<JDSU chart looks sick doesn't it. However, I have not changed my view on it. Bullish. >
Here's the problem [perceived? real?] with the sector:
<we read with great interest a recent
research report on the telecom equipment industry from Sanford
Bernstein analyst Paul Sagawa. Quoting from the report: "Free cash
flows have turned sharply negative – only four of 41 US (communications)
carriers showed positive cash flow during (the first half) – making it
painful to fund further capex acceleration without external
financing…Increased scrutiny of equipment suppliers’ balance sheets has
made it more difficult to secure vendor financing. In this environment, we
believe we are likely to see few new-build network projects funded, more
carrier bankruptcies and a trend toward capex unfriendly industry
consolidation.”
All we can say is that the “communications arms race” has provided the
(in the spirit of Hyman Minsky) ultimate in “Ponzi Finance” (see May
26th CB Bulletin). This scheme, however, is now faltering. Reiterating
our point from last week, this is an absolute credit nightmare in the
making.
With rapidly deteriorating fundamentals, it is not surprising that financing
sources are rapidly running dry. That is the nature of credit bubbles. As
junk debt badly lags other sectors, junk bond funds are suffering
outflows. According to AMG Data Services, almost $450 million exited
junk funds this week, bringing to $7 billion the outflows so far this year.
With investor demand waning, issuance of junk debt during the past nine
months dropped by almost 50% to $38 billion (investment grade debt
issuance jumped 8% to $335 billion). So, the predicament should be
obvious: A massive telecommunications sector whose lifeblood is junk
debt and leveraged lending, finds itself running increasingly cash-flow
negative, at the same time increasingly nervous investors flee the sector
and heavily exposed bankers begin to panic.> |
