Steve's note: The Melt Up is back on. But as a DailyWealth reader, you also know the other side of the story... the inevitable, crushing Melt Down. That's why today, we're sharing a warning from my colleague Mike DiBiase. He explains that stimulus efforts will save many companies in the short term but in the long term, many are headed to zero...
The pandemic has led to lower sales and ever-increasing piles of debt for most people and companies. And that's only going to make another growing problem worse...
I'm talking about "zombies." These are companies that can't afford their debt. They don't earn enough profits to cover interest... let alone repay their debt when it comes due.
They're like the walking dead... only kept alive by creditors willing to lend them more money to pay off their debt as it comes due.
Even before the COVID-19 pandemic caused the economy to slide into a recession earlier this year, the number of zombie companies in the U.S. was approaching an all-time high.
And now, it's even worse...
A record 18% of U.S. companies are zombies today, according to the Bank of International Settlements.
That's higher than the 14% before the last financial crisis... and it's even higher than the previous peak of 17%, set back in 2001. Take a look...
To put it simply, corporate debt has never been more burdensome than it is right now... Nearly one in five U.S. companies can't afford their debt. That's an alarming statistic.
As the recession drags on, with many companies still struggling to bounce back from the pandemic-related shutdowns, we expect the percentage of zombies to soon surpass 20%.
The next chart tells a similar story... It shows U.S. corporate debt as a percentage of cash profits. The higher the ratio, the more burdensome the debt... and the lower the chances it will be repaid. You can see that this ratio is also now higher than it has ever been...
The truth is, many companies have only been able to keep paying their bills during the COVID-19 pandemic by borrowing. But you can't borrow yourself out of a crisis. Even if a COVID-19 vaccine became widely available tomorrow, this debt wouldn't go away.
Eventually, all of this record-setting debt must be repaid or refinanced.
For many companies, the shift to a remote and digital economy means sales and profits will never recover to pre-pandemic levels. And with lower sales and profits for these companies, their prospects are looking less likely with every passing day.
That leads me to a simple conclusion... Much of this debt won't ever be repaid. The only way it will be cleared off the books is through bankruptcy.
We're certain to see a massive wave of bankruptcies in the coming months and years. It's just getting started...
So far this year, 124 U.S. companies have defaulted on their debt, according to credit-ratings agency Standard & Poor's ("S&P") including 57 in the second quarter. That represented the highest number of quarterly defaults since 77 companies defaulted in the second quarter of 2009, at the peak of the last financial crisis.
You can tell where the default rate is headed by looking at the number of credit downgrades. This year, more than 2,100 companies already have been downgraded. That's already 40% more than the previous annual record of roughly 1,500 downgrades in 2009.
While downgrades are at all-time highs, corporate credit quality is at an all-time low...
The number of companies with the lowest credit ratings ("B-" or lower) that are on negative credit watches or with negative credit outlooks from S&P are known as "weakest links." And the number of weakest links hit an all-time high in September. The U.S. is home to more than 400 of these companies.
Here's why that's important... The default rate increases dramatically the further you go down the credit ladder. The default rate for the weakest-link companies is around five times higher than the overall high-yield default rate.
In other words... with a record number of weakest links muddling through a weak economy, I expect the default rate to soar. And when it happens, you will see fear return to the stock and bond markets once again. It could make the sell-offs in March look like blips on the radar.
Good investing,
Mike DiBiase
Editor's note: You don't have to be a victim when fear returns to the markets. In fact, that's when Mike's unique investing strategy really shines... The greater the fear, the larger the profits. Just ask one of our subscribers, who used the same approach in 2009 to make a 660% total return in three years... Get the details here.
Further Reading
"Not every company will be able to withstand the pressure," Mike says. With the coronavirus still weighing on the world's economies and central banks watering down their currencies, the dam holding back the debt flood is about to break... Get the full story here: 'Debt Dams' Are Weak... And COVID-19 Is Bringing the Flood.
You don't have to be a victim of a credit-market "explosion." With the extreme volatility we're seeing today, you can still sleep well at night if you know how to protect your portfolio. Read Mike's simple guide to find out how: Five Steps for Avoiding the Credit-Market 'Bombs.'
