GNP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 10

[Roland]

GP:

"Could you explain that? The interest rate for corporate debt was set by the financial markets. If funds were not sufficient, rates would go up, no?"

Or an abundance of funds is created by the fed to bridge the gap. Or/and companies do swaps on extremely low short term rates (wonder how this will show up in results of coming years....). Or/and a flood of cheap money makes its way to the treasury where it is used to buy back the benchmark treasury bonds....

"If the markets judged the debt as worthwhile, than why shouldn't funds come in from overseas?"

The "market" has some serious judgment problems in a boom like the last one. Risk is ignored or shifted on via derivatives. then there's funny accounting - how long did it take the rating agnecies to downgrade enron debt to crap ?

"I mean nobody put a gun to foreign funds managers to make them buy US corp bonds. They obviously didn't think the rates were too low when they bought bonds."

Foreign buyers have been profitting from currency gains. If you are japanese even artificially low US rates are attractive. If you are european and risk-shy, you may look for GSE debt when sovereign issuance is reduced.


You can expand this to equity (esp venture capital), vendor financing, GM's incentives and what not.... no matter how it makes its way ind etail, on the monetary and credit side, the Fed can destort the entire system, esp when it gets boom mechanisms going - like "new economy" delusions.

[TCO]

Originally posted by Roland
GP:

"Could you explain that? The interest rate for corporate debt was set by the financial markets. If funds were not sufficient, rates would go up, no?"

Or an abundance of funds is created by the fed to bridge the gap. Or/and companies do swaps on extremely low short term rates (wonder how this will show up in results of coming years....). Or/and a flood of cheap money makes its way to the treasury where it is used to buy back the benchmark treasury bonds....

"If the markets judged the debt as worthwhile, than why shouldn't funds come in from overseas?"

The "market" has some serious judgment problems in a boom like the last one. Risk is ignored or shifted on via derivatives. then there's funny accounting - how long did it take the rating agnecies to downgrade enron debt to crap ?

"I mean nobody put a gun to foreign funds managers to make them buy US corp bonds. They obviously didn't think the rates were too low when they bought bonds."

Foreign buyers have been profitting from currency gains. If you are japanese even artificially low US rates are attractive. If you are european and risk-shy, you may look for GSE debt when sovereign issuance is reduced.


You can expand this to equity (esp venture capital), vendor financing, GM's incentives and what not.... no matter how it makes its way ind etail, on the monetary and credit side, the Fed can destort the entire system, esp when it gets boom mechanisms going - like "new economy" delusions.

Maybe you should be a bond trader! If your contrarian theories work, you should be able to make some good money and bring the market back to equilibrium. (Of course you could wind up like Meriwether and LTCM..but that's life.)

Actually I pretty much agree with you (and did even before the correction) reradring bonds, equity, valuation etc. (I'm more of a believer in an extreme amount of random walk and my own inability to predict markets...so I was never as adamant as you.)

I would therfore put much more responsability for market stupidness on the market and less on evil little Alan. The Fed can sometimes pull levers and fail to get market silliness and the market can be silly without Fed intervention.

Regarding foreign bond traders. Why should low returns attract foreign capital? They bought the bonds becasue they expected a good return. They underestimated bankruptcy risks in the valuation of the bonds...just like money managers here did...and just like junk buyers did in the late 80's.* They probably make mistakes the other way at times too.

If foreign bond buyers expect dollare movement, they can speculate without needing to buy bonds (directly via futures).

*I'd be interested if you blame that junk meltdown on Fed intervention.

[TCO]

(New topic)

Roland was an interesting article in the WSJ yesterday (or day before).

Was about the Kirch Group and the failed bailout. Looks like it was written by a German (well reporter name was Ger. and tagline was Hanover).

Was pretty long but basic take was the Schroeder met with some industrial bigwigs in a secret meeting and tried to get the bailout to happen to keep Kirch out of foreing hands. But that the deal brokedown because of shareholder resistance (from taker-overs) and Kirch intransigence. Main point was that the cozy German business world is becoming more rough and tumble.

