UPDATE 1-WORLD BONDS-Deflation fears add to U.S. corp bonds woes
(Adds details, background throughout)
By Dena Aubin
NEW YORK, Oct 15 (Reuters) - Low-inflation times are
usually good for corporate bond investors, but amid a fragile
U.S. recovery, the worry now is too much of a good thing.
Even as corporate America furiously prunes its debt load, a
fall in prices of many manufactured goods is hurting company
earnings and keeping credit quality weak, and analysts see
little relief in sight.
Lack of pricing power, by one measure the worst on record,
explains part of this year's rout in corporate bonds and U.S.
equities, said Jason Trennert, investment strategist at
economic research firm International Strategy & Investment.
"If you have a lot of debt, you want inflation to be as
high as possible so you can pay off that debt with higher
dollars," said Trennert.
Yet just the opposite is happening.
A glut of goods in such industries as basic commodities,
telecommunications, technology and many consumer sectors is
causing prices to tumble, leaving debt-bloated companies with
less cash to pay off loans and bonds.
"There's too much capacity in a number of industries and
it's going to take time to work that off," said Trennert.
GROWING THREAT FROM IMPORTS
The U.S. Labor Department's Consumer Price Index, the most
widely watched gauge of retail inflation pressures, is still
climbing. For the 12 months ended in August, consumer prices
were up 1.8 percent, the largest gain since November of last
year. Excluding food and energy, the index was up 2.4 percent.
But the Producer Price Index, measuring prices paid to the
nation's factories, farms and refineries, has fallen 1.9
percent over the past 12 months, though it inched up 0.1
percent in September.
The growing influence of China in the global economy is a
"tremendous disinflationary force" and one reason Trennert
expects no quick fix to the weak pricing power.
The United States was China's biggest export market in the
first half of this year, buying $25 billion of goods. Many of
those goods are discounted, thanks to China's cheap labor
market -- it has a billion-plus population -- and the country's
decade-long price war.
Manufacturers that compete with such imports are suffering
the worst pricing pressure, said Standard & Poor's Chief
Economist David Wyss. That includes makers of apparel,
textiles, chemicals, metals and other basic commodities.
"Individually, companies cannot do a lot to combat this,
but they get caught," said Wyss. "If they try to raise prices,
they lose market share."
Automakers have more pricing power than basic commodity
manufacturers, but overcapacity is pressuring their prices as
well, he said.
Worries about price pressures in the auto sector helped
send shares and bonds of Ford Motor Co. <F.N> into a nose dive
last week. Ford, the largest U.S. issuer of corporate bonds,
was hurt by worries that its price war with rival General
Motors Corp. <GM.N> would cut into earnings it needs to keep
current on its $150 billion-plus debt load.
"It's a daunting pricing environment out there for many
companies," said Moody's Investors Service Chief Economist John
Lonski. "It helps to explain why business sales growth has been
so sluggish and why companies have not had an easier time of it
making good on debt."
WORST PRICE SLUMP SINCE 1958
Prices on consumer commodities excluding food and energy
fell by 1.3 percent year over year in July, the biggest drop
since the Labor Department began keeping those records in 1958,
Lonski said. Consumer commodities are traded goods that compete
with imports and are separate from the more widely watched core
consumer price index, a gauge of prices paid by U.S. consumers.
Lack of pricing power may explain why issuance of corporate
bonds has slumped, said Lonski.
"It adds to the uncertainty," said Lonski. "Companies shy
away from borrowing for the time being, not knowing what may
become of product pricing in the future."
Falling prices on goods so far are being offset by an
increase in service-sector prices, preventing a broad-based
U.S. deflationary trend.
The United States has not seen a sustained period of
deflation since the Great Depression in the 1930s.
"We're not in deflation right now, but the risk has become
more pronounced as the year has progressed," said John
Mothersole, senior economist for DRI-WEFA, an economic
forecasting firm. "The recovery appears to lack forward
momentum and (aggregate) inflation rates are very low."
One likely outcome is more cost-cutting by U.S.
corporations, said Mothersole. That may benefit individual
companies, but collectively, it spells bad news for the broader
economy, he said. Widespread cost cutbacks would trickle
through the economy, eroding demand and leading to further
pricing pressure.
If that happens, investors should brace for lean times,
said S&P's Wyss.
"Deflationary periods are pretty lousy for investors," said
Wyss. "Shoving dollars under the mattress for once becomes a
rational investment strategy."
(Additional reporting by Jonathan Stempel)
(( U.S. Financial Markets Desk (646) 223-6325,
dena.aubin@reuters.com ))
REUTERS
*** end of story *** |
