To All, Quality-Schmality. I have often mentioned one of the many
scams holding this bubble stock market together, the one where cos borrow money with which they repurchase their stock, and then pay employees with stock options instead of cash. They also get a tax writeoff if their stock goes up and the employee makes money when he exercizes the options. Great scam! But there is a downside. INHO, it is a major downside. The debt-repaying quality of US corps is going to hell in a handbasket because of all this non-productive debt, but I just saw the first partial quantification of this risk factor in this week's Barron's.
A newsletter called, "Gimme Credit," (gotta love a name like that), noted the disappearance of high quality names. One year ago, there were 45 US corps rated AA. In the past year, a time when the economy has supposedly been wonderful, inflation low, profits at record highs and growing rapidly, stocks at ridiculous pe ratios, and interest rates, if not low, not extremely high, TEN, or TWENTY-TWO pct. of the AA issues, were downgraded. One was upgraded. Stock buybacks alone caused 5 of the downgrades. The upgrade had no buyback.
Even worse, DuPont, Campbell's, Hershey, and Archer-Daniels in the AA sector are all under credit watch. None for a possible upgrade. -g-
And, worst of all, none of this buy-back debt is being used to build the corps long term. They are simply mortgaging the firms' futures to try to scam investors over the short term. Some pretty sad stuff. And these are the "good" cos. Multiply that by many times for all the marginal firms playing the same scam. Of course, the sleaziest I ever saw was my old trading sardine, which I love because it make me zillions of dollars, Cephalon, issuing debt to buy call options in the options market. Huh?! That didn't work out. Big time. -g-
Good luck, MB |