What is your take from that side of the pond? Anything we should know about that might have been missed in WSJ (I apologize for not having a link. I read the hard copy. But I expect a story like that would be in the Euro version as well as the standard edition.)

[Sten Sture]

Originally posted by GP


Maybe you should be a bond trader!

God help us all!

] Originally posted by GP
...reradring bonds...

I had better look that up to make sure its a typo, cause I've never heard of it.


On Roland's point about the rating agencies falling asleep on Enron - I don't think that was the case at all. The only things they have to work with (for the most part) are the financial statements of the company. If those are false then there is a limit to how much truth they are going to see. Enron's business collapse was a liquidity crisis precipitated by a lack of access to external capital, caused by a loss of confidence in their business model. Similar in some respects to Barings. Not a pure failure of the business model.

Any leveraged company in the world would have intense difficulty meeting all of their current obligations out of cash. Just as most people would have difficulty paying off their home mortgage for cash the week after they lost their job. I have been worried about this type of thing happening to GE (Capital) for the past 10 years... we'll see if they can avoid relegation to the spectacular failure group. I've given up hoping that they will have to pay the piper, but you never know.

[TCO]

Hey Surly one.

I just read Liar's Poker. The interesting thing to me was not the salacious Wall street stuff but the way that the traders thought. (Looking at macro economics trying to think in a Roland manner.) Is that what you do? Or are you the salesman who blows up people by "jamming" bonds. You seem WAY too nice of a guy to do that.

[Sten Sture]

Neither...

I am a "buyside" portfolio manager: I have my traders buy the bonds that I want through Wall Street brokers (really just customer service reps) who have their traders (risk hedging weenies) quote the price. It is my job to make sure that the retirement plans etc, that I manage don't own the Enrons, Worldcom and GEs of the world, but still perform well versus their designated bond index. All domestic stuff for us by the way. I can't be hassled to learn Euro pseudo-accounting.

Liars is a pretty good book, but a lot has changed since then. It is really kinda dull now, even with the recent spectacular fiascos. Firms don't take nearly as much risk as they used to. I could call six different places and get five identical levels on a piece of paper I want to buy.

[TCO]

Originally posted by Sten Sture
Neither...

I am a "buyside" portfolio manager: I have my traders buy the bonds that I want through Wall Street brokers (really just customer service reps) who have their traders (risk hedging weenies) quote the price. It is my job to make sure that the retirement plans etc, that I manage don't own the Enrons, Worldcom and GEs of the world, but still perform well versus their designated bond index. All domestic stuff for us by the way. I can't be hassled to learn Euro pseudo-accounting.

Liars is a pretty good book, but a lot has changed since then. It is really kinda dull now, even with the recent spectacular fiascos. Firms don't take nearly as much risk as they used to. I could call six different places and get five identical levels on a piece of paper I want to buy.

Aaaah. you're the guy who's supposed to get screwed! (Don't touch it Sten...)

Well it seems like in Liar's Poker (and even nowadays) that the customer is in a sense in competion with the traders (risk weeenies). If he sells to you, you muct think it's worth having and him otherwise. That makes you a little like the trader himself.

But you might have more of a long-term outlook and him more of a short term outlook. Investor versus speculator. How much churn do you have? (NOt sure the metrics so please use common sense term that I can understand.)

[TCO]

Originally posted by Sten Sture
Neither...

How about Jose?