THIS SHIPPING GIANT IS A BULLISH ECONOMIC INDICATOR
Todays chart shows us one sign of economic strength
We often use certain companies and sectors as real-world economic bellwethers. They can tell us if goods and services are in demand, and if people and businesses have the money to pay for them. While COVID-19 has been tough on many industries this year, todays company shows that business is picking up, at least for now
CSX (CSX) is a $70 billion shipping giant with about 20,000 miles of railroad. Its one of the nations leading providers of rail-based transportation And since it moves a wide range of products across the country, its performance helps us see when commerce is humming along. Although CSXs latest quarterly results fell year over year, the company saw a record rebound in volume from the second quarter. And it expects to see these increases continue into 2021.
Similarly, shares of CSX sold off with the rest of the market from COVID-19 fears in March. But the stock is up roughly 90% since then, recently hitting an all-time high. Its a sign that the U.S. economy isnt out of juice yet
Read more:
Beware the Market's 'Zombie Apocalypse' - DailyWealth
- 'Dawn of the Dead' at 45: A Zombie Love Affair That Never Died - The New York Times - April 12th, 2024
- Hyper-sexual 'zombie cicadas' infected with bizarre STD fungus will emerge in US - New York Post - April 12th, 2024
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- E-News | 'Zombie cicadas' infected with sexually transmitted fungus expected to emerge this year in parts of US - WVU ENews - April 12th, 2024
- Deadly Zombie Sedative Penetrating The U.K.s Illicit Drugs Market - Forbes - April 12th, 2024
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- Hyper-sexual "zombie cicadas" that are infected with sexually transmitted fungus expected to emerge this year - CBS News - April 12th, 2024
- Should we be concerned about zombie cicadas? - WGN Radio - Chicago - April 12th, 2024
- You need to play this underrated zombie shooter before it leaves Xbox Game Pass - Digital Trends - April 12th, 2024
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- What Is Xylazine - The Flesh-Eating 'Zombie' Drug Linked To 11 Deaths in The UK? - Times Now - April 12th, 2024
- Zombie Cicadas To Emerge In Virginia: What To Know - Patch - April 12th, 2024
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- Flesh-rotting 'Zombie drug' tranq raises alarm in UK - The Times of India - April 12th, 2024
- Zombie Cicadas To Emerge In GA: What To Know - Patch - April 12th, 2024
- What was the first-ever zombie movie? - Far Out Magazine - April 12th, 2024
- Even Will Smith Couldnt Save Zombie Survival Game Undawn, Which Flopped Spectacularly - IGN - March 24th, 2024
- Rob Zombie Recommends This Surprisingly Wholesome Comedy - Dread Central - March 24th, 2024
- Army Writing and the Zombie (Noun) Apocalypse - Modern War Institute - United States Military Academy West Point - March 24th, 2024
- Fatal Fury's Mai Shiranui Is In This Zombie Survival Game For Some Reason - Time Extension - March 24th, 2024
- Should you be worried about 'zombie deer'? | College of Public Health - George Mason University - March 24th, 2024
- 'Scooby-Doo on Zombie Island' Scares Its Way to Blu-ray for the First Time This Spring - Collider - March 24th, 2024
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- In the fight against gun violence, Rep. Frost Introduces the Destroy Zombie Guns Act - The Apopka Voice - March 24th, 2024
- Elfriede Jelinek's 'The Children of the Dead' is a historical zombie novel - The Washington Post - The Washington Post - March 24th, 2024
- Germany's Zombie Government Is Fueling the Far Right - The Atlantic - March 24th, 2024
- Zombie Survival Game Undawn Has Crashed And Burned According To A Reuters Report - MMOs.com - March 24th, 2024
- Will Smiths Zombie Game Has Been Hit Harder Than Chris Rock at the Oscars Its Astronomical Budget Was ... - imdb - March 24th, 2024
- Scooby-Doo On Zombie Island / Return to Zombie Island Blu-ray (Warner Archive Collection) - Blu-ray.com - March 24th, 2024
- Registration almost here for Dothans annual Zombie 5K Chase - WDHN - March 24th, 2024
