Triggering the Wasabi Receptor
Fancy sushi? If so, you’re abundantly familiar with Japanese horseradish, or wasabi, one of the spiciest substances on the planet. There’s a reason it can clear your sinuses and leave you teary-eyed owing from how the chemical in the plant interacts with the human body. “Allyl isothiocyanate” is an organic chemical compound also found in mustard and others in the Cruciferae family. Our unique “wasabi receptor” causes the stinging sensation in similar fashion as red chili flakes on pizza and jalapenos salsa, or, for the daring – with deadened taste buds – those innocent looking habaneros or, on a double-dog-dare, the dreaded ghost pepper. Our favorite wasabi reaction came care of the decidedly unworldly tow truck Mater. In Cars 2, he mistook wasabi for ice cream. His classic line: “Whatever you do, do not eat the free pistachio ice cream. It has turned!’”
That ice cream is not the only thing that’s turned. As we’ve been writing, it’s likely February marked a turning point in the credit markets. It’s been a while since we typed in BCY <GO> on our Bloomberg terminals, a function that tracks companies with $50 million or more in liabilities that file for (mostly) Chapter 11. This past February, exactly one company fit the bill…that couldn’t be paid. In ‘valuation’ terminology, we’ve reached maximum bullish for the bankruptcy cycle, which fittingly parallels March 2000, the last time we saw the lonely number of one. Financial market historians will tell you that the NASDAQ composite did not reattain its Friday, March 10, 2000, apex of 5,048.62 until April 2015.
This is not to say that the corporate bankruptcy cycle is slipping precipitously. In March, all of eight bankruptcies were announced, extending the string of single-digit months to nine. Drilling down, the post-pandemic period has been fraught with bankruptcies in the consumer discretionary space. In the last year, at 18.6%, this sector made up the largest slice, followed by real estate (17.4%) and industrials (14.0%). Year-to-date, at a quarter of filings, energy is in the lead followed by industrials at 16.7%. March saw a three-way tie in energy, industrials, and utilities.
No surprise, The National Association of Credit Management’s Credit Managers’ Index (CMI) revealed that the factory sector faced more impairment vis-à-vis services. Per the report, manufacturers are being weighed down by unfavorable factors and not as buoyed by favorable ones. Respondents report not being able to satisfy order flow due to a lack of equipment; many more bemoaned a continued lack of materials. Per the report, “There is little need to expand the amount of credit extended if they can’t meet the demands of their customers. And more and more they are seeing rising disputes and higher amounts of customer deductions as everyone is losing patience.”
The CMI is made up of ten components with the credit-cycle-ending capitulation of bankruptcies bringing up the rear. On this count, in March, neither manufacturing nor services waved the red flag with a reading south of the 50-mark. That said, this gauge for the factory sector did hit a 14-month low (inverted red line). The corresponding services series moved in the opposite direction (inverted blue line). We know Russia’s invasion of Ukraine will further gnarl the supply chain, further pressuring margins across the industrial complex.
Through the prism of spreads, we’re seeing echoes of credit default risk in both the investment grade (IG, orange line) and high yield (HY, purple line) markets. Corporates coming to market in 2022 will face the triumvirate of rising rates, a war/energy shock and rising recession risk. In recent years, widening of CDX spreads has harkened a pickup in corporate job cut announcements. The industrial recession of 2015-16 and the U.S./China trade war in 2018-19 saw Challenger job cuts rise alongside heightened default concerns. With the bankruptcy cycle off its max bullish point, labor cost cuts should follow – albeit at a gradual pace.
For clues on whether that process has started, we figured it was best to check in with that other post-pandemic website we’d abandoned for a spate to see if activity there was also picking up. Wouldn’t you know it, DailyJobCuts.com is hopping. In late March, the trends in cutting labor resonated with some of the themes we’ve lobbed onto in recent weeks – the peak in Mergers & Acquisitions and the onset of industrial recession.
As a result of acquiring Cambridge, Massachusetts-based Acceleron Pharma, Merck is laying off 170 former employees; it only took the pharmaceutical behemoth four months to announced its realized post-deal ‘synergies.’ Meanwhile, healthcare giant McKesson is making redundant 225 of its employees at a Kentucky facility, a move that pushed Elite Staffing in nearby Louisville to cut more than 200 of its staff (you know the cycle is turning when a staffing agency is downsizing).
Turning westward, Dometic Corporation, a maker of products for the recreational vehicle, marine and hospitality industries, announced it is laying off 159 people from its plant in Elkhart, Indiana. And in California, Centric Parts, which manufactures aftermarket brake and chassis parts, filed notice that it will cut 252 employees from its 200,000-square-foot warehouse in City of Industry.
Though another subject for another day, the pace of small business closures via the same website is also plenty brisk. And we continue to track the dissipating pace of new job postings. Along with the ice cream and credit cycle, it would seem the job market has also turned.