[Sten Sture]

We have about 35% turnover (churn implies a high rate ) in our bond portfolios. That is pretty low; by nature you should have more turnover in a bond portfolio than a stock portfolio because my stuff is constantly approaching final maturity. I definately have a longer term outlook than a trader would - I am looking at the business and econ cycles as well at the core business model of the borrower. I can go for a month without doing a trade - just let the portfolio cook for a while. There can be an adversarial relationship with the traders, but in reality, you hold all of the cards if you own good stuff. In the end, you are the one that has the money to spend. They just get mad when they can't get anyone to take them out of a losing position.


rt was an equity derivatives (options) trader, and I think he had to create some of his own securities. Probably more engineering related than most things in the finance/business world. He said it was one of those things that was initially very complex, but eventually quite routine - once the formulas and worksheets were all set up. Maybe like being a fly-fishing guide? Don't know.

Last he and I talked he was looking to get back into the finance stuff in the convertable bond area...

[TCO]

Good to have you back holding up your end of the Roland Stennish group.

[Sten Sture]

Looks like the the some of the usual cast of characters are about.

I have been doing too much work lately, time to let the portfolio cook for a bit!

[TCO]

Originally posted by Sten Sture


I have been doing too much work lately, time to let the portfolio cook for a bit!

Probably do better that way...

[Sten Sture]

LoL

Usually the way it works!

[Roland]

GP:

"If your contrarian theories work..."

Timing problem. Actually I would have never thought that towards mid 2002, the Fed would still be at the pump. They're nuts. Simply gaga.

"Of course you could wind up like Meriwether and LTCM..but that's life.)"

Well, if I don't leverage...

"I would therfore put much more responsability for market stupidness on the market and less on evil little Alan. The Fed can sometimes pull levers and fail to get market silliness and the market can be silly without Fed intervention."

True, yet both combined are a potent mix. And no one forces speculators to risk their money - but the Fed is using the government's fiat money system for price fixing and should not manipulate it. And Greenspan will be even held less accountable than the enron crowd.

"If foreign bond buyers expect dollare movement, they can speculate without needing to buy bonds (directly via futures)."

True, but it still makes $-denominated bonds more attractive. Also there's a lot of appetite for top-rated securities, and no one's manufacturing them like the US system.

"I'd be interested if you blame that junk meltdown on Fed intervention."

In the 80s ? I think that was quite isolated, but haven't looked a that more closely.

Sten:

"On Roland's point about the rating agencies falling asleep on Enron - I don't think that was the case at all. "

Well, being asleep or getting fed funny numbers - it was too late.

"I have been worried about this type of thing happening to GE (Capital) for the past 10 years... we'll see if they can avoid relegation to the spectacular failure group. I've given up hoping that they will have to pay the piper, but you never know."

What has GE capital been betting on ? I assume on low risk and low rates. Both have been insured by the Fed and the boom - we're going into some interesting times, especially if we are really seeing the final blowout of the housing bubble.

As to GE stock - I wouldn't buy it. There is a very sophisticated gambling industry in Austria, so no need for it....

[Roland]

"Was about the Kirch Group and the failed bailout.... Schroeder met with some industrial bigwigs in a secret meeting and tried to get the bailout to happen to keep Kirch out of foreing hands. But that the deal brokedown because of shareholder resistance (from taker-overs) and Kirch intransigence."

I've only seen speculation about this intervention, it's quite a funny habit since the Holzmann "incident". I'd say if it does not mention the specific tastiness of Stoiber's CSU and a related bavarian bank being the (early) main sponsor of Kirch, it's speculation and rumours. Schröder has no interest in saving the Kirch group as such - only in the sat1-pro7 group, if at all.

" Anything we should know about that might have been missed in WSJ"

We have the WSJE here since a couple of weeks, for reasons unknown to me ("it wasn't me" )....

On Thursday: "Corporate Germany Proves Powerless in Collapse of Kirch", by Matthew Karnitschnig

That one knows the backgrounds and looks quite plausible. Yet the real interesting big story is not so much the demise of Germany inc (compared to Nippon inc or America inc, that one was always quite weak), but the changes in capital markets away from the Hausbank system. Corp bond markets and the pressure on banks to compete means they can no longer support suboptimal capital allocations - which causes some transition problems but will be very benefecial a couple years out.