The Big Picture for Performing and Non Performing Mortgages

As an investor, do you have a preference in what type of note you buy? Many of us like NPLs. Personally, I like cash flow with a little risk added through non performing loans.

Here’s Dion DePaoli’s point of view:

October 25, 2016

Low rates have allowed big corporate to divert cheap capital into non-productive investments.  This in turn has driven up share price as some of that capital is used to buy back shares.  It does little to enhance cash flow or expand market cap except for the few firms which have used that money for M&A strategies.

The global bond market is estimated at $100 Trillion.  The global stock market $64 Trillion.  The world credit market $200 Trillion.   Corporate bonds have increased $3.1 Trillion which is roughly 63% since the 2008 crisis.  GDP growth has only managed to rise by 27%.  So, this gives us a clear picture, equities – the companies in the market place are now more leveraged than they have been, perhaps in history.  Debt to earnings ratio for high yield stocks is roughly 5x compared to 4.2x before the crash.  The more stable median yield companies are 2.6x opposed to 2.2x in 2008.

So when we step back we can see the mountain of debt piling up in stocks.  There has been a spike in corporate bankruptcies over the last year.  Simply look at the energy sector, low oil has decimated many companies.

If we glance over at who is being affected, which seems to go relatively unnoticed, pension funds are forced to cut benefits.  The CSPF, the Teamster’s pension funds has come out and started to cut benefits as it believes it will be insolvent by 2025.  Massive benefit drop in Illinois pension fund which they put onto the tax payers.  The Police and Firefighter pension in Texas is also approaching insolvency.  These are not isolated incidents.

As if that is not enough, on the flip side of retirement planning is the recent uptick in 401k raids.  Some 28% of 401ks have been borrowed from over the last 2 years.  We can speculate this number will only continue to get worse as wages have been stagnate and most households accumulate more debt than they actually contribute to their savings.  This is coupled with the frightening statistic that something around 47% of American households can’t come up with $400 in emergency.

None of this should be a surprise to us.  We can see the uptick in newbie investors chasing risky assets in the hopes of catching up on their retirements and rebuilding a nest egg to retire on.  Therein lies our opportunity is get their heads out of the sky and back down to earth.  Place them into cash flowing instruments which preserve their capital and deliver monthly cash flow.  Why anybody would raid their 401k and chase assets that ‘might’ make them 30% returns is beyond me but it does show the desperation clothed as some type of sophistication that has been growing all around us.  Now remind yourself, those assets they chase – they are illiquid.  (NPLs)


Dion DePaoli

Chief Executive Officer

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