- Zombie magic and gambling club Magic Island will come alive again this summer - Houston Chronicle - March 24th, 2024
- Undawn | The $140m zombie survival game starring Will Smith that bombed while nobody was looking - Filmstories - March 24th, 2024
- After 4 years, a cult classic zombie horror manga from Ga-Rei's creator is finally getting an official English release - Gamesradar - March 24th, 2024
- Will Smith's Zombie Game Has Been Hit Harder Than Chris Rock at the Oscars - Its Astronomical Budget Was ... - FandomWire - March 24th, 2024
- "The game literally no one knew existed": The Will Smith Zombie Survival Game is Reportedly a Big Flop and Fans Are ... - FandomWire - March 24th, 2024
- Zombie-palooza --- Get to the biggest undead music event in the latest Dead Island 2 expansion: SoLA - Gaming Trend - March 24th, 2024
- Bournemouth University medical students treat 'zombie attack' in mass training simulation - The Tab - March 24th, 2024
- Zombie car factories on the rise in China as buyers opt for EVs - Financial Times - March 16th, 2024
- Hey, Remember When Rob Zombie Was Going To Direct THE CROW 3? - FANGORIA - March 16th, 2024
- New Walking Dead Twist Shows How The Zombie Outbreak Will Finally End - Screen Rant - March 16th, 2024
- Candid conversations from death row with The Zombie Hunter - Arizona's Family - March 16th, 2024
- Zombie! The Musical - REVIEW - City Hub Sydney - March 16th, 2024
- A Gorgeous Harp and Guitar String Duet of 'Zombie' by The Cranberries in Honor of Alexei Navalny - Laughing Squid - March 16th, 2024
- Y2K Review: A 1999 Youth Nostalgia Comedy That Turns Into an Attack-of-the-Computers Zombie Movie. But Only the First One Is Fun - Variety - March 16th, 2024
- AMC Announces Every Zombie in The Walking Dead Getting Its Own Spin-Off - Hard Drive - March 16th, 2024
- The Growing Threat of Zombie Code - CXOToday.com - March 16th, 2024
- The Greatest Zombie Movie Ever Gets Theatrical Return For Anniversary - Giant Freakin Robot - March 16th, 2024
- You won't expect which fighting game character pops up in this random mobile zombie game trailer for a bizarre ... - EventHubs - March 16th, 2024
- Coby White, Butler and the 'Zombie Heat,' Fontecchio Are All Here to Stay - Canis Hoopus - March 16th, 2024
- 'Land of the Dead' 19 Years Later: Romero's Return Was Smarter Than the Average Zombie Movie - Bloody Disgusting - March 16th, 2024
- Z Nation Season 6: SYFY Tease Return of Zombie Series 6 Years After Its Death - ComingSoon.net - March 16th, 2024
- Zombie! The Musical (Hayes Theatre Co) - Limelight - March 16th, 2024
- Get This Definitive Edition Zombie Game For Free Right Now On Steam - Screen Rant - February 19th, 2024
- The Best Ghost and Zombie Movie Romances - Vulture - February 19th, 2024
- The couple trying to keep killer 'zombie viruses' at bay - and protect us from another pandemic - The Telegraph - February 19th, 2024
- Meet the Serbian Businessman/DJ Who Runs the Zombie AI Southwest Journal - Racket - February 19th, 2024
- Dead Island 2 Spreading Its Zombie Virus to Steam in April - GameSpace.com - February 19th, 2024
- Lincoln hosts Alice Cooper and Rob Zombie - Omaha - KETV Omaha - February 19th, 2024
- 'The Walking Dead - The Ones Who Live' Review AMC's Zombie Epic Shambles On - Collider - February 19th, 2024
- Legislative recap: zombie bills, teacher pay, lithium tax, pipelines and more - Black Hills Pioneer - February 19th, 2024
- Japan's stock markets are on a tear. Will 'zombie firms threaten the bull run? - CNBC - February 11th, 2024
- Thebe Phetogos haunted response to zombie figuration in art - The Washington Post - February 11th, 2024
- Cosmic dust from 'zombie' galaxies could form planets and life - The Telegraph - February 11th, 2024
- I walked with a zombie: 16 monster love interests that set hearts aflutter - The A.V. Club - February 11th, 2024
- Free Steam zombie shooter you've never heard of is getting rave reviews, somehow - GAMINGbible - February 11th, 2024
- South Korea's 'zombie football' finally leaves them in a hole too deep to climb out of - ESPN - February 11th, 2024
Reviewed and Recommended by Erik Baquero