Tuesday, July 22, 2014

Replacing Equity with Debt: The PEU Decade

Corporate leaders learned from private equity underwriters how substituting debt for equity can pay off.  Juggling Dynamite reported:

The glaring overshoot of corporate profits as a percentage of GDP the past 5 years has some re-coupling to do.  And when that happens, those owning stocks today valued at 26 times average 10 year earnings, are likely to feel the financial pain of excessive optimism.
The glaring overshoot seems to begin around 2005.  Private Equity Underwriters became ubiquitous the last decade and it appears their methods have spread to corporations in general.

Leverage is a two edged sword and it cut deep during the fall 2008 financial crisis.  Someday it will wound again, sometimes mortally.