Debt and No Defaults

Junk bonds and bank loans continue *not* to default.

But a funny thing happened on the way to the meltdown: According to Moody's Investors Service (MCO ), junk-bond defaults actually fell in 2006 for the fifth straight year, to 1.7%--well below the long-term average of 5%. The story is the same in the booming leveraged-loan market, which, thanks to more flexible borrowing terms, has become a favorite of the private equity firms raising billions for leveraged buyouts and the hedge funds that buy most of that debt. By the end of 2006, leveraged-loan defaults slid below 1%, an all-time low.

Some private equity players see a major structural shift at play: Greater liquidity across the capital markets and the explosion of sophisticated financial instruments, they say, are reducing the level of risk permanently. But others say the cycle is just being delayed, possibly leading to a harsher crash when it turns. "The big question is whether the excess money is simply giving weak companies all the rope they need to hang themselves," says David T. Hamilton, Moody's head of credit default research.

The level of risk is reduced permanently (!) by liquidity and financial instruments. Really? The second in particularly is a dangerous thought. Can you really increase the amount of cash available from the enterprise by how you slice it?

Full article from Businessweek here

Remembering Conglomerates

Remembering Conglomorates

For quite a few years, the conglomerate stocks rose and rose, and to this day I don’t think anyone knows exactly why. What tempted investor psychology appears to be that the mother company seemed to promise new types of economies of scale, called synergies in those days. The conglomerate was said to borrow at lower cost than the companies it purchased. It was reputed to spread its operational knowhow to its benighted purchases. It would efficiently allocate capital internally among them, investors were told. It could bring name recognition through a corporate brand. It could purchase large amounts of advertising more cheaply. Sometimes the head of the company was thought to be a genius, a new King Midas, who could turn a zinc smelter into a household name. These were the hopes and dreams. They made some sense as all such stories do. How much sense, no one knew. There was, as is usual, uncertainty. But the market was a bull, and uncertainties evaporated before the winds of optimism.

Meanwhile there were realities. The conglomerates were paying big premiums over market value when they bought out companies. If there were to be economies, the selling company shareholders of the target firms were getting the lion’s share. The sellers were receiving handsome premiums up front because the conglomerates were operating in competitive buyout markets. They bought companies at auction. Buyers bid up prices at auctions. Most of the gains, if they were real, were going to the target companies that were selling themselves to the conglomerates.

How one company could create value for its shareholders by paying a big premium over market value to buy another company in an unrelated industry was a mystery, then and now. When the conglomerate sold at a price/earnings ratio of 20 and bought a company with a price/earnings ratio of 10, the combination seemed to fetch a price/earnings ratio of 20! This financial legerdemain (or was it ledger-demain?) created value, for a while. It was not permanent. By 1970 the days of reckoning arrived and the conglomerates crashed along with many other stocks.

Full article here: http://www.lewrockwell.com/rozeff/rozeff89.html

Read and discuss.

Tip comes from Going Private

Finance Blogs to Watch

Great finance blogsFast Paced / News Oriented http://abnormalreturns.com/

http://seekingalpha.com/

Private Equity - Half Analytical / Half Gossipy (one of my favorite online blogs on its good days) http://equityprivate.typepad.com/

Harvard MBAs as a contrarian indicator of equity performance

I was sure someone was tracking this data...totally unsurprising

Equities Swing With Harvard MBAs

By JAY AKASIE Staff Reporter of the Sun November 9, 2006

Everyone has his own method of timing the market. When Joseph Kennedy's shoeshine boy began asking him for stock tips in 1929, old Joe had a hunch it was time to sell.

Ray Soifer, a retired executive from Brown Brothers Harriman, has his own system. And it's proven itself to be a splendid long-term indicator of the American equities market.

Mr. Soifer tracks how many Harvard Business School graduates choose market-sensitive jobs each year. If 10% or less of that year's class take jobs in investment banking, investment management, sales & trading, venture capital, private equity, or leveraged buy-outs, it's a long-term ‘buy' signal.

If 30% or more take such jobs, it's a long-term ‘sell.'

This year, some 37% of Harvard Business School's graduate found work on Wall Street, up from 30% a year ago and 26% for the Class of 2004. The trend suggests that Wall Street is becoming bloated and the American economy is ripe for a slowdown.

Full article here