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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: Lucretius who wrote (259185)	9/5/2003 3:45:09 PM
From: KM	Read Replies (1) \| Respond to of 436258

A Strong Statement Something to consider There is a possibility that I hope you will consider. It is meant with the best intentions. It is made not to change the way you act, but to put just a little caution in your minds. I make it because I truly believe that the hard part is not making money, but keeping it. It is prompted not by today’s market action, but by the announcement just made by General Motors(GM:NYSE) that they filed to issue $10 billion in stock and debt. We have seen over the last several months (and I could argue longer) an unprecedented amount of liquidity injected into the system. The Federal Reserve has made dollars available in floods around the world. This liquidity has found its way into U.S. stocks and bonds. It has certainly drawn the small investor back into the market. Credit spreads have improved, not because companies have less debt, but because investors are starving for yield. Companies are actually accumulating debt, not paying it back. In fact most of this new debt is not being used for new capacity (we have plenty of that), but being to satisfy other obligations like pension liabilities. So I want you to just consider and keep in the back of your mind when you invest that risk has increased, not decreased. Many will argue that the level of debt is not what is important, but the cost of debt service what matters. This is true as far as the implications to cash flow go, but risk has still increased. If rates rise, perhaps from a collapse in the dollar, the cost of debt service will rise as well. Liquidity is higher and the markets are higher. But perhaps that is by design to allow desperate companies like GM to issue securities in order to survive. When you buy their stock and the price rises, this allows them to refinance at much better levels. Brian Reynolds has written about this extensively and is one of things he is keying on in measuring the health of the system. I am not arguing that things will fall apart. Just that when there is so much liquidity, people forget about risk and concentrate on return. Don’t forget about risk. John Succo No positions in stocks mentioned. John Succo welcomes your comments and feedback at Succo@minyanville.com and invites you to check out his explanatory series on the basics of derivatives by clicking here. John Succo is the Chief Investment Officer and co-founder of a New York-based hedge fund concentrating in derivative strategies with approximately $175 million under management (the "Fund"). Prior to his current role, Mr. Succo was head of risk and a member of the investment allocation committee at Alpha Investment Management, a New York-based fund-of-funds. Prior to that, Mr. Succo was an options trader and head of derivatives at various Wall Street firms. Mr. Succo and the Fund may trade securities that are discussed on the site, both before and after the articles are published and/or may have a position in such securities. Mr. Succo will indicate whether he or the Fund has a position in stocks or other securities in any of the companies he discusses in an article but will not disclose the direction of the position. He will not disclose his or the Fund's ownership of any securities issued by companies that are not discussed in an article. The disclosures will be accurate as of the time of publication of an article and may change thereafter. This article reflects an analysis of market, sector or specific security trends or conditions by Mr. Succo and nothing contained in this article should be interpreted as or deemed to be a recommendation to any investor or category of investors to purchase, sell or hold any security. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Mr. Succo will not respond to requests for investment advice. Nothing contained in this article is intended as a solicitation for business of any kind or for investment in the Fund.