Carl Icahn of being shy and earlier this year he had a very candid sitdown with Larry Fink  whom Icahn leveled quite a bit of sharp (if good natured) criticism related to BlackRock's role in creating the conditions that could end up conspiring to cause a meltdown in illiquid corporate credit markets. 

Over the course of the video, Icahn lays out his concerns about many of the issues I've been warning about for years and while none of what he says will come as a surprise the video, called "Danger Ahead", is probably worth your time as it does a fairly good job of summarizing how the various risk factors work to reinforce one another on the way to setting the stage for a meltdown. 

Here's a list of Icahn's concerns:

Low rates and asset bubbles: Fed policy in the wake of the dot com collapse helped fuel the housing bubble and given what we know about how monetary policy is affecting the financial cycle (i.e. creating larger and larger booms and busts) we might fairly say that the Fed has become the bubble blower extraordinaire. 

Herding behavior: The quest for yield is pushing investors into risk in a frantic hunt for yield in an environment where risk free assets yield at best an inflation adjusted zero and at worst have a negative carrying cost.

Financial engineering: Icahn is supposedly concerned about the myopia displayed by corporate management teams who are of course issuing massive amounts of debt to fund EPS-inflating buybacks as well as M&A. We have of course been warning about debt fueled buybacks all year and make no mistake, there's something a bit ironic about Carl Icahn criticizing companies for short-term thinking and buybacks as he hasn't exactly been quiet about his opinion with regard to Apple's buyback program (he does add that healthy companies with lots of cash should repurchases shares).

Fake earnings: Companies are being deceptive about their bottom lines.

Ineffective leadership: Congress has demonstrated a remarkable inability to do what it was elected to do (i.e. legislate). To fix this we need someone in The White House who can help break intractable legislative stalemates.

Corporate taxes are too high: Inversions are costing the US jobs.

Here's more from Reuters:

Billionaire investor activist Carl Icahn ramped up criticism of the U.S. Federal Reserve, warning about the unintended consequences of ultra low interest rates on the economy and financial markets.

"They don't understand the treacherous path they are going down," Icahn said in an interview with Reuters, in which he also declared his support for Donald Trump as a candidate to be the next U.S. president.

"God knows where this is going. It's very dangerous and could be disastrous," said Icahn, who has been a consistent critic of the Fed for keeping its benchmark interest rate close to zero since late 2008.

Icahn said he felt compelled to raise red flags about the state of the financial markets because he believes if more big investors had warned about subprime mortgage market in 2007, the United States might have avoided the crisis that strangled the economy the following year.

In a video entitled "Danger Ahead" and released on Tuesday, Icahn said the Fed's rate policy had enabled U.S. chief executives - many of whom he describes as "nice but mediocre guys" – to pursue "financial engineering" that he said has exacerbated an already wide gap between rich and poor in America.

Icahn, who slammed money managers who benefit from the so-called "carried interest" loophole under which their earnings are taxed as capital gains rather than ordinary wage income, also endorsed Donald Trump's presidential bid.

Trump unveiled a tax plan on Monday that he said would eliminate the loophole.

"Those guys who run these companies are borrowing money very cheaply, leveraging up their companies, using it to do two things … They are going in and they are buying back stock or even worse, making stupid takeovers," said Icahn, adding some recent acquisitions have been done at a too high a price.

Much of this debt is bought via exchange-traded funds, a popular vehicle for trading baskets of bonds and stocks.

Icahn said retail investors had a false sense of security about how easy it would be to sell their holdings of such debt if the market turns.

"It's like a movie theater and somebody yells fire. There is only one little exit door," he said. "The exit door is fine when things are OK but when they yell fire, they can't get through the exit door … and there's nobody to buy those junk bonds."

Ultimately what Icahn has done is put the pieces together for anyone who might have been struggling to understand how it all fits together and how the multiple dynamics at play serve to feed off one another to pyramid risk on top of risk. Put differently: one more very "serious" person is now shouting about any just how dangerous the current environment is.


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