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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: smolejv@gmx.net who wrote (22486)	8/10/2002 6:25:06 PM
From: Mark Adams	Read Replies (3) \| Respond to of 74559

DJ, The cost of capital is rising (higher corporate bond spreads) while excess capacity (US and Global) seems to remain. I think ML is looking at the (US) PC refresh cycle starting to kick in, supporting some rise in investment, albeit at a much slower pace than pre Y2K. A more positive note, apparently productivity gains have helped lower the cost of labor 2.2%. This may help offset higher capital costs, leaving overall profitability unchanged. It truly is an uncertain landscape out there. I'm trying to determine if both the ML opinion and that expressed here Message 17861558 can be correct at the same time. What say you? Can both views be correct? I suspect that the complaints expressed about the quality (or lack thereof) of statistical data on the US economy might be a source of the current fog of uncertainty on the near term US and Global economic future. I think it's important to get a working thesis in place, quickly. I think one thing that really stood out in the ML article, is the adjustment of the consumer debt burden for a higher level of credit card transactions. This is the first I've seen of that, and not an easy piece of info to come by. Consumer debt burdens have been a key foundation stone for the secular bear case. It appears that ML has found a way to determine how much additional credit card debt is transitional, ie balances paid off monthly, where credit card debt used for convenience or to collect reward points. The adjusted numbers tell quite a different story from the unadjusted. So Corp Capex may remain in the toilet near term, but the consumer may not be in as desperate straits as previously thought. WDIK?

To: smolejv@gmx.net who wrote (22486)	8/11/2002 3:06:44 AM
From: smolejv@gmx.net	Respond to of 74559

...continued on CapEx from D.Noland this week prudentbear.com ... Capital One is one of the major issuers of asset-backs, and we were rather surprised by a recent research report that candidly addressed the issue of pricing for what we would have expected to be one of the more actively traded securities in this arena. From the report: “We thought that the most compelling part of the capital structure was the A rated Cap One ABS, which we had understood traded at LIBOR +60-70 bp after Cap One’s memorandum of understanding (MOU) with regulators was announced. However, that was a notional estimate of where our trading desk thought they would trade and our trading has not seen actual transactions in A rated Cap One paper; in fact, their estimate of where it would trade now – and, in retrospect, where it probably would have traded just after the MOU was announced – is on the order of LIBOR +100 bp. What this shows is just how illiquid the Cap One name is in the ABS sector and how difficult it is to do price discovery... The problem is that it is unclear where these really do trade and where to mark them. We still don’t like Metris ABS, unless it is wrapped by a monoline insurer.” .... from PIMCO letter aug 2002 pimco.com ...But let me alert you, Mr. Greenspan. The corporate market at the moment is close to full tilt, half frozen, trading on price - not yield. While you perhaps contently rest on the historical laurels of near 0 percent real Fed funds, its stimulation to the housing market, and your hopes for an eventual robust recovery, the cost of capital for corporations is nowhere near 13/4 percent or even that 6 percent level available to first time borrowers in the mortgage market. The cost of capital for Baa and lower corporations is in double digits. Aa and A companies can barely come to market. You sir, have a problem. If the cost of corporate capital skyrockets, the markets move the other way, and then of course, the economy follows. ... dj