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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (5880)	3/22/2002 8:12:07 AM
From: John Pitera	Read Replies (1) \| Respond to of 33421

More GE 3/21/02 01:15 PM ET Brian Reynolds Over on RMPro, Doug Kass has a number of counter-points to Bill Gross' conclusions about GE. One of Doug's points was that Gross' comments might have been in response to GE's shelf filing that was filed after last week's bond deal. That view is supported by comments that Gross made that appear in today's Washington Post. In it, Gross is quoted as saying the decision was not based on the creditworthiness of the company, but about the quality and rate of disclosure, and the paper says that he feels that the bond deal should have been delayed until the shelf was filed. He is quoted as saying that PIMCO needed to send them a message and use them as an example, and that they are just one of many corporations that treat bond investors with little consideration. Now, whether or not you agree with this view, Gross brings up a topic that has long been a sore spot with bond investors. We often joke among ourselves about how companies will do a quick "drive-by" offering and then announce bad news shortly after. PIMCO has been absent from the corporate arena, but has been moving into corporates in recent months, and seems to be serving notice to companies that they will not stand idly by if companies sandbag them. Given my view that bondholders are becoming more activist, I think companies will have to pay more attention to bondholders than they have been. Also, a follow-up to my earlier thought on the risk that other money market fund managers follow along with Gross and lighten up on GE commercial paper. There is no mathematical incentive for a fund manager to own GE commercial paper (or that of any other company) now. I've detailed how last year's arbitrage chased many companies out of the commercial papermarket and lead to the credit squeeze. With this lack of demand, and with commercial paper spreads to Treasuries near zero, I've advised every company with high levels of short-term borrowings to reduce their reliance on short-term debt. It's true that, at 50%, GE's ratio of commercial paper to debt is the same as it was in 1998. However, given the trends in the commercial paper market, that number seems high for today's environment. I think the drop in GE's stock reflects the downside to these developments, which is why I sold my puts this morning. I think the bigger risk is that money fund investors continue to remove other, less flexible issuers, from their approved lists. Brian Reynolds GE 3/21/02 10:56 AM ET Whether one agrees or not with Bill Gross' conclusion, he carries a ton of weight in the fixed income community, and other managers often follow his lead the way that Warren Buffet fan try to mimic his investments. Thus, the risk is that other money managers follow suit (imagine being a money fund manager at a quarterly board meeting next month and having a board member say "I see that PIMCO isn't buying GE's paper anyomore, why are we?). In no way do I see this as threatening GEs viability, but it is another indication of increasing activism of bondholders.